Tariff Negotiations in NAMA & South Asia July Agreement and Beyond
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Tariff Negotiations in
NAMA & South Asia
July Agreement and Beyond - extracted text
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W ORKING PAPER -
Hariff Negotiations in
NAMA & South Asia
July Agreement and Beyond
I
t
i
Clelnltlald
Centre for Trade & Development
An Oxfam GB Initiative
Copyright © Centad April 2005
Centad Working Papers are intended to disseminate the preliminary find
ings of ongoing research both within and outside Centad on issues around
trade and development for the purpose of exchanging ideas and catalysing
debate. The views, analysis and conclusions are of the authors only and
may not necessarily reflect the views or position of Centad or Oxfam GB.
Readers are encouraged to quote or cite this paper with due acknowledge
ment to the author and Centad.
Centad acknowledges the comments and inputs provided by Aditya Bhattacharjee, Bhagirath Lal Das, Indra Nath Mukherji, Nitya Nanda, Pranav
Kumar, Robin Koshy, S.K. Mohanty, Sanchita Chatterjee and T.S. Vishwanath on an earlier draft of this paper. Centad is also grateful to Mustafizur
Rahman for providing inputs about the impact of NAMA negotiations on
Bangladesh. Views and errors if any are solely author's responsibility.
Key Words : Girard formula, NAMA, South Asia, Swiss formula, Tariff, WTO
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Foreword
As developing countries including those from South Asia, rally forces and evaluate options
ahead of the Hong Kong Ministerial meeting in December 2005, Non Agricultural Market
Access (NAMA) assumes importance as one of the most critical issues that will be up for
negotiations. A longer transition period to rationalise tariffs combined with increased access
into the markets of developed countries, is the elusive formula that developing and Least
Developed Countries (LDCs) would like to secure. However, gaining this would not be easy
and developing countries would have to be pragmatic in approach, as this paper argues.
This paper moots a bold approach to tackle tariff reductions, sectoral elimination, tariff
binding and preference erosion with the interests of five South Asian countries - Bangla
desh, India, Pakistan, Nepal and Sri Lanka in mind. On tariff reductions, it acknowledges
that a linear formula for tariff reduction that many developing countries favour, might not
evoke consensus.
Instead, it suggests a non-linear Girard formula with a smaller 'B' coefficient for developed
countries and a higher 'B' coefficient for developing countries with a longer transition
period. The paper explores ways to realise the Doha Ministerial Declaration so that tariffs
in sectors of export interest to developing countries are reduced. It further advocates that
the call from developed countries to bind all tariff lines should be resisted by developing
countries. Instead, it proposes that all countries be divided into four groups according to
the current tariff binding coverage and the rates at which tariffs are bound be linked to
current bound rates rather than applied rates. Finally, the paper suggests various options
to recompense LDCs that stand to lose out on preferential access to developed markets,
once tariff liberalisation is underway.
This paper's conclusions are based on an aggregate analysis and a lot more research is
called for on individual tariff lines and sectors. Achieving a positive outcome in the NAMA
negotiations will require a lot more homework by the South Asian countries. Centad hopes
that this working paper will provide some leads in developing a detailed research agenda
to articulate the interests of South Asian Countries ahead of the Hong Kong Ministerial
Meeting in December 2005. Centad will shortly be launching a special Hong Kong Series of
Papers on NAMA and Agriculture, to support this cause.
Samar Verma
Regional Policy Advisor
Oxfam GB
m
Abbreviations
IV
ATR
:
Applied Tariff Rate
BTR
:
Bound Tariff Rate
DDA
:
Doha Development Agenda
EC
:
European Commission
EU
:
European Union
GATT
:
General Agreement on Tariffs and Trade
GSR
:
Generalised System of Preferences
LDCs
:
Least Developed Countries
MFN
:
Most Favoured Nation
MTN
:
Multilateral Trade Negotiation
NAMA :
Non Agricultural Market Access
US
:
United States
WTO
:
World Trade Organisation
Contents
Foreword
Hi
Abbreviations
iv
Executive Summary
vii
1.
Background
1
2.
Scope of the Paper
2
3.
Negotiations need to be consistent with GATT and Doha Mandate
2
4.
Initial Reluctance to the July Agreement
4
5.
Tariff Reduction
5.1 Implementation Phase
5
12
6.
Sectoral Approach
6.1 Zero for Zero Approach
6.2 Implementation Process
12
14
15
7.
Tariff Binding
7.1 Tariff Binding Coverage
7.2 Rate at which Unbound Tariff Lines should be Bound
16
17
18
8.
Preference Erosion
19
9.
Conclusion
20
List of Figures
Figure 1 : Percentage reduction in the MFN bound tariff rates for 'fish and fish
products' of US, EC, India and Pakistan on application of the Swiss formula
demonstrating 'more than full reciprocity' by India and Pakistan
11
Figure 2: Proposed tariff binding coverage
17
List of Tables
Table 1 A: MFN average and bound tariff rates with binding coverage in five South
Asian countries for non-agricultural products by MTN category
5
Table 1 B: MFN average and bound tariff rates with binding coverage in five South
Asian countries for non-agricultural products by MTN category
6
Table 2: Bound duties for non-agricultural products of four South Asian
countries
6
Table 3: Binding coverage of agricultural and non-agricultural products of four
South Asian countries
8
v
Table 4: The impact of the Girard formula with different coefficients of'B' on
the average MFN bound tariff rates for select non-agricultural products of
India by MTN category
8
Table 5: The impact of the Girard formula with different coefficients of 'B' on
the average MFN bound tariff rates for select non-agricultural products of
Pakistan by MTN category
9
Table 6: Hypothetical application of the EC proposed Swiss formula on the MFN
bound tariff rates of'fish and fish products' of US, EC, India and Pakistan
demonstrating 'more than full reciprocity' by India and Pakistan
11
Table 7: MFN applied and bound tariff rates of four developed countries for select
non-agricultural products by MTN categories
13
Table 8: The hypothetical application of the implementation period proposal for a
developing country assuming hypothetical bound tariff rate
15
Table 9: The hypothetical application of the implementation period proposal
under the sectoral initiative for two non-agricultural products of India and
Pakistan by MTN category
16
Table 10: Depicting application of binding unbound tariff lines at two times
the average ATR and BTR for India and Pakistan
18
List of Boxes
Box 1: Tariff negotiations - Article XXVIII bis of GATT 1994
3
Box 2: Doha Development Agenda, Ministerial Declaration -
market access for non-agricultural products, paragraph 16
4
Box 3: Different tariff reduction formula proposed by different countries
during different stages of the negotiation process before the July agreement
7
Box 4: Tariff reduction proposals by different countries after the July agreement
10
Box 5: Potential gains for Bangladesh from duty free access to
developed country markets
vt
14
Executive Summary
Negotiations on industrial tariffs or Non Agricul
tural Market access (NAMA) are crucial for devel
oping countries. Hasty tariff liberalisation could
impose harsh adjustment costs on developing
countries. It is therefore necessary that negotia
tions on NAMA adequately reflect the concerns
of developing and least developed countries
(LDCs), as warranted by the General Agreement
on Tariffs and Trade (GATT), Doha ministerial
declaration and the July agreement. Also, the
negotiations on NAMA should result in substantial
market access for developing countries and LDCs
by bringing down barriers like tariff escalation
and tariff peaks in developed countries. One of
the regions which helps in building a case against
indiscriminate tariff liberalisation in the South and
protectionism in the North is South Asia.
This paper on 'Tariff Negotiations in NAMA and
South Asia' looks at the possible impact of the
ongoing tariff negotiations on five South Asian
countries namely Bangladesh, India, Nepal, Pak
istan and Sri Lanka at an aggregate level or at
Multilateral Trade Negotiation (MTN) categories
level. The paper analyses the impact of some of
the submissions and also endeavours to find out
the obligations that South Asian countries may
have to fulfill in the ongoing negotiations under
NAMA.
Tariff Reduction
Due to lack of consensus on a linear formula or
an average tariff cutting approach, the paper
proposes to follow the non linear Girard formula.
This formula takes into account the average
tariff profile of a country while calculating the
new bound rate for a particular tariff line. The
non linear formula is less harsh as compared to
the pure Swiss formula, which would drastically
reduce the tariff rates. How drastic would the
reduction of tariff rates be after applying the
Girard formula, depends on the coefficient value
'B' in the formula. Higher the value of 'B' lesser
would be the reduction. Hence, this paper pro
poses:
+ A higher value of 'B' in the Girard formula for
developing countries
♦ A lower or smaller value of 'B' in the Girard
formula for developed countries.
