The proposals at the WTO in the negotiations on non-agriculture market access (NAMA) to slash industrial tariffs in developing countries are inappropriate and, if accepted, would result in devastating effects on local industrial firms and jobs, according to experts at a workshop held in Geneva on 9 May 2005.

In particular, the experts warned, an obligation to cut industrial tariffs across theboard on a 'line-by-line' basis would remove flexibilities and policy space, anddeprive the developing countries of their ability to plan their future industrialdevelopment.

The experts proposed that any commitments made on tariffs should be on the basisof the average tariff rate of a country. It would then have the flexibility to choose atwhich rates to change the tariffs in particular products and sectors.

The workshop on 'NAMA negotiations and implications for industrial developmentin developing countries', organised by the Third World Network, was attended by 80participants - developing country diplomats, officials from international agencies,experts and NGOs.

Among the papers preseented were 'WTO negotiations on industrial tariffs: what is at stake?' by Dr. Yilmaz Akyuz, former director of UNCTAD's Division on Globalization andDevelopment Strategies.

Other experts who spoke included international trade expert Bhagirath Lal Das, Cambridge University economist Dr Ha-Joon Chang and UNCTAD senior economistMehdi Shaffaeddin and War On Want policy director John Hilary.

A final session in the workshop on 'The way forward' heard views by somedeveloping countries' senior officials (including the Ambassadors of Brazil, Tanzania,India and the Philippines) as well as some of the experts and participants on thecurrent state of the NAMA negotiations and the position that developing countriescould take.

Below is a report of the experts' presentations at the workshop.

Martin Khor
TWN

Experts warn of devastating effects of NAMA framework

By Meena Raman
Geneva
10 May 2005

The proposals at the WTO in the negotiations on non-agriculture market access (NAMA) to slash industrial tariffs in developing countries are inappropriate and, if accepted, would result in devastating effects on local industrial firms and jobs, according to experts at a workshop held on 9 May in Geneva.

In particular, the experts warned, an obligation to cut industrial tariffs across theboard on a 'line-by-line' basis would remove flexibilities and policy space, anddeprive the developing countries of their ability to plan their future industrialdevelopment.

The experts proposed that any commitments made on tariffs should be on the basisof the average tariff rate of a country. It would then have the flexibility to choose atwhich rates to change the tariffs in particular products and sectors.

The workshop on 'NAMA negotiations and implications for industrial developmentin developing countries', organised by the Third World Network, was attended by 80participants - developing country diplomats, officials from international agencies,experts and NGOs.

A paper on 'WTO negotiations on industrial tariffs: what is at stake?' was presentedby Dr. Yilmaz Akyuz, former director of UNCTAD's Division on Globalization andDevelopment Strategies.

In his presentation, Akyuz said that the conventional view that there are short-termcosts and long-term benefits to liberalisation in industrial goods was not true, and thereverse is more accurate. To cut and bind tariffs on a line by line basis hasparticularly serious implications as the obligations on the sectors would beirreversible.

Akyuz said that the developed countries during their development phase hadindustrial tariffs that were far higher than the current tariffs in developing countriesor LDCs.

For example, the United States had average applied tariffs of 40-50% for much of thecentury 1820-1920. In comparison, the average rate in 2001 in developing countriesas a whole was 8.1% and in LDCs it was 13.6%.

Even in 1950, the average tariff was 14% in the US (with a per capita income then of$9561) and 26% in Germany (per capita income $3881) and 23% in the UK (percapita income $6907).

These compare with the tariffs in 2001 of 8.1% for developing countries (per capitaincome $3260), 13.6% for LDCs (per capita income $898), 10.4% for Brazil ($5508per capita income), 12.3% for China (per capita income $3728) and 24.3% for India(per capita income $1945).

[All per capita incomes are in on PPP terms in 1990 prices.]

Akyuz said that in the present NAMA talks, developing countries are asked to cuttheir tariffs much more rapidly than the developed countries had done in the 30 yearsafter the Second World War.

