An analysis of tariff reduction modalities in Non-Agricultural Market Access (NAMA) in light of the Hong Kong Ministerial Declaration.

By Prabhash Ranjan
Research Officer, Centad

Summary
This paper analyses one of the most contentious issues in ongoing negotiations on Non-Agricultural Market Access (NAMA) under the purview of the World Trade Organisation (WTO): the tariff reduction modality. It examines this crucial issue in light of the Hong Kong Ministerial Declaration (HKMD) of December 2005 (click here to read the full text of the paper).

Building on the potential impact on South Asian countries (India, Pakistan, Bangladesh, Nepal and Sri Lanka) of the different tariff reduction formulae that have come up in the course of the ongoing NAMA negotiations, the paper argues for a formula that would be able to address two crucial concerns of developing countries:

  • Retention of sufficient policy space (by way of adequate ‘water’ between bound and applied tariffs) in order to use industrial tariffs as an effective tool for pursuing their developmental goals.
  • Elimination or reduction of existing tariff peaks and tariff escalations in developed countries (DCs), so as to ensure better market access for them, especially in products of export interest.

Why industrial tariffs are important
Tariffs have always acted as an important tool available to countries to protect their domestic industries. However in the post-WTO era, tariffs have become the only instrument available to member countries of the WTO to protect their domestic industries. This is because the Quantitative Restrictions (QR) regime has been dismantled for most countries, including India, while the balance of payment measures under Article XVIII B of the GATT have also been put under severe disciplines.

Hence, one of the major apprehensions of developing countries like India is that any hasty and indiscriminate tariff reduction would not only take away the only available protective armour and impose harsh adjustment costs, it would also deny the country the opportunity to use industrial tariffs to develop an industrial base.

Ongoing NAMA negotiations on tariff reduction modalities
As part of the Doha Development Agenda (DDA) of 2001, negotiations on the reduction of industrial tariffs were launched in January 2002. Member countries of the WTO were first expected to agree on how to conduct the tariff-cutting exercise (ie, the ‘modalities’). However, no agreement has been reached so far even on this core issue of tariff reduction modalities. This is attributable to differences of opinion among member countries regarding the exact form of tariff reduction formula that should be adopted to undertake the tariff reduction exercise.

Developed countries favour a ‘pure Swiss formula’ that cuts tariffs steeply, with higher tariffs being cut even more sharply. To counter such a formula, which is likely to take away the much-needed policy space of developing countries, India, Brazil and Argentina proposed a ‘modified Swiss formula’ that takes into account the existing average tariff rate of a country while applying tariff reduction. The advantage of this formula, which has come to be known as the ‘ABI formula’, is that it takes into account the existing tariff structure of a country and ensures that there is no disproportionate reduction in tariffs.

The Caribbean group of countries have proposed another formula (known as the ‘Caribbean formula’), which incorporates not only the average tariff rate of a country (like the ABI formula), but also a ‘credit’ to be accorded to a developing country in order to take into account the different purposes that are served by tariffs in these countries.

As far as the tariff reduction modality is concerned, the HKMD (under Paragraph 14) mandates the following:

  • Adoption of “a Swiss formula with coefficients”.
  • Choosing appropriate coefficients of this formula so as to ensure that there is a reduction or elimination of tariff peaks, tariff escalations and high tariffs, particularly in products of export interest to developing countries; and Less Than Full Reciprocity (LTFR) in reduction commitments for developing countries.

Core arguments of the paper
The paper argues that the phrase “a Swiss formula with coefficients”, as included in the HKMD, may be interpreted in two ways:

  • A Swiss formula with just two coefficients, one for DCs and another for developing countries.
  • A Swiss formula with two, three or ‘n’ number of coefficients, with these coefficients being embedded in the formula.

Notably, while the first interpretation can accommodate only the ‘pure Swiss formula’, the second can accommodate the ABI and the Caribbean formulae as well. The paper demonstrates that from the perspective of developing countries, the second interpretation would be preferable since it would allow for the adoption of either the ABI or the Caribbean formula, which are much less stringent in terms of tariff reduction.

The paper also suggests, on the basis of a rigorous numerical exercise, the exact numerical figures that the coefficients should adopt in order to satisfy the other two mandates of Article 14 of the HKMD: honouring real LTFR in reduction commitments for developing countries, and the reduction/elimination of tariff peaks and tariff escalations in DCs.

The numerical exercise further reveals that the aforesaid second interpretation of the phrase “a Swiss formula with coefficients” would be commensurate with these two mandates of the HKMD as well.

Conclusion and policy suggestions
The conclusion that follows from the rigorous analysis undertaken in the paper is that the only manner in which Paragraph 14 of the HKMD could be operationalised is to adopt either the ABI or the Caribbean formula (which can be accommodated under the second interpretation of the “Swiss formula with coefficients”) to cut industrial tariffs. A Swiss formula with only two coefficients, ie, the ‘simple Swiss formula’ would be in violation of the mandate specified in the HKMD. Moreover, adoption of either the ABI or the Caribbean formula would also be in keeping with the development interests of developing countries in general, and South Asian countries in particular

Unfortunately, the paper observes that for some inexplicable reason there is tacit acceptance of the first interpretation of the Swiss formula by developing countries like India and Brazil. Hence, it calls for an all-out attempt on the part of these developing countries to ensure adoption of an ABI type of formula in the course of ongoing negotiations in the WTO regarding the finalisation of tariff reduction modalities.

The paper further suggests that the implementation of tariff reduction commitments by developing countries should take place over a long period, to give these countries time to absorb the probable shocks emanating from tariff reduction; it would also give them sufficient time to develop their industrial capabilities.

July 2006