+ A longer implementation period spanning ten
years for developing countries to undertake
reduction commitments.
Sectoral Elimination
According to the Doha Ministerial Declaration,
the tariff rates on all sectors that are of export
interest to developing countries and LDCs should
be substantially reduced. Sectoral elimination
talks of eliminating the tariff rates on selected
sectors of export interest to developing countries
and LDCs.
The negotiations on sectoral elimination could
follow the following structure :
+ Developed countries completely eliminate
tariffs on sectors of export interest to devel
oping countries and LDCs such as 'textiles
and clothing', 'fish and fish products', etc.
+ Developing countries reduce their tariffs on
these sectors with a lower coefficient value
of'B'. The coefficient value to be used in the
sectoral elimination approach by developing
countries could be smaller than the value of
'B' to be used for other tariff lines.
+ Developed countries eliminate their tariffs
in four years and developing countries have
a ten year time period to reduce their tariff
rates.
VII
+ Developing countries retain the flexibility
to choose the tariff lines within a particular
sector that would be subjected to reduction
commitments.
Tariff Binding
Developed countries want developing countries
to bind all their tariff lines. This demand should
be stoutly resisted. Any further binding of tariff
lines should take cognisance of the existing bind
ing coverage.
+ All countries be divided into four slabs on the
basis of their current tariff binding coverage
and then increase their respective tariff bind
ing.
+ Countries with less than 30 percent of tariff
binding coverage could increase their bind
ing coverage to 50 percent, countries with
a binding coverage of more than 30 percent
but less than or equal to 50 percent could
increase their coverage up to 70 percent.
Similarly, countries with binding coverage of
more than 50 percent but less than or equal
viii
to 70 percent could increase their binding
coverage to up to 85 percent and, countries
with a binding coverage in excess of 70 per
cent could increase their coverage to up to
90 percent.
+ The rate at which tariff lines are bound could
be twice the bound tariff rate and not the
applied tariff rate.
Preference Erosion
With increasing tariff liberalisation the prefer
ence margins that LDCs such as Bangladesh and
Nepal enjoy in developed country markets is
getting eroded. Developed countries should give
preferential treatment to the products of LDCs in
their markets so as to minimise the harm caused
due to erosion of preferences.
Developing countries including those from South
Asia need to protect their interests in the ongo
ing NAMA negotiations. However, while doing so,
these countries should not get overcautious. A
pragmatic approach, with a proper blend of defen
sive and aggressive agenda could be followed.
1. Background
Negotiations on industrial tariffs or non-agricultural market access (NAMA) have always been a
contentious process. Developing countries have
apprehended that any hasty and indiscriminate
tariff liberalisation will impose harsh adjustment
costs on them. These costs could be in the form
of balance of payment problems, de-industri
alisation and hence unemployment. The rapid
reduction in industrial tariffs in Sub- Sahara
Africa in 1980 led to de-industrialisation and
unemployment in some countries. Moreover,
significant market opening by reducing tariff
rates could also lead to a lower tax revenue and
hamper interests of many developing countries,
as import tariff is a major component of total
revenue. Industrial tariff is an important policy
tool and countries use this tool for numerous
purposes ranging from checking any alarming
rise in imports to protecting livelihoods and fos
tering industrialisation.
However, negotiations on industrial tariffs are
not just about developing and Least Devel
oped Countries (LDCs) adopting defensive pos
tures but also about the protectionist stance of
developed countries. The potential gains that
could accrue to developing countries and LDCs,
if developed countries reduce their high tariff
rates on products of export interest to these
countries is mammoth. Hence negotiations on
NAMA are about resisting hasty liberalisation in
South and dismantling excessive protectionism
in North.
One of the regions that helps in building a case
against hasty liberalisation in South and protec
tionism in North is South Asia.1 All the South
Asian countries, except Sri Lanka to some extent,
maintain high industrial tariff rates. These coun
tries rely on tariff revenue for revenue mobilisa
tion. According to the World Bank, tariff reve
nue's contribution to tax revenue in South Asian
countries is significant. In 2003, in Bangladesh
and India, tariff revenue contributed 22.6 per
cent and 18.5 percent to total revenue respec
tively. In Nepal this figure was 27.2 percent.
Similarly, the tariff revenue contribution to total
revenue in Pakistan and Sri Lanka, in 2003, was
12.2 and 11.3 percent respectively. Any drastic
reduction in the tariff rates could hamper the
revenue mobilisation in these countries.
Some estimates show that drastic tariff reduc
tion methodologies could change tariff revenue
in India by -61 to -30 percent.2 Even a modest
tariff reduction formula will also lead to change
in tariff revenue by -8 percent.3
Moreover, from the experience of Sub Saharan
African countries like Senegal, Sierra Leone,
Sudan, Tanzania, Uganda, it is clear that any
drastic opening up of the markets would not
augur well for development imperatives of South
Asian countries.4 At the same time, the South
Asian region faces a lot of barriers in markets of
developed countries in the form of tariff peaks
and tariff escalation. Tariff escalation as a tariff
measure in developed countries, discourages
the growth of processing industry in developing
countries and in LDCs. It does not allow these
countries to graduate from exporting raw mate
rials to processed and finished goods. The aver
age US tariff for all imports is 1.6 percent, but
this rises to 4 percent for imports from India and
to 14-15 percent for imports from LDCs such as
Bangladesh and Nepal. EC imposes tariffs of less
1 South Asia in the context of this study means Bangladesh, India, Nepal, Pakistan and Sri Lanka.
2 Santiago Fernandez de Cordoba and David Vanzetti, 'Now What? Searching for a Solution to the WTO Industrial Tariffs’, http://192.91.247.38/
tab/namameeting/NAMAstudy.pdf (visited on 5 April 2005).
3 Ibid
4 Kamal Malhotra, 'Making Global Trade Work for Poor', (London: Earthscan Publications: 2003) 163.
Tariff Negotiations in NAMA & South Asia
than 4 percent on Indian yarns, but this tariff
rate escalates to 12 percent if the yarn is woven
into garments.5
Hence, from the South Asian perspective nego
tiations on NAMA should:
4- Result in better market access for their prod
ucts of export interest.
+ Take into account the special needs of the
region and provide flexibility in using indus
trial tariff as an important policy tool to
pursue development objectives.
The negotiations on non-agricultural products
in the World Trade Organisation (WTO) were
launched in January 2002 by creating a Nego
tiating Group on Market Access (NGMA). The
ongoing negotiations on non-agricultural prod
ucts were to be completed by 1 January 2005.
However, this deadline has been missed and the
negotiations are still far from being completed.
The participants in the negotiation process were
expected first to agree on how to conduct the
tariff cutting exercise. In other words, the par
ticipants have to first agree on 'modalities'. The
current state of play is that the member coun
tries are still struggling to establish modalities
for future negotiations. Though, in July 2004
the member countries agreed to a framework
for establishing modalities in market access for
non-agricultural products.6 The July agreement
was an important development as it was the first
agreement amongst the member countries of the
WTO after the collapse of the Cancun ministerial.
Since it lays down the framework for establishing
future modalities, it needs to be comprehended
well as it could determine the future course of
action.
2. Scope of the Paper
This paper looks at the July text of NAMA from
a South Asian perspective and endeavours to
identify a road map for future negotiations that
reflect the concerns of South Asia. The analysis
in this paper is not based on individual tariff lines
or disaggregate level but at an aggregate level
or on Multilateral Trade Negotiation (MTN) cat
egories level. Further, the analysis in this paper
uses simple tariff averages rather than weighted
tariff average. Hence, the conclusions should be
understood in this context. The paper looks at the
following key components in NAMA negotiations:
4- Tariff reduction
4- Sectoral component
4- Tariff bindings
4- Preference erosion
3. Negotiations need to be consistent with
GATT and Doha Mandate
It is frequently argued in international trade
theory that customs duty and other tariff rates
often act as impediments to free flow of goods
across borders and hence should be substantially
reduced. Article XXVIII 6/sof the General Agree
ment on Tariffs and Trade (GATT) 1994 reflects
this principle of international trade. However,
Article XXVIII bis also states that negotiations
directed towards substantial reduction of the tar
iffs and other charges will be done on a mutu-
5 Stitched Up - How Rich Country Protectionism in Textiles and Clothing Trade Prevents Poverty Alleviation, 60 Oxfam Briefing Paper,
http://www.oxfam.org/eng/pdfs/bp60_textiles.pdf (visited on 10 April 2005)
6 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex B.
