Global Trends by Martin Khor

Monday 31 October 2005

Extreme EU demands threaten developing economies

The European Union last Friday issued a dramatic paper on the world trade talks.  It would make some limited concessions in agriculture, but only if the developing countries agree to extreme demands that they cut almost all their industrial tariffs to a maximum of 10%, and increase commitments to open up most of their services sub-sectors to foreign firms.   The developing countries are asked to become victims of the so-called Development Round, in a dangerous “blame game” if the talks fail.

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Developing countries’ markets have come under aggressive attack by the European Union in the EU’s latest attempt to deflect blame for stalling global trade talks. 

In a much-awaited new paper released last Friday, the EU made extreme demands on developing countries to slash their tariffs on industrial products and open up their important services sub-sectors.

If these EU demands are accepted, even in dilute form, they would threaten the business and the very survival of local manufacturing and services firms in developing countries.  

The sudden and extreme opening of markets in developing nations is part of the price the EU is demanding in exchange for its offer to cut its own agricultural tariffs and subsidies.

The EU has been criticised by other members of the World Trade Organisation for not doing enough in agriculture, and for holding back progress in trade talks that will culminate in the WTO’s ministerial meeting in Hong Kong in December.

On Friday, it unveiled new offers to cut its farm tariffs.  The EU claimed its offer would reduce its average tariffs from 23% to 12%, or by 46%.    However, others challenged that figure, saying it is less.

One reason for this over-estimation is that the EU wants 8% of its most protected farm products to be classified as “sensitive products” and thus exempted from the full cuts determined by a formula.  Critics say the EU offer would not have that much effect after all.

In exchange for this small offer, the EU is making demands on others, especially the developing countries, that trade experts from developing countries consider extreme and even outrageous.

It is asking developing countries to reduce their import duties of manufactured products by a “Swiss formula” (in which higher tariffs are cut by a higher percentage), with a coefficient of 10.

The lower the coefficient, the steeper the cuts.    The proposed coefficient of 10 is extremely low, implying that developing countries would have to cut their tariffs very steeply.

Under this formula and coefficient, all tariffs would be brought down to between zero to 10 percent.    For example, tariffs that are now 10% would be brought to 5%;  tariffs that are 30% would be cut to 7.5%;  tariffs that are 60% would now be 8.6% and tariffs above 60% would go down to about 9%.

Some limited “flexibilities” would be available to developing countries to reduce a few of their tariff lines by less than this formula, said the EU paper.  But in any event, all tariffs cannot exceed the level of 15%.

The EU also proposes a very harsh treatment of unbound tariffs.  At present, countries are allowed not to “bind” in the WTO the tariffs of some of their products (usually sensitive items which need the most protection).  Since they are not “bound”, these tariffs can be set at or raised to any level.    

This flexibility is about to be taken away.  The EU wants all tariffs to be bound, and at very low levels.  It proposed a system to mark up the applied rates of the unbound tariffs by 10 percentage points and then reduce them by the formula.

For example, a product with an applied tariff of 40% that is not bound would have 10 percentage points added to give it a base value of 50%.  This would then be slashed by the formula, giving the result of the new tariff (now bound) of 8.3%.

Although many countries including Malaysia have liberalised their imports in recent years, they still keep moderate to high tariffs (some exceeding 50% or even 100%) for sensitive products (for example, motor vehicles and their components) to protect local industries.

If all tariffs have to be brought down to the low levels demanded by the EU, many local firms would lose a large part of their business, or close down.      

The EU demand in services is equally extreme.  The present WTO rules on services allow developing countries the right to commit to open up various sub-sectors to the extent it considers appropriate, according to their national policies and interests.

Using this flexibility, developing countries have been cautious and have not opened up in many sectors in which local firms are unable to compete.  Also, they have committed to open up only partially in some sectors, retaining some controls, for example that in some areas foreign firms can own a maximum of 30 or 40 or 50 per cent of equity.

The EU is now demanding a new system, known as “benchmarking”, in which developing countries must compulsorily commit to open up at least a certain number of services sub-sectors.  

Last Friday, it revealed the extent of its demands. It wants developing countries to increase liberalisation in 93 out of the 163 services sub-sectors (or 57%) classified in the WTO.

Further, it wants the WTO to launch “sectoral negotiations in key sectors to achieve quality offers for critical masses of WTO Members.”   By this it means that there will be additional efforts by (and thus pressures on) countries to open up in the most important sectors.

The EU mentions financial services, telecommunications, distribution services, construction, computer and related services, environmental services, financial, maritime transport plus certain sub-sectors of professional and business services.

According to the EU proposal, developing countries have to participate in sectoral negotiations in 8 out of 16 selected sub-sectors.

At a WTO meeting last week, 14 developing countries (including Malaysia) issued a joint statement opposing any attempts to include the “benchmarking approach” (or the setting of targets) in the Ministerial Declaration that will be adopted at the WTO’s Hong Kong meeting.

Many others spoke in support of the 14 countries.

Despite this, the EU is insisting that its demands on services as well as on industrial tariffs be accepted, otherwise it will not keep to its agriculture offers.

The EU move is seen by many observers as deliberately asking for a “package”, in which other partners have to accept its extreme demands in other areas (especially services and NAMA) so that it can shift the blame to them if its agriculture offers are rejected for being inadequate.

The scene is thus set for continuing the “blame game” in which each party uses public relations to try to shift responsibility to the other parties in the event the Hong Kong Ministerial meeting does not succeed.

It is an extremely dangerous game, because the future development of the developing countries (and the survival of their local firms) are being used as pawns in a high-level bargaining process that at the moment involves only a few countries.

These global trade talks have gone a long way down the hill from the high rhetoric of the Doha Declaration that launched them in 2001, when the Trade Ministers declared that the needs and interests of developing countries would be at the centre of the negotiations.

The developed countries keep talking about how the talks are a Development Round to benefit the developing countries.  But in their concrete proposals and demands, they are cynically doing the opposite, as the EU’s latest paper revealed.