Treatment Of Special Products: Implications Of The Chair’s May 2008 Draft Modalities Text

June 2008"ICTSD Programme on Agricultural Trade and Sustainable Development

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

By Riza Bernabe

Issue Paper No. 14

ii

Published by International Centre for Trade and Sustainable Development (ICTSD) International Envrionment House 2 7 Chemin de Balexert; 1219 Geneva, Switzerland Tel: +41 22 917 8492 E-mail: [email protected]

Fax: +41 22 917 8093 Internet: www.ictsd.org

Chief Executive: Programmes Director: Programme Team:

Ricardo Meléndez-Ortiz Christophe Bellmann Jonathan Hepburn, Marie Chamay and Ammad Bahalim

Acknowledgments This paper has been produced under the ICTSD Programme on Agricultural Trade and Sustainable Development as part of its project on Special Products and the Special Safeguard Mechanism. ICTSD wishes gratefully to acknowledge the work of Riza Bernabe, who conducted the original research and authored this paper as well as comments provided by developed and developing country negotiators and policy-makers, academic experts, staff of intergovernmental and non-governmental organisations and other participants in a series of ICTSD multistakeholder dialogues. The activities of this project have benefited from the generous support of the UK Department for International Development (DFID) and the Dutch Ministry of Foreign Affairs (DGIS).

For more information about ICTSD’s Programme on Agricultural Trade and Sustainable Development, visit our website at www.ictsd.org ICTSD welcomes feedback and comments on this document. These can be forwarded to jhepburn @ ictsd.ch Citation: Bernabe, Riza (2008). Treatment of special products: Implications of the Chair’s May 2008 draft modalities text, ICTSD Project on Special Products and a Special Safeguard Mechanism, Issue Paper No.14, International Centre for Trade and Sustainable Development, Geneva, Switzerland. Copyright ICTSD, 2008. Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-Noncommercial-No-Derivative Works 3.0 License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/us/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. The views expressed in this publication are those of the author(s) and do not necessarily reflect the views of ICTSD or the funding institutions. ISSN 1817-3551

iii

CONTENTS

1.

Introduction

2.

Tariff Structure of Possible Special Products across G-33 countries i). Bound Rates ii). Applied Rates iii). Tariff Overhang iv). Approximating the Number of Special Products Requiring Maximum Market Access Flexibility

3.

Effect of Proposed Modalities on Treatment of Special Products on Selected G-33 Countries i). Evaluation Based on the 16 Proxy Special Products

4.

Assessing the Adequacy of Bound Rates in Bridging the Gap Between Domestic and Import Prices

5.

Sustaining Agriculture: Some Case Studies i). Case Study 1: The Philippines ii). Case Study 2: Kenya iii). Case Study 3: Indonesia

6.

Conclusion

7.

Bibliography

8.

Annex 1

9.

Endnotes

ICTSD – June 2008

EXECUTIVE SUMMARY Recent studies and discourse on special products (SPs) have focused mainly on developing acceptable indicators for food security, livelihood security and rural development, which are the criteria for designating SPs. However, the coverage and selection of special products comprise only one aspect of negotiations on this trade facility. Equally important is the question of what treatment or market access flexibility should be accorded to commodities that are designated as SPs. Central to this discussion is the debate on whether or not SPs should be excluded from tariff reductions. The G-33 is the main proponent of the need to exempt special products from tariff cuts. It maintains that the delivery of this flexibility for developing countries is an essential step in ensuring that the outcome of the agricultural negotiations is faithful to the mandate of the Doha Development Agenda. On the other hand, countries such as the US, Malaysia and Thailand argue that special products should not be exempted from tariff reductions because all Members are expected to have market access commitments, as a contribution to the Doha Round. These countries propose that flexibilities for special products be limited to smaller tariff cuts and lesser tariff rate quota (TRQ) expansion compared to non-special products. To assess developing countries’ need for market access flexibility, this paper looks into the difference between applied and bound duties, or the tariff overhang, for 16 proxy special products which are the most commonly identified potential special products from the 19 country studies on SP and Special Safeguard Mechanism (SSM) conducted by ICTSD. These products are: rice, corn, wheat, beans, milk, dairy products, bovine meat, goat meat, sheep meat, pork, chicken, potatoes, tomatoes, onions, vegetable oils and sugar (ICTSD 2007). This paper focuses on commodities that have either a zero or a very minimal gap between applied and bound rates for each country. These have the most need for maximum market access flexibility, as any tariff reduction for these products will result in effective cuts on both bound and applied duties, as well as the narrowing down of the difference between bound and applied tariffs for commodities that are important to developing countries’ food security, livelihood security and rural development objectives. The paper examines the tariff structures for special products of 30 developing country Members of G-33, excluding least-developed countries (LDCs).1 An analysis of current tariff bindings and applied rates shows that nine have zero or negative overhangs, which means that any tariff cut on the bound rates of special products will result in a further narrowing down of the already limited difference between bound applied tariffs. These countries – Barbados, China, Cote d’Ivoire, Grenada, Guyana, Honduras, Jamaica Nicaragua, the Philippines and Venezuela – need to exempt some of their products from tariff reductions. The most common products that have zero or negative tariff overhangs across these countries are rice, chicken, corn and onions.2