He said that there is a pattern of optimal tariffs in different sectors (resource-basedand labour-intensive; medium technology-intensive; and high technology-intensiveproducts) at different phases of a country's industrial development.

For example, when a country is at the lower end, it may want higher tariffs to protectits labour-intensive industries, but zero or low tariffs on other products which it didnot and cannot produce. When the country enters a higher phase, it could reduce itstariffs on labour-intensive products (as it was already competitive there) but may wantto now raise tariffs on medium and high-tech products so that it could developindustries in these areas.

Given this pattern of optimal tariffs, the developing countries need a lot of flexibilityto lower and raise their tariffs in different products at different times and differentphases of industrialisation. To allow, this, the WTO should allow them to bind theiraverage tariff without a line-by-line commitment. This would especially allow themto raise tariffs in future when they were more developed and able to produce morehigh-tech products.

Akyuz added that the developed countries should have already long ago cut orremoved their tariffs on low-end industries in which they were uncompetitive, suchas textiles. It would be unfair for them to offer to cut these tariffs in return fordeveloping countries' agreeing to cut and bind their tariffs on medium and higher-endsectors, when the developing countries would need higher tariffs in these sectors topush themselves up the industrial ladder in future.

He characterised as an 'unfair bargain' if developing countries were asked to give upon their prospects of moving up the industrial ladder in exchange for short-termbenefits arising from the developed countries' promise to phase out tariffs on low-endproducts that they should have unilaterally given up long ago.

Any line-by-line binding of product tariffs, and tariff reduction line-by-line, wouldundermine the WTO as a multilateral organisation as this could cause damage andconflict that should be avoided., Akyuz said. The problem of preference erosion couldbe handled by allowing affected countries to subsidise their affected exportstemporarily until they are efficient, he added.

Chakravarthi Raghavan, editor emeritus of the SUNS bulletin, said that the theoriesof WTO and World Bank economists that more trade liberalisation would solvedevelopment problems had been contradicted by many recent empirical studiesshowing that liberalisation does not necessarily produce more growth, leave asidepoverty reduction. The studies show that in fact when some developing countries havetrade barriers, they seem to have higher growth. Trade is at best one element forensuring growth, development and poverty reduction.

Thus, the developing countries should be cautious about accepting the liberal, freetrade orthodoxy. Towards the end of the Uruguay Round, a GATT study had claimedthat there would be $250 billion gains from the Round, but after the Round wasconcluded, a World Bank study estimated an $80 billion gain globally, with large partof the gains to the developed countries and many developing countries losing out. Thedeveloping countries were then advised to liberalise even more in order to develop!

Raghavan said manufacturing was essential for the developing countries not only fortechnology and capital accumulation and catching up with the rich countries as Akyuzhad brought out, but in large heavily populated poor countries, manufacturing andindustrialization was needed to provide jobs with decent wages for millions ofunemployed in urban and rural sectors. No information technology and service sectorscould fill this role. The developing nations therefore need an active state andselective protection to their industries to encourage their establishment and formaintenance and fostering of the manufacturing sector.

Raghavan also challenged the notion that it would be a disaster if the Doha Round isnot concluded, and soon. If there was development in the content of the Round, thenthere is a good case for concluding the Round, he said.

But in the Doha Round as of now, 'development exists only in rhetoric'. There is nodevelopment content in the July package - whether in agriculture, NAMA or otherareas. If there is nothing concrete on development, it may be good if there is no resultat the Hong Kong ministerial meeting; the negotiators would then be forced to lookagain and negotiate, he said.

In another session, international trade expert, Bhagirath Lal Das said the mainconclusions from Akyuz's presentation, with which he agreed, were that developingcountries need tariff protection for industrial development; that during theindustrialisation process a country may require low, high and then low tariffs atdifferent times on the same products; and taking up the production of a new productwill be difficult if the option for raising its tariff is lost.

