NAMA: Downplaying the Danger
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.