NAMA: Downplaying the Danger C.P. Chandrasekhar

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.