TWN Info Service on WTO and Trade Issues (Jan05/4)

26 January 2005

Third World Network

SOME GAINS BUT MANY COSTS IN NAMA PROPOSALS:  UNCTAD PAPER

UNCTAD’s Trade Division held an interesting meeting on NAMA and the adjustment costs of trade liberalization on 18-19 January in Geneva.

A main paper on the implications of the industrial tariff negotiations in NAMA was presented by UNCTAD.  There were also several country case studies.

According to the main paper, developing countries may enjoy some trade and welfare gains if various proposals on NAMA are adopted, but these gains come at considerable costs in lower tariff revenues, lower output and job losses.

“Negotiations will continue to be difficult unless some way is found to take into account the special and differential needs of developing countries and additional action is taken to mitigate the collateral damage,” stressed the authors of the paper.

“An agreement to reduce NAMA barriers could lead to significant gains for developing countries in exports, employment and economic efficiency,” says the paper.  “However, as this study shows, these gains will come with short term adjustment costs such as loss of employment and output in import-competing sectors and loss of government revenue.”

Below is a report of the presentation of the main paper.   Other reports of the seminar will also be sent.

With best wishes

Martin Khor

TWN

Some gains but many costs in NAMA proposals, says UNCTAD paper

By Martin Khor, Geneva, 24 Jan 2005

Developing countries may enjoy some trade and welfare gains if various proposals on cutting industrial tariffs are adopted at the World Trade Organisation, but these gains come at considerable costs in lower tariff revenues, lower output and job losses, says a new UNCTAD paper presented at an UNCTAD seminar on 18-19 January 2005.

“Negotiations will continue to be difficult unless some way is found to take into account the special and differential needs of developing countries and additional action is taken to mitigate the collateral damage,” stressed Santiago Fernandez de Cordoba, an economist with the Trade and Analysis Branch of UNCTAD’s Trade Division.

He was presenting a paper, “Coping with Trade Reforms: Implications of the WTO industrial tariff negotiations for developing countries”, at a two-day UNCTAD meeting, “Adjusting to Trade Reforms:  What are the major challenges for developing countries?”

The paper, authored by de Cordoba and David Vanzetti, analyses various proposals put forward during the WTO negotiations on non-agricultural market access (NAMA), using a general equilibrium model (GTAP).  It points out the implications in terms of changes in imports, exports, output, employment and welfare gains for various countries and regions.

It says the NAMA negotiations is an opportunity to address tariff and non-tariff barriers, but the July Package text on NAMA leaves considerable uncertainty about the future direction of the negotiations.

“An agreement to reduce NAMA barriers could lead to significant gains for developing countries in exports, employment and economic efficiency,” it says.  “However, as this study shows, these gains will come with short term adjustment costs such as loss of employment and output in import-competing sectors and loss of government revenue.”

The paper makes use of different scenarios based on three different tariff-cutting proposals: a Swiss “harmonizing” formula, the “WTO proposal” (proposed by former NAMA group chairman Pierre-Louis Girard) and a capping formula (uniform reduction, with a cap on tariffs at three times the national average applied rate).  Each proposal is then subjected to three levels of tariff reduction:  ambitious, moderate and flexible.

The analysis shows that the generally modest overall results conceal important changes in individual sectors.  Some countries will gain in key sectors, but in other countries, some sectors will face important adjustments.  “Moreover, the estimated tariff revenue losses could have a strong negative impact on government revenues in a number of countries,” adds the paper.

The results of the modeling show that developing countries will lower their tariffs considerably, after the tariff-cutting exercise.  The current weighted average import tariff rate for developing countries is 12.5%, and it could plunge to as low as 3.4%, warns the paper.  

Under the Swiss formula, the average rate would be reduced to 3.4, 6 or 9.2 per cent under the ambitious, moderate and flexible reduction scenarios respectively.  Under the capping formula, the average tariff rate will drop to 5.7, 9 and 10.5 per cent.

The liberalization can increase welfare and exports in developing countries in the long run, according to the paper.  Welfare gains (including what consumers gain from cheaper import prices) range from US$41-69 billion, and exports could grow by 2.1-4.3 per cent.

However, data in the paper show that in many cases, export growth is matched or more than offset by import growth, in which case there would be a negative effect on the trade balance of those countries.

For example, under the Swiss formula moderate scenario, China and Hong Kong would have 10% higher exports but 12.5% higher imports, India’s exports would grow by 19.7% and imports by 21.1%,  Southeast Asian exports by 3.4% and imports by 4.7%, Sub Sahara African exports and imports would both grow at 2.3%, while Brazil export growth at 6.3% would exceed import growth of 5.7%.

One of the most disturbing findings of the paper is that the NAMA proposals would cause government revenue to drop significantly or even drastically for many developing countries, as their applied tariffs are hit by the tariff cuts.

The most ambitious (Swiss) scenario modeled in the paper show a global reduction in tariff revenues (in developing and developed countries) of 50%. 

For developing countries as a whole, their present overall tariff revenue of $156 billion would drop under the Swiss formula by 41, 29 or 21 percent (under the ambitious, moderate and flexible scenarios respectively).  Under the WTO formula, it would drop by 36, 14 or 12 per cent and under the capping formula it would drop by 32, 15 and 12 per cent.

Under the ambitious Swiss formula scenario, there would be a 51% drop in the present tariff revenue of $32 billion in China and Hong Kong, India would lose 63% of its $12.9 billion revenue, Brazil 64% of its $5.6 billion revenue, Southeast Asia 37% of its $14 billion revenue, Andean Pact countries 42% of their $4.8 billion revenue, Central America and Carribean 22% of its $3.6 billion revenue, Middle East and North Africa 54% of its $22 billion revenue, and Sub Sahara Africa 16% of its $10.7 billion revenue.

The revenue losses would be highest under the “ambitious” scenario on the three formulae (Swiss, WTO and capping).  But the losses would still be significant under the moderate and flexible scenarios.

“Clearly, large falls are more significant in developing countries that are more dependent on tariffs as a source of revenue,” says the paper.  “The lowest income developing countries tend to have the greatest dependence on tariffs as a source of revenue.”

The paper also shows that whilst there may be no overall changes or overall gains in employment in many developing countries, there could however be significant job losses in certain sectors in these countries.

An annex to the paper shows that one the worst hit would be the motor vehicles sector in developing countries. Under the Swiss formula (ambitious scenario), employment in this sector would fall by 10% in China and Hong Kong, 5.6% in India, 36.8% in the rest of South Asia, 4.3% in Brazil, 6.6% in Southeast Asia, and 9.6% in Andean Pact countries. 

In his presentation, Fernandez de Cordoba said developed countries’ industrial tariffs on developing countries’ exports are twice the rate imposed on other developed countries, and they are three times higher for LDC exports.

He added that both the Swiss and capping formulae can achieve the same degree of trade liberalization, but the capping formulae have the added benefit of transparency.

Also, allowing developing countries to bind at twice the simple average of bound tariffs of developing countries (i.e. twice 29.4%) provides them greater flexibility for sensitive products.

“Developing countries may achieve some important trade and welfare gains (from the NAMA proposed measures) but these gains come at a cost---lower tariff revenues and reductions in output and employment in some sectors,” said Fernandez de Cordoba.

There may be benefits in the long run, but adjustment costs in the short run.  He added that the challenge for developing countries is to determine the special and differential treatment they require. 

“Therefore a cautious or measured approach is preferable, as is recognized in the Doha Declaration, which calls for non-full reciprocity for developing countries,” he concluded.  “Gains will only be possible through a development-centered agreement and strategies to reduce the adjustment costs.”