1

2

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

Seventeen of the 30 countries covered by the study have tariff overhangs below 10 percentage points, while twenty have tariff overhangs below 20 percentage points. In approximating the number of special products that should be exempted from tariff reductions, one logical option is to identify countries and commodities that have no or minimal tariff overhangs (not exceeding 10 percentage points) as these will have effective tariff cuts once the proposed tariff reduction for special products is implemented. Based on this criterion, the percentage of SPs that should be excluded from tariff cuts varies widely with each country from 6.25 percent of total SPs in the cases of Grenada and Guyana, to as much as 100 percent in the cases of China and Cote d’Ivoire. Taking all country data together, the percentage of special products that needs maximum flexibility ranges from a minimum of zero to a maximum of 100 percent, at an average of 23.85 percent. Expanding the minimum tariff overhang to 20 percentage points will slightly increase this average to 26.34 percent. There is great disparity in the distribution of overhangs that the above averages fail to capture. These figures can be viewed as a minimum approximation of developing countries’ need to exempt SPs from tariff reductions, because the analysis is based on the use of the 16 proxy special products across G-33 countries. However, each country has its own SP list, which will more accurately reflect its need for market access flexibility. To have a more realistic evaluation of a country’s need for tariff cut exemption, this paper cross-referenced the results of the analysis above with information from the ICTSD country studies on SP and SSM.3 Data show that some countries’ need for maximum market access flexibility is indeed actually greater, and this becomes more apparent as the SP list becomes more accurate. For instance, for Honduras, the analysis based on the use of the 16 proxy special products showed that 12.5 percent of products need to be exempted from tariff reductions; however, once the analysis is done using the more specific SP list from the Honduras country study commissioned by ICTSD, this number increases to 57 percent, indicating that more than half of the country’s special products have minimal tariff overhang and as such can benefit greatly from a zero cut treatment. The same is true in the case of Barbados and the Philippines where the number of SPs that need to be exempted from tariff reductions increases significantly from 18 percent to 73.33 percent and from 31.25 percent to 81 percent respectively once the lists of special products from the individual ICTSD country studies are used in the evaluation. However, countries that generally have high tariff bindings and relatively lower applied import duties yielded the same results when analysed using the 16 proxy special products as well as the ICTSD SP list. Overall, the percentage of special products that need to be exempted from tariff cuts, on account of limited difference between bound and applied tariffs, increased from 23.85 percent to 34.90 percent. In terms of tariff lines, the percentage of special products requiring market access flexibility ranges from zero to 11 percent of total 6 digit HS (harmonised system) tariff lines, based on data from countries that identified their special products at this level. However, the wide difference in the tariff structures of developing countries makes these figures less meaningful.

