WTO negotiations on Non-Agricultural Market Access (NAMA) are about resisting hasty liberalisation in the South and dismantling excessive protectionism in the North. For India and Pakistan, the Girard formula for tariff reduction may be the best option if a non-linear approach is adopted. But this would still mean a steep reduction in tariff rates. India and Pakistan should use this as a bargaining chip and ask for compensation.

By Prabhash Ranjan
Research Officer, Centad

Summary
Negotiations in the World Trade Organisation (WTO) have yet to establish the modalities for negotiating market access for non-agricultural products. However, in July 2004, member countries agreed on a framework for establishing the modalities ( click here to read the full text of the paper)

Negotiations on industrial tariffs, or Non-Agricultural Market Access (NAMA), are crucial for developing countries. Hasty tariff liberalisation could impose harsh adjustment costs on developing countries, such as balance of payment problems, de-industrialisation and unemployment.

This paper looks at the possible impact of ongoing tariff negotiations on South Asian countries, namely Bangladesh, India, Nepal, Pakistan and Sri Lanka, at an aggregate level or at the Multilateral Trade Negotiation (MTN) categories level. It analyses the impact of some of the submissions and also endeavours to find out the obligations that South Asian countries may have to fulfil in the ongoing negotiations under NAMA.

The key areas in negotiations on NAMA are tariff reduction, the sectoral component, tariff bindings and preference erosion.

TARIFF REDUCTION: CHOOSING THE RIGHT FORMULA
Drastic import tariff cuts will negatively affect developing countries. In sub-Saharan Africa, it led to de-industrialisation and unemployment in some countries. It also leads to a decrease in tax revenue, since import tariff is an important source of revenue (18.5% in India).

At the same time, huge benefits will accrue to developing countries if developed countries reduce their high tariff rates on products that developing countries are interested in importing. Negotiations on NAMA are, therefore, about resisting hasty liberalisation in the South and dismantling excessive protectionism in the North.

Though the linear method of tariff reduction would have meant less drastic cuts in tariffs, the July Agreement pushed for a non-linear method, which India and other developing countries accept. In this method, India favours the Girard formula with a higher coefficient of ‘B' for tariff reduction (B = 2).

In this formula, the extent of tariff reduction hinges on the value of the coefficient ‘B'. For a lower value of ‘B', say 0.5 or 1, the tariff reduction in average bound tariff rates for India and Pakistan would be huge, especially in areas where tariff rates are high. For example, in the ‘fish and fish products' category, where India levies a bound tariff of 100.7, the tariff reduction would be 14.6%, if B = 0.5, and 25.5% if B = 1. As the value of ‘B' increases, the rate of reduction in the final tariff rate declines.

Developed countries favour the Swiss formula, which involves very steep tariff reductions that would be disastrous for developing countries. Adopting this formula would result in India and Pakistan reducing their Most Favoured Nation (MFN) bound tariff rates on ‘fish and fish products' by 66.8% and 66.7% respectively.

On the other hand, the same formula with the same coefficient would result in the US and EU reducing their MFN bound tariff rates on the same category of products by a meagre 9% and 18.7% respectively.

If the Swiss formula is to be even considered, developing countries must be allowed the full exemption of 15 categories from tariff cuts. There is a provision currently for partial exemption for just 10% of tariff lines.

While the Girard formula may be the best option, if a non-linear approach is adopted, it would still mean a steep reduction in tariff rates. India and Pakistan should use their acceptance of the non-linear method as a bargaining chip and ask for compensation.

This compensation could be in the form of developed countries cutting their tariff rates, using the Girard formula with a value of ‘B' less than 1, or providing preferential access to their markets.

The paper suggests that the implementation period for developing countries should comprise five phases, each phase being for two years, with the tariff rate brought down in equal instalments over the 10-year span. For developed countries, the implementation period should be four years, in two phases, with the tariff reduction forward-loaded, so that cuts are higher during the first two years.

SECTORAL APPROACH: BOOSTING DEVELOPING COUNTRY EXPORTS
The sectoral approach essentially means cutting or eliminating tariffs on certain sectors, independent of the tariff-cutting formula followed for other sectors.