2
July Agreement and Beyond
Box 1: Tariff negotiations - Article XXVIII bis of GATT 1994
1.
The contracting parties recognize that customs duties often constitute serious obstacles to trade;
thus negotiations on a reciprocal and mutually advantageous basis, directed to the substantial
reduction of the general level of tariffs and other charges on imports and exports and in particular
to the reduction of such high tariffs as discourage the importation even of minimum quantities,
and conducted with due regard to the objectives of this Agreement and the varying needs of
individual contracting parties, are of great importance to the expansion of international trade. The
CONTRACTING PARTIES may therefore sponsor such negotiations from time to time.
2.
(a) Negotiations under this Article may be carried out on a selective product-by-product basis
or by the application of such multilateral procedures as may be accepted by the contracting
parties concerned. Such negotiations may be directed towards the reduction of duties, the
binding of duties at then existing levels or undertakings that individual duties or the aver
age duties on specified categories of products shall not exceed specified levels. The binding
against increase of low duties or of duty-free treatment shall, in principle, be recognized as a
concession equivalent in value to the reduction of high duties.
(b) The contracting parties recognize that in general the success of multilateral negotiations would
depend on the participation of all contracting parties which conduct a substantial proportion of
their external trade with one another.
3.
Negotiations shall be conducted on a basis which affords adequate opportunity to take into
account:
(a) the needs of individual contracting parties and individual industries;
(b) the needs of less-developed countries for a more flexible use of tariff protection to assist their
economic development and the special needs of these countries to maintain tariffs for rev
enue purposes; and
(c) all other relevant circumstances, including the fiscal,* developmental, strategic and other
needs of the contracting parties concerned.
Source: GATT Legal Text
ally advantageous basis. Further paragraph 3 of
Article XXVIII bis of GATT 1994 states that while
conducting negotiations on bringing down the
tariff rates, it is important to take due cognisance
of the needs of individual countries which include
fiscal, developmental, strategic and other needs
(See Box 1 for the legal text of Article XXVIII bis
of GATT).
The elements of Article XXVIII bis of GATT 1994
were reflected in the Doha Development Agenda7
(DDA). Paragraph 16 of the DDA states that nego
tiations on NAMA will, in future, target to reduce
or eliminate ail kinds of tariff barriers in particu
lar on products of export interest to developing
countries. It also states that negotiations shall
take cognisance of the development needs of
developing countries and LDCs. Further, it recog
nises the special and differential treatment for
developing countries by asking them to make less
7 World Trade Organisation Ministerial Declaration, WT/MIN (Olj/DEC/l, adopted 14 November 2001, paragraph 16.
Tariff Negotiations in NAMA & South Asia
3
Box 2: Doha Development Agenda, Ministerial Declaration - market access for nonagricultural products, paragraph 16
We agree to negotiations which shall aim, by modalities to be agreed, to reduce or as appropriate
eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation,
as well as non-tariff barriers, in particular on products of export interest to developing countries. Prod
uct coverage shall be comprehensive and without a priori exclusions. The negotiations shall take fully
into account the special needs and interests of developing and least-developed country participants,
including through less than full reciprocity in reduction commitments, in accordance with the relevant
provisions of Article XXVIII bis of GATT 1994 and the provisions cited in paragraph 50 below. To this
end, the modalities to be agreed will include appropriate studies and capacity-building measures to
assist least-developed countries to participate effectively in the negotiations.
Source: World Trade Organisation Ministerial Declaration, WT/MIN(01)/DEC/l, adopted 14 November 2001
than full reciprocity (See Box 2). In other words,
developing countries and LDCs should not be
asked to undertake the same type and level of
commitments that developed countries undertake
depending on their development needs.
Thus any negotiation process or final agree
ment on tariff reductions should be consistent
with Article XXVIII bis of GATT and the Doha
mandate.
4. Initial Reluctance to the July Agreement
Members exhibited a great reluctance in agreeing
to a NAMA text in the July agreement because
there was no consensus on the modalities on
agriculture. As a result, the decision on NAMA
in the July agreement is not specific and most
of the contentious issues have been left for the
future negotiations. The decision on NAMA is not
in the form of modalities. The Annex on NAMA
merely outlines "initial elements for future work
on modalities".
The entire text on NAMA, except the first para
graph, had been drawn from the failed Cancun
ministerial text or the Derbez text.8 In fact, it is
interesting to note that the first draft of the July
package that was circulated on 16 July 2004 was
similar to the Derbez text. Developing countries
and LDCs had vociferously opposed the NAMA
portion of the Derbez text during the Cancun
ministerial. The cropping up of the same text in
the first draft of the July package shocked and
outraged many developing countries and LDCs.
The huge opposition by developing countries and
LDCs led to the addition of a paragraph prefacing
the entire Annex on NAMA.9 This paragraph states
that the framework on NAMA contains initial ele
ments for future work on modalities. It further
states that additional negotiations are required
to reach the specifics relating to the formula for
tariff reduction, issues concerning the treatment
of unbound tariffs and the flexibilities to ease the
participation of developing countries.
8 Draft Cancun Ministerial Text, Second Revision, JOB(03)/150/Rev.2, 13 September 2003
9 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex B, paragraph 1.
reement and Beyond
But this appears to be a big ask since the Derbez
text forms the major body of the framework for
establishing modalities on NAMA.
The addition of this paragraph was intended to
assuage the feelings of developing countries by
offering them a platform for further negotiations.
5. Tariff Reduction
An interesting debate on the issue of tariff reduc
tion is whether developing countries should
undertake line-by-line tariff reduction or should
they be asked only to reduce their average tariff,
thus, leaving the flexibility to the individual coun
try to spread the average over different tariff
lines. The proponents of the latter option argue
that this would enable countries to take care of
their development dynamics. Line-by-line tariff
reduction will erode the policy space of develop
ing countries. Reducing average tariff and then
distributing it over individual tariff lines could be
the best way forward for developing countries.
However, the hard realities of multilateral trade
negotiations make this option extremely difficult.
How difficult this option is could be gauged from
the fact that even a linear formula for line-by
line tariff reduction has no takers, let alone the
option of reducing the average tariff and then
distributing it to individual tariff lines.
India and many other developing countries have
been advocating a linear formula for cutting
tariff on non-agricultural products in develop
ing countries (See Box 3). However, consider
ing the developments since the formation of
the NGMA to the July Agreement, it seems that
the option of a linear formula for tariff reduc
tion in developing countries is extremely diffi
cult. The NGMA, in 2003, in its draft elements
of modalities, proposed a non-linear formula.10
Moreover, Annex B in paragraph 5 states that
the negotiating group should continue its work
on a non-linear formula. It seems that develop
ing countries are also realising this hard reality.
This is evident from the joint communique made
by India, Brazil and Argentina to the NGMA in
April 2005.11 This submission proposes a non
linear formula for tariff reduction. This also
indicates that the advocacy for a linear formula
has not worked.
Table 1 A: MFN average and bound tariff rates with binding coverage in five South
Asian countries for non-agricultural products by MTN category
in percentage
Import
market
Textiles and
clothing
Applied
duty
Av
Leather, rubber,
footwear and travel
goods
Applied
duty
Bound duty
Av
Cov
Av
Metals
Bound duty
Av
Applied
duty
Bound duty
Cov
Av
Av
Cov
Bangladesh
27.7
37.5
0
19.8
3
1
18.8
31.9
India
Nepal
27.1
—
26.6
—
66
—
28.8
—
35.2
—
51
___
29
—
38.7
—
54
—
Pakistan
21.6
21.9
96
18.2
41.4
10
15.5
36.2
4
15.5
50.0
9
6.3
52.2
5
Sri Lanka
5.3
12.1
97
Source: World Trade Report, 2004, World Trade Organisation
Note: Av=Average, Cov=Coverage
10 Draft Elements of Modalities for Negotiations on Non-Agricultural Products, TN/MA/W/35/Rev.l, 19 August 2003.
11 Communication to the NegotiatingGroup on non-agricultural market access from Argentina, Brazil and India,TN/MA/W/54, 15 April 2005
Tariff Negotiations in NAMA & South Asia
5
Table 1 B: MFN average and bound tariff rates with binding coverage in five South
Asian countries for non-agricultural products by MTN category
in percentage
Import
market
Fish and fish prod
ucts
Applied
Bound
Chemicals and photo
graphic supplies
Av
Av
Cov
Av
Av
Cov
Bangla
desh
29.6
41.4
10
15.5
43
2
Wood, pulp, paper
and furniture
Bound
Applied
duty
duty
Av
Cov
Av
21.0
5
38.1
India
30.0
—
100.7
___
13
—
29.2
39.6
—
89
—
25.7
—
36.5
___
62
Nepal
Pakistan
12.0
100.0
10
13.6
48.4
53
19.1
46.8
50
Sri Lanka
9.8
50
95
3.0
9.1
5
10.8
30.8
15
Applied
duty
duty
duty
Bound
duty
Source: World Trade Report, 2004, World Trade Organisation
Note: Av=Average, Cov=Coverage
The negotiating space made available to devel
oping countries by paragraph 1 should be used
to negotiate for a linear formula for developing
countries as a special and differential measure.
