Tariff Negotiations i n Agriculture: Seeking a Compromise

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Tariff Negotiations in Agriculture: Seeking a Compromise

WTO Public SymposiumGeneva, 26 May 2004

Panos Konandreas, FAO Geneva Officewww.fao.org and www.faologe.ch

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Outline: Seeking a Compromise

the pivotal importance of market accesswhy difficulties on market accessoperational objectives on market access how different formulae score vs these objectivesbasic principles on how to achieve objectivesbalancing ambition and flexibility: bring in “economics”implications for the Framework text

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Market access: make or break issue

market access most controversial issue from the very beginningprobably 75% of negotiating time spent on itmake or break issue and not only in agricultureChair of SSCoA: no convergence on blended formula or any other approach“2/3” framework by July? unlikelycompromise in market access is imperative for meaningful framework text

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One of the difficulties:lack of clarity

proposed formulae did not spell out what would be achieved and how different members affectedmuch left to interpretation e.g. blended formula thought to be compromisebut, infinite number of possible outcomes depending on parameter choicesame formula interpreted as overly ambitious or too flexible, depending on the assumptions made“blend” thought to be the main advantage, but also became the main drawback uncertainty not conducive to compromise

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Another difficulty:focusing on the “tool”

proposed approaches placed too much emphasis on the formula (“tool”) to be used this led to outright likes and dislikes of certain “tools” (UR vs Swiss is typical)inflexible positions on including or avoiding a particular “tool” w/o regard to possible effectstoo little emphasis on defining in concrete terms the basic principles of what is to be achieved – the shape of the final outcome

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Fundamental difficulty: ambition vs flexibility

Para 13 of the Doha Declarationlong-term objective market-oriented trading system through fundamental reform“substantial improvements in market access”SDT for developing countries NTCs will be taken into account

contradiction embedded into the Doha languagebalancing ambition and flexibility main issue during the long negotiating processextremely difficult to arrive at operational set of objectives that accommodate both

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Operationalizing Doha:generally understood objectives

1. substantial reduction of the average level of tariffs

2. reduction of tariff peaks (and tariff escalation)

3. accommodation of country-specific concerns on particular products:

for developing countries expressed as SPs on the basis of food security and rural development considerationsfor developed countries expressed as “sensitive” products, inter alia on NTC grounds

4. SDT for developing countries, implying less onerous commitments compared to those of developed country members

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The starting point:initial tariff profiles

(1)

WTO member

(2)

Ave. initial bound tariff (%)

(3) Spread

of bound tariffs

(STD/ave) (%)

(4)

Peak initial bound tariff (%)

(5)

Ave. initial

applied tariff (%)

(6) Spread

of applied tariffs

(STD/ave) (%)

(7)

Peak initial

applied tariff (%)

(8) Applied

over bound ave.

tariffs (%)

(9) Peak

bound over ave.

bound (%)

US 6.4 257.8 182.7 6.4 254.7 182.7 100.0 2854.7 EU 17.4 170.1 456.9 17.4 170.1 456.9 100.0 2625.9

Japan 20.8 245.7 534.8 18.5 242.7 477.9 88.9 2571.2 Brazil 35.5 29.6 55.0 12.5 43.2 55.0 35.2 154.9

Colombia 91.9 37.4 227.0 14.8 35.1 20.0 16.1 247.0 India 115.1 45.9 300.0 42.6 63.1 210.0 37.0 260.6 Kenya 100.0 0.0 100.0 23.1 52.4 85.0 23.1 100.0

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Initial tariff profiles :main patterns

average bound tariffs of dev’d generally less than dev’gspread of bound and applied for dev’d several-fold that of dev’gmax applied tariffs for dev’d high; equal to boundopposite for dev’g; significant gap between bound and applied (“water in tariffs”)tariff profiles of dev’d highly skewed with many tariff lines at zero or single-digit levels and another set at very high levelsthese differences have implications on the relative impact of different tariff cut formulae

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UR formula:too much flexibility

how does it score in achieving the four objectives?1. yes 2. marginally - can actually increase relative tariff peaks

(spread between low and high tariffs)3. yes4. yes

fails to achieve effective market access, which essentially would come from reducing tariff peaksOpposed by those members that expected substantial market access and had preference for a Swiss-type formula