ICTSD – June 2008

In terms of products, those most commonly identified as having minimal tariff overhangs across all 16 ICTSD studies are beef or bovine meat, pork, milk, dairy products, potatoes, poultry meat and sugar. Other possible potential SPs that have no or narrow gaps between bound and applied rates are: cabbages, carrots, onions, rice, sheep meat, beans, peas, coffee, garlic, lettuce and maize, among others. Across the 16 ICTSD country studies, there are 45 instances when potential special products have negative, zero or minimal tariff overhangs. This indicates that many developing countries may negotiate for maximum flexibility in the treatment of products that are important to their food security, livelihood security and rural development objectives. The paper also simulated the application of the proposed treatment for special products on commodities from the country specific SP listing from the 16 ICTSD country studies. The draft modalities on agriculture issued in May 2008 by Agriculture Committee Chairman Falconer outlined the possible treatment of special products. Paragraph 123 of the said document lays out the possible ranges, as described below: There shall be [a maximum entitlement of 20 per cent and a minimum entitlement4 of] 8 per cent5 of tariff lines available for self-designation as Special Products. Within this entitlement, [forty per cent of those6] [no] tariff lines shall be eligible for no cut. For the remaining tariff lines, there shall be an overall average cut of 15 per cent achieved with a minimum cut of 12 per cent and a maximum cut of 20 per cent on each tariff line. Guided by these draft modalities, this paper generated new bound rates, and overhangs of 8 percent, 12 percent, 15 percent, based on the proposed tariff cuts for SPs. In order to more accurately evaluate the implications of the proposed treatment on special products for developing countries, the paper used the more specific SP listing from the 16 country studies in determining the percentage of potential special products that would have minimal tariff overhangs every time import duties are reduced. The results of the simulations show that for some countries, the difference between bound and applied tariffs decreases as tariff cuts increase. For instance, once tariffs on special products are reduced by 8 percent, the number of SPs with tariff overhangs not exceeding 10 percent increases for Barbados and Ecuador but remains unchanged for the other countries. A 15 percent tariff cut on special products will increase the percentage of SPs with minimal tariff overhangs for the Philippines, from 81.81 percent to 90 percent, in addition to the two countries mentioned earlier. Similarly, more commodities stand to lose the difference between bound and applied tariffs across the 16 countries as tariffs on special products are reduced. In particular, more countries register minimal tariff overhang for milk, pork, poultry meat, sugar, coconut, tomatoes,

3

4

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

groundnut and vegetable oil, as import duties on these commodities are cut, based on the proposed modalities on the treatment of SPs. However, the difference between bound and applied tariff rates only provides one dimension in assessing developing countries’ need for maximum market access flexibility. Another assessment dimension is the capability of current tariff bindings to cover the gap between the domestic price and import price of special products. This is an important consideration because for tariffs to be effective policy tools they should afford governments the flexibility to protect producers from displacement by giving the state the capacity and option to equalise domestic prices with import prices through tariff bindings. As can be expected, countries with low tariff bindings are more likely to have inadequate bound duties, and as such less capacity to address price gaps for special products to help them protect their small agricultural producers from importation. Examples of these countries are China, Fiji, Ecuador and the Philippines. Fiji and the Philippines have fairly linear tariff structures, with import duty bindings pegged mostly at 40 percent. On the other hand, China and Ecuador have more divergent tariff profiles as bound tariffs vary from one special product to another. For Ecuador, for instance, tariff bindings on special products range from 20 percent to 70 percent, while for China bound rates vary, from 3 percent to 65 percent. Still, what these countries have in common is the fact that in many instances, their tariff bindings are not sufficient to bridge the gap between domestic and import prices for their potential special products. For these countries, any tariff cut on special products will further whittle away their capability and option to bridge the gap in domestic and import price, and consequently their means to protect their small farmers and agricultural producers from liberalisation. The treatment and selection of special products is a sensitive subject because of the divergent conditions and needs of developing countries. Some countries have negligible tariff bindings while others have high tariff bindings. The results of this study demonstrate that countries with high tariff bindings may rely too heavily on a few commodities to achieve their food security, livelihood and rural development objectives while others with low tariff bindings may face broad economic consequences that impact those objectives. The case studies conducted highlight the need for some countries to be able to exempt certain products from any cuts. An effective special product designation is an important negotiating objective for many developing countries and this may be contingent upon exemption from cuts for some products.

ICTSD – June 2008

5

1. INTRODUCTION Discussions and negotiations on special products (SPs)

hopes to contribute to ongoing discussion on the matter

have largely centred on defining the number of

by examining available data and evaluating if there is

commodities that will be declared as SP and the process

indeed a need for developing countries to exempt

to identify them. Recent studies and debate have

special products from tariff reductions. At the same

focused mainly on developing acceptable indicators for

time, the paper seeks to assess the implications of this

food security, livelihood security and rural development,

market access flexibility on the food security, livelihood

which are the criteria for designating SPs. However, the

security and rural development objectives of developing

coverage and selection of special products comprise only

countries. Finally, the study seeks to consolidate

one aspect of the negotiations on this trade facility.

available information on the extent of developing

Equally important is the question of what treatment or

countries’

market access flexibility should be accorded to special

approximating the number of special products that

products.

would have the most need for this type of treatment.

