Staff Working Paper TPRD-98-02May, 1998

Staff Working Paper TPRD-98-02May, 1998

World Trade Organization

Trade Policy Review Division

Multilateral Approaches to Market Access Negotiations

Sam Laird: WTO

Manuscript date: May, 1998

Disclaimer: This is a working paper, and hence it represents research in progress. This paper represents the opinions of individual staff members or visiting scholars, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the authors. Copies of working papers can be requested from the divisional secretariat by writing to: Trade Policy Division, World Trade Organization, rue de Lausanne 154, CH-1211 Genéve 21, Switzerland. Please request papers by number and title.

May 1998 (OAS#MA1)

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Draft – not for citation

Multilateral Approaches to Market Access Negotiations

Sam Laird, World Trade Organization

Paper prepared for a conference on Multilateral and Regional Trade Agreements: An Analysis of Current Trade Policy Issues, organized by the OAS, WTO and Georgetown University, and held in Washington D.C. on 26-27 May 1998.

Abstract

Market access negotiations in merchandise trade at the multilateral level cover tariffs and non-tariff measures (NTMs). While tariffs have been substantially reduced in earlier rounds, they remain high in certain areas and further reductions involve a number of complex technical issues. Some formulae approaches, not used in the Uruguay Round, seem more favourable to developing countries. Elimination or phased reductions of NTMs in agriculture is one of the main areas for further market access negotiations in trade in goods. However, most NTMs are now the subject to negotiations on the rules under which they may be applied, e.g. in the areas of contingency protection and technical barriers to trade.

Key words: WTO, market access, trade negotiations, tariffs, non-tariff measures

JEL Category: F13

The views expressed in this paper are those of the author and do not necessarily represent the views of the World Trade Organization or its Member States. The author wishes to thank Yvette Davel for her most valuable advice on the tariff section of the paper.

Multilateral Approaches to Market Access Negotiations

Sam Laird, World Trade Organization

I.Introduction

This paper is concerned with multilateral negotiating techniques in the areas of most favoured nation (MFN) tariffs and certain non-tariff measures (NTMs). It does not cover market access in services, nor does it contain any detailed discussion of a number of NTMs, such as government procurement, safeguards, trade remedy laws and TRIMs (being covered by other authors at the conference). Export restrictions are not discussed.
Inevitably, it is necessary to make some reference to the procedures used in earlier rounds and, in particular, the results of the Uruguay Round, since this provides the base for market access negotiations in a future round. However, the objective is not to review the results of the Uruguay Round; those who wish to re-examine the results of the round are directed to GATT (1993), GATT (1994), Martin and Winters (1995) and articles therein, OECD (1993), Safadi and Laird (1996), among others.

II.tariffs

A.issues

1.MFN, bound and applied rates, credit, averages, peaks, dispersion, escalation, preferences, concessionary regimes

