An informal meeting on 10 May 2005 of the Special Session of the Committee on Agriculture of the WTO was presented with an updated set of draft guidelines on the methodology for converting non-ad valorem duties into ad valorem equivalents (AVEs).

The new draft contains certain paragraphs on certain issues that had been the subjectof great contention among five major WTO players on agriculture in Paris beforebeing agreed to by some 30 countries at a WTO 'mini-ministerial' meeting in Paris on4 May.

The draft was received with some caution by members, with many saying that theyneeded time to study it or send back to their capitals. Some sugar-exportingdeveloping countries expressed concern about the special treatment given to sugar.

The six-page draft guidelines contains two paragraphs (paras 25 and 26) that had beenagreed to in Paris, after several days of well-publicised contention among theso-called Five Interested Parties (FIPs - the US, EU, Australia, Brazil and India).

The ad valorem issue had been holding back progress in other areas of agriculturenegotiations. It has been contentious because the method agreed for calculating theconversion can significantly affect the extent to which the tariffs are to be eventuallyreduced.

Below is a report of the meeting of 10 May and an explanation of the AVE issue.It was published in the South North Development Monitor of 12 May and is reproducedhere with permission of the SUNS.

Martin Khor
TWN

Cautious response to new agriculture AVE guidelines at WTO meeting

Kanaga Raja
Geneva
11 May 2005
SUNS (South North Development Monitor)

An informal meeting on 10 May 2005 of the Special Session of the Committee on Agriculture of the WTO was presented with an updated set of draft guidelines on the methodology for converting non-ad valorem duties into ad valorem equivalents (AVEs).

The new draft contains certain paragraphs on certain issues that had been the subjectof great contention among five major WTO players on agriculture in Paris beforebeing agreed to by some 30 countries at a WTO 'mini-ministerial' meeting in Paris on4 May.

The draft was received with some caution by members, with many saying that theyneeded time to study it or send back to their capitals. Some sugar-exportingdeveloping countries expressed concern about the special treatment given to sugar.

The six-page draft guidelines contains two paragraphs (paras 25 and 26) that had beenagreed to in Paris, after several days of well-publicised contention among theso-called Five Interested Parties (FIPs - the US, EU, Australia, Brazil and India).

Para 25 deals with alternative ways of calculating the conversion of non-ad valoremduties to ad valorem equivalents to take into account distortions arising from the useof sets of data. Para 26 gives special treatment from the general rules for sugar.

A last-minute agreement among the FIPs on these two paragraphs saved themini-ministerial from what would have been a significant failure. The FIPs broughttheir short text on the AVE issue to the 30 countries meeting for a few hours on 4May afternoon at the mini-ministerial, and they then agreed to forward it to WTOmembers in Geneva.

The ad valorem issue had been holding back progress in other areas of agriculturenegotiations. It has been contentious because the method agreed for calculating theconversion can significantly affect the extent to which the tariffs are to be eventuallyreduced.

Non-ad valorem duties on certain products have to be converted into AVEs in orderto ascertain the degree of market opening these products would undergo whenapplying the 'tiered formula' for making tariff reductions.

Some developed countries such as the EU and Switzerland which use non-ad valoremduties most extensively, have been arguing for a method of conversion that wouldallow them as much flexibility to ensure that these products would not have to makesubstantial tariff reductions. This was opposed by efficient agriculture exporters likethe Cairns Group countries that seek greater market access.

The informal meeting Tuesday at the WTO was held to circulate the draft to membersand get preliminary feedback. The Chair of the Special Session, Ambassador TimGroser of New Zealand, said that he was not seeking a decision that day as it wouldbe unfair to ask delegations to endorse the new draft at short notice. He asked themto especially consider two unresolved issues: prices to be used to make adjustmentsfor sugar, and details on how members would verify each others' calculated advalorem equivalents.

Several countries made some preliminary comments on the draft guidelines with somesaying that they needed more time to consider it, while others raised specificconcerns. Nonetheless, according to trade officials, no one seemed to oppose theguidelines.

In his opening remarks, Groser outlined the difficulty that members had faced beforethe 30-or-so delegations agreed in Paris. He said that he had criticized them forinflating a technical issue instead of leaving the substance to the next phase when thetariff reduction formula is negotiated. He also observed that verification ought not tobe a major task if the agreed method of calculating ad valorem equivalents is tightenough.

According to trade officials, some of the key delegations that were in Paris (US,Brazil, EU, Switzerland, and Australia) urged members to accept the packagealthough some said that they themselves also needed time to think about some of theother parts of the draft guidelines.

Some countries described the guidelines as imperfect but added that they were willingto accept it in order to move on, said the trade officials. Others wanted more time toconsider it.

Several sugar-producing countries expressed reservations about the text. Mauritius,the Philippines, Barbados, Antigua & Barbuda (speaking also for St Kitts and Nevis)and the Dominican Republic expressed concern that sugar was given special treatmentin the calculation method. Australia said they should not be too concerned, addingthat the decision not to use IDB and Comtrade data was because both are highlydistorted by the amount of protection and support given to sugar.

Australia also predicted that whatever price is chosen, the two major sugar producers(implying the US and the EU) would end up with their sugar tariff in a high tier in thereduction formula and would then designate sugar as a sensitive product (implyinga lower reduction than normal).

