SUMMARY

Negotiating modalities on non-agricultural market access (“NAMA” or industrial goods), is one of the critical areas of the Doha Development Agenda where WTO Members have not yet reached agreement (initial deadline of May 2003). On August 22, 2003, Members failed to endorse a draft text prepared by the Chair of the Negotiating Group on NAMA, Ambassador Pierre Louis Girard that intended to set out a framework for reaching a future agreement on modalities for market access talks.

The major differences among Members exist in the following areas:

• Nature of tariff cutting formula: Developed countries seek a higher level of ambition in tariff reduction, while developing countries propose relatively moderate cuts, especially in regard to their own tariffs. Developing countries would be subject to much deeper tariff reductions in this Round since developed countries’ tariffs are mostly at a low level.
• Sectoral tariff elimination/harmonization: Ambassador Girard’s draft text on modalities(1) proposes duty reduction on seven product groups of export interest to developing countries Developed countries seek participation in the sectoral initiatives by all Members. Developing countries however, argue that they should participate on a voluntary basis.

General Council Chairman Carlos Perez del Castillo has incorporated much of Girard’s draft text into the draft Ministerial Declaration(2), by reference in Annex B. Unlike in agriculture negotiations, Castillo did not attempt to offer many compromise positions. Castillo did, however incorporate several issues to reflect developing country concerns, including flexibility on sectoral negotiations. Members in Cancun will attempt adopt a “framework” for establishing the modalities in order to conclude modalities by early next year. Members will also try to take account of developing countries’ needs while avoiding the creation of a two-track WTO process and a double standard in the world trading system.

ANALYSIS

I. Background

As provided in the Doha Ministerial Declaration, WTO Members agreed in November 2001, to launch negotiations on industrial market access that would aim, by modalities to be agreed, for a reduction or elimination, as appropriate, of tariff peaks, high tariffs and tariff escalation as well as non-tariff barriers, particularly for products of export interest to developing country. Members also agreed upon the following provisions:

• Comprehensive product coverage without a priori exclusions; and
• Special and differential treatment for developing and least developed countries, including through “less than full reciprocity” in reduction commitments.

WTO members were originally scheduled to reach a deal on modalities(3) for the non-agriculture talks by May 31, 2003 but failed to do so because of diverging positions. Members then agreed to try to secure an agreement on modalities at the Cancun Ministerial. The Chair of the negotiating group on NAMA, Ambassador Pierre-Louis Girard, issued towards that end a first and a revised version (TN/MA/W/35/Rev.1) of the “Draft Elements of Modalities for Negotiations on Non-Agricultural Products” in May and August 2003, respectively. Girard’s draft texts presented a variety of tariff reduction formulas, seven sectors for expedited tariff elimination and other guidelines.

Members, however, were unable to reach agreement on the text in late August, and aim to do so at Cancun. Girard circulated on August 21 a draft framework for establishing modalities to be appended to the Cancun Ministerial text. The framework for establishing modalities that appears as “Annex B” in the Draft Cancun Ministerial Declaration issued on August 24, is closely based on Girard’s August 21 draft framework and proposes that Girard’s August 19 draft modalities text be used as a reference for future work. In Annex B, General Council Chairman Carlos Perez del Castillo did not attempt to offer many compromise positions, unlike his approach towards agriculture. He did however, factor the views of developing countries’ into several areas, including sectoral tariff initiatives.

At a General Council meeting on August 25-26, the framework was received with criticism, with Members still unable to settle their differences on certain key issues. Discussion of these contentious issues will now be taken up at Cancun.

II. Girard Draft Texts on Modalities: Criticized, But a Basis for Compromise

Ambassador Girard’s first draft text(4) on modalities issued in May proposed that Members adopt a single, non-linear formula for a line-by-line reduction in tariffs on industrial products. The formula uses a country’s average base rate and the base rate of the product in question so as to impose bigger cuts in tariffs for goods where the tariff is above the average rate and lower cuts in tariffs falling below the average. The EU and US however, criticized the formula, arguing that it would reward those countries (mainly developing) that have higher rates and could result in some countries being allowed to maintain bound rates above current applied rates.

