WTO Agriculture meeting suspended over 'misunderstanding' on AVEs

By Kanaga Raja, Geneva, 20 April 2005 South North Development Monitor (SUNS) 21 April 2005

A formal meeting of the Special Session of theCommittee on Agriculture of the WTO was 'suspended' late Tuesday as memberstried to resolve a 'misunderstanding' that developed over the issue of convertingnon-ad valorem duties into ad valorem equivalents (AVEs).

The formal meeting came at the end of a week-long series of informal meetings ofthe Special Session, which discussed in greater detail two export subsidy issues offood aid and state trading enterprises and the domestic support issue of Blue Boxcriteria.

No date has been set for the formal meeting to resume but the next Agriculture Weekof negotiations is scheduled for 30 May.

There were behind-the-scenes discussions over the week on the method for calculating ad valorem equivalents (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 is considered a necessary step for negotiations to begin ona tariff reduction formula on imported products.

According to trade officials, the key members involved in the talks thought they hadan agreement Tuesday afternoon that they could present to the rest of the membershipin the formal meeting. However, about half an hour before the meeting was due tostart, it emerged that members had different understandings on how some of themathematical processes would work.

According to news reports, the agreement was rejected at the last minute by the EU.

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 exporting nations in the CairnsGroup and the G20) argue that this gives a price that is too high and that they preferthe UN's Comtrade database (which looks at the global trade and an estimate of theworld price for a product).

Other members such as those in the G10 are not in favour of the Comtrade database,arguing that the prices are too low (resulting in high AVEs, and consequently, largertariff cuts through the tariff reduction formula.)

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 (i.e. by the use of anumber that is somewhere between the two).

The unresolved issue related to products caught in the filter, whether (1) to try for aprice between the unit values given by the WTO Integrated Database and UNComtrade data first and then convert to ad valorem equivalents, or (2) to use the twounit values to convert to ad valorem equivalents first and then go for a tariff ratebetween the two.

Apparently, this could yield significantly different results.

In his assessment, Groser said he had no criticism of the countries involved in theconsultations, on the effort they have put into solving this. He said members shouldtake note of the 'massive amount of work done'. The fault, he stressed, lies in amisunderstanding. But he added that he was 'extremely critical' of the membershipfor losing sight of the bigger picture.

Groser contrasted market access against the other two pillars. Members are makingsteady progress on export competition (subsidies and related issues), he said.Domestic support shows less marked progress, but a result (a 'first approximation'of modalities) could still be delivered in July, he added.

Market access has always been by far the most sensitive and it would be'inconceivable' that the membership could accept a document in July that containsa 'massive hole' for the market access pillar, he cautioned.

Members are waiting to discuss a long list of issues such as tropical products,sensitive products, special products, etc, but before they can even start to do so, theyneed a basis for starting to negotiate the tariff reduction formula. And that, Grosersaid, requires 'comparing apples with apples' (comparing all tariffs on the same basis,i.e. ad valorem).

To illustrate the problem, imagine a formula with two tiers, the Chair said: (1) tariffs99% or below, and (2) 100% up. And imagine a product has a specific duty of $600per ton. Suppose the agreed reduction is 25% in the lower tier and 75% in the highertier. For importers and exporters there could be a big difference between the two. Ifthe conversion to an ad valorem equivalent (AVE) puts the product in the higher tier,its duty will be cut by three quarters, leaving $150 per tonne, which exporters wouldprefer. But if the ad valorem equivalent is below 100%, the reduction is only onequarter, leaving a tariff of $450 per ton, which a defensive importer would prefer.

At the same time, all have understood that there is no single correct method, he said.'We'll never find a precise answer.' But until an answer of a kind is found, the talkscannot move forward (on market access), he said.

Groser said he had held nine consultations with about 15-16 delegations in Room F(one of the smaller rooms in the WTO, used for smaller group consultations). He saidhe relied on the delegations to keep others informed, including other members of theiralliances, and they had done this reasonably well. There had been numerous otherprivate discussions such as dinners, phone calls, emails, etc. According to tradeofficials, on 19 April a group of about 30 delegations (hosted by the Canadianmission) met and thought they had an agreement that could be put on paper, andGroser thought he could put it to the formal agriculture meeting for adoption. But inthe afternoon, about half an hour before the formal agriculture meeting began, themisunderstanding emerged, he said.

From the start there were always two price indexes, Groser said: the WTO IntegratedDatabase (IDB) and the UN's Comtrade data. Members also accepted as 'reasonable'the proposal that products that are more processed should have ad valoremequivalents that are closer to the value given by the IDB, he added.

Groser then outlined the 'filters', which he described as a 'relevancy test', (i.e. a testto see how relevant the WTO IDB data is for each product by comparing it withComtrade). If the difference is not too great, members would use the WTO IDB data.Groser described this as a result slightly weighted in favour of 'defensive interests'.

For products caught in the filter, the negotiators agreed that the calculations forprocessed products would be closer to the WTO IDB calculations, and for more basicproducts it would be closer to the UN Comtrade calculations, Groser said. Heexplained that they then agreed that broadly the processed products would be thosein Chapters 18-24 (i.e. products whose code numbers begin with 18 to 24 under theHarmonized System of classification, which includes prepared food, confectionary,etc), and the basic products would be those in Chapters 1-17, except for a handful of more processed products.

It was only after all of this was agreed, that the misunderstanding emerged, he said.It involves the adjustment for products caught in the filter. Some negotiatorsunderstood that the adjustment would be made by taking a price estimate (a 'unitvalue') between the WTO IDB and UN Comtrade values first (according to an agreedapproach), and then using that to calculate the ad valorem equivalent. Othersunderstood that two ad valorem equivalents would be calculated first, using the IDBand Comtrade price estimates, and then the appropriate value between the two wouldbe used.

Groser asked members to analyse the situation and resist the temptation to throwaway the agreement. He urged them not to lose sight of the bigger picture, which hesaid includes the likelihood that members will adjust their approach to the tariffformula negotiations according to the outcome of the ad valorem equivalentcalculations. If the calculations favour those with exporting interests, the importerswill be less willing to liberalize, and if they favour defensive importing interests, theexporters will be more aggressive, the Chair argued.

He said it was too soon to say what the significance of the blockage is. But, ifcommon sense doesn't prevail, 'what do you expect me to do? Flip a coin?'

No country spoke up during the meeting except for Bulgaria which expressed concernover the fact that it was not part of the consultations.

However, speaking to the media later, the US expressed its disappointment sayingthat it thought that the issue would be resolved Tuesday.

Codoaldo Hugueney, a Brazilian trade official, remarked that members have beenspending months on this technical issue, holding up other issues in the process.