Tariff Negotiations in Agriculture: Implications for India


By

Dr. G Bharathi Kamath
Asst. Professor-Economics
ICFAI Business School
Nirlon Complex, Goregaon (East), Mumbai
 


Abstract:

The World Trade Organization (WTO), which was established in 1995 as a successor to the General Agreement on Tariffs and Trade-1947 (GATT 1947), is the principal international organization governing multilateral trade among Members. The WTO administers the implementation of a set of agreements, which include the General Agreement on Tariffs and Trade, other agreements in the goods sector and in addition, agreements in two other areas, viz., trade in services, and Trade Related Intellectual Property Rights (TRIPs). The objective of the Agriculture on Agreement (AoA) is to reform trade in the sector and to make policies more market-oriented.

This article is intended to bring out the meaning of Agreement on Agriculture and its component and the details of the Recent Developments in Negotiations of Agricultural Tariff, vrious types of tariff estimation techniques, and finally would discuss in brief the possible impact of it on India.

Introduction:

WTO and Trade in Agriculture- Origin, Developments and Issues

The World Trade Organization succeeded its predecessor GATT in 1995. There were many agreements that were signed under the aegis of this new organization. The Agreement on Agriculture (AoA) as it is commonly known was among the various other agreements that were signed. The other agreements were related to Investments, Trade in Goods, Trade in Services, Trade Related Intellectual Property Rights etc.

As mentioned above, the original GATT did have some agreements related to trade in agriculture, but it contained many loopholes. For example, it allowed countries to use some non-tariff measures such as import quotas subsidies etc as a measure to protect the agriculture. Therefore, the Agricultural trade became highly distorted and the developed countries used these loopholes to massively protect their agriculture.

The Uruguay Round produced the first multilateral agreement dedicated to agriculture. These agreements served as a basis for the following agreements on this sector. However, there was no consensus on the agreements at any point of time.

The objective of the Agriculture on Agreement (AoA) is to reform trade in the sector and to make policies more market-oriented. This was expected to improve predictability and security for importing and exporting countries alike1.

The new rules and commitments apply to:

  • Market Access various trade restrictions confronting imports of agricultural products.
  • Domestic Support subsidies and other programmes of providing direct and indirect support to the agricultural activities of the country, including those that raise or guarantee farm gate prices and farmers' incomes
  • Export Subsidies and other methods used to make exports artificially competitive.

The WTO maintains that the agreement does allow governments to support their rural economies, but preferably through policies that cause less distortion to trade. It also allows some flexibility in the way commitments are implemented. It is believed that the developing countries do not have to cut their subsidies or lower their tariffs as much as developed countries, and they are given extra time to complete their obligations. Least-developed countries don't have to do this at all. Special provisions deal with the interests of countries that rely on imports for their food supplies, and the concerns of least-developed economies. However, the developing countries do not agree to the above view at all.

Trade in Agriculture: Some Statistics

Agricultural products have always been an important part of the world trade. The value of trade in agricultural products is a whooping 674bn dollar. The share of this sector is more than 1/3rd of the total exports in the primary products as can be seen in the Table 1.

Table 1

World trade in agricultural products, 2003

Value $bn

674

Annual change %

 

1980-85

-2

1985-90

9

1990-95

7

1995-2000

-1

2001

0

2002

6

2003

15

Share in world merchandise trade %

9.2

Share in world exports of primary products  %

41.2


Source : WTO International Trade Statistics 2004, table IV.3, includes trade between EU members

Though the developing countries are considered as the agro oriented economies, the share of US and EU (developed nations), is top among the list of the countries who are major exporters and Importers of Agro products. The developing countries as a group also appear dwarfs in front of these major giants. This is depicted in Table 2

Table 2

Top 15 agricultural exporters and importers, 2003

 

Value
$bn

Share in world
%

 

Value
$bn

Share in world 
%

Exporters

   

Importers

   

EU members (15)

284.14

42.2

EU members (15)

308.87

42.8

EU to rest of world

73.38

10.9

EU from rest of world

98.11

13.6

United States

76.24

11.3

United States

77.27

10.7

Canada

33.69

5.0

Japan

58.46

8.1

Brazil

24.21

3.6

China

30.48

4.2

China

22.16

3.3

Canada c

18.02

2.5

Australia

16.34

2.4

Korea, Rep. of

15.56

2.2

Thailand a

15.08

2.2

Mexico

13.85

1.9

Argentina b

12.14

2.1

Russian Fed. a

13.73

1.9

Malaysia

11.06

1.6

Hong Kong, China

10.81

-

Mexico

9.98

1.5

retained imports

6.47

0.9

     

Taipei, Chinese

7.96

1.1

Indonesia

9.94

1.5

Switzerland

7.12

1.0

New Zealand

9.60

1.4

Saudi Arabia

6.26

0.9

Russian Fed. a

9.37

1.4

Thailand a

5.72

0.8

Chile

7.47

1.1

Indonesia

5.44

0.8

India a

7.03

1.2

Turkey

5.22

0.7

Above 15

548.44

81.8

Above 15

580.44

80.4


Source : WTO International Trade Statistics 2004, table IV.8. "EU members" includes trade between EU members

a Includes WTO Secretariat estimates. b 2002 instead of 2003, c Imports are valued f.o.b

Looking at the trade region-wise also, it can be clearly observed in Table 3 that the share of developing countries in Asia and Africa is very limited.

