This Centad working paper takes a critical look at the Hong Kong Ministerial text on agriculture and NAMA. On the basis of this analysis, the paper suggests specific and important negotiating points for developing countries.

By Prabhash Ranjan
Research Officer, Centad

Summary
The Hong Kong Ministerial held in December 2006 failed to deliver on crucial issues such as agricultural subsidies and tariff and non-tariff barriers. There was no consensus on tricky issues like the quantum of cuts in domestic subsidies in agriculture or a tariff reduction formula in both agricultural and non-agricultural market access (NAMA). These issues are crucial for developing countries. In terms of effecting a significant correction in the imbalances in world trade, Hong Kong (HK) barely scratched the surface. This Centad working paper takes a critical look at the HK Ministerial text on agriculture and NAMA. On the basis of this analysis, the paper suggests specific and important negotiating points for developing countries. ( click here to read the full text of the paper).

AGRICULTURE

Domestic support
A major cause for the imbalance in world trade is the distorted nature of agricultural trade. The distortion arises principally from the huge subsidies that developed countries give their farmers, enabling them to sell their produce at below the cost of production. This depresses world prices and makes it difficult for farmers from poor countries to sell their produce in international markets.

For example, the US has been dumping cotton in international markets since 1990. The dumping margin (difference between the selling price and cost of production) has ranged from 32 percent to 47 percent from 1990 to 2003, touching 63 percent and 65 percent in 2001 and 2002 respectively. This enormous export dumping has depressed prices of cotton in the international markets and consequently impaired livelihoods of millions of farmers across West and Central Africa .

Developing countries have been adamant that the rich country subsidies must be drastically reduced. The July framework agreement had provided for cutting trade distorting subsidies, but from the bound level. Where there is a huge gap between bound and applied rates, as in the case of Japan and Canada , the actual amount of the subsidy cut would be very low.

Even without going up to the maximum permitted level of subsidy, the subsidies granted by these countries are distorting trade. For example the US 's overall subsidy is US$ 23,299 million. This is 47 percent less than the maximum permitted level of subsidy. Yet it is distorting trade. If it went up to $44,118 million (the bound level) the distortions would only increase.

Moreover, cutting subsidies from the bound level will result in very slight reductions in the overall subsidy. If the case of the US, even if there is a reduction of 45 percent in the bound level of US$ 44,118 million, the new bound level of subsidy will be US$ 24,265 million, which is still more than the actual or applied level of subsidy of US$ 23,299 million.

Developing countries want a very steep reduction in subsidy levels from the bound rates in order to bring down the actual level of subsidies. The G20 had proposed that for overall trade distorting subsidies (OTDS) of more than US$ 60 billion, the reduction should be 80 percent; for support between US$ 10 and 60 billion, the reduction should be of 75 percent and support less than US$ 10 billion should be reduced by 70 percent.

The HK declaration does say that effective cuts in domestic subsidies will be made. Developing countries must hold out for this. They must ensure that the new subsidies are substantially less than the present level of the applied subsidies.

Developing countries must also ensure a more effective disciplining of the green box subsidies. These have been growing over the years in the EU and US. The G20 has suggested reforms such as decoupled income support. However in HK, developing countries tried to get more policy space to use their green box subsidies rather than ending the misuse of these subsidies.

Market Access
The major issues here are tariff reduction, special products (SP), and special safeguard mechanism (SSM).

Tariff reduction

Developed countries want to see cuts in developing countries' agriculture tariffs. The latter argue that steep cuts in tariffs could hurt their farmers. The tariff reduction formula proposed by the G20 has four bands both for developed and developing countries. What needs to be negotiated is the range of bands and the cuts within each of the bands.

While negotiating the tariff cuts, the huge tariff escalation in developed countries must be taken into account. For instance, in Japan , the bound tariff rate on raw sugar is 224 percent and climbs to as high as 328 percent for refined sugar. Reduction rates in the tariff reduction formula for developed countries should be such that they are able to bring down the high tariff escalation in developed countries.

SP and SSM

A positive development at HK was that developing countries can use the SSM to protect themselves from cheap imports. This allows developing countries to impose restrictions if there is a sudden surge in imports.

They can also designate certain products as special products. This will give d eveloping countries the flexibility not to subject an appropriate number of products to tariff reduction commitments. However, the number of tariff lines that can be designated as SP is yet to be decided.

Export Subsidies
The elimination of export subsidies by end 2013, agreed to in HK, benefits developing countries only marginally. Export subsidies make up just a small portion of overall trade distorting subsidies for developed countries. Also, the date for ending the subsidies has been pushed back from 2010 to 2013.

NON AGRICULTURAL MARKET ACCESS (NAMA)

Tariff reduction formula
The tariff reduction formula is the main sticking point in NAMA negotiations. At HK it was agreed that there will be a ‘Swiss formula with coefficients.' This could be taken as a rejection of the Swiss formula with two coefficients, one for developed and one for developing countries, and acceptance of the ABI (Argentina, Brazil, India) proposal of more than one coefficient embedded in the formula. This type of formula will ensure ‘less than full reciprocity' for developing countries. It will also eliminate the tariff peaks and tariff escalation on products of interest to developing countries.

Flexibilities
Developing countries also want flexibilities in NAMA whereby certain tariff lines can be left out of the tariff reduction formula, as a stand alone provision not linked to the tariff reduction formula as some developed countries want.

Treatment of unbound tariffs
The treatment of unbound tariff lines saw some movement in HK. According to the HK declaration, all unbound tariff lines will be marked up by using a non-linear mark up and then subjected to tariff reduction. Developing countries should negotiate for different mark ups for different tariff lines.