Following the failure of the talks on
NAMA and a number of other issues in WTO to conclude before the end of
April, Mr. Lamy has warned that the price of the "failure" is
high. I entirely agree with him that the "price of the failure will
be high", but my concept of "failure" is different from
that of Mr. Lamy. He is referring to the "failure" to conclude
an agreement. What I have in my mind is the risk of the "failure"
by developing countries to fully appreciate that accepting the proposals
made by developed countries on NAMA will put the majority of developing
countries on the slippery slip road of de-industrialization. In fact,
they will be locked in the production of primary commodities and simple
resource-based and labour intensive products. Then the price of the failure
will be extremely high for generations to come.
Having an agreement is not for the sake of an agreement; hence let it
fail if it does not serve the objective of industrialization and development.
The failure to reach an agreement will be success. Let me back-up my claim
by some argument: the proposed formula …will tie hands of developing countries
for ever in terms of flexibility in their trade and industrial policy;
treats all developing countries, with little exceptions, the same way
and puts all industries of any particular country in the same basket.
These are recipes for "backwardness", not progress. All it does
is to facilitate the operation of translational companies-globalization
not development. Let me explain further.
Although the text of the Hong Kong Declaration of December 2005 on NAMA
is vague, since the beginning of the Doha Round, developed countries have
been pushing for the trade liberalization in manufactured goods which
has three main characteristics:
• Reduction of tariff rates across-the board, leading eventually to zero
tariff rates;
• Reduction in tariff dispersion; uniformity of tariff rates; and
• Universal application: applying the same principal and tariff reduction
formula to all countries irrespective of their level of industrialization
and development- with some special treatment of LDCs for a temporary period.
Accordingly, it is proposed that all countries, with the exception of
the LDCs, for a temporary period, cut average tariffs rates and reduce
their dispersion and bind 95 per cent of their individual tariff lines
at the same low rate. For example, the USA proposed cutting the tariffs
to 8 per cent by 2010 and reducing them to zero by 2015. Certain sectors
were proposed to be subject to zero tariffs immediately upon the conclusion
of the Doha Round. The EU has suggested non-linear cuts in tariffs according
to the Swiss formula, and a low and uniform coefficient of 10 chosen for
both developed and developing countries. Further, EU has proposed a tariff
cap of 15 per cent for developing and 10 per cent for developed countries
for binding all industrial tariff lines.
The Swiss formula proposed by EU, and approved in Hong Kong, despite the
opposition of the majority of developing countries, is:
T= (a. t)/ (a+t), and R=t/ (a+t)
Where T and t are the new and initial tariff rates respectively and a
is the constant coefficient, and R is the rate of tariff reduction.
This formula has the following main characteristics. First of all, the
coefficient "a" determines the maximum tariff rate possible
under the formula. Therefore, a coefficient of 10 implies that the highest
new tariff rate a country can have will be 10 per cent irrespective of
its present tariff rate. Secondly, the higher the initial tariff rate,
the higher the rate of reduction in tariff. Thirdly, the lower the coefficient,
the higher will be the rate of reduction in tariff. Fourthly, for high
tariff rates, the rate of reduction in tariffs is higher than the rate
of reduction in tariff when simple linear formula is applied according
to which the same percentage reduction is applied to all tariff lines.
Finally, the formula will lead to lower rates of percentage reduction
than those generated by a tariff independent linear reduction, in a certain
range of low tariff rates.
The choice of the value of the coefficients of the formula for developing
and developed countries is still subject to negotiation. Nevertheless,
the proposals so far made by developed countries are not in the interest
of developing countries. Initial tariffs for developing countries are
well higher than that of developed countries. Therefore, they would be
subject to significantly greater reduction in their tariff rates not only
in absolute terms but also in percentage terms. For example, if the EU
proposal is approved, a tariff rate of 5 per cent for developed countries
will be reduced to 3.33 - a reduction of 33 per cent or 1.67 percentage
points. By contrast, a tariff rate of 60 percent for developing countries
will be reduced to 8.8 - or a deduction of 85 per cent, or 51.2 percentage
points. (See SUNS, November 1, 2005) This maximum rate will also apply
to all unbound tariffs after tariff cuts and binding.
The application of the proposed Swiss formula has a significant detrimental
long-term effect on the industrialization of developing countries, apart
from their loss in government revenues. But it has no negative effects
on developed countries. Developed countries are already industrialized;
they have the supply capacity to produce capital, skilled and technology
intensive goods. By giving up trade barriers on imports in exchange for
market access in developing countries, they do not sacrifice their long-run
industrial development. Of course their upgradation of the industrial
sector depends on development of new technology. But they have firmly
secured protection of their new technologies through TRIPs, with patents
protected for 25 years.
By contrast, tariffs remain almost the only remaining means of trade policy
for developing countries as NTBs have been removed almost entirely, and
they are effectively denied subsidies geared to export performance. Yet
the industrial sector of most developing countries is, unlike that of
developed countries, underdeveloped, thus they need to apply higher tariffs
to some of their industries, particularly new ones, than developed countries.
Thus the low and bound tariffs rates will disarm them of an important
policy tool for establishing new industries and upgrading the existing
ones.
Of course, by obtaining further market access in developed countries,
they will improve the prospects for the expansion of exports for their
existing efficient industries i.e. industries in which they have static
comparative advantages. But binding tariffs at low levels deprives them
of the tool of expansion of supply capacity in new industries in which
they may wish to develop dynamic comparative advantage. Therefore, even
when market access is provided for such potential products, the prospects
for their supply expansion will be absent due to the lack of policy space.