The

issue

of

treatment

is

particularly

need

for

tariff

cut

exemption

by

significant, as it determines the effectiveness of SPs as a means to help developing countries safeguard commodity

The paper is divided into four parts. Part I looks at the

sectors that are important to their food security,

tariff structure of potential special products across G-33

livelihood security and rural development objectives.

countries, with particular focus on tariff overhangs, or the difference in the applied and bound rates of these

In its first Ministerial Communiqué on Special Products

commodities. These will provide data on the possible

and Special Safeguard Mechanism (SSM) issued in 2005,

number of products that will have effective tariff cuts

the G-33 proposed that all SPs be exempted from tariff

across a broad range of developing countries if SPs are

reductions and tariff rate quota (TRQ) expansion (G-33

not excluded from tariff reductions. It will also offer

2005). The coalition argues that the flexibilities that it is

information on the percentage of special products that

seeking for developing countries through SP and SSM will

have the most need for tariff cut exemption.

help ensure that the outcome of the negotiations is faithful to the development mandate of the Doha

The results of this analysis are cross-referenced with an

Development Agenda. Since then, the coalition has

evaluation of tariff overhangs of special products from

moderated its position on the treatment of special

each of the 16 ICTSD country studies.7 These studies

products, bringing down its proposal to exclude 100

include a more accurate listing of possible special

percent of cuts on special products from tariff reductions

products per country. Hence, they provide more definite

to 50 percent, and then later to 40 percent of SPs. The

information on developing countries’ need for market

remaining SPs should be subjected to minimal cuts of 5

access flexibility, albeit across a smaller sample group.

to 10 percent. Par

II

simulates how

developing

countries’

tariff

On the other hand, other countries including the US,

structure will be affected by the treatment for SPs

Malaysia and Thailand argue that special products should

proposed

not be exempted from tariff reductions (Malaysia 2006;

negotiations,

Thailand 2006; US 2006). The US, in particular, asserts

modalities paper. This simulation also explores how the

that SPs should also be subjected to TRQ expansion.

difference between bound and applied tariffs could be

These countries maintain that the flexibility for special

affected.

by

the

chair

Ambassador

of

the

WTO

Falconer,

in

agriculture his

draft

products should be in the form of smaller tariff cuts and lesser TRQ expansion, since every Member is expected to

Part III looks at other considerations that influence

make market access commitments, as contributions to

developing countries’ need to exempt special products

the Doha Round.

from tariff reductions. It assesses the capability of current tariff bindings to safeguard special products from

The question of whether or not special products should

potential displacement by imports. To do this, the paper

be exempted from tariff reductions lies at the crux of

examines tariff bindings to evaluate if these are

the debate on the treatment of special products. A

sufficient to cover the gap between domestic and import

corollary question relates to the number of special

prices.

products that must be given this flexibility. This paper

6

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

Finally, Part IV presents case studies from Indonesia,

provides data on the possible effect of exempting special

Kenya and the Philippines. These studies provide a

products on these countries’ food security, livelihood

better understanding of the different reasons that

security and rural development objectives.

motivate countries to seek maximum market access flexibility for special products. At the same time, it

2. TARIFF STRUCTURE OF POSSIBLE SPECIAL PRODUCTS ACROSS G-33 COUNTRIES This paper examined the tariff structures of possible

proxy products with the analysis using the more specific

special products for 30 developing country Members of

listing of possible special products from each of the

G-33.8

Least-developed

ICTSD country studies.

Benin,

Haiti,

country

Madagascar,

Members,

Mozambique,

namely

Tanzania,

Uganda, Zambia, Haiti and the Democratic Republic of

(i) Bound Rates

the Congo were not included in the analysis since these countries are not mandated to undertake tariff cuts as

Except for a few countries, many of the G-33 Members

part of the special and differential treatment granted to

covered by the study have generally linear tariff

LDCs.

Other Members were also excluded from the

structures. This means that each country has uniform or

paper on account of limited data on tariffs. The tariff

very close tariff binding levels for the majority, if not

data used in this study were sourced from the schedule

all, of their agricultural commodities. This is also

of concessions and notifications submitted by each

evident in their respective final bound rates for the 16

Member country to the WTO Secretariat.

proxy special products identified above.

