AG, NAMA CHAIRS RELEASE DRAFT AGREEMENTS, POINT WAY TO DOHA COMPROMISE

WTO Members will need to drop longstanding demands and agree to deeper subsidy and tariff cuts for there to be any hope of an accord in the troubled Doha Round of trade talks, according to the terms set out in draft agreement texts issued on 17 July by the chairs of the agriculture and industrial goods negotiations.

That further concessions are necessary for a deal is hardly news. What is different this time is that the chairs have identified specific figures for the cuts that they think could form the basis for an acceptable agreement, enabling a comparison between, say, potential constraints on US farm spending and India's future industrial tariff rates.

The numbers, the chairs suggested, indicated that divisions had narrowed and a commercially substantial compromise was within reach - but not without political courage.

Several trade analysts have said that a clear presentation of potential Doha Round compromises would help governments and interest groups assess what was at stake. The chair of the agriculture negotiations, Ambassador Crawford Falconer (New Zealand), said that he hoped to galvanise shifts in countries' bargaining positions by describing a "compromise that no Member can quite bring themselves to articulate."

"You will have to change your positions to reach an agreement," non-agricultural market access (NAMA) Chair Ambassador Don Stephenson (Canada) wrote, reminding Members that he had only been asked to propose a deal because they had failed to strike one on their own. In a similar vein, Falconer wrote that "pain will be required to get agreement," stressing that he had done his best to spread it "in a reasonably balanced way."

Members are set to provide preliminary reactions to the papers during committee meetings next week, with in-depth negotiations to start at the beginning of September, after the WTO's annual holiday.

Deeper subsidy cuts from US, EU

The agriculture chair's text set out two potential levels of ambition for farm subsidy cuts, linking higher cuts to relatively deeper tariff reduction. It would have the US cap overall trade-distorting support (OTDS) at $13 billion or $16.4 billion, equal to a 73- or 66-percent cut respectively.

Though lower than the $22.5 billion ceiling Washington has formally tabled and even the $17 billion figure it has broached unofficially, both of the newly proposed upper limits remain higher than the roughly $12 billion cap sought by the G-20 group of developing countries. The two potential caps also exceed the $11 billion that the US is estimated to have spent on trade-distorting support last year. Washington, which has maintained that it could not lower the subsidy ceiling any further unless assured of greater market access elsewhere, noted that current payments are low even by recent standards, and wanted to retain the freedom to raise payments to farmers should commodity prices drop.

With regard to the heavily trade-distorting 'amber box' payments that make up a major share of OTDS, Falconer's draft agreement penciled in a 60-percent reduction for the US, matching Washington's own proposal. In theory, the US might be able to meet a relatively low OTDS cap by making deeper reductions to other kinds of trade-distorting support entitlements, especially a barely used 'product-specific de minimis' allowance that would amount to about $5 billion. However, practical restrictions on how payment schemes can be classified would mean that this would likely entail at least some restructuring of farm subsidy programmes.

Falconer's text would have the EU lower its OTDS spending entitlement by 75 or 85 percent, more than the 70-percent reduction Brussels has proposed.

Of the relatively less distorting components of OTDS, 'blue box' spending would be capped at 2.5 percent of the value of production, while 'de minimis' entitlements would be reduced either to a similar level or 2 percent. Both would be subject to some rules aimed at preventing spending from being concentrated on a small number of products.

Although the standard basis for calculating future product-specific subsidy limits would be spending from 1995 to 2000, Falconer created a special provision for the US to take into account the entire period from 1995 to 2004, when its payments were higher.

The paper set out rules for the elimination of export subsidies by 2013, in accordance with Members' agreement at the Hong Kong Ministerial Conference in December 2005.

Tariff cuts: more than EU, less than US

As for market access, the agriculture chair's text would have developed countries slash farm tariffs worth 75 percent and above by between 66 and 73 percent, which is higher than the 60 percent that Brussels has described as the most it could tolerate. Though the upper end of this range is close to what the G-20 wanted for industrialised countries, it is lower than the cuts sought by the US. Tariffs lower than 75 percent would be classified into three other bands, each slated for correspondingly gentler rates of reduction.

