EU & US plan will keep barriers in place

Its impor­tant to under­stand the impact of the US and EU ‘joint’ pro­pos­al[⇒ relat­ed sto­ry] for the future of world agri­cul­ture trade. Although it has been crit­i­cised[⇒ relat­ed sto­ry] from all sides, the paper has already been incor­po­rat­ed into the pro­posed “draft declaration(link to sto­ry in the Globe and Mail)”:http://www.globeandmail.com/servlet/ArticleNews/TPStory/LAC/20030825/IBTRAD/TPBusiness/International put for­ward by the Chair­man of the Trade Nego­ti­a­tions Com­mit­tee, Ambas­sador Perez del Castil­lio. It may well be the choice we are asked to accept. After a care­ful read­ing, I see no rea­son to change my ini­tial reac­tion[⇒ relat­ed sto­ry] of dis­ap­point­ment with this paper: rather than pro­mote “sub­stan­tial reforms” to agri­cul­tur­al mar­kets, the pro­pos­als seem to allow WTO Mem­bers to cre­ate tai­lor made pro­tec­tion. What fol­lows is a detailed, slight­ly tech­ni­cal, analy­sis of the mar­ket access aspects of the paper. You may find it’s more than you need (so be warned). But it’s almost always the case in trade pol­i­cy that the dev­il is in the detail . Obscu­ri­ty is, after all, the friend of spe­cial inter­ests. The text of the joint US-EU paper is includ­ed at the end of the ear­li­er sto­ry[⇒ relat­ed sto­ry]. The EU and USA pro­pose two sets of modal­i­ties ( ways to achieve reform) # a three-part ‘blend­ed’ for­mu­la, and
# a tar­iff ‘cap’ The pro­pos­als are much clos­er to those that were put for­ward a cou­ple of months back by the EU than to those of the ear­li­er USA pro­pos­als. The most notice­able dif­fer­ence is that they leave out the strong sin­gle modal­i­ty of the US paper (a ‘swiss for­mu­la’ tar­iff reduc­tion tech­nique that would have cut all agri­cul­tur­al tar­iffs to a max­i­mum of 25%). They also omit all ref­er­ences in the ear­li­er US pro­pos­als to the key issue of TRQ(tariff rate quo­ta) admin­is­tra­tion. It appears on the sur­face that the strength of this pro­pos­al depends on the num­bers to be agreed in the ‘square brack­ets’ in the text — for exam­ple, the num­bers describ­ing the size of the tar­iff cut. But on clos­er read­ing, it becomes clear that the chief weak­ness­es of this text are struc­tur­al – they can’t be com­plete­ly fixed by vary­ing the num­bers in the square brack­ets: * The ‘three part for­mu­la’ (para 2.1) allows a menu of á la carte modal­i­ties to apply to dif­fer­ent tar­iff lines pre­serv­ing tai­lor-made pro­tec­tion for ‘sen­si­tive’ prod­ucts
* There is no set peri­od for imple­men­ta­tion of the tar­iff cuts
* It is not clear that the addi­tion­al ‘cap­ping’ pro­pos­al (para 2.2) would have any effect at all since the rate cap is option­al: a Mem­ber gov­ern­ment may elect in the alter­nate to ‘ensure effec­tive addi­tion­al mar­ket access’ – what­ev­er that is – through a ‘request:offer process that could include TRQ’s’. h3. Fixed pro­por­tions One of the biggest inno­va­tions of the joint EU-USA text, is the ‘three part for­mu­la’ for cut­ting the very high duties that plague agri­cul­tur­al trade. But its an inno­va­tion with­out any ben­e­fit to the objec­tives of the nego­ti­a­tion. Dis­trib­ut­ing tar­iff cuts among the three parts of the ‘for­mu­la’ accord­ing to a pro­por­tion of tar­iff lines has no ratio­nale relat­ed to lib­er­al­iza­tion. In fact the fixed pro­por­tion pro­vi­sion cre­ates two impor­tant hur­dles to lib­er­al­iza­tion # There is no means of ensur­ing that the most pro­tect­ed prod­ucts will be sub­ject to the any lib­er­al­iza­tion. Since pro­tec­tion is not dis­trib­uted even­ly with­in the tar­iff what mat­ters to the out­come is which lines and not what pro­por­tion of lines is sub­ject to the dif­fer­ent modal­i­ties. Except for the lat­er ref­er­ence to cuts in prod­ucts of inter­est to devel­op­ing coun­tries and the option­al ‘cap­ping’ pro­pos­al, the pro­por­tion­al dis­tri­b­u­tion of lines makes it impos­si­ble to aim at spe­cif­ic prod­uct areas.
