Special Article: WTO Deadlock

The WTO Negotiations: No end in sight
Parthapratim Pal¹

The WTO negotiations in the Doha Round of trade talks have once again run into problems. After nine long days of negotiations in July, some key issues remained unresolved. However, this is not the first time that the talks have stalled. In the time-table published in the Doha Ministerial Meet, it was suggested that negotiations for new round should be concluded by 2005. Repeated failures to attain consensus on key issues have kept pushing back the deadline and after the recent breakdown, doubts have been raised whether the Doha Round is ever going to be concluded . Though multilateral trade negotiations have a tendency to drag on and the previous round of negotiations (the Uruguay Round) went on for seven years before a deal was signed, the Doha Round is already into its seventh year now and nobody is sure when it is going to be concluded. Pascal Lamy, the Director General of WTO, however, feels that significant progress have been made on various important issues and says “we have never been so close to an agreement”. He goes on to mention that there are only two major issues where there was no convergence. The first is regarding the working of Special Safeguard Mechanism (SSM) in agriculture and the second is the issue of regulating cotton subsidies given by the United States. Lamy expects that the trade negotiators will start working on these contentious issues soon enough and a deal may not be too far away. But in the world of WTO, nothing is agreed until everything is agreed. Therefore, when the negotiations start again, it is unlikely to be a resumption of the dialogue carrying forward from where it stopped. Rather, it is expected that all the quid pro quos will be re-examined and new equations will be formed. Therefore, unless there is a sudden change in the dynamics of the negotiations, it appears that the Doha round is easily going to go on for some more time.

It is not surprising that the Doha round is taking so long to get concluded. In the earlier rounds of multilateral trade talks, negotiations were essentially done by a few developed countries and most developing countries had little or no role in these negotiations. In this round, the number of active players in negotiations has increased significantly. Dani Rodrik , Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University, points out that in the Doha round there are 153 countries, of which Rodrik reckons probably 60 or 70 are actively involved in the negotiations. And as the WTO works on a ‘consensus’ based approach, every member has a potential veto power . Therefore, it is not completely unexpected that this round of trade negotiation is dragging on for so long.

The present round of negotiations was largely centered across the issues of agriculture and non-agricultural market access (NAMA). The NAMA negotiations showed certain amount of progress. In the Doha Round it has been broadly decided that attempts will be made to “reduce or as appropriate eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs, and tariff escalation, as well as non-tariff barriers, in particular on products of export interest to developing countries” . Subsequently it has been decided that a ‘Swiss Formula’ based approach will be used for tariff reduction. The functional form of the ‘Swiss formula’ is like this:

t₁=Ct₀/(C+t₀)

where t₀=initial tariff rate, t₁= final tariff rate and where ‘C’ is a coefficient which is decided through the negotiation.

This formula has some interesting mathematical properties. It is a progressive tariff cut formula, meaning that given the same coefficient C, the formula cuts higher tariffs by a larger proportion. For example, using a Swiss formula with coefficient 15, an initial tariff rate of 100 will be reduced to 13, implying an 87 percent tariff cut. But an initial tariff rate of 20 will become 8.6 after the cut, which implies a reduction of around 57 percent.

The second important property of the Swiss formula is that lower the coefficient ‘C’, higher is the tariff cut. In the above example with an initial tariff of 100, if one uses a coefficient of 7 instead of 15, the post cut tariff rate will be 6.5 percent- a tariff cut of around 93.5 percent.

The third and most interesting property of the Swiss formula is, no matter what the initial tariff is, the post cut tariff rate will always be less than the coefficient ‘C’. In other words, ‘C’ acts as the ceiling of post cut tariffs.

Given these important mathematical properties, the value of the coefficient C becomes very important in the case of a ‘Swiss formula’. Quite expectedly significant amount of negotiating time have been spent on deciding the coefficients. The draft modalities text published by WTO on July 10th, indicates that in the NAMA negotiations there has been some convergence regarding the coefficients .

It has been suggested that for developed countries, the coefficient will be between 7 and 9. For developing countries, it will be between 19 and 26. The developing countries may have certain flexibilities to ‘shelter’ a percentage of their sensitive products depending upon which coefficient they chose to implement.

The menu is given in Table 1.