If this is not possible, then, developing countries
should negotiate for a mild non-linear formula,
as Annex B does not specify what is meant by
a non-linear formula. (See Box 3 for different
tariff reduction formula proposed by different
countries). The developing countries should also
argue for elimination of tariff peaks and tariff
escalation by developed countries.
Tables 1 and 2 clearly show that the countries in
the South Asian region maintain high bound tariff
rates. The tariff structure in these countries are
also characterised by low level of binding cover
age and high international (bound tariff rates in
excess of 15 percent) and national peaks (bound
tariff rates that are three times more than coun
try's simple average). In India, 60.1 percent of
the total tariff lines have bound tariff rates of
more than 15 percent. Similarly in Pakistan, 33.2
percent of the total tariff lines have bound tariff
rates that exceed 15 percent.
Table 2: Bound duties for non-agricultural products of four South Asian countries
in percentage
Import
market
Binding
coverage
Simple
average
Bangladesh
3.1
India
National
peaks13
42.9
Inter
national
peaks 12
2.7
0.2
Last year
of imple
mentation
1997
69.8
34.3
60.1
0.1
2005
Pakistan
36.9
35.3
33.2
0
2004
Sri Lanka
28.3
19.2
13.1
0.5
2001
Source: World Trade Organisation Secretariat, WTO Member's Tariff Profiles, TN/MA/S/4/Rev.l/Corr.l, 15 November 2002
12 International Peaks shows the percentage of tariff lines in a country that have a bound tariff rate of more than 15 percent.
13 National Peaks shows the percentage of tariff lines in a country that have bound tariff rates at least three times higher than the country s
simple average.
6
July Agreement and Beyond
Box 3: Different tariff reduction formula proposed by different countries during differ
ent stages of the negotiation process before the July agreement
+ United States proposed the following formula: T1 = 8*T0/8+T0, where T1 is the final tariff rate, TO
is the initial tariff rate and 8 is the Swiss coefficient.
4- South Korea proposed the following formula for tariff rates that were above two times the national
average but less than 25 percent: T1 = (T0*0.8)-0.7*(T0-2*T2), where T1 is the maximum tariff rate
after reduction, TO is tariff rate before reduction (Above two times the national average) and T2 is
the national average tariff rate.
4- China proposed the following formula: T1 = (A+B*P)*TO/(A+P*P)+TO, where TO is the base rate,
T1 is the final rate, A is the simple average of base rates, P is the Peak factor, P = TO/A, B is the
adjusting coefficient, e.g. for the year 2010, B = 3 and for 2015, B = 1.
+ India proposed the following formula - India’s formula was in two steps-Step 1: T1 = (1-AY/100)*T0;
Step 2: T2 = T1 or 3*Ta whichever is less, where A is less than full reciprocity parameter (A = 1 for
developed countries, A = 0.67 for developing countries), Y is reduction percentage (to be negoti
ated), TO is the present bound tariff on an individual line, T1 is the reduced tariff after step 1 on the
individual tariff line, Ta is the simple average tariff after step 1, T2 final bound tariff on the individual
tariff line.
Source: Various WTO Documents.
Hence any drastic or substantial tariff reduction
for the South Asian countries will not be a plau
sible proposition as it may impose huge adjust
ment costs.
towards drastic or substantial tariff reduction for
India and Pakistan will erode the policy flexibility
that both these countries follow.
In the ongoing negotiations in NAMA, only India
and Pakistan in South Asia will be required to
undertake tariff reduction through the formula
approach. Bangladesh and Nepal are exempted
because of their LDC status.14 Sri Lanka may also
be exempted if the present proposal of exempt
ing countries from undertaking tariff reduction,
which have less than 35 percent of binding cov
erage, is accepted.15 (See Table 3)
Further, this paper follows the tariff reduction for
mula proposed by the NGMA in 2003 before the
Cancun ministerial.16 This formula is called the
Girard formula after Pierre Louis Girard, NAMA
chair, 2003.17 This formula takes into account the
interests of developing countries by incorporating
each country's tariff average in the tariff cutting
formula. India along with Brazil and Argentina
has suggested this formula for tariff reduction to
the NGMA.18
Hence, in the analysis that follows, the focus is
on India and Pakistan with respect to tariff reduc
tion. It is important to reiterate that any attempt
In the Girard formula, the extent of tariff reduc
tion hinges on the value of the coefficient 'B'. For
instance, for a lower value of 'B', say 0.5 or 1,
14 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex B, paragraph 9.
15 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex B, paragraph 6.
16 The tariff reduction formula proposed by the NGMA is T1 = B'T2‘T0/B’T2+T0, where T1 is the final bound rate, T2 is the average of
the base rates, TO is the base rate and 'B' is a coefficient.
17 This analysis is not to suggest that the use of the Girard formula is the only option available for developing countries to undertake tariff
reduction. There are other options available like reducing overall average tariff rate or using the linear formula.
18 Communication to the Negotiating Group on non-agricultural market access from Argentina, Brazil and India, TN/MA/W/54, 15 April
2005, paragraph 4.
Tariff Negotiations in NAMA &. South Asia
7
Table 3: Binding coverage of agricultural and non-agricultural products of four South
Asian countries
in percentage
Country
All products
Non agriculture
products
3.1
Agriculture products
Bangladesh
15.8
100
India
73.8
100
69.8
Pakistan
44.3
92.6
36.9
Sri Lanka
37.8
100
28.3
Source: World Trade Report 2004, World Trade Organisation
the tariff reduction in the average bound tariff
rates for both India and Pakistan would be huge,
especially for higher tariff rates (See Tables 4
and 5). In the case of India, the bound tariff rate
for 'fish and fish products' is 100.7 percent. If
the tariff reduction for this category takes place
with a lower value of'B', say 0.5, then the tariff
rate after reduction will be 14.6 percent. The
tariff rate after reduction, for this category with
'B' = 1, will be 25.5 percent. As the value of 'B'
increases, the rate of reduction in the final tariff
rate declines.
Table 4 depicts the impact of the Girard formula
with different coefficients on the average bound
tariff rates for non-agricultural products of India
by MTN categories. Higher coefficients of'B' lead
to drastic reduction in the tariff rates and hence
devoid the countries of the required policy flex
ibility and also disable them to pursue social and
developmental needs.
If South Asia has to negotiate on a non-linear
formula it should negotiate for Girard formula
with a higher value of'B'.
Table 4: The impact of the Girard formula with different coefficients of 'B' on the
average MFN bound tariff rates for select non-agricultural products of
India by MTN category.19
in percentage
Product
MFN aver Cover BTR,
B =
age BTR
age
as on
0.5
26/03/04
Textiles and clothing
26.6
66
10.4
BTR, B BTR, B BTR, B BTR, B MFN aver
= 1
= 1.5 = 1.75 = 2
age ATR
as on
26/03/04
14.9
17.5
18.4
19.1
27.1
28.8
Leather, rubber,
footwear and travel
goods.
35.2
51
11.5
17.3
20.8
22.1
23.2
Fish and fish prod
ucts
100.7
13
14.6
25.5
33.9
37.5
40.8
30.0
Metals
38.7
54
11.8
18.1
22.0
23.5
24.7
29.0
22.6
23.8
25.7
Wood, pulp, paper
and furniture
36.5
62
11.6
17.6
21.3
Source: Author's calculation on the basis of the data given in Table 1.
