Global Trends by Martin Khor

Monday 16 May 2005

Local firms may be hit by WTO measures

Blurb:   The proposals by rich countries to slash the tariffs of the developing countries could well devastate their local industries that are unable to compete with an expected surge in cheap imports, warned development experts at a workshop last week.  The future of the developing countries’ industrial development is at stake.


Experts have warned that current proposals before the World Trade Organisation to slash import tariffs on manufactured goods may devastate local industries in developing countries and result in job losses and loss of government revenue.

In particular, the experts warned that an obligation to cut industrial tariffs across the board on a “line-by-line” basis (on all products) would remove the space that governments now have to choose their own pace of liberalisation, and deprive the developing countries of being able to plan their future industrial development.

They propose that commitments made in the WTO to cut tariffs should be on the basis of the average tariff.  Countries would then be able to choose at which rates to change the tariffs in particular products and sectors.

These issues were discussed at a workshop on the WTO negotiations on non-agriculture market access (NAMA) and their implications for industrial development in developing countries”, organised by the Third World Network, in Geneva last week. 

Current proposals by rich countries (led by the US and European Union) at the WTO would result in tariff cuts of 50-80 percent in tariffs.  The US proposal is that all tariffs be brought down to below 8 percent.

While this may benefit consumers, who can buy cheaper imports, development experts fear that such a drastic and sudden cut in tariffs would affect local firms that cannot compete, and also reduce customs revenue.

A paper on “WTO negotiations on industrial tariffs: what is at stake?” was presented by Dr. Yilmaz Akyuz, a former director of the United Nations Conference on Trade and Development (UNCTAD).

Akyuz said that the developed countries during their development phase had industrial tariffs that were far higher than the current tariffs in developing countries.  For example, the United States had average applied tariffs of 40-50 %  for much of the century 1820-1920.  Even in 1950, its average tariff was 14%.  In comparison, the average rate in 2001 in developing countries as a whole was 8.1%.

Akyuz said that in the present NAMA talks, developing countries are asked to cut their tariffs much more rapidly than the developed countries did in the 30 years after the Second World War. 

He said that there is a pattern of optimal tariffs in different sectors (such as the resource-based and  labour-intensive sector; the medium technology-intensive sector; and high technology sector) at different phases of a country’s industrial development.  

For example, when a country was at the lower end, it may want higher tariffs to protect its labour-intensive industries, but zero or low tariffs on other products which it did not and cannot produce.  When the country enters a higher phase, it could reduce its tariffs on labour-intensive products (as it was already competitive there) but may want to now raise tariffs on medium and high-tech products so that it could develop industries in these areas.

Given this pattern of optimal tariffs, the developing countries need a lot of flexibility to lower and raise their tariffs in different products at different times and different phases of industrialisation.  To allow, this, the WTO should allow them to bind their average tariff without a commitment to bind tariffs on all products.   This would especially allow them to raise tariffs in future when they were more developed and able to produce more high-tech products.

Chakravarthy Raghavan, editor emeritus of the SUNS bulletin, said that the theories of WTO and World Bank economists that more trade liberalisation would solve development problems had been contradicted by many recent empirical studies showing that liberalisation does not necessarily produce more growth, and in fact when some developing countries have trade barriers the result could be higher growth.

Raghavan said manufacturing was essential for the developing countries for technology, decent wages and jobs, and they need to protect their industries to maintain and foster the manufacturing sector.

International trade expert, Bhagirath Lal Das agreed with Akyuz that developing countries need tariff protection for industrial development.  During the industrialisation process a country may require low, high and then low tariffs at different times on the same products; and taking up the production of a new product will be difficult if the option for raising its tariff is lost.

He made a distinction between liberalisation as a domestic policy which is for each country to decide on, and a binding obligation in the WTO, which the country cannot go back on.  The country should maintain the option to raise tariffs on particular products at a later date, which cannot be done if the tariffs are already bound at zero or low levels.

There is an optimum level of tariffs at different stages of industrialisation for different products.  It would be dangerous for developing countries to lose the option of varying the tariffs to meet the optimum.       

On the WTO talks to reduce tariffs, Das said any formula on a line-by-line basis (coering all products) would not be appropriate for developing countries.  By agreeing to formulas put forward by the developed countries, the developing countries would be giving up tremendous policy space.

Cambridge University economist, Ha-Joon Chang, said that if the developed countries’ NAMA proposals were adopted, the developing countries would be subjected to truly drastic tariff cuts.  The effects on developing countries would be “truly monumental.”

It was worrying that many developing countries do not seem to realise how devastating the cuts can be.

To now bring the tariff levels of developing countries to the levels of the rich countries harmonisation was unfair, as such a so-called level playing field would be equivalent of asking a schoolboy football team to take on the national team. 

Chang said the developing countries should wake up as there may be no more industrial development in the developing world in the near future if the NAMA proposals are accepted.  This may sound a drastic conclusion, but is the only realistic assessment.

In response to a question, he added that although the NAMA negotiations are done in the name of development, in reality the developed countries were conducting the negotiations in their own interests.  “Let us not pretend that there’s some benefits for developing countries,” he said. 

UNCTAD senior economist, Mehdi Shaffaeddin, said that in all cases, with one or two exceptions, all industrially successful countries had used tariff protection.  He added that infant industry protection should be for a temporary period.

An UNCTAD study on 50 developing countries showed that only 20 that liberalised their imports had managed to expand their manufacturing exports to any significant extent, and of these only 10 expanded their manufacturing value-added as well.  Half of the countries surveyed experienced deindustrialisation.  There was little evidence they could upgrade their industries.

He added that the implications of NAMA should be understood in context.  The industrial countries were already industrialised, with advanced supply capacity.  When they get the developing countries to liberalise, they will get market access.  By contrast, even if developing countries get access to developed countries’ markets, that may be of benefit to products they presently make, but it would not benefit them for future products that they can potentially make (as the developing countries’ tariffs on these would have been lowered).

“Thus developing countries may be sacrificing their future for a bit of market access for the present,” he said.  He warned developing countries against hoping to get some benefit for their labour-intensive industry,  and in return giving up their possibility for high value-added industry.   This would be the end of their industrialisation.

A final session in the workshop on “The way forward” heard views by some developing countries’ senior officials (including the Ambassadors of Brazil, Tanzania, India and the Philippines) as well as some of the experts and participants on the current state of the NAMA negotiations and the position that developing countries could take..