These points are valid for LDCs as well as more advanced developing countries, asthey are all very far behind the industrial leading countries. He made a distinctionbetween liberalisation as a domestic policy which is for each country to decide on,and a binding obligation in the WTO, which the country cannot go back on. Thecountry should maintain the option to raise tariffs on particular products at a laterdate, which cannot be done if the tariffs are already bound at zero or low levels.

Das added that Akyuz's paper also shows that there is an optimum level of tariffs atdifferent stages of industrialisation for different products. It would be dangerous fordeveloping countries to lose the option of varying the tariffs to meet the optimum.

He added that developing countries are still able to keep their options as the processof working out modalities is still going on. The present tariff levels are what thedeveloping countries have established by negotiations and is a right that they could maintain. They could choose to give up some of the rights if they get adequate newconcessions in return.

The current framework (Annex B of the July package) does not bind the developingcountries to a line-by-line tariff reduction, Das pointed out. This is because Annex Bis not binding, as its first paragraph, stipulating that these are only initial elements andmore negotiations are required, is an overarching provision for the annex.

Das proposed that for unbound tariffs, any commitment agreed to by developingcountries should only be on the basis of average tariff, and the calculation of thisshould also not be based on current applied tariffs. The new average tariff should alsobe higher than the current bound tariff rate, as it would result from a new obligation.

On tariff reduction of bound tariffs, Das said any non-linear Swiss formula would notbe appropriate for developing countries. Moreover, any line-by-line approach, evenif it is tied to a linear formula, would be dangerous.

He said that by agreeing to a Swiss formula, developing countries would be giving uptremendous space, and similarly if they agree to a line-by-line approach. Ifdeveloping countries are to agree, what are they getting in return from the developedcountries, for this great concession, he asked?

Das added that developing countries should propose that the approach be taken fortariff reduction on an average basis, and not line-by-line. If some developingcountries feel they could offer more than this in order to obtain something more fromindustrial countries, they could agree to the general approach, and then enter bilateralnegotiations with the industrial countries on a product basis.

Martin Khor of the Third World Network recalled that in the history of GATT andWTO up to now, developing countries had never been subjected to a tariff-reductionformula, nor to any rules on binding currently unbound industrial tariffs. He said thatthis flexibility should continue, and it would be ironic if the 'Development Round'were to end this flexibility that developing countries require for their industrialsurvival and growth.

He said that the concept of 'reciprocity' should be interpreted as a country receivinga growth in exports equal to a growth in imports. 'Less than full reciprocity' inobligations for developing countries (which is an agreed principle in the NAMAmandate) should thus be translated into 'more than reciprocal' benefits in trade balanceterms. The obligations in tariff changes should be worked out to produce thisoutcome, especially if the development principle is to be upheld.

He suggested that instead of the non-linear line-by-line formula mentioned in theNAMA framework, the Uruguay Round approach could be adopted, in whichdeveloping countries were asked to reduce tariffs by an overall target, and were freeto choose at which rates to reduce particular product tariffs. They should also be freeto choose at which rates to bind their unbound tariffs.

Cambridge University economist, Ha-Joon Chang, said that if the developedcountries' NAMA proposals were adopted, the developing countries would besubjected to truly drastic tariff cuts, bringing their industrial tariffs to their lowestlevels since the days of Unequal Treaties in the 19th and early 20th century. Theywould also be lower than rates that prevailed in any of today's developed countriesuntil the Second World War, with a few exceptions for brief periods. The effects ondeveloping countries would be 'truly monumental', he said.

Chang said the proposed formulae would reduce the tariffs of developing countriesmuch more in proportionate terms as well as in absolute terms, compared to tariffs ofdeveloped countries. It was worrying that many developing countries do not seem torealise how devastating the cuts can be.

He added that harmonisation of tariffs between industrial and developing countrieswas inappropriate and unfair, as such a so-called level playing field would beequivalent of asking a schoolboy football team to take on the national team.

