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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