[DEBATE] : What Next for WTO

Fri Oct 6 09:22:28 BST 2006

TWN Info Service on WTO and Trade Issues (Oct06/1)

6 October 2006

Third World Network

www.twnside.org.sg <http://www.twnside.org.sg>

The WTO: What Next?

Below is a paper by Bhagirath Lal Das, who is an international trade expert

and former Director of UNCTAD's Trade Division, on the situation at the

WTO after the suspension of the Doha negotiations.

The paper cautions developing countries to be ready for moves by the

developed countries to resume the talks at an early opportunity, and for 
renewed

pressures to conclude the talks on modalities.

It also outlines some of the critical issues that will re-emerge in the

negotiations and provides proposals on positions to adopt in these issues,

especially agricultural domestioc subsidies and NAMA.

We hope you will benefit from this paper.

With best wishes

Martin Khor

TWN

---------------------------------------

The WTO: What Next?

By Bhagirath Lal Das

31 July 2006

The collapse of the WTO negotiations following the Doha Work Programme 
has caused widespread concern. News reports and editorials have declared 
the talks virtually dead.

Though the General Council of the WTO did not take a formal decision on 
the talks, there is a /de facto/ suspension.  But the GATT/WTO system 
has given surprises in the past and it is more than likely that the 
negotiations may start once again in full steam soon.

The developing countries will be well advised not to be complacent with 
the suspension but to be prepared for an early resumption. The following 
article gives reasons for this anticipation and also gives some 
suggestions what the developing countries should do.

CRESCENDO TO COLLAPSE

This latest collapse of the WTO negotiations was not totally unexpected. 
The negotiating process had been accelerated by raising a crescendo of 
expectations and creating an air of crisis and tension. Unreal targets 
were fixed from time to time and mini-ministerial meetings of various 
sizes were held too frequently.

Perhaps the strategy was to push the ministers into tight schedules so 
that they would hurriedly soften their positions. But the stakes and 
interests are too complex and diverse for such tactics to be effective. 
What is needed is a meeting of minds in cool atmosphere rather than 
crashing of heads in artificially created turmoil.

The process generated frustration among those that had assumed the role 
of prime-movers: the ministers of Australia, Brazil, Japan, India, the 
US, and the commissioner of the European Commission, representing the 
European Union (EU), (jointly called ?G6? in the WTO parlance).

They decided to suspend their joint deliberation. Other countries appear 
to have accepted this position, though not approving it formally. And 
yet it is very likely that the negotiations may be resurrected in not 
too distant a future, may be even in early autumn. There are three 
reasons for this assessment.

EARLY REVIVAL LIKELY

First, the major developed countries, particularly the US and European 
Union (EU), have within their grip some significant concessions from the 
developing countries that they would not like to slip away.

The developing countries are agreeable to near-total binding coverage of 
industrial tariffs, implying that they will put an obligatory and 
enforceable tariff ceiling on almost all their industrial products.

A coefficient of 20 for the developing countries in the Swiss formula 
for industrial products (with the consequence of capping the industrial 
tariff at 20 percent) and 35-45 percent reduction in their agricultural 
tariff on average are within the reach of the developed countries, in 
their calculation.

Besides, liberalisation in several services sectors through sectoral 
plurilateral negotiations is very much on the cards. The resulting 
opportunities for enhanced market access in goods and services in the 
developing countries may be too tempting for the major developed 
countries to sit back in sullen inaction after the recent collapse of 
talks.

Second, the fast negotiating track authority given by the US Congress to 
the US Executive expires at the end of June 2007 and it is unlikely to 
be extended. Hence the motivating factor mentioned above is likely to 
spur the major developed countries to restart the talks in such a way as 
to catch this deadline. And the following brief examination of the time 
table indicates that it is practicable.

The US Executive is required to present the resulting agreement to the 
Congress at least ninety days before end-June 2007. Assuming that the 
Executive would take about a month to prepare the presentation, the 
agreement along with various schedules should be ready in its final form 
by end-February 2007.