Chang also challenged the limited notion of 'flexibility' being mooted in the WTOnegotiations. This concept of flexibility should not be taken to mean only thatdeveloping countries could exclude a few sectors from the tariff reduction formula. He said that 'this is a peculiar notion of flexibility.' For, once a sector is liberalised,there is no going back. There is a belief that a tariff should never rise above thebound rate.

'If developing countries were to have real flexibility, developing countries should beallowed to unbind tariffs, if there is reasonable ground. What is happening is thereverse. Instead of allowing the countries that have overdone trade liberalisation toraise their tariffs, the developed countries are trying to lower them even more.'

Chang said the developing countries should wake up as there may be no moreindustrial development in the developing world in the near future if the NAMAproposals are accepted. This may sound a drastic conclusion, but is the only realisticassessment.

In response to a question, he added that although the NAMA negotiations are donein the name of development, in reality the developed countries were conducting thenegotiations in their own mercantile interests. 'Let us not pretend that there is somebenefit for developing countries,' he said.

It was important to stress the need for flexibility, he said. For instance in the 19thcentury, bilateral free trade agreements had exit clauses and lasted for 20 years. 'Nowthe agreement binds you forever even it may result in the destruction of industry,poverty and the end of development.'

UNCTAD senior economist, Mehdi Shaffaeddin, speaking in his personal capacity,said that in all cases, with one or two exceptions, all industrially successful countrieshad used tariff protection. He added that infant industry protection should be for atemporary period. Most developed countries had also protected in a selective way.

He said that an UNCTAD study on 50 developing countries showed that only 20 thatliberalised their imports had managed to expand their manufacturing exports to anysignificant extent, and of these only 10 expanded their manufacturing value-added aswell. Half of the countries surveyed experienced deindustrialisation. There was littleevidence they could upgrade their industries.

He added that the implications of NAMA should be understood in context. Theindustrial countries were already industrialised, with advanced supply capacity. Whenthey get the developing countries to liberalise, they will get market access. Bycontrast, even if developing countries get access to developed country markets, thatmay be of benefit to products they presently make, but it would not benefit them forfuture products that they can potentially make (as the developing countries' tariffs onthese would have been lowered).

'Thus developing countries may be sacrificing their future for a bit of market accessfor the present,' he said. He warned developing countries against hoping to get somebenefit for their labour-intensive industry, and in return giving up their futurepotential for high value-added industry. This would be the end of theirindustrialisation, he said.

John Hilary, Policy Director of War on Want, a UK-based development agency, saidthat European NGOs were angered by their governments' hypocrisy, when they talkpublicly about the WTO Development Agenda, while acknowledging in private thatthey are really only looking out for their companies' interests in opening up marketsin the South.

When pressed further about the Development Agenda, the government officials toldthe NGOs that the time for nice words about development is over, and what they theEC governments are after frankly are their commercial interests.

The NGOs are confronting their elected officials, who say they are for developmentand tackling poverty, with the reality that the rich countries' NAMA proposals wouldlead to a loss of jobs, income and increase in mass poverty.

Hilary said that however the EU and US officials recognise the strong argumentraised by developing countries about 'less than full reciprocity', but have been unableto give an answer. The EU also recognises that the current proposal on treatment ofunbound tariffs is asking the developing countries to pay twice, once in binding andthe second time in cutting the tariffs.

He said that it was important not to be 'rushed' into agreeing with an artificialdeadline. The EU and US are forcing the pace by rushing to get modalities by July.This was a deliberate attempt to get a result favourable for their commercial interests.The developing countries should be able to step back and resist the forcing of thepace.

A final session in the workshop on 'The way forward' heard views by somedeveloping countries' senior officials (including the Ambassadors of Brazil, Tanzania,India and the Philippines) as well as some of the experts and participants on thecurrent state of the NAMA negotiations and the position that developing countriescould take.