19 The figures in this table have been have been calculated by using the formula, T1 = B*T2*T0/B*T2+T0, where T1 is the final bound
rate, T2 is the average of the base rates, which is equal to 34.3, TO is the base rate and ’B' is a coefficient. The average base rate is the
simple average of the MFN bound tariff rates in India.
8
July Agreement and Beyond
It is important to understand that if India and
Pakistan agree to the Girard formula for tariff
reduction, they will make a big concession.
Accepting a non-linear formula means agree
ing to relatively steeper reductions in tariff rates
and hence, foregoing important rights. Thus, it
is important that they are duly compensated. In
case no compensation is offered, India and other
developing countries should withdraw their pro
posal on a non-linear formula.
This compensation could be in the form of devel
oped countries cutting their tariff rates using the
Girard formula with a value of 'B' less than 1
or providing preferential access to their mar
kets. It is important that agreeing to the non
linear approach be used as a bargaining chip by
countries like India and Pakistan to get devel
oped countries to agree to a lower value of'B' for
tariff reduction. The July agreement specifically
provides that negotiations on market access for
non-agricultural products will be directed towards
reduction or elimination of tariffs, tariff peaks,
and tariff escalation, particularly on products of
export interest to developing countries.2021
On this
basis, India and Pakistan can press for reduction
in tariff rates of developed countries by adopting
a lower value of'B'. India and Pakistan can have
a higher value of 'B' as a special and differential
treatment measure on the basis of paragraph 1
and 2 of Annex B.
After the July agreement many countries have
made submissions on how tariff reduction should
take place. The submissions made by developed
countries mainly focus on the Swiss formula
with some minor changes. The Swiss formula
remains unacceptable to majority of developing
countries. India has firmly opposed the Swiss
formula approach for cutting tariff rates. Box 4
Table 5: The impact of the Girard formula with different coefficients of 'B' on the
average MFN bound tariff rates for select non-agricultural products of
Pakistan by MTN category.21
in percentage
Product
Textiles and
clothing
MFN
average
BTR as on
26/03/04
21.9
Cover
age
BTR,
B =
0.5
BTR,
B = 1
BTR,
B =
1.5
BTR,
B =
1.75
BTR,
B = 2
MFN aver
age ATR
as on
26/03/04
96
9.7
13.5
15.4
16.1
16.7
21.6
Leather,
rubber, foot
wear and
travel goods.
41.4
10
12.3
19.0
23.2
24.7
26.0
18.2
Fish and fish
products
100.0
10
14.9
26.0
34.5
38.1
41.3
12.0
Metals
36.2
4
11.8
17.8
21.4
22.8
23.9
15.5
Wood, pulp,
paper and fur
niture
46.8
50
12.7
20.1
24.8
26.5
28.1
19.1
Source: Author's calculation on the basis of the data available in Table 1.
20 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex B, paragraph 2.
21 The figures in this table have been have been calculated by busing the formula, T1 = B’T2’T0/B’T2+T0, where T1 is the final bound
rate, T2 is the average of the base rates, which is equal to 35.3, TO is the base rate and 'B' is a coefficient. The average base rate is the
simple average of the MFN bound tariff rates in Pakistan.
Tariff Negotiations in NANA & South Asia
9
Box 4: Tariff reduction proposals by different countries after the July agreement
+ The European Commission (EC) proposed a Swiss formula in NAMA negotiations in March 2005.
The EC formula is T, = (X * TO) / (TO + X) where T, is the final tariff, X is the given coefficient and
TO is the initial tariff. According to this ambitious proposal unveiled by EC. developing countries that
accept this Swiss formula “could use the provisions of paragraph 8 of Annex B of the July Decision
in full". The so-called flexibility given in paragraph 8 is grossly inadequate to take into account the
concerns of developing countries. This is explained in section 5 of the paper. The EC proposal
states that if developing countries do not use the flexibility given in paragraph 8 of Annex B they
earn ‘credits’, which are used to increase the coefficient (X).
+ US proposed a Swiss formula with dual coefficients. One coefficient for developed countries and
another for developing countries. The US proposal also states that the two coefficients must be
“within sight of each other”, which means that the coefficient for developing countries should not be
significantly greater from the coefficient for developing countries. It further states that the two-coef
ficient approach would be an alternative to paragraph 8 of Annex B.
4- Norway submitted a non-linear tariff cutting formula with two coefficients that includes a simple and
transparent system of credits. The formula is T1 = (A*T0)/A+C), where T1 is the new bound tariff
after formula cut, TO is the old bound tariff, A is the coefficient indicating the level of ambition. A will
have different values for developed and developing countries, C is the credit that a country gets for
binding 100 percent tariff lines, participating in sectoral tariff component, foregoing the use of flex
ibilities given in paragraph 8 of Annex B.
+ Argentina, Brazil and India submitted a communication to the NGMA proposing the same formula that
the NGMA had proposed before the Cancun Ministerial, which India had rejected before the Cancun
ministerial. This is called the Girard formula. The formula is T1 = B*T2*T0/B*T2+T0, where T1 is the
final rate, TO is the bound rate, T2 is the average of the current bound rates and ‘B’ is a coefficient.
Source:
1. Third World Network, 'North Onslaught on South's Industrial Tariffs in NAMA, http://www.twnside.org.sg/title2/twninfo 195.htm (visited
on 10 April 2005)
2.
A proposal for a simple Non linear Formula with Credits, Communication from Norway, TN/MA/W/7/Add.l, 11 March 2005
3.
Communication to the Negotiating Group on Non-Agricultural Market Access from Argentina, Brazil and India, TN/MA/W/54, 15 April 2005.
provides information about some of the Swiss
formula approaches submitted by developed
countries. All these proposals are disastrous for
countries like India and Pakistan, as they would
lead to drastic reductions in the existing bound
tariff rates. The flexibility that these approaches
offer is minimal and in many cases require more
than full reciprocity, which is a violation of Article
XXVIII 6/5 of GATT, the DDA and the July Agree
ment.
From Table 6 and Figure 1 it is clear that applying
the EC proposed Swiss formula (Box 4) with single
10 July Agreement and Beyond
coefficient, would result in India and Pakistan
reducing their MFN bound tariff rates on 'fish
and fish products' by 66.8 and 66.7 percent
respectively. On the other hand, the same for
mula with the same coefficient would result in US
and EC reducing their MFN bound tariff rates on
'fish and fish products' by a meager 9 and 18.7
percent respectively. This clearly demonstrates
'more than full reciprocity' on part of India and
Pakistan. The only alleged gain that countries like
India and Pakistan may achieve by agreeing to a
single coefficient Swiss formula approach is to have
the flexibility given in paragraph 8 of Annex B.
This paragraph talks of pro
Table 6: Hypothetical application of the EC proposed
viding flexibility to developing
Swiss formula on the MFN bound tariff rates
countries by enabling them to
of 'fish and fish products' of US, EC, India and
apply less than formula cuts to
Pakistan demonstrating 'more than full reci
up to [10] percent of the tariff
procity' by India and Pakistan.23
lines or as an exception keep
in percentage
ing the tariff lines unbound.2223
*
Importing
By how
MFN bound Bound tariff
This flexibility implies that
country
tariff rate
much does
rate after
90 percent of tariff lines of
(TO)
reduction
the initial
developing countries would
tariff get
(Tl)
be subject to tariff reduction
reduced
through the formula approach
US
1.1
1.0
9
and only 10 percent would be
18.7
EC
11.2
9.1
exempted from the full for
33.4
66.8
India
100.7
mula approach. However, this
66.7
Pakistan
100
33.3
does not mean that the 10
percent of tariff lines are com
Source: Author's calculation
pletely exempted from tariff
Developing countries need more flexibility than
reduction. These tariff lines
this.
These countries should aim at having at least
would be subjected to less than formula cuts.
15
percent
of tariff lines not subjected to reduc
In other words, they would be subjected to par
tion,
either
through
the tariff reduction formula or
tial cuts. This connotes that no tariff line would
any
other
approach.
In other words, developing
be completely immune from tariff reduction
countries should have the freedom to choose 15
commitments.
Figure 1: Percentage reduction in the MFN bound tariff rates for 'fish and
fish products' of US, EC, India and Pakistan on application of
Swiss formula demonstrating 'more than full reciprocity' by
India and Pakistan.24
22 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex 8, paragraph 8
23 The calculations in this table have been done by using the Swiss formula T1 = (X * TO) / (TO + X) where T1 is the final tariff, X is the
given coefficient and TO is the initial tariff. In this table X = 50 for all the four countries.