The preparation of schedules by governments and their mutual 
verification will be an arduous task; but, presuming intense work under 
time-pressure, a period of three months can be considered adequate for 
this exercise.

This brings us to end-November 2006 for a complete agreement on 
modalities in agriculture and NAMA. Other substantive subjects of 
negotiations too can go on concurrently until end-November 2006. And 
some remaining subjects can be handled even later until end-February
2007. To achieve the end-November deadline, the talks should be resumed 
early in autumn.

Third, the gaps in the positions in G6 on the three priority issues that 
they took up for resolution are really not so large as to be totally 
unbridgeable, as will be explained later.

PRIORITY ISSUES

We may recall that the focus in the recent negotiation within the G6 was 
the priority resolution of three elements: (i) total trade distorting 
support (TDS), i.e., the sum of amber box, blue box and /de minimis/ 
subsidies in agriculture in the US, (ii) tariff in agricultural products 
in the EU and (iii) industrial tariff in the developing countries.

Though the differences within G6 had considerably narrowed down, an 
agreement could not be reached and the talks collapsed.  The differing 
positions, as reported, are briefly given below.

The US reportedly offered to reduce its total TDS to the level of US$ 23 
billion. The G20 (where Brazil and India are influential members) had 
wanted it to go down to US$ 12 billion while the EU expressed 
satisfaction if the level was brought down to US$ 15 billion.

In agricultural tariff, the EU reportedly offered to reduce its average 
tariff by 51 percent. The G 20 and the US had asked for reduction by 54 
percent and 66 percent respectively.

In industrial tariff, the EU has reportedly suggested the coefficient of
15 for the developing countries in the Swiss formula. The US wanted a 
lower coefficient, while Brazil and India appeared to be agreeable to 30.

Among these subjects, the agricultural tariff does not appear to have 
been the hard bone of contention. Even though France had openly opposed 
going beyond the offer of 39 percent reduction that EU made earlier in 
October 2005, the EC Commissioner appears to have sensed the overall 
mood in the EU countries and offered 51 percent reduction. Perhaps EU 
might not have found it too difficult to move slightly higher to match 
the G20 expectation of 54 per cent.

The really hard issues were the other two: domestic subsidy in 
agriculture in the US and industrial tariff in the developing countries.

In the area of domestic subsidy, the G20 had asked for 70-80 percent 
reduction in the total TDS in the developed countries. With the levels 
of the US and EU of respectively US$ 48 billion and Euro 110 billion
(year 2000, the last year of notification), the G20?s expectation of the 
reduced values were respectively US$ 12 billion and Euro 27 billion
(after reduction by 70-80 percent,).

Against it, the US and EU offered to reduce the levels to US$ 23 billion 
and Euro 33 billion. Perhaps there was some indication that the EU might 
be finally willing to go down to the level suggested by the G20. Hence, 
the main target in this respect was the US that refused to offer any 
further reduction.

In respect of the industrial tariff, Brazil-India (members of a 
coalition of eleven developing countries, commonly called NAMA11) 
perhaps appeared to be moving towards a coefficient of 25 in the Swiss 
formula, but the demand from developed countries was for 15.

After the protracted course of negotiations since 2001, passing through 
various vicissitudes, these differences would not appear to be such as 
to cause a total break down.

For example, there was a scope for the US to come down slightly lower in 
its TDS, say US$ 19 billion, which is near its current applied rate. The 
freedom to raise the green box subsidy and thus neutralise the effect of 
any reduction in the TDS would have tempered its hesitation. Similarly, 
considering the current trends in the negotiating positions of 
Brazil-India, going slightly lower in the coefficient in the Swiss 
formula in NAMA does not appear impossible.

Indeed, the differences among G6 did not really appear unbridgeable. But 
the environment was not propitious. Also, the whole exercise had been 
given a high profile and visibility that partly contributed to the 
hesitation of the ministers to appear too soft.