Developing countries, Falconer suggested, would cut tariffs by two-thirds of whatever is agreed to for developed nations, but would be allowed some adjustments to keep their average reduction below 36 or 40 percent. Although the 36-percent average corresponds to the G-20's own proposal, the group would have to move up to 40 percent in order to get the higher subsidy cuts from the US.

The text makes no mention of a cap on farm tariffs, a G-20 objective to which Japan and the other G-10 countries with heavily protected farm sectors are adamantly opposed.

Flexibilities: few details on 'special products'

Falconer proposed allowing developed countries to ordinarily designate up to 4 or 6 percent of their tariff lines as 'sensitive', making them eligible for tariff cuts one- to two-thirds lower than that demanded by the formula in return for the creation of new import quotas. The EU had wanted 8 percent of tariff lines to be eligible for this flexibility; Japan and the rest of the G-10 had wanted as many as 15 percent. Meanwhile, the G-20, the US and the Cairns Group farm exporters wanted no more than 1 percent of products to be accorded 'sensitive' status.

As per the paper, for the smallest deviation, governments would create new tariff quotas equivalent to 3 or 5 percent of domestic consumption of the product in question. For the full two-thirds deviation from the formula (i.e., a 20-percent instead of a 60-percent reduction), new access opportunities would have to equal at least 4 or 6 percent of domestic consumption. If the country is already importing substantial quantities of a sensitive product, quota expansion requirements would be softened.

In comparison, Falconer provided no specific details about the number or treatment of the 'special products' that developing countries will be able to shield from tariff cuts to safeguard food and livelihood security and rural development concerns, justifying this on the grounds of insufficient progress.

Debate on the issue has been polarised: the US and some other exporters warn of diminished market access opportunities, while the G-33 developing countries insist that the livelihoods of subsistence farmers should not be made subordinate to export interests elsewhere.

Nevertheless, Falconer wrote that "we are well beyond the utterly entrenched positions of a year ago." He suggested that Members could work on the basis of a G-33 proposal to develop verifiable indicators for food and livelihood security and rural development, and possibly identify a minimum number of products that developing countries would be allowed to designate as 'special' irrespective of what the indicators yield.

In May, Falconer raised the ire of the G-33 by suggesting that no more than 5 to 8 percent of tariff lines should be eligible for 'special product' status, and that even these should all be subject to at least some tariff reduction (see BRIDGES Weekly, 2 May 2007).

Other issues on which Falconer refrained from commenting in detail included the special safeguard mechanism (SSM), and the conflicting demands between Latin American countries seeking deep tariff cuts for tropical products and states fearing the erosion of the trade preferences they currently enjoy for the very same crops.

NAMA: "Start with the end in mind"

After playing second fiddle to ever-contentious agriculture for much of the Doha Round negotiations, divisions on NAMA came to the fore last month, when the US and the EU blamed India and Brazil's refusal to cut industrial tariffs for the breakdown of their trade summit in Potsdam (see BRIDGES Weekly, 27 June 2007). India and Brazil countered that the farm subsidy reform they were being offered was too paltry to merit deeper tariff reduction.

Acknowledging the many unresolved differences between some Members, NAMA Chair Stephenson encouraged governments "to start with the end in mind" when assessing the deal that he deemed plausible. "After the modalities I have proposed have been applied," he wrote about his draft negotiating text, "developed countries will have bound tariffs below 3 percent on average, and tariff peaks below 10 percent even on their most sensitive products. The two largest developed Members will have more than 90 percent of their duties below 5 percent and less than 2 percent of duties between 7 and 8.5 percent - their new tariff peaks."

"In the developing countries applying the formula, bound tariffs will be below 12 percent on average, and only a handful will have averages above 15 percent," he added. "In these same countries, 80 to 90 percent of bound duties will be lower than 15 percent, dramatically reducing the "overhang" in their tariff schedules."