In response, Girard suggested as “possible options”(5), adjustments to certain parameters of the formula. He suggested for instance, capping the average base rate, or parameter "ta", at a certain level to be determined by the participants. Additionally, the calculation of "ta" could be disassociated from the calculation of the base rates. For example, one could consider calculating "ta" using a 50/50 weighting of the average of all bound rates (after full implementation of current concessions) and the average of all applied rates. The base rates (“to”) used in the formula would remain unchanged.

Girard’s revised version of his modalities draft, entitled “Draft Elements of Modalities” (TN/MA/W/35/Rev.1), dated August 19, sets out additional flexibilities in the application of the proposed tariff-reduction formula but does not incorporate the “possible options” outlined in JOB(03)/155. The framework paper in Annex B excludes details on the tariff reduction formula as provided in Girard’s August 19 modalities text. Paragraph 2 of the framework paper, however proposes that Girard’s modalities text be used as a reference for future work.

III. Chairman Castillo’s Framework for Establishing Modalities (“Annex B”): Incorporates Girard’s Texts; Some Additional Compromises

The “Draft Cancun Ministerial Text” circulated on August 24 by Ambassador Carlos Perez del Castillo, the Chairman of the WTO’s General Council, contains the draft “framework” - known as “Annex B” for the negotiations on tariffs and non-tariff barriers, on the basis of which detailed modalities will be established. The framework for the non-agricultural talks was last considered at the General Council meeting on August 25-26 where disagreement among Members ensued due to differences particularly on the tariff reduction formula to be adopted and the extent of sectoral tariff elimination. Ambassador Castillo indicated that ambiguities in the framework were intentional, describing the text as having the “constructive ambiguity” of not prejudging issues on which Members have differences and leaving those issues open for negotiation.

Despite opposition from developing countries to the harmonization approach, which would impose bigger cuts on higher tariffs, the Annex B framework retains the language provided in Ambassador Girard’s August 19 draft, proposing the use of a non-linear formula applied on a line-by-line basis (See table). Developing countries generally have higher applied and bound tariffs on manufactured imports than their developed country counterparts.

The US and the EC on the other hand, consider Annex B as lacking in ambition and clarity with regard to a definition of the tariff-reduction formula. The EC and the US have expressed their disappointment at what they consider a low level of ambition reflected in the draft framework. The framework paper does not, for example, contain any figures outlining the level of ambition for tariff cuts. It also does not mention the “single co-efficient” as proposed in the US-EC-Canada proposal of August 11 (See table).

Members also stand divided on the proposal that reductions on tariffs not subject to WTO bindings should use as the starting point the applied rate multiplied by two. The proposed starting point appears within brackets, indicating that Members will decide upon the final figure at Cancun.

We provide below an overview of the key elements of the framework in Annex B:

A. Parameters for Negotiations: The Basics

The framework in Annex B instructs the Negotiating Group to continue its work on a non-linear formula applied on a line-by-line basis. Additionally, the Annex B framework lists the following provisions:

• Product coverage - Coverage shall be comprehensive without a priori exclusions;
• Base rates - Tariff reductions or elimination shall commence from the bound rates after full implementation of current concessions; however, for unbound tariff lines, the basis for commencing the tariff concessions shall be [two] times the MFN applied rate in the base year.
• Base year - The base year for MFN applied tariff rates shall be 2001 (applicable rates on 14 November; date of Doha Ministerial).
• Ad valorem basis - All non ad-valorem duties shall be converted to ad valorem equivalents on the basis of a methodology to be determined and bound in ad valorem terms.
• Reference period - The reference period for import data shall be 1999-2001.
• HS 96 and 2002 standards - Negotiations shall commence on the basis of the HS96 or HS2002 nomenclature, with the results of the negotiations to be finalized in the HS2002 nomenclature
• Autonomous liberalization - Credit shall be given for autonomous liberalization provided that the tariff rates were bound on an MFN basis in the WTO since the conclusion of the Uruguay Round.

B. Special and Differential Treatment: Avoiding a Double Standard

The Annex B framework paper proposes that the tariff reduction formula take fully into account the special needs and interests of developing and least-developed countries, including through “less than full reciprocity in reduction commitments” as stated in the Doha Declaration. The paper submitted jointly on August 11 by the EU, US and Canada proposes in contrast, that “less than full reciprocity” would be extended to developing countries through a system of credits, which would be accorded on the basis of certain stipulated eligibility criteria (See table). Neither the Annex B framework nor Ambassador Girard’s August 19 framework draft makes reference to any such eligibility criteria.

