'EXCHANGE RATE' COMES TO FORE IN NAMA IMPASSE

The balance between concessions demanded of rich and poor nations as part of a potential Doha Round accord has acquired heightened prominence in the talks on liberalising trade in industrial goods.

Following last week's sharp disagreement over how deeply developing countries should have to cut their bound industrial tariffs compared to developed countries, negotiators report that Canadian Ambassador Don Stephenson, who chairs the non-agricultural market access (NAMA) negotiations, has been meeting with small groups of delegations to try to find a way forward.

The consultations have focused on issues such as non-tariff barriers, lenient tariff treatment for small and vulnerable economies and recently-acceded Members, and how to address the erosion of trade preferences. They did not address the 'core' issues in the NAMA negotiations: the tariff reduction formula that will determine the depth of tariff cuts made by industrialised countries and the larger developing country economies, and the 'flexibilities' for the latter to shield some products from tariff reduction.

Members' deep divisions on the core issues were underlined on 9 October when a large group of developing countries including Argentina, Brazil, India, and South Africa argued that they should not have to cut bound manufacturing tariff rates more deeply than industrialised nations.

The developing countries implicitly turned down the terms of a draft deal set out by Stephenson in July. That text proposed a 'Swiss formula' coefficient of between 8 and 9 for industrialised countries, and between 19 and 23 for developing countries. Since the coefficients become countries' future tariff ceiling, and serve as the basis for across-the-board tariff cuts, these figures would have required developing countries to slash their average bound tariff rates more heavily than rich countries (although cuts to the former's applied rates would be lower).

In a stronger-than-usual response, the US claimed that their demands risked condemning the round to failure (see BRIDGES Weekly, 10 October 2007). EU Trade Commissioner Peter Mandelson later called it an "unacceptable" attempt to "shift the goalposts further to the point where competitive, emerging economies will end up making next to no contribution to new trade flows."

There have subsequently been moves to smooth over the differences. Notably, Indian Prime Minister Manmohan Singh told US President George W. Bush earlier this week that India was comfortable with "most of the elements" of both the NAMA text and a related draft agriculture deal. "India can by and large live with what is on the table and has concerns only on agriculture," he said, according to the Indian government's press bureau. With regard to farm trade, Singh highlighted New Delhi's need for greater clarity about how it will be allowed to shield its vulnerable farmers from tariff cuts and import surges.

What officials have referred to as the 'exchange rate' between agriculture and NAMA is emerging as a critical issue in the determining the concessions that some countries will make. The developing countries that signed on to the response to Stephenson's text last week emphasised that the outcome of the agriculture negotiations would set the parameters for concessions on industrial tariffs. Some officials suggest that substantial enough farm subsidy reform by rich countries could see otherwise-recalcitrant developing countries agree to deeper industrial tariff cuts.

IBSA summit criticises "disproportionate" demands

Indian Prime Minster Singh, together with Brazilian President Luiz Inacio Lula da Silva and South African President Thabo Mbeki, on 17 October stressed their commitment to the Doha talks, but said that they should not be held hostage by "disproportionate" demands from industrialised nations. Following a summit among the three democracies in Pretoria, Lula said that the US and the EU were asking developing countries to make concessions on agriculture, manufacturing, and services trade that went well beyond what they themselves were willing to do, reports the Associated Press.

Part of the problem in the 'exchange rate' determination comes from the tension between bound ceiling limits for tariffs and subsidies versus the actual duties levied and payments doled out.

Bound rates have been the traditional goalposts in WTO negotiations. Thus, EU and US demands for developing countries to slash their industrial tariff caps enough to force down applied duty rates on a substantial proportion of goods have been controversial. Years of autonomous tariff liberalisation have left India and Brazil with applied tariffs on many products low enough that they would only be 'bitten into' by deep percentage cuts to their bound ceiling rates - percentage cuts that substantially exceed those that the EU and the US have offered.

Moreover, neither Brussels nor Washington has offered to cap trade-distorting farm subsidies at levels that go substantially beyond already-planned reform. The lowest figure for the potential cap on US trade-distorting farm subsidy payments in the draft agriculture text is $13 billion - some $2 billion above Washington's estimated spending last year.

