The breakthrough on agriculture

Reporting of a ‘breakthrough’ in the WTO agriculture negotiations in the past week or so has provided only very sketchy information on what was finally agreed among about 30 trade Ministers in Paris last week.  Here’s a summary of the outcome without all the twists and turns of the historyof deals, re-negging and misunderstanding that accompanied the months of wrangling over this purely technical issue. 1. Why do we need consistent price data? Negotiatiors must have an agreed way of describing tariff barriers in every country before they can start to make deals that involve cutting all duties at the same rate—or at least on an ‘equitable’ basis. The Framework agreement says that the cuts to be made to agricultural tariffs will be ‘progressive’; that is, deeper cuts where the tariff is higher and shallower cuts for lower tariffs. There will be a number of ‘tiers’ that will group tariffs according to whether they are high or medium or low and all tariffs in each tier will be cut to the same extent.

For industrial countries:
* if tariffs are greater than 90%, a reduction of 60%;
* if tariffs are equal to or less than 90% and greater than 15%, a reduction of 50%;
* if tariffs are equal to or less than 15%, a reduction of 40%. For developing countries: 
* if tariffs are greater than 120%, a reduction of 40%;
* if tariffs are equal to or less than 120% and greater than 60%, a reduction of 35%;
* if tariffs are equal to or less than 60% and greater than 20%, a reduction of 30%;
* if tariffs are equal to or less than 20%, a reduction of 25%. Tiers “proposed in March 2003”:http://www.wto.org/english/tratop_e/agric_e/negoti_modtnc_july03_e.htm by Amb. Stuart Harbinson, then Chair of the Agriculture Negotiating Group