«Ibid.
Z
Tariff Negotiations in NAMA & South Asia
11
percent of tariff lines for which no tariff reduction
is required. Similarly, developing countries need
to have flexibility in binding tariff lines.
Other two major disadvantages in using the EC
proposed single coefficient Swiss formula are:
♦ If a larger coefficient is used both for devel
oping and developed countries, the tariff
rates of developed countries will not come
down drastically and hence the issue of tariff
peak and tariff escalation in developed coun
tries will remain unresolved.
+ In case a smaller coefficient is used for both
developing and developed countries, the
tariff rates of developing countries will come
down drastically and hence will not be con
sistent with their development needs.
In both the situations developing countries stand
to lose.
5.1 Implementation Phase
An important issue towards establishing modali
ties for future negotiations on NAMA is to agree on
a differential implementation period. This is also
warranted by the special and differential treat
ment principle. It is important to note that a dif
ferential and a longer implementation period will
extend the desired policy flexibility that developing
countries need to purse their social and develop
ment needs. Also, a longer implementation period
will mitigate the harsh adjustment costs. The July
agreement states that developing country partici
pants shall have longer implementation periods.25
However, the moot issue is how long will be the
implementation period for developing countries?
This author's submission is that the implemen
tation period for developing countries should
comprise of five phases - each phase being of
2 years. Hence, the total implementation period
will be of 10 years. The tariff rate to be brought
down should be reduced in equal installments
over a span of 10 years. For developed coun
tries the implementation period should be of two
phases i.e. 4 years. However, the tariff reduc
tion by developed countries should be forward
loaded. In other words, the rate of tariff reduc
tion by developed countries should be descend
ing or decreasing. This implies higher cuts in the
first implementation phase.
6. Sectoral Approach
Another important element of Annex B of the
July Agreement is the 'sectoral tariff compo
nent'.26 This is also called the sector-by-sector
approach where the tariff rates on all products
of export interest to developing countries and
LDCs, is eliminated and bound. The sectoral
approach essentially means cutting or eliminat
ing tariffs on certain sectors independent of the
tariff cutting formula that is followed for other
sectors. This needs to be understood in context
of the DDA. Paragraph 16 of the DDA states
that negotiations in NAMA shall aim to reduce
or eliminate tariffs, including the reduction or
elimination of tariff peaks, high tariffs, and tariff
escalation.... on products of export interest to
developing countries.27
Annex B recognises that sectoral tariff compo
nent aimed at elimination or harmonisation is
a key element in achieving the objectives laid
down in Paragraph 16 of the DDA. In further
negotiations developing countries should ensure
that developed nations undertake commitments
to tariff reduction or elimination on sectors that
are of export interest to developing countries.
India has not made any submission on the issue
“ Above n 22.
26 Decision Adopted by the General Council, WT/L/59, adopted 1 August 2004, Annex B, paragraph 7.
v Mxims n 7.
12 July Agreement and Beyond
Table 7: MFN applied and bound tariff rates of four developed countries for select
non-agricultural products by MTN categories
in percentage
Importing
market
Textiles and
clothing
Fish and fish
products
Leather, rubber,
footwear and
travel goods
Mineral prod
ucts and pre
cious stones and
metals
Applied
duty
Bound
duty
Applied
duty
Bound
duty
Applied
duty
Bound
duty
Applied
duty
Bound
duty
United
States
9.6
8.6
1.1
1.1
4.3
4.4
2.0
1.9
European
Union
7.9
7.9
11.7
11.2
4.2
4.2
2.0
2.0
Canada
11.7
12.5
1.0
1.3
5.7
7.6
1.7
2.8
Japan
7.4
6.7
5.7
5.0
6.4
6.6
1.1
1.0
Source: World Trade Report 2004, World Trade Organisation
of sectoral liberalisation. India's argument is
that the sectoral approach should be voluntary
in nature and should be taken up only after the
issue of tariff reduction formula is settled.
The NGMA in 2003 proposed the following sec
tors for tariff elimination28:
> Electronics and electrical goods
4 Fish and fish products
4- Footwear
4
Leather goods
4 Motor vehicle parts & components
4- Stones, gems, & precious metals
4 Textiles and clothing.
All these sectors are of "exporting interest" to the
whole of South Asia. In India, textiles and apparel
industry account for 35 percent of total national
export earnings. In 2003, 'textiles and clothing',
'leather and leather goods' and 'gems and jew
elry' constituted over 50 percent of India's exports
to EC. For the same period, over 60 percent of
export from Pakistan to EC was in textiles. Textile
products are also principal exports of Bangladesh,
Sri Lanka and Nepal. 75 percent of total exports
from Bangladesh to EC are in textiles.
Moreover, developed countries like EC, US and
Canada are the major export destinations of
South Asian countries. Nearly 75 percent of
Bangladesh's exports in 2002 were destined to
developed countries with, EC absorbing 43 per
cent of the total Bangladeshi exports.
Further, sectors such as 'textiles and clothing' and
leather and footwear are hugely labour intensive
sectors in the South Asian countries. In India, tex
tiles and apparel industry provides employment
to 38 million people, and is the largest employer
after agriculture. Textiles sector in Bangladesh
employs more than 1 million women workers.
If MFN tariff rates on these sectors come down
drastically or get eliminated in developed coun
tries it would give a big boost to South Asian
exports29 and hence serve their development
28 Draft Elements of Modalities for Negotiations on Non Agricultural Products, TN/MA/W/35/Rev.l, 19 August 2003, paragraph 9.
29 Some may argue that it is too simplistic to suggest that mere reduction or elimination of tariff rates in the identified sectors will give a
boost to exports from South Asia as these exports continue to face many non tariff barriers such as anti dumping measures, rules of origin,
standards etc. This is true. However, high tariff rates are certainly one of the factors that restrict the growth of exports from South Asia. If
these high tariffs rates are substantially brought down or are eliminated it will certainly have a beneficial impact on South Asian exports.
Tariff Negotiations in NAMA & South Asia
13
Box 5: Potential gains for Bangladesh from duty free access to developed country
markets
If Bangladesh gets duty free and quota free access to the markets of Quad countries (US, EU, Canada
and Japan) its export revenue would increase by 45 percent. Exports of textiles and clothing to Canada
and US would rise by more than US $ 700 million.
Textiles sector in Bangladesh is hugely labour intensive. It employs more than 1 million women work
ers. Since this is a labour intensive sector any gains to this sector have wide ranging benefits. It is
estimated that increased textile exports from Bangladesh to the US and Canada after the elimination of
tariff peaks and other restrictions would significantly increase employment. Further increased exports
would also help generate resources needed to make domestic industry more competitive.
Source: Kamal Malhotra, 'Making Global Trade Work for Poor', (London: Earthscan Publications: 2003) 162.
needs by providing better market access and
augmenting employment. A South Asian country
that perhaps would gain the most from elimina
tion of tariff peaks and tariff escalation or from
duty free and quota free access to developed
country markets is Bangladesh (See Box 5).
However, from Table 7 it is clear that developed
countries maintain high tariff rates especially
on sectors such as 'textiles and clothing' where
South Asian countries have tremendous export
potential. If we take the specific case of US, the
bound tariff rate for textiles and clothing is 8.6
percent, which is much higher than the simple
average of MFN bound tariff rates for all nonagricultural products of 3.2 percent. Similarly
for EC, the simple average of the MFN bound
tariff rates for non-agricultural products is 3.9
percent. However, the bound tariff rates of both
'textiles and clothing' and 'fish and fish products'
are almost two to three times higher than the
simple average in EC. Nearly one half of clothing
exports of Bangladesh to US face an ad-valorem
duty of 15 to 20 percent. Another 13 percent of
clothing exports are subject to tariffs in excess
of 25 percent. It is hence necessary that both EC
and US bring down or eliminate their tariff rates
in these two sectors.
6.1 Zero for Zero Approach
An important issue that often emerges in the
sector-by-sector approach is the zero for zero
approach. This approach implies that in the iden
14 July Agreement and Beyond
tified sectors all countries should bring down the
tariff rates to zero.
This is a violation of the 'less than full reciproc
ity' principle. In order to fulfill the principle of
special and differential treatment, developing
countries need to have flexibility in the sec
toral approach. Moreover, asking all develop
ing countries to bring down the tariff rates
in the identified sectors to zero also means
depriving countries with the policy flexibil
ity necessary to pursue development needs.