In other words, for better access to markets for their current export
products, they sacrifice their ability to establish new industries or
upgrade into new products.
Such a trade off will result only in the deepening of their static comparative
advantage; but long-run industrialization and development are sacrificed
even if there is an efficiency gain through reallocation of resources
in the short run. The experience of successful industrializers and premature
liberalization in colonies and developing countries provide us with lessons
from history.
The experience of successful early and late industrializers indicates
first of all that: with the exception of Honk Kong, no country has managed
to industrialize without going through infant industry protection phase,
although across-the-board import substitution and prolonged protection
have also led to inefficiency and failure. Secondly, government intervention,
both functional and selective, in the flow of trade and in the economy
in general has played a crucial role in the process of industrialization.
In all cases, including Great Britain, industrialization began on a selective
basis, although to a different degree, and continued in the same manner
until the industrial sector was consolidated. Thirdly, when their industries
matured, they began to liberalize selectively and gradually. Therefore,
trade liberalization is essential after an industry reaches certain level
of maturity, provided it is done gradually and selectively. Otherwise,
premature trade liberalization, whether during the colonial era or in
more recent decades, has been disappointing. In the case of the USA, when
the country tried to liberalize prematurely in 1847-61, the industrial
sector suffered and the country had to revert to protectionism against
imports from Great Britain.
Fourthly, government intervention was not confined to trade, the state
intervened through other means; directly and indirectly, in particular
to promote investment and to develop the necessary institutions and infrastructure.
In particular, industrialization was supported by attention to and growth
in the agricultural production.
Fifthly, while different countries did not follow exactly the same path,
all learned from the experience of others; the USA learned from the UK,
Germany from the USA, Japan from Germany and the Republic of Korea from
Japan, etc.
Sixth, all main early industrializers tried to open markets in other countries
when their industrial sector matured. In the 19th century, free trade
policy was forced on colonies and 5 per cent rules (according to which
5 per cent was the maximum tariff rate allowed on any import item) were
imposed on semi-colonies and independent countries through "unequal"
bilateral treaties and, or, through force (e.g. the imposition of the
opium war of 1839-42 on China). During recent decades, developing countries
have been pushed through multilateral organizations and bilateral trade
agreements to open their markets. The policy space of the colonies, in
the 19th century, was further limited by England by outlawing high value-added
manufacturing activities in the colonies and banning export of competing
items from the colonies to England. Instead, production of primary products
was encouraged. During recent decades, tariff peaks and escalations and
arbitrary anti-dumping measures have been among means of restricting imports
of high-value added products from developing countries. The outcome of
imposition of premature trade liberalization on the colonies was devastation
and de-industrialization.
The results of a study by the author of about 50 developing countries,
which have undertaken trade liberalization for the 1990s indicate that
with the exception of East Asia, their trade liberalization has had three
main characteristics- common with the proposals of developed countries
in NAMA negotiations: Uniformity: i.e. a tendency toward uniform tariff
rates for various industries in each country; Universality, i.e. application
of the same recipe to all countries irrespective of their level of industrialization
and development; and premature and rapid liberalization. And the results
have been disappointing for most countries other than East Asian ones.
First of all, Only (20 countries) in over 40 percent of the sample with
manufactured exports showed high growth rates (more than 10 per cent a
year), out of which only in about 10 countries- mostly in East Asia, high
growth rate of exports was accompanied by accelerating, or high growth
rate of MVA. In fact, in half of the sample countries, de-industrialization
took place over 1980-2000; MVA/GDP ratio declined without recovering to
the initial level; in many countries industrial employment also suffered
severely.
Secondly, when exports expanded, it was mainly in resource-based industries
and some assembly operations without much upgrading, except for industries
which were dynamic during import-substitution era and were near the stage
of maturity, or continued to benefit from some sort of support from the
government.
Thirdly, even though the relative incentives changed in favour of exports,
the manufacturing industry suffered from low investment despite a significant
increase in FDI in some cases e.g. Brazil. Investment in manufacturing
suffered because the balance of risk and return turned against the manufacturing
sector.
In short, low and uniform bound rates, particularly if it tends to zero
in the next round, would imply the end of industrialization of many developing
countries. What is needed is a dynamic flexible tariff structure where
only average tariffs (which may be even higher than the current average
rate) are bound with significant dispersion. In developing countries different
industries require different rate of protection and different length of
time for their development. This is because they involve different risks,
scales of production and the time and experience needed to learn the industry
and the technology involved. Further, uniform tariff rates provide different
effective rate of protection for various industries, depending on their
import intensity. For given uniform rates for output and inputs, the higher
the import intensity the lower the effective rate of protection. As a
result, uniform rates involve biases against new industries as new industries
usually have high import intensity. This explains why assembly operation
does not easily lead to increase in value added.
Since the conclusion of the Uruguay Round, developing countries have stepped
in a slippery slop situation. The solution, I am afraid, is to change
the road as the change of slop only postpones their slipping into the
depth of backwardness. The change of the road is achieved only by the
change in the philosophy behind GATT/WTO rules which is the static version
of the international trade theory. What is needed is a dynamic trade policy
with dimension of space and time which would allow:
• for different level of industrialization and development at each point
in time, as a rule not as an exception;
• change of trade policy in each country as the country develops
• applying export performance requirement and national treatment clauses
in relation between host countries and TNCs;
• transfer of technology to developing countries more easily by changing
TRIPs rule.
Most important of all, however is that developing countries should be
clear in their mind what their industrial policy is before entering negotiation;
not to follow a tit-for-tat diplomacy and be bullied by developed countries.
Developing countries do not need to bemoan the failure of the talks, if
the results of negotiations are a recipe for de-industrialization.