The dubious hold-up over NAMA

Simon Evenett 28 April 2011

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 I believe we are confronted with a clear political gap which, as things stand, under the NAMA framework currently on the table, and from what I have heard in my consultations, is not bridgeable today--Mr. Pascal Lamy, Report by the Director-General on his consultations on NAMA Sectoral Negotiations, 21 April 2011, page 3.

Not long ago, when several "new" issues were being proposed for inclusion on the Doha Round agenda, numerous trade experts and non-governmental organisations argued that the WTO should stick to what it was good at, namely, negotiating better access to foreign markets for industrial goods. Having successfully completed numerous post-war trade negotiating rounds, the view was that – if anything – trade officials knew how to negotiate market access.

NAMA used to be no-DRAMA

In the light of this history, it is pretty surprising that one of the major factors holding up the conclusion over the Doha Round is the inability to narrow differences on proposals to liberalise non-agricultural market access (NAMA). According to the current chairman of the NAMA negotiations, differences here are not of recent vintage:

the issue of the divergence in views between some Members about the appropriate level of ambition which is considered to be the main stumbling block of the NAMA negotiations since mid‑2008. (WTO 2011a, page 1).

What's going on? Do the underlying negotiating claims stand up to scrutiny? Are the claims concerning commercial benefits exaggerated? The purpose of this chapter is to answer these questions.

The DRAMA over NAMA

Fortunately the Director-General himself has provided a succinct summary of disagreement over the level of liberalising ambition for NAMA and its manifestation in the form of proposals for tariff-free trade in certain sectors of the world economy. Mr. Lamy notes:

One side considers tariff cuts achieved through the [Swiss tariff-cutting] formula as being insufficient to meets its expectations for the level of ambition of the Doha Round on industrial tariffs. They argue that the formula only provides for limited cuts in applied tariffs in emerging countries. They also argue that given the already low level of developed country industrial tariffs, and the application of the formula reductions with no exceptions, they would lose all leverage to obtain future industrial tariff reductions from emerging economies. Therefore, they saw the Doha Round as the last opportunity towards a harmonisation of tariffs with emerging economies. For that, the essence of tariffs on chemicals, industrial machinery and electric and electronic products should be eliminated. (WTO 2011b, page 2).

The proponents of a high level of liberalising ambition base their arguments on several factors, each of which will be examined in the section that follows. North American and European manufacturing associations have made prominent claims that there is not enough tariff liberalisation envisaged for emerging markets in the current NAMA proposals. Let's leave aside quite how they came to this conclusion, especially since leading emerging governments have not stated which of the three options available to them they plan on implementing. Still, the view of little benefit to Western manufacturers appears to have had a particularly significant impact on the view of US trade negotiators and policymakers.1

Those WTO members preferring a more modest level of ambition have had their position characterised by Mr. Lamy as follows:

The other side considers that the formula delivers a significant level of ambition. These Members point at the unilateral tariff reductions that many developing countries have undertaken since the Uruguay Round and point at the value in binding them in the Doha Round. They also indicate that, for the first time in the history of the multilateral trading system, developing countries are systematically cutting their tariffs, including some of their applied tariffs. As to sectorals, these Members see them as a means to improve the level of ambition, but according to them, such negotiations must be faithful to the mandate of the Doha Round, be balanced and proportionate. On this last point, some Members point at the disproportionate efforts that emerging countries would be undertaking when eliminating tariffs on chemicals, industrial machinery and electric and electronic products, considering the current very low level of tariffs applied by developed countries (WTO 2011b, page 2-3).

One solution to the impasse is for those seeking a higher level of negotiating ambition to withdraw their proposals. We should not be surprised that in a trade negotiation a party demands a lot of reform by others. What a negotiator asks for and what they get – if they are serious about concluding the deal – are all-too-often two different matters. In what follows a fact-based assessment is made of the arguments made in favour of a high level of negotiating ambition. If these arguments are found wanting, then they provide a dubious basis upon which to hold up the NAMA negotiations.

Are the claims made in support of a high level of ambition sensible?

It will be useful to start with some facts concerning the tariffs applied by the larger emerging markets on imports of industrial products (see Table 1). The five emerging markets selected include three of the BRICs – Brazil, India and China. The most important feature of this table is the substantial heterogeneity across the larger emerging markets which, as I will argue below, calls into question the tendency to lump all emerging markets into the same category when criticising the lack of ambition in existing NAMA proposals.

For example, of the largest emerging markets two (India and Turkey) still have substantial proportions of their import tariffs on industrial products unbound. The lowest average bound rate of tariffs for these five countries is less than a third of the highest average bound rate; likewise for average applied rates. The resort to tariff peaks – tariffs above 15%– varies considerably too.