With some reflections in the summer and following some informal contact 
among the main actors, that has already started, it is likely that the 
corridors of the WTO will not remain quiet very long. And that is the 
scenerio for which the developing countries must remain fully prepared.

POINTS OF CAUTION:  (1)   Domestic subsidy in agriculture

The developing countries have got some time now to reflect on the 
implications of the various figures that emerged in the recent 
negotiations and had some chance of acceptance in the G6. There are 
grave risks in them.

Let us first take the domestic subsidy in agriculture in the US and EU. 
Even if the EU reduces its total TDS to Euro 27 billion and the US to, 
say, US$ 15 billion, will it be an effective safeguard against the 
possible damage to the developing countries? farmers due to the 
subsidised agricultural imports from the US and EU? And will it expand 
developing countries? market access in the US and EU?

The answer is a clear ?no? because of two factors: (i) the green box 
subsidy and  (ii) the possible concentration of the reduced total TDS on 
a limited number of products.

/Green Box:  /There is a massive escape route for the US and EU through 
the green box subsidies, i.e., those given under the cover of Annex 2 to 
the WTO Agreement on Agriculture (AOA).

/ /

/These are not under discipline so far on the presumption that they are 
not trade-distorting. But enough evidence is now available to indicate 
that the green box subsidies can distort production and trade. /

/ /

/These subsidies have wealth effects and also improve the risk-taking 
tendency of the farmers. They enhance the staying capacity of the 
farmers in agriculture and support their unviable agricultural 
production. /

/ /

/Some forms of the green box subsidy cause serious concern, particularly 
the decoupled income support, insurance against income loss and 
investment aid, given respectively under paragraphs 6, 7 and 11 of Annex 
2 to the AOA. Any amount can be given through these routes without 
limit, resulting in limitless distortion of production and thereby of 
trade. /

These open and unrestrained provisions have been variously used by the 
US and EU from year to year. For example, the amount for decoupled 
income support in the US was US$ 4 billion in 2001 and that for 
investment aid in the EU was US$ 5.7 billion in 2001-2.

After reducing their total TDS to an agreed level, the US and EU can 
easily enhance the amount given under these provisions of the green box, 
thus nullifying the effect of reduction. All they have to do is to make 
changes in their legislation and that will be entirely their internal 
process. Thus obtaining a commitment for reduction of total TDS without 
closing the escape route of the green box can be very much an 
infructuous exercise.

We have the past experience of the Uruguay Round, where the major 
developed countries utilised the escape routes in agriculture and 
textiles. They fulfilled their commitment of reducing their amber box 
subsidy, but enhanced their total subsidy in agriculture. In textiles. 
They fulfilled their obligation of liberalisation in four phases without 
actually bringing about any effective liberalisation up to the end of 2004.

They used the escape routes that had found their way in the respective 
agreements. There is no assurance that they will not do the same once 
again. An effective safeguard can come only by disciplining the criteria 
of the green box which is already mandated by the July 2004 Framework. 
G20 has already given some proposals which need being further amplified 
and specified, as suggested later.

/ /

/Product concentration of TDS:  /The second risk relates to the 
concentration of the TDS on a limited number of products. The total TDS 
in the US and EU, even at their reduced levels, can be highly injurious 
to the developing countries if they are concentrated on a small number 
of products. It can infuse high competitive strength to the particular 
products.

/ /

/Hence it is necessary to prescribe product ceilings for the total TDS. 
The US and EU have been giving very high subsidies for some products in 
the past and there will be a natural tendency to prescribe ceilings 
based on such historical period. This will not be proper as now the 
objective is to have effective reduction in subsidies. /

(2) Industrial tariff (NAMA)

In NAMA, the current figures under consideration for the coefficient in 
the Swiss formula are: 20-30 for the developing countries and around 10 
for the developed countries. Taking 30, i.e., the highest, as 
coefficient for the developing countries, their average tariff of 28, 
which is their average tariff, will be reduced to 14, i.e., by 50 percent.