There’s no problem determining the height of most tariffs; they are published in the form of ad-valorem taxes expressed as a percentage of the import price (e.g. 20% of the ‘value for duty&#8217)in the tariff schedules of all WTO Members. But many countries also have specific duties expressed as a unit of currency per import unit (e.g. cents per kg.) or complex duties (which apply ad valorem or specific rates, whichever is higher) or mixed (e.g. a combination of the two). You cannot tell whether a specific tariff of $2 per kg is high, low or medium unless you know what the price is. If you know that the price is $10 per kg, then you know that the $2 per kg tariff is equivalent to 20%, i.e. the “ad valorem equivalent (AVE)” is 20%, which can be compared with a 25% or 35% duty. 2. Where can we get price data from? There are very few ‘quoted’ world prices for agricultural products that everyone will accept are accurate (in the end, only one such ‘quoted’ price will be used—for sugar). This means that we have to fall back on data reported by countries’ customs authorities. There are two sources: # The WTO’s ‘Integrated Database” (IDB) that records the import prices reported by Members. These prices differ from Member to Member and among similar products for each member. Why? Because in markets where there is high protection—particularly tariff-quota protection—either only high price/quality varieties are imported (why pay the duty on low quality goods?) or the import price reflects price discrimination by the exporter who raises the price to secure a share of the economic “rent” that protection provides to the local competitition, or both of the foregoing might apply
# The UN’s COMTRADE database that collects reported import prices from around the world and averages them to get a single estimated ‘world’ price that is less affected by the import conditions of any particular market. Usually the IDB price is higher than the Comtrade price, but for some goods there may be no IDB price at all (imports are prohibited by high protection or there is no demand for imports at all). For these products the negotiators agree a rough and ready procedure using ‘proxy’ data from similar products or even from the same product in a comparable country. The key question is what price to use when the Comtrade and IDB prices are very different. The question is important because the price chosen can determine where the ad-valorem equivalent (AVE) of the duty will fall in the ‘tiers’. That allocation, in turn, will determine what degree of cut will apply to the tariff. You might be thinking that this is a matter of ‘swings and roundabouts’. If, as a result of selecting a low price estimate a product falls in the highest tier rather than in a lower tier then the duty cuts would be expected to be greater, too. Whereas, if a higher price were chosen it would fall in a lower tier but would face smaller cut. Wouldn’t the results (the final tariff rate) be nearly the same in the end? Not necessarily. First, there has been no agreement on the thresholds of the tiers yet, so we don’t know what’s ‘high’ and what’s ‘low’. Also we don’t yet know what cuts will apply in each tier. Finally, there is a provision in the Framework agreement taht allows each country to nominate a certain number of highly protected products as ‘sensitive’. These products could have much tariff cuts applied as long as they open up a small ‘quota’ window for low-protection entry. In summary, the ‘swings’ and the ’roundabouts’ are not necessarily equivalent. 3. What did they decide?
Here’s the final recipe: # Compare the import value per unit from IDB with the world price estimate in the Comtrade database. If the difference is more than 40%, (e.g. the IDB calculation gives $1 per kg, and Comtrade gives $0.50 per kg, a difference of 100%), then this product’s price would be caught in the “filter”. Products whose difference is less than 40% would pass through the filter, and the (usally higher) IDB price would be accepted, resulting in an estimated lower ad-valorem equivalent (AVE) of the specific (or complex or mixed) duty.
# For products caught in the “40%” filter, go ahead and calculate the AVEs using the prices from IDB and Comtrade and if the difference in the AVEs is less than 20 percentage points, then allow the AVE calculated on the IDB data to pass through. For example if the ad valorem equivalent using the IDB is 50% and the ad valorem equivalent using Comtrade is 65%, a difference of 15 percentage points, then the product would pass through.
# If the price difference is too great to allow it to pass through either the “40%” or the “20%” filter then adjust the difference betweent the IDB and Comtrade prices using the following method (except for sugar):
## For ‘basic’ agricultural commodities listed in Chapters 1 – 16 of the Harmonized System tariff nomenclature (which is consistent among all countries down to a resolution of 6 digits) and for some raw materials nominated in Annex 1.1 (ii) of the Uruguay Round Agreement on Agriculture e.g. wool, silk, hemp etc, pick a price between the higher IDB and the lower Comtrade prices that is a weighted-average combination of the two prices. The weights to be used are (0.825 times the Comtrade price) and (0.175 of the IDB price). This means that the price to be used will be 82.5% of the way down the gap between the two prices from the IDB price and 17.5% of the way up the gap from the lower Comtrade price. The weights will usually bias the prices to the ‘lower’ end of the gap which means a ‘higher’ AVE.
## For (mostly processed) products in Chapters 17 – 24 of the HS, use the same procedure but with weights of 60% (Comtrade) and 40% (IDB)
## For Raw and refined sugar—probably the most distorted price for any agricultural commodity, although dairy products, bananas and rice would come close—a world reference price will be used, althgough it’s not certain yet which one. None of this could be called accurate. Despite the illusion of mathematical estimation, it’s nothing more than a diplomatic compromise and therefore bound to give rise to fur ther disputes along the way. For example, the ‘filters’ work at the 6-digit level because the Comtrade data (and most of the IDB data) is at that level. But many of the processed products that are of interest are identified at 8-digit or even 10-digit level. Each Member will have to apply some sort of ‘scaling’ of the Comtrade and IDB data to apply the prices found there at 6-digit level to products at the lower level of specification. 4. What comes next In summary: the hard part. Negotiatiors now have to work out the thresholds for the ‘tiers’ and the cuts to be applied in each tier. This will take months because there’s very little agreement (you won’t be surprised to learn) about what the details of the Framework agreed in July 2004 mean. I will be surprised if Ministers managed to squeeze out an agreement in December, in Hong Kong. Meanwhile, each Member is expected to do it’s own AVE calculations and submit them for verification by other Members. The largest economies are expected to conclude this realatively simple spreadsheet procedure by the end of May. There will be an ‘objections’ procedure with—no doubt—more wrangles to come over AVE’s that fall just on or near the threshold between tiers.

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