Bindings on MFN rates. The main ideas in GATT tariff negotiations are to reduce and “bind” (or fix) most-favoured nation (MFN) tariff rates, creating enhanced and more secure access to the markets of members. Whatever is negotiated between particular trading partners is a “concession” available to all other WTO members (previously GATT contracting parties) by application of the MFN principle. WTO members agree to bind their MFN tariff rates at negotiated levels, meaning that such rates may not be increased except through the re-negotiation of bindings under Article XXVIII of the GATT. Such re-negotiation takes place with the other member with which the concession was first negotiated as well as any other member with a “principal supplying interest”.[1]
Many developing countries have applied MFN rates which are substantially below their bound levels (“ceiling” bindings) as a result of unilateral or autonomous rate reductions in the last 10-20 years under structural adjustment programmes supported by the World Bank and the IMF. In the Uruguay Round, they sought “credit” for these reductions, but there is little evidence that they received tariff cuts on exports of interest to them for such reductions. The higher bound levels persist because individually their markets are often small and their offer to bind their applied rates is a reciprocal concession of little interest to developed members, a weakness of the approach under which bilateral negotiations initially take place on an item-by-item basis to be later applied on an MFN-basis. The absence of such bindings leaves a degree of uncertainty about trade regimes which may be discouraging to foreign investment and, hence, technology transfer and development.
Increasing the extent of bindings was one of the main objectives of the Uruguay Round, and the major result was the very substantial increase in bindings by developing countries (Table 1). While there was no specific target for industrial goods, it was agreed that all rates in agriculture would be bound. Overall, the percentage of developed countries' imports of industrial goods under bound rates rose from 94 per cent to 99 per cent. However, developing economies increased their share of bound rates from 14 to 59 per cent, while the transition economies increased their binding ratios from 74 to 96 per cent. In Latin America most countries bound close to 100 per cent of their tariff rates at ceiling levels. Asia as a region has the lowest level of bindings: only 67 per cent of industrial tariff rates are now bound.
Tariff reductions. Over the eight GATT negotiating rounds since 1949, the industrial countries’ import-weighted average tariffs on industrial products were reduced from some 40 per cent to 3.9 per cent, and tariff reductions were also a key objective of the Uruguay Round, where the goal was the reduction of average tariff levels by at least as much as in the Tokyo Round (i.e., one third) for industrial products (covering manufactures, tropical products and natural resource-based products, but not trade in petroleum products). In the end, the average trade-weighted tariff rate on all industrial products from all sources being reduced by 38 per cent, while the average reduction on imports from developing countries was 34 per cent (GATT, 1994). Overall, at the end of the implementation period in 2005, the industrial countries' import-weighted average bound tariff on industrial products against imports from developing countries will be 4.5 per cent, compared with 3.9 per cent on imports from all sources.
In a number of industrial sectors of export interest to developing countries, tariff reductions by the industrial countries exceeded the overall target. For example, duties on imports of metal products from developing countries are to be cut by an average of 67 per cent (cf. 59 per cent reduction on imports from all sources), while the rates on wood, pulp, paper and furniture products imported from developing countries are being cut by 63 per cent (cf. 69 per cent on import from all sources). For tropical and resource-based products, tariff reductions by developed countries on imports from all sources also exceed the overall target: on a trade-weighted average, the cuts will be 45 per cent and 34 per cent, respectively, while the corresponding cuts affecting developing countries' exports to developed countries will be higher, amounting to 57 per cent and 35 per cent, respectively. The lowering of tariff rates is taking place in five equal annual reductions which began in 1995.
In agriculture, NTMs[2] were to be eliminated or converted into their tariff equivalents, often amounting to hundreds of percent in the first instance. Subsequent to this “tariffication”, developed country tariffs were to be reduced by an average of 36 per cent over 6 years from their 1986-88 base, and 24 per cent over ten years in the case of developing countries (subject to the condition that each tariff line will be affected by a 15 per cent minimum reduction). Rice and other staple foods were exempt from the general reduction guidelines, but are subject to the general minimum access guarantee, equivalent to 4 per cent of domestic consumption in the 1986-88 base period, increasing by 0.8 per cent annually to reach 8 per cent at the end of the implementation period. The minimum access amounts are subject to reduced tariffs, while amounts above that level are subject to the higher tariffied rates which are to be progressively reduced during the implementation period. Special safeguards may be triggered by volume increases or price reductions. Average duties affecting trade in agricultural tropical products, of key interest to developing countries, are subject to a reduction of 43 per cent, with duties on spices, flowers and plants being reduced by 52 per cent.
Abreu (1995) estimates that developing countries cut their trade-weighted average bound MFN rates against imports from industrial countries from 14.9 to 10.7 per cent. This is made up mainly of cuts by Latin American countries, from 22.1 to 18.2 per cent, Asian countries, from 12.4 to 8.4 per cent, and developing Europe, from 26.4 to 15.5 per cent. African countries made no measurable cuts, retaining average bound rates at 23 per cent. Abreu also shows that developing countries cut their trade-weighted average bound MFN rates on imports from other developing countries from 10.1 to 7.1 per cent.
An overview of the sectoral breakdown of applied and bound tariffs in developed and developing countries is shown in Table 2.
Base period and implementation of results. In the Uruguay Round, there was some discussion of the base period from which tariff reductions would be implemented as well as the period over which implementation was to take place. The discussion about the base period were most intense in the case of agriculture, since periods in which world prices were relatively high would imply low tariffied rates and allow little scope for increasing protection when world prices fell. There was, therefore, interest in choosing periods when protection (and other forms of support) were relatively high, so that reduction commitments would be lessened, as happened. In the end the base rates chosen were existing bound levels, where they existed, or for unbound products, the applied artes in 1986. Given the success of the Uruguay Round in extending binding coverage, including in agriculture, it would seem that the base period for a new round could be fixed as the final year for implementation of the Uruguay Round results.