The Philippines also said it had reservations about the distinction between processedand unprocessed products, which it said is unnecessary since tariff escalation (highertariffs on processed products than on raw materials) is already a problem.

The issue of the decision-making process, in which five members practicallynegotiated the guidelines and presented them to the rest for endorsement, was alsoraised, at least indirectly. Switzerland articulated concerns on the process, and saidbecause of the pressure it exerted, it could participate in the Paris meeting.

Groser said he had his own concerns also about the process, while he also appreciatedthe leadership taken by these countries (alluding to the FIPs).

Zambia, coordinator of the LDC group, said that while it recognizes LDCs will nothave to make commitments, it was relieved to see that countries with opposite viewscan eventually reach agreement. It urged members to continue to consider the interestsof LDCs.

The Chair accepted Australia's and Mexico's proposal for major countries to supplytheir ad valorem equivalent calculations by 20 May. He agreed that much of thecalculation had already been made, and said he would make it a 'soft deadline'. Headded that smaller countries would be allowed more time and would need help fromthe Secretariat.

A Secretariat study notes that 34 countries have non-ad valorem duties covering some7,977 tariff lines, with the EU-15 having the most tariff lines followed bySwitzerland.

Australia also proposed a one-month verification period starting with comments byemail and ending with one verification meeting. Groser said that members shouldthink about this. He also urged members to get together to find a solution to thequestion of sugar prices.

Speaking to the media after the informal meeting, Ambassador Luiz Felipe de SeixasCorrea of Brazil said that while the solution reached had not been ideal, it allowedmembers to move forward. It was a positive sign for the 'July approximation'. The realproblem, he added, would be in the discussions on market access. With respect toverification, he said that this process should be transparent and done in an expeditiousmanner.

The next 'agriculture week' starts on 30 May. With the AVE issue expected to beresolved by then, negotiations will move on to the more difficult core issues in marketaccess.

Groser told the meeting that he wants negotiators to start on the tariff reductionformula during that week, as well as some other related questions such as sensitiveproducts, special products and a special safeguard mechanism.

The draft guidelines center around the method for calculating ad valorem equivalents(AVEs, expressed as percent of the value of an import) of non-ad valorem duties(expressed as value per unit such as dollars per ton). A resolution of this issue isconsidered a necessary step for negotiations to begin on a tariff reduction formula onimported products.

At issue is the import price of the product to be used in converting non-ad valoremduties into ad valorem equivalents.

With regards to determining the price of the product, members had generally agreedto find the estimate of the price based on the Integrated Database (IDB) of the WTO.The approximation of the price that is obtained from this is the unit value of theimport (total value of import divided and compared by the total quantity of importover a period).

However, some members (such as the agricultural exporters in the Cairns Group andthe G20) had argued that this gives a price that is too high and they preferred the UN'sComtrade database (which looks at the global trade and an estimate of the world pricefor a product). Other members such as those in the G10 were not in favour of theComtrade database.

So, what members agreed to was a filter process. The import value per unit calculatedfrom IDB data is compared directly with the world price estimate calculated from theUN's Comtrade database. If the difference is more than 40%, (e.g. the IDB calculationgives $1 kg pound, and Comtrade gives $0.50 per kg, a difference of 100%), then thisproduct's price would be caught in the filter. Products whose difference is less than40% would pass through, and the IDB calculation would be accepted.

Products caught in the 'forty' filter now face another test. The ad valorem equivalentswould then be calculated and if the difference is less than 20 percentage points, thenthe product would pass through. For example, if the ad valorem equivalent using theIDB is 50% and the ad valorem equivalent using Comtrade is 65%, a difference of 15percentage points, then the product would pass through. Only products that remaincaught in this second filter would require some adjustment (use a number that issomewhere between the two).

Members had agreed that there will be different adjustments, broadly for processedproducts (Chapters 17 to 24 of the Harmonized System, i.e. products whose tariffcode numbers begin with 17 to 24), except for raw and refined sugar, and basicproducts (Chapters 1 to 16, and some beyond chapter 24). Sugar (part of Chapter 17)will be treated differently.

The WTO mini-ministerial in Paris took up only paragraphs 25 and 26 of the 6-pagedraft guidelines involving the proposed method of adjusting the calculations whenserious anomalies arise.

Agreement on the two paragraphs was reached on 4 May in Paris by the 'FiveInterested Parties' and these were then endorsed by the other countries at themini-ministerial. The paragraphs and the whole text had to be brought to the entiremembership of the WTO.

Paragraph 25 of the updated draft guidelines says:

'The conversion of non-ad valorem duties, captured in the 40/20 filter, into theirAVEs will be calculated using the following weightings based on unit values ofComtrade and IDB data:

(a) For HS Chapters 1 to 16, and the products in Annex 1 of the Agreement onAgriculture in the HS Chapters beyond Chapter 24, a 82.5/17.5 (Comtrade/IDB)weighting will apply.

(b) For HS Chapters 17-24, a 60/40 (Comtrade/IDB) weighting will apply.'

Paragraph 26 says: 'For all tariff lines for raw and refined sugar, world prices willapply, with prices to be agreed.'

Members still have to decide which price reference to use for sugar. Members havealso reserved the right to comment on some of the AVEs calculated by othercountries. Discussions still have to be completed on how this would be handled.

The draft guidelines also covered such questions as how to deal with circumstancesthat do not fit the normal situation, for example, if data are missing.