Swiss formula:harmonizing tariffs

WTO member

Average initial

bound tariff (%)

Peak initial bound tariff

(%)

Average tariff

reduction (%)

Cut of peak tariff

(%)

US 6.4 182.7 17.8 88.0 EU 17.4 456.9 37.1 94.8 Japan 20.8 534.8 34.6 95.5 Brazil 35.5 55.0 40.5 52.4 Colombia 91.9 227.0 63.2 81.9 India 115.1 300.0 66.6 85.7 Kenya 100.0 100.0 66.7 66.7

Note: In this illustrative application the coefficient “A” of the Swiss formula was assumed to be 25 for developed countries and 50 for developing.


Swiss formula:too much ambition

how does it score in achieving the four objectives?1. yes, but highly uneven both within dev’d and

between dev’d and dev’g2. yes, dramatically for both dev’d and dev’g3. not at all4. no; in fact the opposite, with average cuts for dev’g

much greater than for dev’dSwiss fails in two key objectives:

concerns with sensitive and special productsSDT for developing countries

it accomplishes what the UR did not and vice versahence, need for middle ground


Harbinson formula:first attempt to compromise

WTO member

Average initial

bound tariff (%)

Peak initial bound tariff

(%)

Average tariff reduction

(%)

Cut of peak tariff

(%)

US 6.4 182.7 41.3 45.0 EU 17.4 456.9 44.7 45.0 Japan 20.8 534.8 44.2 45.0 Brazil 35.5 55.0 29.6 20.0 Colombia 91.9 227.0 35.8 30.0 India 115.1 300.0 36.1 30.0 Kenya 100.0 100.0 35.0 25.0 Harbinson formula Developed countries: 3 band reduction formula

tariff > 90 average reduction of 60% with a minimum 45% 15 < tariff 90 average reduction of 50% with a minimum 35% tariff 15 average reduction of 40% with a minimum 25%

Developing countries: 4 band reduction formula tariff > 120 average reduction of 40% with a minimum 30% 60 < tariff 120 average reduction of 35% with a minimum 25% 20 < tariff 60 average reduction of 30% with a minimum 20% tariff 20 average reduction of 25% with a minimum 15%


Harbinson formula:too ambitious?

How does “banded” formula score?1. Yes2. Yes3. No (possibly Yes for developing countries with the

envisaged SP provision)4. Yes

tougher than pure UR and less ambitious than pure Swissrejected by both sides of the spectrum but more from those favouring UR70+ broadly-based alliance against itmajor dividing issue in March 2003 modalities deadline


Blended formula:second attempt to compromise

WTO member

Ave. initial bound tariff (%)

Peak initial bound tariff (%)

Average tariff reduction (%)

Cut of peak tariff (%)

Assumed proportion of tariff lines between

UR/Swiss/duty free categories (%)

5/65/30 10/60/30 20/50/30 30/40/30 40/30/30 US 6.4 182.7 22.2 21.7 22.5 24.7 27.7 15.0 EU 17.4 456.9 42.9 40.7 38.1 36.9 36.7 15.0

Japan 20.8 534.8 38.6 36.3 33.8 33.3 33.9 15.0 Assumed proportion of tariff lines between UR/Swiss/

“duty free” categories (%)

10/85/5 20/75/5 40/55/5 60/35/5 80/15/5 Brazil 35.5 55.0 40.6 39.8 36.3 32.9 29.5 10.0

Colombia 91.9 227.0 61.1 59.4 52.5 45.4 37.1 10.0 India 115.1 300.0 66.0 64.0 55.5 46.9 37.2 10.0 Kenya 100.0 100.0 63.8 59.6 51.0 42.5 34.0 10.0


Blended formula:outcome highly unpredictable

difficult to gauge in relation to objectives:1. yes, but highly uneven within dev’d and between dev’d and

dev’g2. no; to some extent if the UR category is very narrow3. yes, if the UR category is wide enough 4. no; because of initial tariff profile, dev’g would make higher

cuts of bound tariffseverything depends on parameters assumedproponents hoped that ambiguity could foster a compromise with much to be negotiated latersceptics felt that the uncertainty would prejudice a negotiated outcome against their interestsessentially what proponents thought as the main advantage of blended formula (flexibility it offered in its application by individual members) also became its major drawback