Table 3

Agricultural products' share in trade, by region, 2003

 

Exports

Imports

 

Exports

Imports

Share in total merchandise trade, % 

  

  

Share in primary products trade, % 

  

  

World 

9.2 

9.2 

World 

41.2 

41.2 

North America 

11.0 

6.2 

North America 

56.6 

32.2 

Latin America 

19.8 

9.7 

Latin America 

47.2 

44.0 

Western Europe 

9.6 

10.4 

Western Europe 

57.6 

48.3 

C./E. Europe/Baltic States/CIS 

8.8 

10.1 

C./E. Europe/Baltic States/CIS 

22.7 

47.6 

Africa 

13.9 

15.9 

Africa 

20.2 

59.4 

Middle East 

3.4 

12.4 

Middle East 

4.4 

68.0 

Asia 

6.3 

8.9 

Asia 

46.3 

33.2 


Source: WTO International Trade Statistics 2004, table IV.5, includes trade between EU members

The huge share of developed countries in the agricultural trade is believed to be so because of their competitiveness in the international market, which is created by the massive spend of the government and the blanket support provided to the agricultural fraternity in these countries. The spend of these countries on their agriculture under various heads is given in Table 4

Table 4

How much do they spend?

Notified domestic support, 1999, and export subsidies, 1998.


Source: member governments' notifications to WTO

The above statistical analysis shows the importance of the agriculture for the developed economies. Therefore, it is observed in the WTO negotiations that the developed economies resist the reduction in the tariff and want the developing economies to open more and more markets (Market access) through higher reduction in tariffs for the agricultural products from developed countries.

Recent Developments in Negotiations of Agricultural Tariff:

Agricultural issues have always been a sensitive issue for discussion and negotiation in the WTO. There is always a deadlock or lack of unanimity among the member nations on the various agreements drafted for negotiation. This section tries to highlight some recent developments in negotiation in agricultural tariff.

There has always been a debate not only on the extent of support that domestic agriculture should get, but also on which method should be adopted by member countries to reduce their tariffs.

In the on-going multilateral trade negotiations at the World Trade Organization (WTO), it has been decided by all participating countries to use the Swiss formula for reducing import tariffs on industrial goods.

After a long-standing debate on the number of reduction coefficients to be used in the formula, a unanimous decision was recently taken that there would be two sets of coefficients one for developed countries and another for developing countries. A decision on the value of the coefficient is yet to be taken.

There are many methods of tariff reduction available and a brief of each would be helpful in determining why developing countries especially India prefers certain methods as compared to the others.

Different methods of Tariff reduction2

Here's a brief account of the different tariff reduction structures that any country could follow to achieve a balance of tariff with other participating members of the organization.

Single rate: Tariffs are cut to a single rate for all products. Theoretically, this is the simplest outcome. In practice it is mainly used in regional free trade agreements where the final tariff rate is zero, or a low tariff, for trade within the group.

Flat-rate percentage reductions : the same percentage reduction for all products, no matter whether the starting tariff is high or low. For example, all tariffs cut by 25% in equal steps over five years.

Uruguay Round approach : The 1986-94 Uruguay Round negotiations in agriculture produced an agreement for developed countries to cut tariffs on agricultural products by an average of 36% over six years (6% per year) with a minimum of 15% on each product for the period.

Harmonizing reductions: These are designed principally to make steeper cuts on higher tariffs, bringing the final tariffs closer together.

  • Different percentages for different tariff bands. For example, no cuts for tariffs between 0 and 10%, 25% cuts for tariffs between 11% and 50%, 50% cuts for tariffs above that, etc. A variation could include scrapping all tariffs below 5% which are sometimes seen as a nuisance with little benefit. These could be simple or average reductions within each band.
  • Mathematical formulas designed to make steeper cuts (i.e. higher percentage cuts) on higher tariffs. One example is the so-called Swiss formula (more below).

Other methods: There are a number of possibilities-

  • Different rates for different categories of products. For example steeper cuts on processed products than on raw materials. This is an attempt to deal with "tariff escalation", where countries protect their processing industries by making imported raw materials cheap and imported processed products expensive.
  • Combinations of any of these.