In approximating the list of possible special products

However, developing countries are widely divergent

per country, the paper used 16 proxy commodities,

when it comes to tariff binding levels. Some have very

which emerged as the most commonly identified

low bound rates even as others enjoy high import duty

potential special products from the country studies on

bindings. Bound import duties for proxy special products

SP and SSM conducted by ICTSD. These products are:

range from 15 percent to as much as 300 percent for

rice, corn, wheat, beans, milk, dairy products, bovine

the countries covered by the study.

meat, goat meat, sheep meat, pork, chicken, potatoes, tomatoes, onions, vegetable oils and sugar (ICTSD

Countries can be classified into three groups, based on

2007).

their level of tariff bindings for the 16 proxy special products. The first group is composed of those with low

As proxy special products these 16 commodities are not

bound duties, where tariff bindings are not more than

expected to provide an accurate representation of the

40 percent. Of the 30 countries covered by the study,

actual need for market access flexibility of G-33

eight belong to this category. These are China, Cote

Member countries, as they may not exactly reflect the

d’Ivoire,

range of products that are important to each country’s

Mongolia, Peru and the Philippines, among others. Cote

food security, livelihood security and rural development

d’Ivoire and Mongolia have the lowest tariff bindings,

objectives. The paper addresses this limitation by cross-

ranging from 6 to 15 percent for most of the 16 proxy

referencing the results of the analysis based on the 16

special products.

Cuba,

Dominican

Republic,

Honduras,

ICTSD – June 2008

The second group covers countries with tariff rates ranging from 41 to 80 percent. The Republic of Korea,

Table 1 Grouping of Countries based on Average Bound Tariff

Nicaragua, Venezuela and Indonesia, which have bound tariffs ranging from 60 to 80 percent for the proxy special products, qualify under this category. The third group includes countries that have high bound rates for all the 16 proxy special products. This includes

High > 80% •Antigua and Barbuda •Barbados •Belize •Ghana •Grenada •Guyana •India •Jamaica, •Kenya •Mauritius •Nigeria •Pakistan •St. Kitts and Nevis •St. Lucia •Trinidad and Tobago •Turkey •Zimbabwe

Barbados, Belize, India, Mauritius and Kenya, to name a few. The highest tariff bound rates are observed in India, which charted as much as 300 percent bound tariffs for vegetable oils. From these groupings, one can identify countries that do not have a homogenous tariff structure in the sense that there are wide differences in the tariff binding levels for the 16 proxy special products. These countries include China, Indonesia, Venezuela, the Republic of

Medium < 80% •Indonesia •Nicaragua •Republic of Korea •Sri Lanka •Venezuela

Low < 40% •China, •Cote d’Ivoire, •Cuba •Dominican Republic •Honduras •Mongolia •Peru •Philippines

Korea and Turkey. In Indonesia for instance, bound import duties vary from 40 percent for onion and sugar to as much as 160 percent for rice and 270 percent for selected milk products. In Venezuela, tariffs range from 25 percent for various meat items to 122 percent for cereals such as rice and corn, while in the Republic of Korea, bound rates are from 18 percent for chicken to 328 percent for corn. Table 1 below lists countries under the three categories.

goat meat and sheep meat at 225 percent for Turkey,

The huge differences in the tariff binding levels across developing

countries

warrant

broader

and

more

encompassing flexibilities particularly in the treatment of special products. For instance, the application of minimum tariff cuts may be acceptable as a flexibility for countries with high tariff rates but may not be sufficient for those whose tariff bindings are already very low. This will become more evident as we look at data on applied tariffs and tariff overhangs. Since most of the countries covered by the study have rather linear tariff structures, data on bound rates per product are not as informative since there are very little differences in the tariff bindings of all 16 proxy special products in each country. Still, for countries that showed variations in bound duties, the highest rates were recorded for corn at 328 percent for the Republic of Korea, vegetable oils at 300 percent for India and 170 percent for St. Vincent and Grenadines;

tomatoes at 223 percent, onions at 216 percent and chicken at 184 percent for Barbados. The lowest bound tariff for special product is for chicken at 10 percent for China.

(ii) Applied Rates A country’s decision to set applied rates at a certain level is determined by a host of factors. These include considerations such as the need to (1) influence domestic

supply

and

availability

of

a

particular

commodity, (2) meet government domestic price targets and (3) respond to political pressure or domestic lobby, among others. For instance, governments reduce applied

tariffs

to

encourage

importation

during

production shortfalls in order to augment domestic supply and meet demand. Similarly, it may reduce applied rates to facilitate imports and exert a downward pressure on the domestic price of a particular commodity.