Sectors suggested for tariff-cutting are electronics and electrical goods, fish and fish products, footwear, leather goods, motor vehicle parts and components, stones, gems and precious metals, and textiles and clothing. Many of these are big export earners for developing countries and are also labour-intensive. Developing countries will benefit hugely if developed countries reduce their high tariffs on these sectors.

The paper suggests that:

  • Developed countries must reduce their tariff rates to zero on all sectors that are of export interest to developing countries.
  • Developing countries must reduce their tariffs on these sectors with a lower coefficient value of ‘B'. The coefficient value used in the sectoral elimination approach by developing countries could be smaller than the value of ‘B' to be used for other tariff lines.
  • Developing countries must have the flexibility to decide the number of tariff lines they want to commit to reduction, in an identified sector.

The implementation period should be such that it offers enough flexibility to developing countries to pursue their social and development needs, and, at the same time, realistically fulfil their international obligations.

The paper suggests an implementation period of five stages, with each stage being for two years. The reduction in tariff rates by developing countries should be spread over all five phases. It is proposed that 60% of tariff reduction should take place in the first four stages (equal instalments), and 40% of reduction in the last phase.

For instance, assume that the initial bound tariff rate for a product is 100%, and the simple average of the bound tariff rate is 35%. The final bound tariff rate, after applying the Girard formula with B = 0.5 would be 14.8%.

The tariff reduction that has to take place is 85.2 percentage points. Sixty per cent of 85.2 should be reduced in the first four phases, that is, the first eight years (equal instalments) and 40% in the last phase, that is, at the end of the 10th year.

TARIFF BINDING: LOW COVERAGE, HIGH BOUND RATES
Two issues are involved in tariff binding. One is tariff-binding coverage, implying the number of tariff lines to be bound, and the other relates to the rate at which unbound tariff rates should be bound.

Developed countries want developing countries and Least Developed Countries (LDCs) to increase the coverage of tariff binding to 100% or thereabouts. If they do this, developing countries will be binding more tariff lines and thus giving up the flexibility of increasing tariff rates on a particular product beyond a certain point.

The impact of this will be felt in the industrialisation of developing countries and LDCs. Domestic industry could be discouraged by a low level of bound tariff rates for a particular product because of the fear of a surge in imports.

Since developing countries are not bound to increase their tariff coverage to such high levels in the ongoing negotiations, they must ensure that they get adequate gains in return if they do agree.

The paper suggests dividing all countries into four slabs, based on their current tariff binding coverage. Their respective tariff binding can then be increased on a graded scale. Thus, countries with less than 30% tariff binding coverage could increase their binding coverage to 50%; countries with a binding coverage of more than 30% but less than or equal to 50% could increase their coverage up to 70% and so on. The rate at which tariff lines are bound could be twice the bound tariff rate and not the applied tariff rate.

The other important issue is the rate at which unbound tariff lines should be bound. Paragraph 5 of Annex B states that for unbound tariff lines, the basis for commencing tariff reductions should be twice the MFN applied rate in the base year. The base year for MFN applied rates is 2001. The proposal to bind unbound tariff lines at twice the average applied rate is detrimental for developing countries. It will result in very low bound tariff rates of unbound tariff lines.

The paper suggests that unbound tariff lines, if bound, should have their bound tariff rates equivalent to twice the average bound rate, and not average applied rate. This would ensure enough flexibility to increase applied tariff rates in case there is a surge in imports.

Higher bound tariff rates are also important because the next stage, after binding tariffs, is to undertake tariff reduction. If developing countries have smaller bound rates, tariff reduction would reduce them further. Moreover, it is important to note that South Asian countries maintain lower applied rates. High bound rates will ensure flexibility if ever applied tariff rates have to be increased.

PREFERENCE MARGINS: UNKIND TO LDCs
Increasing tariff liberalisation jeopardises the preference margins that Least Developed Countries (LDCs) enjoy in developed country markets. If tariff rates were reduced to zero for developing countries such as India and Pakistan, it would have a negative impact on LDCs like Bangladesh and Nepal. To offset this, developed countries should give preferential treatment to the products of LDCs in their markets.