In the run up to the Hong Kong WTO Ministerial,
the focus of attention is the deadlock over liberalisation of agriculture.
This is not surprising, given the fact that the unwillingness of EU members,
especially France, to agree to "adequate" concessions on agricultural
tariffs and subsidies, has stalled negotiations on further liberalisation
of trade in areas outside of agriculture. What is disturbing, however,
is the perception purveyed by the negotiators, government spokespersons
and the media that once the agriculture deadlock is resolved, the task
of moving the Doha Round forward is rendered easy: that is, the prospect
of getting the developing countries to agree to substantial liberalisation
of the trade in industrial goods and services is seen as extremely bright.
This is disconcerting because the walls of protection built by developing
countries since the Great Depression and during the years of decolonisation,
to overcome the debilitating effects of international inequality, were
predominantly in these areas. Protection was seen in the first instance
as the means to build an indigenous industrial base, thereby ensuring
the structural diversification needed in predominantly agricultural economies
to garner productivity gains and obtain a sustainable position within
the unequal international division of labour. But, more importantly it
was recognised as the means to carve out the necessary domestic policy
space within which national governments could pursue their own economic
and social objectives.
It is indeed true that in the wave of liberalisation and globalisation,
which saw domestic elites in the Third World scrambling to attract international
capital in a desperate attempt to overcome the constraints to their own
expansion set by the failure to introduce the institutional reforms needed
to expand domestic markets and trigger domestic investment, much of this
protection has been dismantled. But rather than learn the lessons delivered
by the deindustrialisation that this process of liberalisation has spurred,
the effort seem to be to accept the intensification and institutionalisation
of such liberalisation that the developed countries are seeking to achieve
through the WTO and the Doha Round.
A typical example of this is, of course. the negotiations on non-agricultural
market access (NAMA). The NAMA negotiations, mandated under the Doha ministerial
declaration of November 2001, are aimed at reducing border restrictions
to trade such as tariffs and other barriers to market access for industrial
exports. The negotiations cover all goods not covered under the Agreement
on Agriculture. Since 2002, NAMA negotiators have sought to establish
modalities or rules specifying how and to what extent a country should
reduce their trade barriers. At the 2003 Cancun ministerial conference,
conference chairman and Mexican trade minister Luis Ernesto Derbez submitted
a text, commonly known as the "Derbez Text," proposing a framework
for modalities in NAMA.
The Derbez text reflects the objectives of the developed countries with
regard to increasing non-agricultural market access. As argued by Yilmaz
Akyuz, former Director of the Division on Globalization and Development
Strategies, UNCTAD, these objectives are of four kinds. The first, is
to ensure that ultimately tariffs on all product lines should be bound
or subject to a maximum ceiling, constraining across-the-board the ability
of developing countries to exercise the tariff protection option to foster
or expand particular industries. This is of significance because unlike
the developed countries in whose case almost all industrial products are
subject to a ceiling, a large number of products, particularly in the
case of the African countries, are still not covered by tariff binds.
In fact, coverage in the case of as many as 30 countries is less than
35 per cent. Binding tariffs obviously reduces policy flexibility substantially,
inasmuch as these maximum levels set a ceiling on what developing countries
can do to protect an industry they choose to develop at some point in
the future.
The second objective seems to be a continuous process of trade liberalisation
culminating in a situation where trade is near-completely free. This requires
that the liberalisation and tariff reduction achieved during the Uruguay
Round is advanced further through tariff reduction in the Doha Round.
In fact, Annex B even proposes a sectoral initiative where WTO members
select several products for complete tariff elimination, also called "zero-for-zero"
reductions.
The third and related objective is to reduce tariff dispersion across
countries. The intention is to reduce the current 11 percentage point
difference in average weighted bound tariffs between developed (3 per
cent) and developing (14 per cent) countries, initially to around 4 per
cent and finally to zero. The absurdity of believing that in an obviously
unequal global industrial environment the extent of protection must be
homogenised should be obvious. That belief is even more absurd when judged
in the context of evidence that all developed countries used protection
as the means to industrialize in their early stage of development, and
continue to do so even now.
Finally, the intention is to reduce tariff dispersion across tariff lines
by forcing a greater proportionate reduction in tariffs in the case of
products currently protected with higher tariffs. Since it is known that
in an increasingly diversified economic world complete insularity is not
an option open to any country, this measure undermines the ability of
countries to adopt strategies that focus on fostering and developing individual
industries.
Given these objectives embedded in the Derbez text and the strength of
the developed countries, it is not surprising that the NAMA negotiations
are centred on the extent of binding coverage and the formula to be used
for tariff reduction. The text seeks to combine increased binding with
a single "non-linear" tariff-reduction formula. The latter is
designed to ensure larger proportionate reductions in tariffs in countries
and sectors with higher tariffs in order to realize the homogenization
agenda. The intent of the exercise was clear from the fact that this "Swiss
formula" is often referred to as "the harmonizing formula"
inasmuch as it is a move towards uniform tariff structures across different
sectors and countries.