7

8

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

An analysis of the applied tariff structures of the countries in this study shows that many have low

Table 2 Grouping of Countries based on Average Applied Tariff

applied tariffs for all 16 proxy special products. Twentysix or more than three quarters of the 30 countries have applied tariffs ranging from zero to 40 percent. Among these, Mongolia has the lowest average applied rate at 5 percent, followed by Indonesia, Cote d’Ivoire and Cuba, which have applied rates from 5 to 20 percent. Guyana, Sri Lanka and Zimbabwe have import duties varying mostly from 20 to 40 percent. The number of G-33 Members that exhibit greater variance or differences in applied tariffs is greater than those that show variance in bound rates. This indicates that countries actively manage and rationalise tariff settings given their available tariff bindings. For instance, Barbados, which generally has high bound levels for SPs, applies tariffs from 30 percent for potatoes to 212 percent for tomatoes. China, which has low tariff bindings, has import duties ranging from 10 percent for chicken to 65 percent for rice. Many countries adopt low applied tariff rates even though their bound duties are higher. It is clear that countries

set

actual

tariffs

based

on

domestic

sensitivities and not on the level of tariff bindings. An evaluation of tariff overhangs in the next section will further illustrate this point. Several countries (Barbados, Cote d’Ivoire, Honduras and Turkey), and particularly those with low tariff bindings, reported applying import duties that are higher than their bound rates. For these countries,

Low < 40% •Antigua and Barbuda •Belize •China •Cote d’Ivoire •Cuba •Dominican Republic •Ghana •Grenada •Guyana •Honduras •India •Indonesia •Jamaica •Kenya •Mauritius •Mongolia •Nicaragua •Pakistan •Peru •Philippines •St. Kitts and Nevis •St. Lucia •Trinidad and Tobago •Sri Lanka •Venezuela •Zimbabwe

Medium < 80% •Barbados •Nigeria •Republic of Korea

High > 80% •Turkey

current bound tariff levels are arguably not sufficient to address the actual trade protection needs for the 16 proxy special products.

(iii) Tariff Overhang Due to their limited resources, some countries use tariff

overhang. This is evident in countries like Antigua and

overhangs as a policy instrument to achieve domestic

Barbuda, Nigeria, Pakistan, St. Kitts and Nevis, St. Lucia

agricultural objectives. The diversity in the tariff

and Zimbabwe which have an average tariff overhang as

structure of G-33 Members is clearly reflected in the

high as 96.77 percentage points.

way the extent of tariff overhangs varies across countries. Those with low tariff bindings generally have

In Annex 1, Table 3 classifies countries according to the

low overhangs. This includes China, Cote d’Ivoire,

average difference in their tariff bindings and actual

Dominican

tariff rates.

Republic,

Honduras,

Mongolia,

the

Philippines and the Republic of Korea. These countries have an average tariff overhang of 10.08 percentage

To understand developing countries’ need for market

points. At the other end of the spectrum, countries with

access flexibility, it is important to look at the specific

high bound duties are more likely to have greater tariff

difference between applied and bound duties for each commodity in each country. Additionally, in order to

ICTSD – June 2008

160

140

140

120

120

100

100

80

80

60

60

40

40

20

20

0 -20 Cote d’Ivoire China Mongolia Republic of Korea Honduras Philippines Dominican Republic Peru Sri Lanka Cuba Turkey Nicaragua Venezuela Indonesia Barbados Jamaica Guyana Belize Grenada Ghana Kenya Trinidad and Tobago India Mauritius Pakistan Antigua and Barbuda Nigeria St. Kitts and Nevis Zimbabwe St. Lucia

0

Average Tariff Overhang (Percent)

Average Tariffs (Percent)

Figure 1: Average final bound duties, applied tariffs and tariff overhangs for the 16 proxy special products in selected G-33 Countries

Country

Average Final Bound Tariffs

Average Applied Tariffs

Average Tariff Overhang

evaluate if developing countries have a valid need to

overhangs. Some countries have applied rates that are

exempt some special products from tariff reductions,

higher than their bound rates. This indicates that their

the paper focused on countries and commodity groups

current tariff bindings may be insufficient to meet their

that have zero or very minimal differences in applied

tariff protection needs. This supports calls, raised

and bound rates. These have the most need for

mostly by farmers groups and civil society organisations,

maximum market access flexibility, as they are the ones

regarding the need to allow some special products to

that will have to undertake effective tariff cuts if

have tariffs that go beyond the Uruguay Round (UR)

special

bound rates. This flexibility will be particularly useful

products

are

not

exempted

from

tariff

reductions.

for countries that already have negative overhangs or

Data show that nine of the 30 countries covered by the

overhangs in relation to a country’s binding levels. This

study have at least one special product that has zero or

often leads to the conclusion that those countries

negative overhang and, as such, can potentially benefit

require minimum market access flexibility because most

very low tariff bindings. Some analysts evaluate tariff

from being exempted from assuming market access

tariff overhangs are small in relation to bound duties.