With certain variations, Uruguay Round rate cuts are being implemented from 1995 in equal annual stages over 5 years for manufactures and six years for agriculture, except that developing countries have 10 years to implement the results in agriculture. (In textiles and clothing the progressive opening of quotas has been back-loaded so that the more profound liberalization will only occur toward the end of the implementation period). However, at the Mid-term Review of the round in Montreal in December 1988, it was decided to advance to mid-1989 at the latest the implementation of agreed tariff cuts on a number of tropical products of particular interest to developing countries.
Averaging techniques. In past rounds, targets for the reduction of tariffs on industrial products were set in terms of import-weighted averages. This was to give greater weight to the more important products in trade, although petroleum products, where tariffs are mainly set for revenue or excise purposes, were excluded. However, in the Uruguay Round negotiations on agriculture, simple averages were used to determine the depth of cut, since, for many products, there was no trade, whether for lack of demand or because of the restrictiveness of tariffs and other measures on imports. Since imports are adversely affected by duties and NTMs (acutely so in agriculture, textiles and clothing), there is a downward bias in import-weighted averages. Moreover, in order to achieve an overall reduction of a given amount, there would no need to cut rates in sectors where trade is prohibited by the height of protection since such items would have no weight in the calculation. This was partly overcome in the Uruguay Round by requiring a minimum cut of 15 per cent in each tariff line (10 per cent for developing countries) within the context of the overall target.
Another objective of the Uruguay Round was to reduce tariff peaks and tariff escalation. Despite eight rounds of tariff negotiations, there are still substantial tariff peaks in some sectors, and it has been estimated that a 50 per cent reduction in remaining industrial tariffs would yield approximately US$270 billion in global income (welfare) gains per year (Francois and McDonald, 1996). It has been pointed out that the abandonment of tariff-cutting formulae (see later) has shifted the focus of tariff-cutting to less sensitive areas, and, as a consequence, there is a persistence of tariff peaks on sensitive products (Blackhurst, Enders and Francois, 1995). This is most evident in the cases of textiles and clothing, leather, rubber footwear and travel goods, major exports of the developing countries, where the Uruguay Round rate cuts of 21 and 19 per cent, respectively, were substantially less than the average (GATT, 1994). Lesser commitments were also made for transport equipment where the reductions will average 18 per cent. Together, trade in these three product groups accounts for 31 per cent of total developed countries' imports from developing countries by value in 1993. However, as discussed later, these cuts will be supplemented by the removal of non-tariff barriers (NTBs) resulting from the phase-out of the Multi-fibre Agreement (MFA), and the elimination of VERs, especially on footwear, electronics and travel goods.
Another objective of the Uruguay Round was to reduce tariff escalation, by which tariffs increase or escalate at later stages of processing. This structuring of tariffs, which is common in developing and developed countries, provides greater effective protection or assistance to processing than is evident from nominal rates alone. In developing countries, tariff escalation is associated with the import-substitution industrialization (ISI) strategy, being designed to foster the manufacture or further processing of natural resource-based products previously exported in primary form. Tariff escalation by developed countries works against these efforts to increase domestic processing in developing countries.
GATT (1994) provides information on percentage and absolute changes in tariff escalation in the Uruguay Round.[3] The results, set out in Table 3, reveal that the percentage reductions were generally greater on the earlier stages of processing, except that the cuts were greater for finished tropical products and semi-manufactured natural resource-based products than in the preceding stages of processing. The general implication of higher percentage reductions on material or semi-processed inputs is that effective protection is increased on the next stage of processing, a strategy that has been used explicitly by some developed countries to increase effective protection while meeting overall tariff reductions.[4] Thus, escalation remains of importance and is an explicit part of the strategy of a number of countries. Apart from the fact that the externalities associated with this strategy are dubious and associated with negative effects on the rural sector, overall, tariff escalation by both groups of countries, is self-defeating and produces a trade bias against processed goods due to the higher import duties imposed on these items.
An overview of the tariff regimes of Canada, the European Communities, Japan and the United States is given in Table 4. This illustrates some of the issues discussed in the preceding paragraphs.
In some countries there is a proliferation of different tariff rates (a number of countries have hundreds of distinct rates of duty). This can arise from the adoption of several approaches to tariff policy, including tariff escalation. Other approaches involve setting higher rates on consumer goods and luxury goods, on the same basis as for indirect taxes, as a revenue collecting device or to divert resources to what is perceived as more socially valued production. Under this strategy, lower rates would be set on intermediate goods and the lowest rates on capital goods and raw materials. However, experience at the WTO shows that, in practice, this can lead to an inversion of rates at different stages of processing (e.g., de-escalation between intermediate and final stages). While zero rates are usually used in an escalation strategy, they are may be rejected in favour of minimum rates of, say, five per cent, in a strategy to increase tariff revenues. This also has the advantage of compressing dispersion and reducing the associated misallocation of resources.
Another strategy which leads to the proliferation of tariff rates is the notion of made-to-measure protection, providing industries “just the amount of protection they need to compete against imports”. Such an approach takes no account of the social costs of the protection, nor the social benefits, if any, of individual industries. There is no consideration for the efficiency of the industries and the protection afforded in this way becomes reflected into the value of the capital and land involved in production, providing windfall gains for the owners. This approach results from the exercise of political power, e.g., by entrepreneurs in certain regions of a country, as described in a series of studies of the political economy of protection commissioned by the World Bank in the early 1980s.
An alternative strategy, where tariffs are required for revenue purposes, is the uniform tariff, such as that of Chile. In many developing countries, the domestic taxation system is poorly developed and trade taxes remain an important source of revenue.