Several developing countries have opposed the idea that flexibility under this provision be made conditional on the system of credits proposed by the three Quad countries. The US-EU-Canada paper proposes that in addition to the system of credits, Members could agree to other elements of flexibility for developing countries such as longer staging of reduction commitments, less than formula cuts for a limited number of tariff lines not concentrated in any one sector but subject to a minimum required cut. Although the US-EC and Canada are receptive to allowing flexibility for developing countries, they insist that developing countries must commit to meaningful liberalization in this Round, so as not to create a two-track WTO process.(6)

C. Sectoral Tariff Reductions: Elimination, Harmonization or Both

The Annex B framework paper calls for discussions on a sectoral tariff component aiming at elimination or harmonization of tariffs, particularly on products of export interest to developing countries. It proposes participation by all Members. Notably, Ambassador Girard’s August 19 framework provides for the more ambitious objective of sectoral tariff “elimination” in contrast to the “elimination or harmonization” wording in the Annex B framework. The adjustment in language evident in Annex B resulted due to resistance by developing countries that have argued that sectoral tariff elimination should apply to them on a voluntary, rather than mandatory basis.

In a letter(7) to Ambassador Girard circulated on September 1, a group of 15 Latin American countries(8) expressed their preference for a voluntary sectoral approach, arguing that the proposed tariff elimination would imply going beyond the tariff reduction resulting from the application of the formula. Moreover, it would be difficult to find sectors that are of interest to all developing countries (e.g. beyond the initial seven categories identified). They also argued that negotiations on product coverage could also delay the talks beyond the time limits set in the negotiating mandate.

Annex B does not specify the products that would be subject to elimination or harmonization. However, Ambassador Girard’s August 19 draft modalities, proposes an initial seven product groups (i.e., electronics and electrical goods; fish and fish products; footwear; leather goods; motor vehicle parts and components; stones, gems and precious metals; and textiles and clothing) for zero duties. Although Girard’s product grouping does not find mention in Annex B, it is probable that these groupings are used as a reference for the future work of the Negotiating group.

Girard’s draft mentions that Members will need to determine the product coverage applicable to these sectors. The draft sets out the implementation of the sectoral tariff elimination in three phases of equal length. The basis of elimination will be from the bound rates after full implementation of current concessions or for unbound items, the MFN applied rates in 2001. The tariff reductions will occur in equal annual stages, as follows:

• Developed participants and other participants who so decide, shall eliminate tariffs at the end of the first phase;
• Other participants shall achieve tariff reduction and elimination as follows:

-- Tariff reduction to a proposed level of not more than 10 percent(9) at the end of the first phase;

-- Maintain this level during the second phase; and

-- Achieve elimination of tariffs at the end of the third phase.

Some other concerns have arisen with regard to the sectoral component. Neither the Annex nor Girard’s draft mentions environmental goods as one of the product grouping eligible for sectoral tariff elimination, as proposed in the US-EC-Canada paper. The EC has expressed its disappointment in this regard. In addition, Japan is seeking the removal of leather and fish and fish products from the sectoral elimination initiative.

It is noteworthy that Annex B does not propose that the sectoral elimination initiative be an “integral part” of a future modalities deal, as set forth in Girard’s August 19 framework as well as the US-EC-Canada paper. Developing countries (e.g., Brazil and Mexico, in particular) have resisted the inclusion of this language in the framework paper.

D. Binding Coverage: Extent of Binding To Be Decided

The Annex B framework exempts Members with a binding coverage of industrial tariff lines of less than [35] percent from making tariff reductions through the formula. Instead, these countries would be expected to bind [100] percent of industrial tariff lines at an average level that does not exceed the overall average of bound tariffs for all developing countries after full implementation of current concessions. Members will decide upon the bracketed figures at Cancun.

E. Other Provisions for Developing and Least Developed Countries: Long Implementation Periods and Unbound Tariffs

Annex B grants developing countries the following additional flexibilities:

• Longer implementation periods for tariff reductions; and
• Tariff lines will not be subject to binding or formula cuts, for up to [5] percent of tariff lines provided they do not exceed [5] percent of the total value of a Member’s imports.