Table. 1. Three Alternative Choices for Tariff reduction under NAMA for Developing Countries (Suggested Menu)

Different Alternatives	Flexibility: Sensitive Items	Rider to flexibility	Alternative Flexibility:	Rider to alternative
Case 1. A country accepting most ambitious coefficient C = 19-21	The member can designate 12 to 16 percent of its NAMA tariff lines which may attract tariff reduction no less than half the formula cuts	Provided these exempted products do not exceed 12-19 percent of total NAMA imports	the member can keep 6 or 7 percent of its tariff lines unbound or exclude them from tariff cuts	provided these exempted products do not exceed 6 to 9 percent of the total value of its NAMA imports
Case 2. A country accepting coefficients C=21-23	The member can designate 10 percent of its NAMA tariff lines which may attract tariff reduction no less than half the formula cuts	Provided these exempted products do not exceed 10 percent of total NAMA imports	the member can keep 5 percent of its tariff lines unbound or exclude them from tariff cuts	provided these exempted products do not exceed 5 percent of the total value of its NAMA imports
Case 3. A country accepting coefficients C=23-26	None	-	None	-

During the July 2008 negotiations, further deliberations were made on these numbers and as reported by the Chairman, Negotiating Group on Market Access in his report dated 12 August 2008, the Swiss coefficient of 8 has been decided for developed countries. For developing countries, the package now stands as given in table 2.

Table. 2. Three Alternative Choices for Tariff reduction under NAMA for Developing Countries (Revised Menu)

Different Alternatives	Flexibility: Sensitive Items	Rider to flexibility	Alternative Flexibility:	Rider to alternative
Case 1. A country accepting most ambitious coefficient C = 20	The member can designate 14 percent of its percent of its NAMA tariff lines which may attract tariff reduction no less than half the formula cuts	Provided these exempted products do not exceed 16 percent of total NAMA imports	the member can keep 6.5 percent of its tariff lines unbound or exclude them from tariff cuts	provided these exempted products do not exceed 7.5 percent of the total value of its NAMA imports
Case 2. A country accepting coefficients C=22	The member can designate 10 percent of its NAMA tariff lines which may attract tariff reduction no less than half the formula cuts	Provided these exempted products do not exceed 10 percent of total NAMA imports	the member can keep 5 percent of its tariff lines unbound or exclude them from tariff cuts	provided these exempted products do not exceed 5 percent of the total value of its NAMA imports
Case 3. A country accepting coefficients C=25	None	-	None	-

It has been proposed that the implementation period for tariff reductions will be five years for developed members and ten years for developing members, starting 1 January of the year following the entry into force of the Doha results.

The NAMA proposal allows countries to choose from different alternative tariff reduction strategies. This may lead to some problems regarding tariff harmonization for countries that have formed ‘Customs Unions’ or regional trade agreements with common external tariffs (CETs). For these countries, maintaining parity on external tariffs is important. Therefore, it has been proposed that countries forming the Mercosur customs union (Argentina, Brazil, Paraguay and Uruguay) and the South African customs union (Botswana, Lesotho, Namibia, South Africa and Swaziland) should include common list of flexibilities.

It is worth mentioning here that the Swiss formula based tariff reduction package is not applicable to all developing countries. Additional flexibilities have been suggested for countries with low level of tariff bindings for non-agricultural products. Flexibilities have also bee offered for Small and Vulnerable Economies (SVEs) and for certain Recently Acceded Members (RAMs). Least developed countries have been completely exempted from tariff reduction.

As a result of these various flexibilities and exemptions, it has been estimated by WTO that around 40 of its 163 Members will be applying the Swiss formula covering close to 90 per cent of world NAMA trade. The choice of coefficients also implies that, if these proposals are accepted, the maximum tariff rate in developed countries will be less than 8 percent. WTO also estimates that the majority of tariff lines for developing country members applying the formula would be less than 12-14 per cent, depending on the coefficient agreed and the flexibilities used. In the developing countries applying the formula, bound tariffs would be at an average of between 11 to 12 per cent, and only a limited number of developing countries would have averages above 15 per cent.