Taking 10 for the developed countries, their tariff of 4, which is their 
average tariff, will be reduced to 3, i.e., by 25 percent. This will be 
clearly a reversal of the agreed principle of ?less than full 
reciprocity? for the developing countries and will be extremely unfair.

The Hong Kong Ministerial Conference has decided to use the Swiss 
formula for tariff reduction in industrial products and now one has to 
work within this frame. The choice of the coefficient in this formula is 
crucial in determining the extent of tariff reduction. Hence it is 
necessary that the choice of coefficients is such that they result in 
?less than full reciprocity? by the developing countries.

The most appropriate manner in which the principle of ?less than full 
reciprocity? can be followed is by the developing countries opening 
their market for the developed countries less than the developed 
countries opening their markets for the developing countries.

One way of achieving it is for the developing countries to effect lesser 
reduction in their absolute tariff numbers than the developed countries. 
For example, if the developed countries reduce the tariff from 10 to 4
(thus having a reduction of 6 in absolute tariff number), the developing 
countries should reduce their tariff from 35 to 31 (thus having a 
reduction of 4 in absolute tariff number). The respective coefficients 
in the Swiss Formula for the developed countries and the developing 
countries could be worked out accordingly.

If the developing countries are more accommodating, ?less than full 
reciprocity? could be accomplished by a differential percentage 
reduction in tariffs. For example, the developed countries could reduce 
their tariffs by, say, 60 percent, while the developing countries reduce 
their tariffs by 40 percent. Again, the respective coefficients could be 
worked out suitably.

In any case, considering simple numerical parity between the 
coefficients applicable to the developed countries and the developing 
countries (for example, 10 for the former and even 30 for the latter) 
will not be conforming to the agreed principle of ?less than full 
reciprocity?.

SOME SUGGESTIONS:   (1) Domestic subsidy in agriculture

Green box subsidy:/  Any agreement for reduction of the total TDS will 
be ineffectual if there is no discipline on the green box by defining 
specific criteria.

An effective way to stop green box subsidies from being trade-distorting 
is to prohibit these payments altogether. If that is not possible, these 
payments, if otherwise necessary, should be kept at a minimal level in 
order to make the trade-distortion minimal.

Some criteria for eligibility of the farmers for payments and some 
ceiling on payment are therefore called for. For example, as an initial 
step to ensure that the green box subsidies are non-trade-distorting or 
minimally-trade-distorting, the following criteria may be established.

1. Payment should be made only to individual farmers. The corporate 
entities should be totally excluded from such payment.

2. Even among the individual farmers, there should be some criterion of 
eligibility that could be based on income, in recognition of the fact 
that comparatively richer farmers do not need this support. For example, 
only those farmers having annual income from all sources up to 10 
percent of the average annual income in the country should be eligible 
for the payment.

3. There should be a ceiling on the amount of annual payment to an 
individual farmer, say, US$ 5,000 to 10,000.

/Product specific ceiling:  /In order that the total TDS is not 
concentrated on a small number of products resulting in high 
subsidisation of such products, it is necessary to fix product specific 
ceilings.

As the subsidies on some products have been high in the past and now the 
objective is to have low subsidy, the past levels of subsidies must not 
be the basis for fixing ceiling. It will be more rational to fix the 
product specific ceiling on the basis of a certain percentage of the 
annual production of the particular product, say 10 percent of production./

(2) Industrial tariff (NAMA)

The primary target should not be the coefficients in the Swiss formula, 
rather it should be the percentage reduction in tariff. Then appropriate 
coefficients should be worked out in order to have such tariff reduction.

For illustration, let us take an example. A decision may be taken that 
the developed countries and the developing countries are to reduce their 
tariff respectively by 60 percent and 40 percent. For such reduction in 
their respective tariffs of 4 and 30, which are close to their 
respective averages, the coefficient for the developed countries works 
out to 2.7 (or 3, after rounding off) and that for the developing 
countries is 45.