'Discussion paper' creates stir

Earlier this week, a stir was created in the negotiations by press reports of a potential Indian 'discussion paper' calling for a coefficient of 5 for developing countries, and a sliding scale of between 24 to 33 for developing countries, with lower coefficients accompanied by the freedom to shield a higher share of manufactured imports from tariff cuts. The figures would require both rich and poor countries to roughly halve their respective bound average tariff rates of 5.9 percent and 28.5 percent, the paper estimated.

At the bottom end of the scale, the paper envisioned allowing developing countries to subject 15 percent of tariff lines (covering a similar proportion of import value) to only half the standard tariff reduction, or to exclude 7.5 percent of lines from cuts altogether (covering up to 7.5 percent of imports). These flexibilities would go further than the corresponding 10 and 5 percent figures outlined in Stephenson's paper. At the opposite end, developing countries completely foregoing the use of these flexibilities would be permitted to apply a coefficient of 33.

However, sources say that the paper was little more than a preliminary attempt to conceptualise a sliding scale, as well as a hierarchy under which developed countries would have to cut tariffs more than the 30 or so developing nations who would apply the formula, who would in turn reduce tariffs by a greater margin than small and vulnerable economies.

It is not clear whether the NAMA-11 group, of which India is a member (as are Brazil, Argentina, and South Africa), will come forward with any new proposals for the formula and flexibilities. The group has maintained that rich country farm reform will serve as the benchmark for industrial goods liberalisation.

Regional blocs intersecting with Doha

Meanwhile, consultations on preference erosion saw four members of the Central American Free Trade Agreement (CAFTA) ask for ten tariff lines, covering clothing and textiles, to be considered in any response. The value of their duty-free access to the US market stands to be eroded by multilateral liberalisation. Sources report that a number of countries, including Thailand, Pakistan, and CAFTA member Costa Rica, expressed opposition to the idea, arguing that the mandate was supposed to address one-way trade preferences, not reciprocal market access resulting from free trade agreements.

A new sticking point in the NAMA negotiations has emerged in the shape of the potential effect of Doha Round industrial tariff cuts on developing country customs unions. South Africa, for instance, shares a customs union with four neighbours not required to apply the tariff reduction formula. They would be disproportionately affected by a Doha-driven cut in the bloc's common external tariff.

Furthermore, members of a customs union must come up with a common list of products to shield from liberalisation, or else their common tariff would fall apart. In order to adequately address their various sensitive manufacturing sectors, Brazil and Argentina want to be permitted a longer list, although the Estado de Sao Paulo newspaper reports that their Mercosur partners Paraguay and Uruguay are not especially enthusiastic about the idea. The same newspaper quoted Brazilian WTO Ambassador Clodoaldo Hugueney as saying that if Brazil were forced to choose between the Doha Round and the stability of Mercosur, it would have to opt for the latter.

However, one negotiator in Geneva suggested that although the Southern African Customs Union might merit special consideration, Mercosur's requests have met a cool response, in part because it is not a notified customs union at the WTO (and thus its members would be expected to calculate goods liberalisation commitments based on their national tariff structures).

A trade diplomat reported that Stephenson's separate consultations on addressing non-tariff barriers had been "more constructive." A majority of delegations seemed to be coalescing around the notion of creating a 'horizontal mechanism' to mediate quickly bilateral disagreements over non-tariff barriers that affect trade in goods. Questions remain about the scope of the mechanism - for instance, whether it could also apply to agricultural trade - as well as its relationship to the WTO dispute settlement system.

Negotiators expect NAMA Chair Stephenson to issue a revised draft agreement text in conjunction with a revised agriculture text. New Zealand Ambassador Crawford Falconer, who chair the farm trade talks, is now expected to present Members with a revised potential deal in late November.

ICTSD reporting; "Trade talks through shadow over India, Brazil, South Africa meeting," 17 October 2007; "Developing powers mull softer stance in WTO talks," REUTERS, 17 October 2007; "Brasil diz na OMC que, pelo bloco Mercosul, abre mão de Doha," O ESTADO DE SAO PAULO, 9 October 2007.