Apart from Swiss formula based tariff reduction procedure, there is another initiative going on in the current round of negotiations to reduce tariff on non-agricultural goods. These are the sectoral initiatives. The rationale for this is given in the NAMA framework of the ‘July package’ of 2004 . Officially the objective is to “reduce, harmonize or as appropriate eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs and tariff escalation, over and above that which would be achieved by the formula modality, in particular on products of export interest to developing Members”.

Sectoral initiatives have so far been on voluntary basis where countries may or may not opt for a certain sector. In the selected sectors, participating developed country members are asked to eliminate tariff rate. For participating developing countries, certain flexibilities are given. Generally they are not asked to eliminate tariff completely but are allowed to have some low tariff rate on the products of that sector . Secondly, they can have longer implementation period and partial coverage of products. There are 12 sectors on which the sectoral initiatives are on. They are automotive and related parts; bicycles and related parts; chemicals; electronics/electrical products; fish and fish products; forest products; gems and jewellry; hand tools; industrial machinery; open access to enhanced health care; raw materials; sports equipment; toys; and textiles, clothing and footwear.

In this round of negotiations, there has been significant tension about making the sectoral negotiations mandatory. USA specially is very keen that large developing countries participate in the sectoral negotiations. In the view of NAM (National Association of Manufacturers) of USA, the Swiss formula based package offer too many flexibilities to developing countries and unless the involvement of some of the large developing countries are made mandatory in the sectoral initiatives, the outcome will tilt against the developed countries. Not surprisingly, this view has been strongly opposed by developing countries members. Chen Deming, head of the Chinese delegation and minister of commerce, said that sectoral liberalization should follow the principle of voluntary participation reached by all parties and choose sectors of export interest to developing members so as to reflect the spirit of the Doha Round negotiations as a development round. Many other developing countries including India expressed support for China's position.
This position by developing countries is not altogether irrational. Though these countries are growing at a fast rate, the level of industrialization in many such countries is in such a state that it requires some level of protection. Historically, one has seen that most countries, including USA, have maintained fairly high level of tariff while industrializing . Even now developed countries protect their weaker sector, which is agriculture, through a plethora of subsidies and market access barriers. So it is unfair to force developing countries into accepting sectoral commitments over and above the Swiss formula based NAMA package.

A look at the tariff structure of India makes it clear why countries like India are not very comfortable about making sectorals mandatory (Figure 1).

Figure 1. Average and Bound Tariff Rates of India (2006-07)

Figure 1 shows that India’s bound tariff rates for most sectors are much higher than the applied rates. In fact while average bound tariff rate of India is 48.6 percent, average applied tariff rate is only 15.8 percent. For industrial products, the average applied tariff rate is even lower at 13.9 percent. Any tariff reduction formula used in WTO is applied on the bound tariff rates and not on applied rates. Therefore, if the gap between bound and applied tariff rate is large, then in spite of tariff reduction, the applied rate may not get affected by much. Therefore, the Swiss formula based package, with its flexibilities, may allow a country to protect its sensitive sectors.

However, if participation is made compulsory in sectorals, India will have to reduce its tariff rates to a low level in the designated sectors. In certain sectors (eg, 17- transport equipment in Figure 1), it may lead to major problems. In the ‘transport equipment’ sector not only the applied rates are high but the difference between bound and applied rates is also low. So, any tariff reduction will force India to adjust its applied rates significantly. This may go against the broader development objectives of the country. Therefore, it is not surprising that developing countries are unwilling to the US proposal of making sectoral initiatives compulsory. However, it is somewhat unclear why USA is so keen to make the sectorals compulsory. Applied tariff rates in many developing countries are at an all time low. With the ‘Swiss package’ the rates are expected to become even lower. So, the potential gains from making sectorals compulsory are slim. According to World Bank estimates quoted in Rodrik (2008), complete elimination of all merchandise trade restrictions would ultimately boost developing-country incomes by no more than 1 percent. The impact on developed-country incomes would be even smaller. If these figures are correct, then it makes one wonder whether all these problems with sectorals are worth the trouble.

