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)”: 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

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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