concessions. These are Barbados, China, Cote d’Ivoire,

An average applied rate, that is, for example, 50

Grenada, Guyana, Honduras, Jamaica, Nicaragua and

percent of average bound tariffs, will be very different

Venezuela. The most common products that have zero

for a country with tariff binding levels of 110 percent

or negative tariff overhangs across these countries are

compared to a country with bound duties of 20 percent.

rice, chicken, tomatoes and onions. Table 4 lists

For instance,

countries and products that have zero or negative

9

10

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

applied tariffs as a percentage of bound rates do not go

agreements. The preservation of policy space, or the

beyond 50 percent for Cuba, Dominican Republic and

maintenance

Mongolia, among others. However, these countries’

important negotiating objective for many developing

of

this

flexibility,

has

become

an

average tariff bindings range from 16 percent to 40

countries in the agricultural trade talks in the WTO. The

percent, which means that the difference between

proposal to exempt special products from tariff

applied and bound tariffs is already very limited and

reductions represents a proposition to maintain such

stands to be further narrowed down by proposed

space.

modalities on tariff reductions for SPs. For these countries,

market

access

tremendous impact

flexibility

can

on their capacity to

have sustain

As mentioned earlier, many developing countries facing resource

constraints

rely

primarily

on

tariffs

to

commodity sectors that are crucial to their food

safeguard the economic viability of their agricultural

security, livelihood security and rural development

producers, many of which are poor and have very little

objectives.

access to competitiveness-enhancing measures and

This

will

become

more

evident

in

subsequent sections when we look at case studies of

support services.

other countries, and when we evaluate the capacity of current tariff bindings to breach the difference between

The need for tariffs to safeguard small farmers and

domestic and import prices of some SPs for some

producers is also significant in view of the continued use

developing countries.

of subsidies that affect international trade. Trade

Figure 1 graphs the average final bound duties, applied

subsidies dampen commodity prices, although this is

tariffs and tariff overhangs for the 16 proxy products

only one determinant when it comes to import surges

across selected G-33 Members.

(FAO 2006). Removing subsidies is expected to result in

distorting domestic support measures as well as export

movements in world prices, underscoring the link In order to evaluate developing countries’ need to

between subsidies and world prices. A study shows that

exempt some products from tariff reductions, it is

world

important first to elaborate on the concept of policy

particularly

space and how it relates to developing countries’

anticipated to change by anywhere from 2.54 percent to

requirement for market access flexibility within the

4.86 percent for rice, 5.10 percent to 6.27 percent for

scope of international trade agreements.

The United

wheat, 11.30 percent to 16.84 percent for cotton and

Development

15.78 percent to 19.06 percent for sugar, under various

Nations

Conference

on

Trade

and

(UNCTAD) defines policy space in the context of

prices

of

rice,

major wheat,

agricultural cotton

commodities,

and

sugar,

are

subsidy elimination scenarios (Mittal 2007).

developing countries’ need to adopt domestic policies, including on trade, in pursuing development objectives,

At the same time, this paper recognises the need for a

but which are often constrained by international trade

minimum buffer between applied and bound rates to

accords (UNCTAD 2004). This definition indicates the

provide for fluctuations in commodity prices. The paper

tension between national policy in pursuit of specific

used ten percentage points and 20 percentage points as

development

possible minimum benchmarks for an acceptable buffer

goals

and

international

policy

9

commitments.

or tariff overhang for the 16 proxy special products. This figure is indeed a minimum given that commodity

Discussion on this tension is no doubt an important and

prices in real terms have fluctuated tremendously

valid concern for many developing countries. However,

throughout the last few decades. Commodities such as

this paper refers to a much simpler notion of policy

beef, sorghum, maize, sugar, rice and wheat have

space, one that focuses on flexibilities available to

exhibited

developing countries to respond to domestic needs

movements, with price drops ranging from -3 percent to

within the ambit of current trade agreements. Using

-47 percent, to price increases varying from 3.9 percent

this definition in terms of tariffs, policy space refers to

to 121.59 percent. However, price fluctuations in

the gap or water between bound and applied rates, as

recent years have not been dramatic, though still

this provides countries with the room to move import

significant to warrant the maintenance of a minimum

duties to respond to domestic sensitivities, without

tariff overhang. Figures 2 to 7 chart price changes in the

going beyond what is already provided in existing

commodities mentioned above.

substantial

negative

10

and

positive

price

ICTSD – June 2008

Moreover, an evaluation of import prices of possible

countries. Figures 8 to 11 graph the price movements of

special

selected potential SPs, from the specific SP list in the

products

for

countries

like

China,

the

Philippines, Ecuador and Fiji demonstrates the extent to

ICTSD study for each of these countries.