Least-developed countries (LDCs), while exempt from the application of the formula and participation in the sectorial approach, will be expected to increase substantially their level of binding commitments. Many LDCs did not bind a substantial part of their tariff schedules during the Uruguay Round.

Developed countries are called upon to grant autonomous duty-free and quota-free access for industrial products originating from LDCs by a date to be decided upon.

F. Newly Acceded Members: Possible Extension of Implementation Periods

Annex B grants newly acceded Members such as China recourse to special provisions for tariff reductions so as to account for market access commitments undertaken as part of their accession and on-going implementation of staged tariff reductions. China was one of the demandeurs for more lenient commitments for new Members, given the significant commitments China and others had undertaken as part of their accession.

A group of Latin American countries however, have taken issue with what they consider as inequity in the treatment proposed for different developing countries(10). They point out that Girard’s draft allows certain newly acceded Members differentiated coefficients for applying the tariff reduction formula while providing certain developing countries with the possibility of protecting their sensitive sectors by keeping up to 5 percent of their tariff lines unbound. They also assert that developing countries that are not recent Members and have bound 100 per cent of their tariffs do not have recourse to similar flexibility.

G. Supplementary Modalities: Additional Approaches Considered

Annex B keeps open the possibility of supplementary modalities such as zero-for-zero sector elimination; sectorial harmonization; and the request & offer approach. Annex B also calls for participants to consider the elimination of low duties (pending agreement on the “core” modalities).

H. Non-Tariff Barriers: Intensive Work to Begin this Autumn

Under Annex B, non-tariff barriers (“NTBs”) - which have not received much attention in the Round this far, are set out as an integral part of the negotiations. Members are encouraged to submit notifications on NTBs by 31 October 2003 and to proceed with identification, examination, categorization and ultimately negotiations on reducing NTBs. Modalities for addressing NTBs could include the request/offer approach, horizontal or vertical approaches and should account for special and differential treatment for developing countries.

I. Deadlines: No Target Dates

Annex B is already a less ambitious effort to establish a “framework” for negotiations, and does not attempt to set a deadline for an agreement on the modalities (the last deadline was May 2003). Ambassador Girard’s August 19 framework text had suggested that WTO members fix January 31, 2004 as the next deadline for an agreement on the modalities. The deadline was removed due to resistance from a number of exporting countries such as Brazil, which opposed setting a deadline on the grounds that progress in the non-agricultural talks would depend on developments in the agriculture negotiations.

J. Other Issues to Consider: Preference Erosion, Capacity Building, Etc.

Annex B lists other issues for further consideration as including non-reciprocal preference erosion, high tariff revenue dependency, among others. The issue of preference erosion is of particular concern to developing countries who benefit greatly from developed countries’ preference programs such as GSP, the ACP and others. The framework also states that appropriate studies and capacity building measures shall be an integral part of the modalities.

OUTLOOK

At Cancun, Ministers will take up the most contentious elements of the Annex B framework as contained in the Draft Ministerial Declaration. These issues include, inter alia, whether to adopt the tariff reduction formulas set out in Girard’s draft texts, the level of participation in sectoral tariff reduction initiatives, among other issues. An agreement on the framework, and eventually on modalities sometime next year would be the pre-requisite to the next stage of substantive and binding negotiations. Progress in the NAMA negotiations at Cancun and beyond, as several Members have pointed out - will hinge upon developments in other areas of the Doha mandate and in particular, on the negotiations on agriculture.

Similar to agriculture negotiations, WTO Members are aiming for the less ambitious objective of concluding a “framework” in which to expedite agreement on negotiating modalities. Likewise, industrial market access negotiations are difficult, but more so for developing countries - many of which did not make substantial reduction commitments during the Uruguay Round. In fact, many have not bound most of their tariff schedules. At the Doha Ministerial, these countries insisted on inserting language on “less than full reciprocity”, which should translate to some degree of additional flexibility. Developed countries, however, fear that developing countries are unwilling to agree to ambitious liberalization and risk creating a two-track WTO process whereby developing countries would retain many of their barriers. They assert that such a double standard, ironically, would be to the detriment of developing countries first and foremost.

ANNEX: NEGOTIATIONS ON NON-AGRICULTRUAL MARKET ACCESS