Similarly in agriculture, the negotiations are reportedly stuck on two issues- the Special safeguard mechanism (SSM) and the issue of reduction of subsidies given to its cotton farmers by the United States. SSM is a mechanism through which a WTO Member country can temporarily impose a tariff rate that is higher than the bound tariff rate on the import of a particular product. The idea behind such a safeguard instrument is that it should allow a country to use temporary protective measures to insulate its domestic agricultural product or products from the short-term fluctuations of international prices and also from sudden import surges. Consequently, SSM is a temporary and short-term measure and is not meant to insulate a country from the price signals emanating from long-run or secular movements of commodity prices.

In this round the disagreement is about the extent of import surge that is required to trigger an SSM. Negotiations around the draft agricultural modalities led to the demand that developing countries should have the right to SSMs only if imports equal or exceed 40 per cent of average imports during the three preceding years. Developing countries including India and China objected to this saying that a 40 per cent import surge can potentially destroy the livelihood of millions of poor farmers. Disagreement over the import trigger broke the negotiations. The USA sees the SSM to be a potentially protectionist instrument while developing countries insist that it is a legitimate safeguard mechanism consistent with the broad goals of the Doha Development Agenda.

It is interesting that something like SSM, which is a temporary mechanism and which is only applicable under very special circumstances is deemed important enough to be the deal breaker. As a result of the breakdown of the talks, the issue of US cotton subsidies, which affect income and livelihoods of millions of farmers in many African countries, could not be discussed. In agriculture the biggest stumbling block in negotiation has always been the huge amount of subsidies that is given to the farmers in developed countries. WTO has been trying to reduce these policies over some years now. However, political pressures from some of the rich developed countries have always ensured that sufficient leeway is given to developed countries in reduction of subsidies. Even in this round of negotiations and in spite of steep subsidy reduction commitments, the maximum subsidy limit imposed by WTO on either EU or USA, is much more than these countries plans to spend on their farmers. However, if sector specific commitments on cotton subsidies were discussed, it was possible that it would have required USA to cut down on the money they are spending on cotton farmers now. Therefore, many feel that to avoid such a politically sensitive issue in an election year, the SSM issue has been used by the USA to derail the negotiations.

Overall, what comes out of these negotiations is that the Doha Round has a long way to go. The assessment of Pascal Lamy -where he said that among the 20 issues there were agreements on 18- seems somewhat rhetorical in this perspective. The texts by Chairman of agriculture and NAMA released on August 11 and 12th 2008 have highlighted that there are significant differences among the members over a number of issues. Services trade, which is a key sector for India, was not even discussed. It is possible that the member countries are just buying time. It may not be completely coincidental that general elections are imminent in both USA and India, the two parties which have locked horns in this round of trade talks. The negotiations are likely to resume once the US negotiators get a fresh mandate and a new president. India, China and other big developing countries, meanwhile, will do well not to associate themselves too much with this new elite group of G-7 (Australia, Brazil, China, the European Communities, India, Japan and the United States), else they run the risk of being alienated from the rest of the developing countries in WTO.

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¹  Assistant Professor, IIM Calcutta
²  The Economist has an article aptly titled “The Doha round…and round… and round” The Economist, August 2, 2008.
³  ‘Don’t Cry for Doha’ Dani Rodrik, 2008 (http://rodrik.typepad.com/dani_rodriks_weblog/2008/07/dont-cry-for-doha.html)
⁴  Though WTO has the provision of a ‘one-country one vote’ system in its constitution, so far voting has not been used in WTO.
⁵  Paragraph 16, Doha Ministerial Declaration
⁶  WTO document number TN/MA/W/103/Rev.2 dated 10 July 2008
⁷  http://www.wto.org/english/tratop_e/markacc_e/nama_10july08_e.htm
⁸  http://www.wto.org/english/tratop_e/dda_e/draft_text_gc_dg_31july04_e.htm#annexb
⁹  This is the so called ‘zero for x’ tariff reduction scheme where developed countries will bring down their tariff to 0 but developing countries can have a tariff rate of x percent.
¹⁰  See ‘The WTO Negotiations on Industrial Tariffs: What is at Stake for Developing Countries?, by Yimaz Akyuz, 2005, Third World Network, Geneva Office, http://www.twnside.org.sg/akyuz.htm and ‘Why Developing Countries Need Tariffs? How WTO NAMA Negotiations Could Deny Developing Countries’ Right To A Future’ by Ha-Joon Chang. South Centre, 2005