Now what of the claims that the application of the Swiss tariff-cutting formula will not reduce emerging markets tariffs by much? Since the tariff peaks offer the greatest protection against imports – and the greatest distortion to markets – let's start there. A tariff rate of 15% or more is typically taken to be a tariff peak. Under the most generous tariff cutting formula available to developing countries,2 only bound rates of tariffs currently at 40% of more could generate a post-Doha tariff peak of 15%. As Table 1 makes clear, the average bound tariff rates in the largest emerging markets are well under 40%, so any caricature of a Doha Round leading to virtual tariff elimination in the West while wide-ranging tariff peaks survive in emerging markets is simply impossible to sustain.3

Now bear in mind that nearly two-fifths of Brazil's product categories (at the 6-digit level) have tariff rates applied at 15% or more. The comparable percentages for Mexico and China are 22.7% and 11.6%, respectively. Application of the currently proposed tariff cutting formulas will cut a 15% tariff to between 8.4% to 9.4%, that is, between a 37.5 and 42.9 percentage reduction in the original tariff. The higher the initial tariff peak the greater the percentage reduction in tariff. Therefore a 20% tariff peak would, after the application of these formulas, be reduced to between 10% and 11.1%, a larger actual and percentage reduction in tariffs that with a 15% tariff peak.

Even once allowance for exceptions is made for, the current NAMA proposals will result in a substantial reduction in the number of tariff peaks in three of the largest emerging markets and in percentage cuts in tariff rates that exceed previous trade rounds.

Table 1. The tariffs applied by large emerging markets on industrial products

 

Percentage of manufactured goods lines bound

Average bound rate on manufacturing goods

Average applied rate on manufacturing goods

Percentage of MFN applied rates above 15%

Average tariff rate applied in 1995

Brazil

100

30.7

14.1

39.0

12.9

China

100

9.2

8.7

11.6

(23.8)4

India

69.8

34.4

10.1

7.3

36.0

Mexico

100

34.9

9.9

22.7

12.6

Turkey

42.6

17.0

4.8

3.1

7.5

Sources: Data for the second through fifth columns is taken from WTO Tariff Profiles 2010. Last column data from Mexico and Turkey data is taken from Bacchetta and Bora (2001). India data from its 1998 WTO Trade Policy Review and refers to 1997/8. Brazil's data is taken from its 1996 WTO Trade Policy Review (page xvi).

Much has been made by Western manufacturers of the gap between the bound and applied rates of tariffs. It has been argued that, due to unilateral tariff reforms by emerging markets since the completion of the Uruguay Round, the gap has grown so much that for many imported goods in emerging markets the application of the tariff cutting formulas merely reduces the legally bound tariff without cutting the applied rate. India is the poster child for this "problem". Its average applied tariff in the mid-1990s was 36%, whereas now it is 10.1%. Indian average bound rates are much closer to the former than the latter.

What to make of this criticism? The first, factual comment is that is certainly doesn't apply to all of the large emerging markets that are WTO members.

  • China's bound and applied average rates are very similar, so only under the most unusual circumstances would cutting the former not force cuts in the latter.
  • Brazil, in contrast, has seen its average tariff rate rise – not fall – since the WTO was created, which certainly doesn't fit the story put about by Western exporters' trade associations.

To the extent that the other large emerging markets have seen tariff cuts since the 1990s, they have been on a far smaller scale than India's. All of this suggests that, while gaps between bound and applied rates do exist, there is simply too much variation across even the largest emerging markets to sustain broad-brushed conclusions of limited market access gains for Western manufacturers from current NAMA tariff cutting proposals.

Western manufacturers have also sought to dismiss arguments that there is positive, commercial value in binding some, or all, of previously implemented unilateral tariff reforms. Such manufacturers and their representatives have argued that emerging markets are unlikely to reverse tariff reforms. To believe that this assumption – for it is only that – holds across countries with such different levels of development, political systems, and growth trajectories is heroic. Indeed, as noted earlier, average tariff rates have increased in Brazil since the WTO was formed.

To reinforce the point Table 2 reports on the protectionist measures taken by large emerging market members of the WTO since November 2008. The temptation to reverse prior trade reforms was probably higher during the recent global economic downturn. This table excludes so-called unfair trade actions (antidumping etc) so that they cannot be said to be "distorting" the results.

Once again there is pronounced variation across the large emerging markets that are WTO members, not just in the number of measures taken but in the scope of trade and trading partners affected. The last two columns of Table 2 report the number of times US and EU commercial interests have been hurt by these emerging markets since November 2008.