The real implication of this process of harmonisation emerges once we
consider the following facts that (i) developing countries have seen in
recent years a process of "tariffication" or the replacement
of import quotas on industrial imports with tariffs, making the latter
the principal protectionist device; (ii) developed countries are known
to rely on non-tariff barriers and special safeguards in the case of sensitive
products (such as textiles) rather than tariffs to protect their industries
and therefore are not too concerned with pure tariff protection; and (iii)
as expected, developing countries are characterised in most areas by much
higher tariffs rates than the developed countries, so that the effective
increase in market access associated with any particular proportionate
reduction in tariffs would be far greater in developing countries than
in the developed-a 50 per cent reduction of a 20 per cent tariff rate
would bring it down by 10 percentage points, whereas it would imply a
mere two percentage point reduction in the case of a four per cent tariff.
Following the failure at Cancun and the subsequent opposition from developing
countries, including India, which supported the African group, the text
Derbez was not accepted. However, in an enforced compromise, it was included
as Annex B in the July Framework of 2004 with the caveat that "additional
negotiations ... on the specifics of some of these elements" were
required. These 'specifics', though inadequately specified, were to "relate
to the formula, the issues concerning treatment of unbound tariffs…the
flexibilities for developing country participants, (and) the issue of
participation in the sectoral tariff component preferences." This
kept the Derbez text as the base for negotiations, while providing a window
of opportunity to the developing countries to minimize the concessions
they would have to offer in this area.
However, the more developed among the developing are, it now appears,
not averse to making significant concessions. In a proposal submitted
in April this year, Argentina, Brazil and India (ABI) advanced and therefore
signalled acceptance of a non-linear Swiss-type formula for line-by-line
tariff reduction for all bound tariff rates. They have also to differing
degrees accepted the demand to bind unbound tariff lines. This move has
been defended on the grounds that average tariffs are in any case low
in the developed countries and declining in the developing countries,
and what really matters is the problem of tariff peaks (excessively high
tariffs) and tariff escalation (higher tariffs on end products rather
than inputs) in the developed countries that militate against developing
country exports. Thus a Swiss-type formula applied on a line-by-line basis
is expected to deliver substantial benefits to developing country exporters,
in areas of interest to them, by dealing with the problem of tariff peaks
and tariff escalation in the developed countries. What is ignored is the
possibility that anti-dumping measures, non-tariff barriers especially
technical barriers to trade can be used to neutralise these supposed benefits.
Meanwhile, developing countries would be opening up their own markets
to competition from imports.
This move on the part of the ABI group, besides being a unilateral gesture
advanced with the hope, but no guarantee, of obtaining concessions in
areas such as agriculture and services that are seen as promising substantial
benefits to them, completely undermines the ostensible 'development-oriented'
mandate of the Doha Round. Since Doha was intended to advance a development
agenda, the focus of the NAMA negotiations was to be on the elimination
of tariff peaks and tariff escalation on products of export interest to
developing countries, without reciprocal offers in their own markets.
In fact, governments had on paper agreed that they would take into account
the special needs and interests of developing countries. By making their
offer, the ABI group has paved the way for a retreat of the developed
countries on the question of Special and Differential Treatment (SDT)
and "less than full reciprocity" and also paved the way for
a degree of erosion of trade preferences, excepting perhaps for the Least
Developed Countries.
There are a number of consequences that can be expected to follow from
these developments. First, the nonlinear formula approach denies the current
day developing countries from the instruments used by the developed countries
at similar stages of development. Those countries used tariffs as an important
instrument to protect certain products and allow access for others.
Second, as argued earlier, by increasing their tariff bindings, developing
countries would be forced to forgo some ?exibility in economic policy.
As Martin Khor and Goh Chien Yen have argued, "a developing country
needs to be able to modulate the tariffs on various types of products
on a dynamic basis to support its upgradation of industrial production.
It may need to have lower tariffs on certain products, for example machines,
for some time to encourage their use in the production of downstream products.
But after some time, these tariffs may need to be raised when the country
embarks on producing the former product, e.g., the machines in this example,
in order to protect its newly emerging machine-building industry. If a
commitment for binding of tariffs on machines has already been made, such
raising of tariffs will not be possible without compensation."
Third, the total elimination of tariffs negotiated under the sectoral
initiative will make it virtually impossible to set up industries in those
sectors in the future. Fourth, reducing tariffs leads to a loss of public
revenue for governments in developing countries. Tariff revenue contributed
32 percent of total government revenue in least-developed countries in
2001.
All of this is of significance, not only because the process of tarffication
has made tariffs the most important protective device, but also because
the Uruguay Round has ensured that through clauses in the Trade Related
Intellectual Property Rights (TRIPs) agreement and the Trade Related Investment
Measures (TRIMs) agreed upon, developing countries have lost the right
to use measures such as denial of product patents and insistence on indigenous
content requirements as a means of fostering and developing an indigenous
industrial base. Since the evidence from close to two decades of globalisation
make clear that foreign investors are no substitute for domestic firms
when it comes to ensuring diversification of output and employment in
favour of industry, this tendency in the NAMA negotiations is essentially
a way of institutionalising through an international agreement the process
of deindustrialisation in the developing world.