This is again a violation of Article XXVIII bis of
GATT. In the South Asian context, this applies
to India and Pakistan. In India and Pakistan
in 'fish and fish products' category the bind
ing coverage is only 13 and 10 percent respec
tively. In other words, in this sector, India and
Pakistan have 87 and 90 percent of tariff lines
unbound, respectively. Most of these tariff
lines are unbound because of their sensitive
nature. In sectors where such high proportion
of tariff lines is unbound, it is not economically
prudent to ask for a complete binding let alone
tariff elimination.
However, developing countries like India and
Pakistan should consider increasing their tariff
binding coverage in these identified sectors and,
also bringing down their high bound tariff rates
by adopting a different value of 'B' in the Girard
formula if developed countries agree to eliminate
their tariffs. This may be used as a bargaining
Table 8: The hypothetical application of the implementation period proposal for a
developing country assuming hypothetical bound tariff rate
in percentage
Product
X
Final
bound
tariff
(T2)
14.8
Initial
bound
tariff
(Tl)
100.0
Tariff
after
Phase 1
(Ta)
Tariff
after
Phase 2
(Tb)
Tl - X30
87.22
Tariff
after
Phase 4
(Td)
Tariff
after
Phase 5
(Te)
Ta -X
Tariff
after
Phase 3
(Tc)
Tb - X
Tc-X
Td - Y31
74.44
61.66
48.88
14.8
Source: Author's Calculation.
chip to induce developed countries to eliminate
their tariffs.
The following three important steps could be fol
lowed in the negotiations on sectoral approach:
+ Developed countries reduce the tariff rates
to zero on all the sectors, which are of export
interest to developing countries and LDCs.
+ Developing countries undertake tariff reduc
tion in the identified sectors by adopting the
Girard formula with 'B' = 0.5 for tariff rates
> 50 percent and 'B' = 1 for tariff rates < 50
percent.
4- Developing countries should have the flexibility
to decide the number of tariff lines they want
to commit to reduction, under the sectoral
approach in an identified sector. For instance,
if 'fish and fish products' is identified as one
of the sectors for the sectoral approach, then
developing countries should have the flexibil
ity to identify which tariff lines in this product
category would be committed to reduction
under the sectoral approach. In this regard, it
is proposed that only 80 percent of the total
tariff lines falling under a particular category
or sector should be committed to reduction
under the sectoral approach.
Hence the sectoral approach could be called zero
for 'a' approach, where 'a' is the tariff reduction
value determined after adopting the Girard for
mula where 'B' = 0.5 or 1 depending upon the
tariff rate. The reason to link the tariffs of devel
oping countries under the sectoral approach to
the tariff reduction formula is to link the final
rate to the initial tariff rate. Any arbitrary value
of 'a' would not do justice to the initial tariff rate
and may at times lead to drastic reductions.
6.2 Implementation Process
The NGMA in 2003 had proposed a three-phase
implementation process of equal length for the
sectoral initiative. According to the NGMA pro
posal, developed countries shall eliminate tar
iffs at the end of the first phase and developing
countries shall do this in three equal phases.
This author's submission is that the implementa
tion phase should be of five stages with each
stage being of two years. The reduction in the
tariff rates by developing countries should be
spread over all the five phases. It is proposed
that 60 percent of tariff reduction should take
place in the first four stages (equal installments)
and 40 percent of reduction in the last phase. For
instance, assume that the initial bound tariff rate
for a product is 100 percent and the simple aver
age of the bound tariff rates is 35 percent. The
final bound tariff rate after applying the Girard
formula with 'B' = 0.5 would be 14.8 percent.
So the tariff reduction that has to take place is
85.2 percentage points. Now 60 percent of 85.2
30 X = 60 percent of (Tl-T2)/4, where T1 is the initial bound rate and T2 is the final bound tariff.
31 Y = 40 percent of (T1-T2), where T1 is the initial bound rate and T2 is the final bound tariff.
Tariff Negotiations in NAMA & South Asia
15
should be reduced in the first four phases i.e. first
eight years (equal installments) and 40 percent
of 85.2 in the last phase i.e. after the completion
of the tenth year (See Table 8).
two phases. In the first phase 75 percent of tariff
reduction should take place and in the second
phase remaining 25 percent of tariff should be
eliminated.
Such an implementation period will give enough
policy flexibility to developing countries to pursue
their social and development needs and at the
same time, also realistically fulfill their interna
tional obligations. Table 9 clearly shows how this
implementation period will give adequate flex
ibility and time to countries such as India and
Pakistan to bring down their tariff levels in a
consistent manner. No drastic reduction in tariff
rates will take place and hence the adjustment
costs would be bearable. For developed coun
tries the tariff elimination should take place in
In this regard, it is important that if developed
countries agree to completely eliminate their
tariff rates after the first implementation phase
i.e. after the first two years, developing countries
might consider bringing down their tariff levels to
the final tariff rate in four implementation phases
- in first eight years rather than in ten years.
In such a scenario, developing countries may
also consider reducing their tariff rates in four
equal installments over a period of four phases
(eight years).
7. Tariff Binding
Tariff binding comprises of two sets of issues.
First is the issue of tariff binding coverage imply
ing the number of tariff lines to be bound. The
second issue relates to the rate at which the
unbound tariff lines should be bound.
Table 9: The hypothetical application of the implementation period proposal under
the sectoral initiative for two non-agricultural products of India and Paki
stan by MTN category.32
in percentage
Initial
tariff
rate
(Tl)
26.6
Tariff
Tariff
Tariff
Tariff
Tariff
Final
after
after
after
after
after
tariff
rate32
33 phase 1 phase 2 phase 3 phase 4 phase 5
(T2)
14.9
19.58
21.335
24.845
23.09
14.9
Fish and fish
products
100.7
14.6
87.785
74.87
61.955
49.04
14.6
Pakistan •Textiles and
clothing
21.9
13.5
20.64
19.38
18.12
16.86
13.5
Fish and fish
products
100.0
14.8
87.22
74.44
61.66
48.88
14.8
Import
market
India
Product
Textiles and
clothing
Source: Author's calculation from the data given in Tables 4 and 5.
32 The calculations in this table have been made by using the methodology described in Table 8.
33 The final tariff rate has been calculated by using the Girard formula, where B = 1 for Textiles and Clothing both for India and Pakistan,
and B = 0.5 for Fish and fish products both for India and Pakistan.
16 July Agreement and Beyond
Figure 2: Proposed tariff binding coverage34
Tariff binding
coverage < 30
Tariff binding
coverage < 30
50 < Tariff
binding
coverage < 70
30 < Tariff
binding
coverage < 50
30 < Tariff binding
coverage < 50
7.1 Tariff Binding Coverage
Developed countries have been constantly asking
developing countries and LDCs to increase the
coverage of tariff binding to 100 percent or near
100 percent. Increasing the tariff binding cov
erage implies binding more tariff lines and thus
giving up the flexibility of increasing the tariff
rates on a particular product beyond a certain
point. The other important consequence of
increasing the binding coverage is to follow it by
subjecting it to tariff reduction commitments.
Hence, the issue of tariff bindings is very impor
tant for developing countries and LDCs. The
demand of developed countries to extend the
coverage of tariff bindings to 100 percent or
near 100 percent is not justified. There is noth
ing in the July framework that asks developing
countries or LDCs to increase their tariff bind
ings to such high levels. It has been argued that
high level of tariff binding coverage in develop
■
50 < Tariff binding
coverage < 70
Tariff binding
coverage > 70
Tariff binding
coverage > 70
ing countries and in LDCs would affect industri
alisation.34
35 Domestic industry may get discour
aged from a low level of bound tariff rate for a
particular product36 because of the fear of surge
in imports.
Hence, developing countries and LDCs, if they
agree to increase their binding coverage, should
ensure that they get adequate gains in return.
It is important to understand that developing
countries need not increase their tariff binding
coverage if the reciprocal gains are not forth
coming. This is an important negotiating chip
with developing countries and LDCs. It is impor
tant that this bargaining chip is judiciously used
in the trade negotiations.
In the ongoing negotiations only developing
countries have to increase their tariff binding
coverage. Paragraph 6 of Annex B states that
LDCs are expected to substantially increase
34 Developing countries should undertake these commitments only if reciprocal gains are promised and forthcoming.
35 B L Das, 'NAMA negotiations in the WTO: Binding of Tariff and Tariff Reduction Process', http://www.twnside.org.sg/title2/tvminfol87.
htm, (visited on 2 April 2005).