# It is very dif­fi­cult to deter­mine in advance the lib­er­al­iz­ing impact of dif­fer­ent modal­i­ties. Cut­ting a fixed pro­por­tion of tar­iff lines using a sin­gle modal­i­ty has pre­dictable con­se­quences for over­all lev­els of pro­tec­tion only if the tar­iff is rel­a­tive­ly uni­form. But sur­veys of WTO Mem­bers’ tar­iffs show that the oppo­site is true: the most high­ly pro­tect­ed mar­kets also have the great­est stan­dard devi­a­tions in the dis­tri­b­u­tion of rates [EU (22), oth­er West­ern Europe (50 — 70), some Latin Amer­i­ca (35 — 80), India (51)]. The ‘stan­dard devi­a­tion’ of a dis­tri­b­u­tion indi­cates the spread of the dis­tri­b­u­tion: in the case of the EU (SD=22), rough­ly 70% of its tar­iff rates lie in a range with­in 11 per­cent­age points above or below the aver­age rate of 20%. The excep­tions to the ‘wide dis­tri­b­u­tion’ rule for high­ly pro­tect­ed coun­tries are the uni­form­ly high­ly pro­tect­ed mar­kets of Korea and Japan. bq. My rec­om­men­da­tion: In order to ensure the most lib­er­al­iz­ing out­come, the pro­por­tion of rates allo­cat­ed to each modal­i­ty should be dif­fer­en­ti­at­ed, if pos­si­ble, accord­ing to the exist­ing aver­age lev­els of pro­tec­tion. For exam­ple, it would make sense to require mem­bers with high aver­age lev­els of pro­tec­tion (and there­fore like­ly to have the great­est dis­per­sion of rates through­out their tar­iffs) to place the high­est pro­por­tion of tar­iff lines in bas­kets (ii) [Swiss For­mu­la] or (iii) [duty free] h3. The duty-free bas­ket The objec­tive of a Mem­ber wish­ing to retain its pro­tec­tive options would be to avoid putting any lines into the third ‘duty-free’ bas­ket except those that are already duty-free. This is already a sub­stan­tial pro­por­tion of agri­cul­tur­al lines for most OECD coun­tries [USA (28%), the EU (26.5%), Cana­da (42%), Japan (31%), Aus­tralia (33%)]. How­ev­er, devel­op­ing coun­tries typ­i­cal­ly have less than 1–2% of their agri­cul­tur­al tar­iff lines at zero duties. It is impor­tant to remem­ber that the oper­a­tion of the oth­er two ‘legs’ of the three-part for­mu­la will result in some of the low but non-zero rates falling to zero. The cov­er­age of this bas­ket will there­fore be greater than the cur­rent pro­por­tion of ‘duty-free’ lines as a con­se­quence of even min­i­mal cuts else­where. Any fixed pro­por­tion of tar­iffs to be cov­ered by this bas­ket must, there­fore, be sig­nif­i­cant­ly larg­er than cur­rent lev­els in order to ensure that it con­tributes pos­i­tive­ly to lib­er­al­iza­tion. bq. My rec­om­men­da­tion: The high­er the pro­por­tion of tar­iff lines in the ‘duty free’ bas­ket the greater the over­all lib­er­al­iza­tion. To have a pos­i­tive lib­er­al­iz­ing effect the fixed pro­por­tion of lines to be cov­ered by this bas­ket should be sig­nif­i­cant­ly greater than the cur­rent share of duty-free lines:  say, more than 50% for OECD coun­tries and greater than 30% for devel­op­ing coun­tries. h3. The ‘swiss for­mu­la’ bas­ket A uni­ver­sal­ly applic­a­ble for­mu­la would off­set the á la carte char­ac­ter of the three-part for­mu­la. But a the for­mu­la ini­tial­ly pro­posed by the USA abnd by the Cairns Group of agri­cul­tur­al exporters (the ‘swiss’ for­mu­la) was appar­ent­ly too much of a chal­lenge for the EU. Europe’s idea was to revert to the import-weight­ed aver­age for­mu­la that applied in the Uruguay Round. The dif­fer­ence between the a har­mon­is­ing (‘swiss&#8217)formula and a sim­ple aver­age tar­iff cut is not nec­es­sar­i­ly the lev­el of cut that would result but the degree to which a har­mon­is­ing cut attacks high tar­iff rates. For exam­ple, a ‘swiss’ har­mo­niz­ing for­mu­la with a coef­fi­cient of 20 would bring all EU agri­cul­tur­al bound rates down to a max­i­mum equal to their post-Uruguay Round sim­ple aver­age (20%). This would be a major reduc­tion in pro­tec­tion but by far its biggest com­mer­cial impact would be in the most high­ly pro­tect­ed sec­tors (dairy, sug­ar, meat, oilseeds, some hor­ti­cul­ture). bq. My rec­om­men­da­tion: The greater the pro­por­tion of the tar­iff sub­ject to a ‘swiss’ for­mu­la with a coef­fi­cient that approach­es (say) the cur­rent applied agri­cul­tur­al tar­iff aver­age ( 15% for indus­tri­al­ized and 20% for devel­op­ing coun­tries) the more lib­er­al­iz­ing the ‘swiss for­mu­la’ bas­ket will be. h3. The ‘aver­age cut’ bas­ket We know from expe­ri­ence in the Uruguay Round that the use of a sim­ple aver­age tar­iff cut com­bined with a require­ment for a min­i­mum cut for each tar­iff line sounds a lot bet­ter than it is in real­i­ty. # Import weight­ed aver­age tar­iff le vels under-esti­mate the lev­el of pro­tec­tion since very high tar­iffs will result (by design) in lit­tle or no import trade in a prod­uct and, con­se­quent­ly, a very low weight­ing for high­ly pro­tect­ed items in the final tar­iff aver­age. Pro­por­tion­al cuts to import-weight­ed tar­iff aver­ages there­fore have a some­what small­er impact than it may seem: a 36% cut in import weight­ed duties will not result in a 36% fall in the medi­an tar­iff rate (or any­thing like it)
# The pro­tec­tion offered by a tar­iff falls by a much small­er amount than the head­line rate sug­gests because the mar­gin of pro­tec­tion is pro­por­tion­al not to the tar­iff (t) but to world price times one plus the tar­iff. Specif­i­cal­ly, a 36% cut in a tar­iff of (say) 100% does not result in a 36% cut in pro­tec­tion. For exam­ple: a 100% tar­iff on a prod­uct whose world price is $100 results in a min­i­mum price for imports of $200. A 36% cut in the tar­iff results in a min­i­mum import price of $164 which is 82% of the pre-lib­er­al­iza­tion lib­er­al­iza­tion price, or a cut of 18% in pro­tec­tion. World Bank staff have shown that to reduce bound pro­tec­tion to lev­els equiv­a­lent to the cur­rent aver­age applied rates of tar­iff (15 — 20% for devel­oped and devel­op­ing coun­tries) WTO Mem­bers would have to agree to aver­age reduc­tions of more than 85%.