Coefficients of 8-9, 19-23

Stephenson's text prescribed a 'Swiss formula' coefficient of 8 or 9 for industrialised countries, while developing nations accept a coefficient between 19 and 23. Under the Swiss formula, a Member's coefficient effectively becomes its new tariff ceiling: when fed through the formula, all duties are slashed to below the level of the coefficient, with lower ones reduced more gently.

A coefficient of 8 would cut the US' average bound tariff rate from 3.3 percent to 2.3 percent. More significantly for trade flows, it would sharply reduce tariffs on the handful of politically sensitive products that Washington has protected throughout half a century of liberalisation - often the very products, such as textiles, that developing countries export competitively. For instance, the highest industrial import tariff applied by the US is 55 percent, according to recent WTO data. A Swiss formula with a coefficient of 8 would slash this to about 7 percent. The EU's top rate would fall from 26 percent to 6.1 percent.

Developing countries would face larger percentage cuts to their bound tariff rates. Brazil's average bound tariff would fall from 30.8 percent to 11.75 percent with a coefficient of 19, and to 13.1 percent with a coefficient of 23. Its current average applied rate is 12.6 percent. The 30 coefficient it was seeking would have yielded a 15.2 percent average bound ceiling. According to calculations carried out by the WTO Secretariat last year, a coefficient of 20 would force reductions to duties currently levied on about half of Brazil's tariff lines; for India, the figure would likely rise over 60 percent.

The US, the EU, and other developed countries had pushed for coefficients of 10 and 15, arguing that this was necessary for "real market access," by which they mean a substantial cut in applied tariffs rather than simply the bound ceiling rates that are the standard basis for WTO calculations.

Brazil and India, in contrast, had sought a coefficient no lower than 30, complaining that the industrialised countries' demands would require poor countries to make disproportionately deep cuts to their industrial tariffs. The NAMA-11 bloc, to which they belong together with other developing countries such as South Africa, Indonesia, and Argentina, has noted that coefficients as far apart as 10 and 35 would cut their own bound rates by close to 50 percent, and lead to roughly equivalent 25-percent cuts to the tariffs applied both by them and by rich countries (see BRIDGES Weekly, 13 June 2007).

The figures in Stephenson's text closely mirrored a late-June "possible middle ground solution" proposed by eight Latin American and Asian nations, in which they called for a developed country coefficient of "less than 10," and one for developing countries "between the upper teens and the low twenties" (see BRIDGES Weekly, 27 June 2007). Sources suggest that the NAMA-11 gave that notion a cool response. Furthermore, most of the sponsors of that paper, such as Chile, Colombia, Costa Rica, Hong Kong, Mexico, Peru, Singapore, and Thailand, that either have unusually low tariffs to begin with or already face duty-free trade with their principal trading partners due to bilateral agreements, and thus are less likely to worry about major dislocation as a result of the Doha Round.

Stephenson also provided for developing countries to shield a limited proportion of imports from the full force of the reduction formula: they would be allowed to subject up to 10 percent of tariff lines to only half of the regular cut, so long as this did not affect more than a tenth of total manufactured imports. Alternately, they could exclude 5 percent of tariff lines from cuts altogether, up to a maximum of 5 percent of import volume. Developing countries electing not to use either flexibility would be eligible for a coefficient three points higher than that agreed to for their peers.

Only 31 developing countries will apply the overall tariff reduction formula. Least-developed countries are exempt from reduction commitments. Different approaches would be used to determine the future tariff ceilings of small economies and countries with a high proportion of unbound tariff lines.

China and other recently acceded Members had asked to be granted a coefficient higher than other developing countries, as a result of the far-reaching liberalisation commitments they had to make in order to join the WTO. However, Stephenson's text only granted them extended implementation periods.

The NAMA chair said little about sector-specific liberalisation initiatives, suggesting simply that sectoral negotiations would need to be finished in time for Members to reflect them in their commitment schedules.