36 Ibid.
TariffNegotiations in NAMA & South Asia
their level of binding commitments. This does
not impose any obligations on LDCs to increase
their tariff binding coverage. In the South Asian
perspective it means that there is no obligation
on Bangladesh and Nepal to increase the cover
age of their tariff bindings. Only India, Pakistan
and Sri Lanka are required to increase their tariff
binding coverage. Tariff-binding obligations in
the ongoing negotiations should divide countries
in four groups and then ask them to bind their
tariffs (Figure 2). As per Figure 2 (also see Table
3) India will have to increase its tariff binding
coverage to 85 percent, Pakistan to 70 percent
and Sri Lanka to 50 percent.
7.2 Rate at which Unbound Tariff Lines
should be Bound
The other important issue in tariff binding is the
rate at which the unbound tariff lines should
be bound. Paragraph 5 of Annex B states that
for unbound tariff lines the basis for commenc
ing the tariff reductions shall be twice the MFN
applied rate in the base year. The base year for
MFN applied rates shall be 2001. The proposal
to bind unbound tariff lines at twice the aver
age applied rate is detrimental for developing
countries. This will result in very low bound tariff
rates of the unbound tariff lines.
From Table 10 it is clear that if unbound tariff
lines are bound at two times the average applied
tariff rates, then the bound rate is too less. For
instance, in Pakistan, if average applied tariff
rates are used to bind tariff lines, then, the rate
for unbound tariff lines will be 33.2 percent,
which is even less than the bound rates of the
presently bound lines. To bind the unbound lines
at such low rates is not a plausible proposition.
The unbound tariff lines, if bound, should have
their bound tariff rates equivalent to two times the
average bound rate and not average applied rate.
This would ensure enough flexibility in increasing
the applied tariff rates in case there is a surge in
imports. Given the sensitive nature of these prod
ucts, the possibility of such import surges cannot
be ignored. Hence, it is important to have higher
bound tariff rates for these tariff lines. Higher
bound tariff rates are also important because the
next stage after binding the tariffs is to under
take tariff reduction. If developing countries have
smaller bound rates, tariff reduction would reduce
them further. Moreover, it is important to note that
South Asian countries maintain lower applied rates.
High bound rates are needed to have the desired
flexibility of increasing the applied tariff rates if the
need be.
Table 10: Depicting application of binding unbound tariff lines at two times the aver
age ATR and BTR for India and Pakistan.37
in percentage
Country
Average ATR
India
27.7
Pakistan
16.6
Proposed bound
rate of unbound
lines (two times
the average ATR)
55.4
33.2
Average BTR
34.3
35.3
Proposed bound rate
of unbound tariff lines
( two times the aver
age BTR)
68.6
70.6
Source: Author's computation on the basis of the average ATR and BTR for India and Pakistan from the World Trade Report, 2004
37 This table does not show the base year average applied and bound tariff rates of India and Pakistan. The table only intends to show the
difference in the final bound tariff rates of unbound tariff lines when average applied and bound tariff rates are used.
18 July Agreement and Beyond
8. Preference Erosion
Tariff liberalisation often erodes the preference
that developing countries and LDCs enjoy in the
markets of industrialised countries. The ongoing
negotiations in NAMA aim at very drastic reduc
tion in the existing tariff levels. Moreover, the
sectoral initiative talks of bringing down the tariff
rates to zero in some of the sectors. This would
undoubtedly help all South Asian countries. How
ever, there is also a possibility of preference ero
sion of the LDCs of South Asia in wake of increas
ing competition from bigger developing countries
like India. There are many tariff lines on which
the tariff rate for LDCs is already zero. Now, if
the tariff rate were reduced to zero for developing
countries such as India and Pakistan as well, it
would certainly have a negative impact on market
access opportunities of Bangladesh and Nepal.
The LDCs from South Asia benefit from the
"Everything But Arms (EBA) Initiative", which
grants duty free and quota free access to EC,
except to arms and ammunitions. This initiative is
provided under the Generalised System of Prefer
ences (GSP). Bangladesh is the most prominent
exporter to the EC amongst all the LDCs. Exports
from Bangladesh constitutes about 20 percent of
the total exports from all LDCs to the EC. LDCs
like Bangladesh have gained immensely from this
preferential access to the European markets.
The growing apprehension is that with tariff lib
eralisation, the terms at which this preferential
access is available to countries such as Bangla
desh, would get diluted. Hence, there is a need
to address this issue of preference erosion.
This can be done by expanding market access
for products of vital export interest to prefer
ence dependent countries. The countries that
have been granting preference should develop
a mechanism whereby they provide bilateral
assistance to countries whose preferences get
eroded.
The African group has made a submission to
the NGMA suggesting some measures to deal
with the problem of preference erosion. This
group has asked for suitable treatment of prod
ucts from African countries currently enjoy
ing non-reciprocal preferential access. The
African group has also proposed a correction
coefficient to improve the preference margins
of the products that are enjoying preferential
access.38 Similarly, Mauritius has suggested the
formation of a 'Competitiveness Fund' for the
countries whose preferences are being eroded.
The contribution to this fund would be on the
basis of contribution from the international
financial institutions. This fund would enable
countries whose preferences are eroded to
undertake competitive adjustment.39
38 Market Access for Non-agricultural products, Treatment of non-reciprocal preferences for Africa, TN/MA/W/49, 21 February 2005.
39 Mustaflzur Rahman, 'Market Access Issues in the Context of the Doha Development Round: Bangladesh's Interests and Concerns’, 32 CPD
Occasional Paper Series, 2003.
Tariff Negotiations in NAMA & South Asia
19
9. Conclusion
Tariff negotiations under NAMA, just like other
trade negotiations, have to be guided by a
degree of circumspection and pragmatism. Cir
cumspection implies resisting all claims of indis
criminate and hasty liberalisation. Pragmatism
implies shedding over-protectionist attitude
and making full use of available opportunities.
Hence, it is important that developing countries
in general and South Asian countries in particu
lar negotiate in a realistic manner that optimises
their interest. If higher commitments are made
then it should be ensured that reciprocal ben
efits from developed countries are forthcoming.
It is important that the negotiations on NAMA do
not loose sight of the development imperatives
of the multilateral trading regime embodied in
the WTO. Hence, it is important that negotia
tions take due account of the existing realities of
not just South Asian countries but also of other
developing countries.
It is also important for South Asian countries
to forge alliance with other countries. India has
already submitted a joint communique with Brazil
and Argentina to the NGMA on tariff reduction
formula. The G20 alliance could be used to forge
common positions on NAMA as well. If this hap
pens it would be important for India and Paki
stan as both are members of the G20.
Ongoing negotiations on NAMA could follow the
following structure:
4- India and Pakistan should negotiate for a
Girard formula with a higher coefficient of'B'
for tariff reduction (B = 2).
4- Developed countries should be pursued to
undertake tariff reduction using the Girard
20 July Agreement and Beyond
formula but with a lower coefficient of 'B'
(B<1).
+ The implementation period for India and Paki
stan to implement tariff reductions should be
10 years whereas for developed countries it
should be 4 years.
+ Developed countries should eliminate tariffs
in sectors that are of export interest to devel
oping countries and to South Asia within four
years with substantial reduction taking place
in the first two years.
+ India and Pakistan might consider bring
ing their tariff rates down in the sectors
identified in the sectoral initiative by using
the Girard formula with 'B' = 1 or 0.5, if
and only if, developed countries agree to
eliminate their tariffs.
+ In the sectoral initiative a zero for zero
approach should be resisted at all cost.
4- For South Asia and other developing coun
tries tariff reduction in the sectoral initiative
should be implemented in a period of 10
years and should be backloaded.
4- South Asian countries and other developing
countries should not be asked to increase
their tariff bindings to 100 percent. Increase
in tariff binding should take into account the
existing binding levels. Developed countries
should duly compensate further increase in
tariff binding.
4- Developed countries should duly compen
sate the LDCs of South Asia, whose pref
erence margins get eroded due to tariff
liberalisation.
Centre for Trade and Development (Centad) was established by
Oxfam GB in 2004, as a not-for-profit organisation, to carry out policy
research and advocacy on issues around trade and development,
with a principal focus on South Asia.
Clelnltlald
Centre for Trade & Development
An Oxfam GB Initiative
# 406, Bhikaiji Cama Bhavan
Bhikaiji Cama Place
New Delhi -110066
Tel: + 91 -11 -51459226
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