# Because the aver­age cut in the Uruguay Round approach applies to a group of tar­iff lines at the 6-dig­it lev­el and because high­ly pro­tect­ed mar­kets tend to have a wide dis­per­sion of duty rates, Mem­bers can min­i­mize the impact of a sim­ple aver­age tar­iff cut on lines with­in a group that have high duties (‘sen­si­tive products&#8217)by sub­ject­ing those lines with­in the group that have low­er duties to greater-than-aver­age cuts. This is the rea­son that the min­i­mum rate of cut exists: it may be the actu­al rate of cut that applies to the high­est duties with­in any group of tar­iff lines. The larg­er the group of lines top which the aver­age rate cut applies, the more like­ly it is that there will be a suf­fi­cient choice of ‘low-duty’ lines to bear the bur­den of achiev­ing the aver­age cut. bq. My rec­om­men­da­tion: In order to tar­get the sim­ple aver­age cuts at the high­est rates of pro­tec­tion, and to ensure that pro­tec­tion is reduced by a mean­ing­ful amount, the pro­por­tion of tar­iff lines includ­ed in this bas­ket should be dif­fer­ent for each coun­try. It should be no greater than the pro­por­tion of ‘peak’ rates — (say) 15% for devel­oped coun­tries. This will min­i­mize the oppor­tu­ni­ty to ‘pad’ the aver­age rate of cut by mak­ing larg­er cuts on non-sen­si­tive items in this bas­ket. It would be prefer­able to spec­i­fy the aver­age and min­i­mum cuts to be achieved in terms of the pro­por­tion by which (1+t) should fall and to keep the min­i­mum cut as close as pos­si­ble to the aver­age. Illus­tra­tion of effec­tive cuts in pro­tec­tion

Ini­tial duty (%)1008550402515105
Effec­tive cut in pro­tec­tion = % reduc­tion in (1+t)
Aver­age cut (%)301516.222021.432426.0927.2728.57
2512.513.5116.6717.862021.7422.7323.81
201010.8113.3314.281617.3918.1819.04
157.58.101010.711213.0413.6314.28

h3. TRQs The Joint Text omits the detailed pro­vi­sions in the US text for Tar­iff Rate Quo­ta (TRQ) admin­is­tra­tion and makes no spe­cif­ic pro­vi­sions for the expan­sion of the “min­i­mum mar­ket access” quo­tas cre­at­ed in the Uruguay Round. The text also omits any ref­er­ence to in-quo­ta tar­iff rates. These TRQs are inevitably asso­ci­at­ed with pro­tec­tion of the most pro­tect­ed prod­ucts — e.g. rice into Japan, dairy into the EU or Cana­da, sug­ar or peanuts into the USA. In the Uruguay Round, Mem­bers agreed that these quo­tas should be opened up as small ‘win­dows’ into the high tar­iff walls around these mar­kets, allow­ing imports to serve a tiny pro­por­tion of domes­tic demand (4 — 5%, less in some cas­es, more in oth­ers) by cre­at­ing, for a small ton­nage of prod­uct, a low­er tar­iff rate. Once import fill this small quo­ta, any addi­tion imports would pay the full tar­iff rate. But since this rate is typ­i­cal­ly pro­hib­i­tive, the TRQs offer the only entry for imports into these pro­tect­ed enclaves. Pend­ing dra­mat­ic reduc­tions in the very high tar­iffs sur­round­ing these mar­kets, the only way to achieve progress in lib­er­al­iza­tion is to expand the quo­ta vol­umes. The USA ear­li­er pro­posed expand­ing them by a mis­er­able 20% (from 5% of domes­tic con­sump­tion to 6% of domes­tic con­sump­tion!). The EU made no pro­pos­al at all on expand­ing the quo­tas. Now even the tiny crack sug­gest­ed by the USA has been sealed in the joint EU-USA text. bq. My rec­om­men­da­tion: It is essen­tial to open up TRQs. Try to imag­ine the world motor-vehi­cle mar­ket if the USA or Europe restrict­ed imports to 4 — 5% of the domes­tic mar­ket. We’d still be dri­ving the sort of cars they dri­ve in Cuba. The Cairns Group pro­posed that the quo­tas be expand­ed to 20% of domes­tic con­sump­tion. A much more real­is­tic approach to lib­er­al­iza­tion.

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