Seeking a compromise:basic principles

unrealistic to expect a complete specification of the tariff reduction formula at this stage, butsome degree of certainty/clarity essential for an approach to receive general acceptancewhat clarity? Focus not on the ‘tool’ but on the shape of the final outcome:

clarity on reduction commitments clarity on SDT provisions clarity on flexibility vs ambition


Seeking a compromise:clarity on reduction commitments

Rejection of some formulae because of substantial differences in the resulting overall average reduction between membersclarity is needed on what would amount to “substantial improvements in market access”, in terms of the overall average tariff reduction levelwould that be comparable to that attained during the UR or higher average cut?would it be the same for all members (aside from SDT differences, see below)?


Seeking a compromise:SDT provisions

UR: SDT concerned levels of reduction commitments and implementation periodsneed to clarify how differentiation of additional provisions envisaged would apply in practicegeneral principle could be a “differentiated symmetry” whereby all commitments by dev’g are by, say 1/3, less onerousthe case for different formula is weakbut, application of same formula with different parameters would be essential in order for a formula to yield desired differentiated outcomes


Seeking a compromise:flexibility at a price

remove the uncertainty on how flexibility would play in practiceintroduce some “economics” into the specification of flexibilitysupply side: a price is placed to what is being offereddemand side: allow the demandeurs to get the flexibility they wish by paying a fair price for it


Flexibility at a price:key specification elements

first element is notion of a member-specific “flexible maximum” or “ceiling” tariff based on the tariff profile of each member; this level is relative and flexible in the sense that could be exceeded at a costsecond element is to introduce a measure of the effort made (or not made) in complying with that maximum and institute a reward (and penalty) proportional to that effort


Flexibility at a price:calculating non-compliance

Overall average final Overall average final tarifftariff

““Ceiling” tariffCeiling” tariff

Final tariff for Final tariff for product xproduct x

Initial tariff for Initial tariff for product xproduct x

Partial Partial compliancecompliance

Residual non-complianceResidual non-compliance

Full Full compliancecompliance


Flexibility at a price:how it works

WTO member

(1)

Initial bound

tariff for product x1/

(%)

(2)

Average final

bound tariff

(%)

(3)

“Ceiling” for final

bound tariffs2/

(%)

(4)

Final bound

tariff for product x3/

(%)

(5)

Residual non-

compliance4/

(%)

(6)

Penalty (additional

TRQ)5/

(%)

Member A 70.0 20.0 40.0 50.0 33.3 3.33 Member B 250.0 30.0 60.0 150.0 47.4 4.74

1/ not necessarily the same product for member A and member B 2/ assumed to be 100% above the average final bound tariff (an across-the-board percentage level, to be negotiated). Alternatively, or additionally, a measure of the spread of the initial tariff profile could also be introduced in the specification of the “ceiling” tariff levels. 3/ for each member the same tariff line as that in column (1) 4/ the ratio between (1)-(4) over (1)-(3) 5/ residual non-compliance times the maximum penalty (10% additional TRQ was assumed – an across-the-board level, to be negotiated).


Flexibility at a price:what it achieves

takes into account diff. in tariff profiles and relative effort made to reduce tariffs of sensitive products designation of sensitive products not necessary; avoids contentious “self-declaratory” optionautomaticity in the penalty (additional TRQ) to be applied in cases of non-compliancebuild-in incentive to reduce tariffs of sensitive products as penalty is proportionally reduced build-in phasing-out mechanism (product by product basis); provision does not become a permanent feature


Seeking a compromise:implications for Framework

while ambiguity is desirable at this stage of the negotiations, some minimum certainty is also necessarybut certainty not by focussing on a formula: subject to interpretation and counterproductive at this stageFramework text should focus on better defining the general shape of the final outcome in terms of:

clarity in reduction commitmentsclarity on SDT provisionsclarity on flexibility allowed and associated penalties

these principles can be translated into legal language in Framework text by using the approach suggestedhave some ideas on this, but better leave it to the negotiators!

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Tariff Negotiations i n Agriculture: Seeking a Compromise