AGRICULTURE: KEY TRADE MINISTERS STRIKE AVE DEAL IN PARIS

Ministers from thirty key WTO Member countries made a technical breakthrough in the WTO agriculture talks on 4 May on an issue that had been bedeviling the overall progress of the Doha Round talks. They reached a preliminary compromise on how to convert 'specific' agricultural tariffs based on quantities imported into 'ad valorem' equivalents (AVEs), i.e., tariffs based on the price of the product. Members have been caught up in disagreement over the conversion process for months; settling the matter is a prerequisite for the rest of the agriculture negotiations to proceed.

The deal was facilitated by the so-called 'five interested parties' (FIPs) -- Australia, Brazil, the EU, India and the US -- during a 'mini-ministerial' meeting that took place on the sidelines of an Organisation for Economic Cooperation and Development (OECD) summit in Paris (see BRIDGES Weekly, 4 May 2005). However, it still needs to be agreed to by the WTO's full membership, and certain elements, notably the treatment of sugar and the process through which Members would verify each others' AVEs, remain undecided.

Geneva delegations considered the guidelines for AVE conversions produced by the Paris gathering at a 10 May meeting called by agriculture negotiations Chair Ambassador Tim Groser of New Zealand. No delegations opposed the broad shape of the deal, though some asked for more time to examine it.

Ministers smooth out political differences in Paris

AVE conversion is a mathematical exercise through which 'per tonne' or 'per litre' tariff rates are expressed as a percentage of the value of the commodity being traded. Specific tariffs can mask very high 'ad valorem' rates: if a tonne of rice only costs USD 100, a USD 100 per tonne specific tariff on it would amount to an ad valorem rate of 100 percent. The cost of imported goods is thus central to the calculation of AVEs -- and the higher the 'per unit' import price, the lower the AVE.

Determining import prices is straightforward for some tariff lines: Members are set to use the 'unit value' method in these cases, basing the conversion on import volumes and notified import values submitted to the WTO Integrated Database (IDB).

Complications arise, however, with some products such as sugar and cheeses, for which import prices often differ significantly from world prices compiled in the UN commodity trade statistics (ComTrade) database. Cases for which the two data sets produce particularly divergent prices (and consequently, ad valorem rates) are 'filtered' out, and the AVE conversions are subsequently carried out based on both IDB and ComTrade data.

Agricultural exporters had been pushing for a conversion based more closely on the lower world prices. These would lead to higher AVEs, eventually putting the commodities in line for steeper tariff reductions. The EU and G-10 countries, which accord relatively high levels of protection to their agricultural sectors, had argued in favour of giving more 'weight' to the higher IDB data. They contended that factors related to product quality would be neglected if the prices used were closer to ComTrade than IDB data. Furthermore, they have argued in discussions that specific tariffs can sometimes actually amount to fairly low ad valorem rates.

Two main differences had been preventing agreement. The first was on the specific weight given to each data set's estimates. The second was on sequencing -- whether to determine a price on the basis of the IDB and ComTrade data sets and then perform a single AVE conversion; or to first calculate AVEs for each data set and then arrive at a point between the two resulting figures on the basis of the agreed weighting.

Compromise puts basic farm products on track for higher tariff cuts

Following tense negotiations in Paris, participants in the mini-ministerial agreed on specific figures for weighting averages of the IDB and ComTrade price estimates. The prices of basic products will be weighted further towards the lower ComTrade prices, while the prices of processed goods will be relatively closer to the higher IDB levels. In terms of sequencing, the weighting of the prices in the two datasets will take place before a single AVE conversion is carried out. The final sequencing agreed was in line with what the EU had wanted, and enabled the EU and G-10 to agree to a weighting more skewed toward the ComTrade data than they had initially been willing to accept.

According to the deal struck in Paris, an '82.5/17.5' weighting will be applied to the Comtrade and IDB data to determine price levels for basic products. The numbers refer to the location of the AVE conversion price between the price levels indicated by each data set. 82.5/17.5 means that the price for the AVE conversion would be at a level that is 17.5 percent of the way towards the higher IDB figure from the lower Comtrade statistic. For example, if the Comtrade price for an unprocessed product is USD 100 per kilogram, and the IDB price is USD 200 per kilogram, the compromise would see a price of USD 117.5 per kilogramme used for the AVE conversion. For processed goods, the weighting agreed to was '60/40.' This means that the earlier price differential would, for a processed good, yield a figure of USD 140 per kilogramme for the purposes of determining the AVE.

In formula terms, the adjusted AVE conversion prices for the two types of products would be expressed as follows:

Unprocessed = (0.825 x Comtrade price) + (0.175 x IDB price)
Processed = (0.6 x Comtrade price) + (0.4 x IDB price)

Ministers hail deal; Groser calls meeting in Geneva

Following the compromise, US Trade Representative Rob Portman commented that it "was a significant breakthrough... Without that... the round would have continued to be stalled." EU Trade Representative Peter Mandelson added that the agreement on AVEs represented just a first step, and much work remained to be done, while Brazil's Celso Amorim stressed that all sides had shown flexibility in the end. Some Geneva sources expressed satisfaction that the AVE disagreement had been dealt with, since the issue had unnecessarily been blown out of reasonable proportion. Speaking in Kingston on 5 May, Jamaican Foreign Affairs and Trade Minister K. D. Knight sounded even less sanguine about an eventual deal on agriculture, saying that "certain sensitive [agricultural] products must be secure from competition," otherwise "we are going to have a deadlock in Hong Kong."

Sugar was explicitly left out of the list of commodities for which Members have been asked to work out AVEs as soon as possible. In Paris, delegates had discussed basing the conversion on prices defined by the London and New York sugar exchanges. However, both the US and EU found this idea problematic, with the EU saying that it would hurt the African, Caribbean and Pacific countries currently enjoying preferential market access to the EU market.

At the 10 May meeting, the US, Brazil, Switzerland, and Australia urged Members to accept the compromise package. No countries expressed explicit opposition to the deal, although a handful said that they would need more time to consider it. Some delegations -- China among them -- said that the package was imperfect, but that they were willing to accept it in order to move on with the negotiations.

The Philippines argued that the distinction between basic and processed products -- specifically the milder tariff cuts on the latter -- was unnecessary, particularly since tariff escalation (low tariffs on raw materials, steadily higher tariffs for more processed products) was already a problem.

Sugar-producing countries including Mauritius, the Philippines, Antigua and Barbuda, and Barbados expressed concern about the exclusion of sugar from the agreement on AVEs. Australia, on the other hand, contended that sugar prices were so distorted by protection in the US and the EU that it was likely to end up slated for steep tariff cuts regardless of which price database is used.

Groser told Members that verifying each others' AVE calculations would not be a major undertaking if the methodology used to calculate them were sufficiently specific. Accepting a suggestion from Australia and Mexico, he established 20 May as a "soft deadline" for major countries to provide their AVE calculations. Smaller countries, he said, would receive extra time as well as assistance from the Secretariat to do so.

The next agriculture week is scheduled from 30 May to 3 June, with delegates set to focus on market access issues. Groser has said that he would like Members to start discussions on the tariff reduction formula during that week.

ICTSD reporting; "WTO Agriculture Chairman Tim Groser To Hold Talks on Tariff Conversion Accord," WTO REPORTER, 10 May 2005; "World trade talks crisis averted after tariffs row," REUTERS, 4 May 2005; "Free Trade Begins With School Math," BLOOMBERG, 10 May 2005; "Knight predicts deadlock at the WTO ministerial, unless...", THE JAMAICA OBSERVER, 8 May 2005.