Understanding the Swiss Formula3

The "Swiss formula" is a special kind of harmonizing method. It uses a single mathematical formula to produce:

  • A narrow range of final tariff rates from a wide set of initial tariffs
  • A maximum final rate, no matter how high the original tariff was.

Usually the required cuts are then divided into equal annual steps.

The formula was proposed by Switzerland in the 197379 Tokyo Round negotiations.

Z = AX/ (A+X)

Where,
X = initial tariff rate
A = coefficient and maximum final tariff rate
Z= resulting lower tariff rate (end of period)

The significance and special feature of this formula is that, a higher reduction coefficient could lead to lower reduction commitment and vice versa.

Arguments:  for and against

It is contended that Swiss formula favored by the developed countries would impact disproportionately on the tariff structures of developed and developing country members. Given the higher bound tariffs of most developing countries and the lower tariff rates of developed countries, and the simple Swiss formula that would cut higher tariffs more dramatically than lower ones, no matter which coefficient is used, developing countries would end up making more significant cuts than the developed countries. In an illustration, developed countries with an average tariff of 4% will make an average cut of 60%, whereas developing countries with an average tariff of 29% will make an average cut of 89%, under a simple Swiss formula with a coefficient of 5. Therefore, ''the simple Swiss formula reverses the principle of less than full reciprocity by reducing the tariffs of developing countries more, and does not take into consideration each country's development needs4''.

Thus, a flexible 'Swiss type' formula which uses the average bound tariff of each individual as part of the coefficient would be more appropriate. This will result in ''concessions commensurate with each Member's tariff profiles.'' In this, developing countries with a higher bound tariff average of 29% will make a reduction of 35%, and developing countries with a lower bound average tariff of 10.5% will make a cut of 39%, when a coefficient of 2 is used in the flexible Swiss formula.

The developed countries on the other hand argue that Swiss formula is more effective and simple 'because it contains only one element, the coefficient, to be applied to each Member's tariff schedule.

Implications for India:

India's average tariffs are much higher than those existing in the developed countries. If a linear formula for tariff reduction was used, then its reduction burden would have been proportional to that of developed countries. However, using a Swiss formula could lead to India taking on a greater reduction commitment than its developed counterparts with lower initial tariffs, therefore, India did not agree to following the Swiss formula.

India was opposing the adoption of swiss formula and pushing for the more gentle Uruguay Round cuts of around 24 per cent for developing countries.

The US proposal which favors swiss formula, in contrast, would cut all tariffs to below 25 per cent.

However, with the recent development of having a dual tariff coefficient, for both developed and developing countries, the coefficient of reduction would be different, thus enabling the developing countries for lower reduction obligations as compared to the developed countries.

But, the developing countries argued that there should be a sufficiently wide gap between the coefficients for developed and developing members, otherwise the developing countries would be required to undertake significantly higher cuts (in percentage terms) in bound tariffs than the developed countries, because of their different current tariff profiles. India has proposed that a difference between the coefficients should be at least 25 points to ensure that the reduction burden on developing countries is not higher than that on developed countries.

Conclusions:

In general, the measures under AoA namely import liberalization; reduction of domestic support and export subsidies is believed to have serious implications especially on the developing economies which have agriculture as their major economic activity and millions of farmers thrive on this for their livelihood. The reduction of domestic subsidies, reducing the tariff barrier without a rational and proportionate reciprocity by the developed world and the removal of non-tariff controls on agricultural products will expose the farmers of these economies to global competition and also put their position on a weaker stage.

Under the WTO rules, India has to reduce all import barriers on over 27,000 items, of which over 800 are agricultural items including milk, milk products, wheat, rice, pulses, livestock, agricultural chemicals, tea, rubber and others. Over 700 items have gone off all quantitative restrictions in 2000. This has already created a crisis in the tea and rubber industry where millions of workers are unemployed as the plantations could not withstand the competition from cheaper imports5.

To conclude, as suggested by experts, India along with other developing countries should look for such negotiations which will not only open our markets partially and only in the areas where we have a competitive advantage over others, such that imports don't have a serious impact on our farmers income, and also look for those areas where more meaningful expansion in the developed country markets can be made so that it enhances market access for products that are of interest to India.

References:

1. http://www.wto.org/english/tratop_e/agric_e/agric_e.htm
2. www.economictimes.indiatimes.com/articleslist 
3. http://www.wto.org/english/tratop_e/agric_e/agnegs_swissformula_e.htm
4. http://www.atisweb.org/sections/wto/wto_index.htm
5. Jan Swasthya Sabha, Whatever Happened to Health for All by 2000? Towards the Peoples' Health Assembly Book-2 Chennai: The National Coordination Committee for the Jan Swasthya Sabha May 2000.
 


Dr. G Bharathi Kamath
Asst. Professor-Economics
ICFAI Business School
Nirlon Complex, Goregaon (East), Mumbai
 

Source: E-mail March 12, 2007

       

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