Key Members' reactions muted

The US and the EU gave the papers a cautious welcome. Gretchen Hamel, a spokesperson for the US trade representative's office, said that both texts would "demand close analysis as we develop a comprehensive US reaction." She stressed that Washington would "participate actively and constructively in the upcoming consultations and negotiations" to revise the two documents.

EU trade and agriculture spokespersons said that the draft negotiating texts "represent a useful step forward." "Our first reaction is that the texts provide a basis for further work in the Doha round," they said in a statement, "though there are points on which we have important concerns and other significant issues in the negotiations that are not included in these texts."

In the agriculture text, Falconer refrained from commenting on the extension of geographical indication protection to products other than wine and spirits (say, Parma ham), a key EU demand that is strongly opposed by Argentina and the US.

Reuters reported from New Delhi that Indian officials indicated it would be premature to comment on the proposals prior to a more careful examination, but that the G-20 would release a statement on them later in the week.

The most critical initial reaction from a major player in the negotiations came from Brazilian Foreign Minister Celso Amorim, who told journalists in Brussels on 18 July that the "papers have problems," according to Associated Press. Following a meeting with EU Trade Commissioner Peter Mandelson, he said that Brazilian officials were still in the process of studying the texts, but that they appeared to lean more in the direction of industrial tariff cuts than towards farm subsidy reform.

Civil society, lobby groups, France more vocal

Oxfam International described the farm subsidy cuts provided for in Falconer's paper as "a step in the right direction," though not quite enough. However, it criticised the industrial tariff cuts demanded of developing countries, warning that they would cause unemployment and impede industrial development. Oxfam concluded that "the overall cost to developing countries of opening their agricultural and industrial markets remains far too high in return for the modest reforms in agriculture in rich countries."

Focus on the Global South, an advocacy group, said that the draft agriculture text's modest reforms to rules governing 'green box' subsidies would let the US and the EU go "scot-free" on farm reform. Such payments, which are deemed not to distort production, are exempt from reductions in the Doha Round. Nevertheless, the advocacy group's Aileen Kwa argued that green box spending "is trade distorting by its sheer quantity," pointing to the fact that the bulk of EU and US subsidies now fall in this category.

Meanwhile, others argued that the farm subsidy cuts set out by Falconer went unacceptably far. Using language more commonly heard from developing country governments, French Agriculture Minister Michel Barnier, France's agriculture minister, said the "WTO document confirms the deep imbalance in the Doha negotiations" - except he meant that the tilt was against the EU. Ireland's agriculture minister and EU farm groups expressed similar views.

While France and Ireland have been at the forefront of a group of EU member states that have repeatedly called for no new concessions on agriculture trade, Falconer's text did not appear to be much more popular with the farm lobby on the other side of the Atlantic. The National Cotton Council said it was "alarmed" by the paper's inclusion of cotton-specific additional subsidy reductions, as proposed by Benin, Burkina Faso, Chad, and Mali, four West African countries affected by US cotton subsidies (see BRIDGES Weekly, 8 March 2006). These additional reductions would see 'amber box' cotton payments slashed by over 80 percent even if the general reduction is only 60 percent. Claiming that the WTO had been "taken hostage by a small, select set of interests that unfairly target a specific sector" of the US economy, the group urged the Bush administration to seek the removal of the cotton-specific provisions.

US industry group the National Association of Manufacturers was more positive, calling Stephenson's text "a focal point for debate," albeit one that did not cut tariffs deeply enough.

Based on Members' reactions, Falconer and Stephenson will revise their texts in September. If there are signs that countries may be able to salvage a deal, delegates say that ministers would be brought to Geneva to finalise an agreement. Without an accord by early 2008, the Doha Round is expected to go into hibernation for years, if not indefinitely, as election campaigns get underway in the US and then in India.

ICTSD reporting; "France slams new WTO proposals," AGENCE FRANCE PRESS, 17 July 2007; "India says too early to comment on WTO texts," REUTERS, 17 July 2007; "Rich nations get off easy in WTO draft - aid groups," REUTERS, 18 July 2007; "Brazil says WTO proposals have 'problems'," ASSOCIATED PRESS, 18 July, 2007