Multilateral trade talks have hit a dead end for a long time. The world trading club with 152 members (including Ukraine, which joined the WTO on May 16, 2008) has failed to make substantive progress mainly on account of two roadblocks. The first is agricultural subsidies. And the second is market access for non-agricultural products (NAMA).
The two deadlocks have become interlinked in some ways. Developing countries are unhappy over the subsidies provided by developed members to their farmers. These subsidies push down prices of agricultural products from advanced countries making developing country exports uncompetitive. As a result, developing countries have been unwilling to reduce tariffs on non-agricultural products to levels that are acceptable to developed countries. This has limited market access for non-agricultural products. Of course, this is not a one-way traffic. High tariffs as well as non-tariff barriers (NTBs) are being faced by developing country exports in developed country markets as well.
There is little doubt that expansion of global trade in manufactured products is unlikely till market access negotiations yield fruitful outcomes. This is one of the main reasons behind the proliferation of regional and bilateral trade agreements in recent times. Disappointed by the lack of progress in multilateral negotiations, most countries have got down to working out one-to-one trade treaties offering better market access on a reciprocal basis.
Sensing the urgency, the WTO has been trying hard to make some progress. The latest suggestion is to arrive at a formula that will set in motion the process of tariff cuts on non-agricultural products in both developed and developing countries. Needless to say, suggested cuts are not the same for the two groups. On the whole, the proposed ?Swiss? formula, should produce deeper cuts for higher tariffs. Nevertheless, the levels of cuts, in terms of the coefficients determining the extent by which tariffs will go down, are going to be lower for developing countries.
What are the proposed Swiss coefficients? For developed countries, these are expected to be between 8-9 per cent. For developing countries, these are to be within 19-23 per cent. The interesting part about the Swiss formula is that higher the coefficient, lower is the tariff reduction commitment. The suggested coefficients are expected to result in deeper cuts for developed countries compared to the developing ones. Moreover, if the existing tariff lines in developing countries are lower than the proposed coefficients, then the actual tariff reduction will also be that much lower.
India has had some problems with the application of the non-linear Swiss formula. It has generally preferred the Girard formula, which, though non-linear, would have resulted in proportionally lighter tariff cuts. However, the emerging consensus in WTO seems to be in favour of the Swiss formula. This makes the value of the Swiss coefficients critically important for India, Pakistan and the rest of South Asia. With the Swiss formula likely to produce much heavier cuts, it is also important for the South Asian countries to take stock of the flexibilities being offered.
Under the framework agreement of the NAMA, developing countries are allowed a couple of flexibilities. These include the option of applying cuts lower than those yielded by the Swiss formula on a given percentage of sensitive tariff lines. There are two caveats. First, the cuts cannot be less than half of the rates determined by the formula. Second, the percentage of tariff lines chosen cannot exceed the same percentage of the member?s NAMA imports. In other words, if India chooses 10 per cent tariff lines for lower cuts, these have to be limited to 10 per cent of India?s total NAMA imports. Alternatively, a certain percentage of tariff lines can be kept unbound or outside the purview of cuts subject to an import ceiling.
The current negotiations include the above flexibilities. The crucial factor for developing countries like India is the value (in per cent) of the tariff lines agreed upon. There?s considerable difference between 5 and 10 per cent in this regard. The latter will not only increase the number of tariff lines for lower cuts, they can also be covered within a greater share of total imports.
So even if developing countries have to yield ground on the Swiss formula, they need not be entirely unhappy. The Swiss coefficients continue to be within square brackets implying the scope for further negotiations. Even if they finally end up with a formula and coefficients that they are not particularly satisfied with, they have enough bargaining chips on flexibilities. Higher percentages on flexibilities will allow them considerable room for sheltering several products. As a result, the final outcome of the latest NAMA talks might be very similar to those earlier. Much ado over nothing!
?The author is a visiting research fellow at the Institute of South Asian Studies (ISAS) at the National University of Singapore. These are his personal views