While Mexico and Turkey have caused little harm to Western commercial interests, the same cannot be said for Brazil, China, and India. In fact, 19 of the measures taken by Brazil were tariff increases. Just because the recent global economic crisis didn't generate the across-the-board transparent tariff increases of the 1930s doesn't mean that Western export interests emerged unscathed from protectionism and that had tariff bindings been lower some of those market opportunities would not have been lost.

Taken together the foregoing arguments suggest that binding unilateral tariff reforms would likely have commercial value to Western firms, the magnitude of which are very unlikely to be uniform across products and trading partners. If bindings do indeed have greater value than thought, resort to sectorals is not so necessary, and the apparently low ambition outcome for the NAMA negotiations cannot be dismissed so easily. 

Table 2. The extent to which the largest emerging market WTO members closed markets during the recent global economic downturn varied

 

Number of protectionist measures implemented since November 2008, excluding unfair trade actions

Number of tariff lines affected (percentage of product categories affected)

Number of trading partners affected (percentage of maximum)

Number of times US commercial interests hurt, excluding unfair trade actions

Number of times EU commercial interests hurt, excluding unfair trade actions

Brazil

34

246 (20.4%)

130

22

26

China

24

351 (29.2%)

164

13

12

India

28

365 (31.3%)

145

16

20

Mexico

5

86 (7.1%)

36

5

2

Turkey

3

11 (0.9%)

14

1

2

Source: Global Trade Alert database.

Perhaps the feeblest argument made by those seeking higher levels of liberalising ambition in the NAMA negotiations is that the implementation of the Doha Round based on the current formula would provide industrialised countries with far fewer negotiating chips in subsequent negotiations on NAMA. This criticism misses entirely the point of a Single Undertaking where trade-offs across matters can be negotiated. On their worst-case scenario in future rounds Western governments would have to make concessions on non-NAMA policies if they are going to persuade emerging market governments to liberalise NAMA. There is nothing counter-cultural about this in the WTO.

Overall, then, the claims that Western exporters will gain little from emerging market implementation of the tariff cutting formulas on the table do not bear close examination. The variation across the large emerging markets alone is so big as to call into question these claims. Without support for these claims the case for aggressively pursuing sectorals is weak. Demands for the latter, then, should not hold up the conclusion of the Doha Round NAMA negotiations.

Concluding remarks

Trade negotiators can ask for whatever they like. What ultimately matters is what all WTO members can agree to.

  • For three years certain WTO members have sought to persuade their trading partners of the merits of tariff elimination – or substantial tariff reductions – in several sectors of the world economy that go beyond the application of the tariff-cutting formulas already agreed proposed.

This argument has not carried the day among most WTO members.

  • Beyond some face-saving gestures, it seems that many emerging-market governments are unprepared to go much further in offering tariff cuts.

Given these points, holding up the NAMA negotiations with further demands for ambition now jeopardises the entire Doha Round.

Even more depressing is the realisation that these demands are more than likely based on a flawed understanding of the underlying facts about emerging-market tariff regimes and a tendency towards gross over-generalisation of emerging-market circumstances. What a way to conduct a trade negotiation.

References

Bacchetta, Marc, and Bijit Bora. "Post-Uruguay Round Market Access Barriers For Industrial Products," UNCTAD Policy Issues in International Trade and Commodities. Study Series No. 12. Geneva.

WTO (2011a). World Trade Organization. "Textual report by the Chairman, Ambassador Luzius Wasescha, on the state of play of the NAMA negotiations." 21 April 2011. TN/MA/W/103/Rev.3/Add.1

WTO (2011b). World Trade Organization. "Report by the Director-General on his consultations on NAMA Sectoral Negotiations," 21 April 2011. TN/C/14.


 

1 Given the fine-grained variation in tariff rates alluded to in the next section, it is an open question whether the computational models used by Western export representatives and their consultations are sufficiently detailed to obtain accurate estimates of the impact of implementing the proposed Swiss-formula tariff cuts.

That with a Swiss formula coefficient of 25.

No doubt some will say that developing countries are allowed to exempt some product lines from the application of the Swiss tariff cutting formula. This is formally correct, but there are limitations on the extent to which such exemptions can be used. Moreover, while the industrialised countries are not allowed such exceptions in the current NAMA text, this does not mean that the negotiation will end with no exceptions being granted for certain tariff peaks in sensitive sectors in industrialised economies. In short, the "exemptions argument" is a double-edged sword.

Pre-accession applied average tariff rate. Notice in nowhere in the main text is the fall in the applied average tariff rate in China attributed to unilateral tariff reform on the part of the Chinese authorities.

 

 

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Topics:  International trade

Tags:  WTO, Doha Round, emerging markets, NAMA

Professor of International Trade, University of St. Gallen; Research Fellow, CEPR

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