which import prices vary over time for these developing

Import Price (US$/MT)

Figure 8: Onions, a possible Special Product for Ecuador

1,000.00 800.00 600.00 400.00 200.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Import Price (US$/MT)

Figure 9: Potatoes, a possible Special Product for Fiji 500.00 400.00 300.00 200.00 100.00 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Import Price (US$/MT)

Figure 10: Chicken, a possible Special Product for the Philippines 8,000.00 6,000.00 4,000.00 2,000.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Import Price (US$/MT)

Figure 11: Soybean, a possible Special Product for China 400.00 350.00 300.00 250.00 200.00 150.00 2002

2003

2004

2005

11

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

(iv)

Approximating

the

Number

of

Special

Products

Requiring

Maximum Market Access Flexibility In approximating the number of special products that

special products from tariff reductions. Expanding the

should may seek exemption from be exempted from

definition of minimum tariff overhang to cover countries

tariff reductions, one logical option is to identify

with tariff overhangs under twenty percentage points

countries and commodities which have no or minimal

increases the number of countries that have a need for

tariff overhangs, as these will have effective tariff cuts

maximum market access flexibility for special products.

once the proposed treatment for special products is

Of the countries covered by the study, twenty have

implemented. The paper looked at the tariff overhang

special products that have tariff overhangs under 20

of the 16 proxy SPs across 30 countries, with the aim to

percentage points.

determine the minimum, maximum and average number of SPs that should be exempted those countries may be

The percentage of SPs that should be excluded from

considering exempting from tariff cuts, as a percentage

having tariffs cuts vis-à-vis total SPs varies widely with

of total SPs. Products with tariff overhangs that are

each country. At 10 and 20 percentage points, it ranges

below 10 and 20 percentage points respectively were

from 6.25 percent in the case of Grenada and Guyana to

included in the list of commodities that should be

as much as 100 percent in the case of China and Cote

excluded from having tariff cuts, primarily because

d’Ivoire.

their

Taking

all

country

data

together,

the

difference

percentage of special products that need maximum

between applied and bound tariffs is already very

flexibility ranges from a minimum of zero to a maximum

limited.

of 100 percent. The percentage of SPs that require

current

policy

spacethe

current

maximum market access flexibility, if acceptable Figure 12 below shows the results of this line of

minimal tariff overhangs are set at 10 and 20

analysis.

percentage points, are 23.85 and 26.34 percent respectively. Clearly, the wide differences in the extent

Of the G-33 Members covered by the study, only

of overhangs across all 30 countries make this average

thirteen countries do not have commodities with tariff

almost irrelevant.

overhangs above 10 percentage points. This indicates that seventeen countries, or the majority of the sample

The analysis above can be viewed as a minimum

group, have a definite need to exempt some of their

approximation of a possible list of products developing

Figure 12: Special Products with Minimal Tariff Overhang 120 100 80 60 Percent

12

40 20 0

Country With tariff overhang of less than 10%

With tariff overhang of less than 20%

ICTSD – June 2008

120

Figure 13: Percent of Special Products with Tariff Overhang of Not More than 10 Percentage Points Based on Two Sets of Products

100 80 Percent

60 40 20 0

Based on 16 Proxy Special Products Based on SP List from ICTSD Country Studies

Percent

Figure 14: Percentage of Special Products with Minimal Tartiff Overhangs 100 90 80 70 60 50 40 30 20 10 0

Tariff Overhang of not more than 10 percentage points Tariff Overhang of not more than 20 percentage points

countries may need to exempt from tariff reductions,

special products. The first set is based on the 16 proxy

based on the 16 proxy special products. Each country

special products used in the analysis above. The second

covered by the study will have its own SP list, which will

set uses the country specific SP listing from the 16

more accurately reflect its need for market access

country studies on SP and SSM commissioned by ICTSD.

flexibility. For instance, one possible consideration for prioritising commodities in the SP list is the limited

Figure 13 indicates that most countries’ need for

water between bound and applied rates. In this case,

maximum market access flexibility is indeed actually

the percentage of special products that needs to be

greater, and this becomes more apparent as the SP list

exempted from tariff reductions, on account of SPs

becomes more accurate. For instance, for Honduras, the

having narrow tariff overhang, vis-à-vis total SPs,

analysis based on the use of the 16 proxy special

increases.

products shows that the percentage of products that may need to be exempted from tariff reductions is only

Thus, to have a more realistic evaluation of countries’

12.50 percent. However, once the analysis is done using

need for tariff cut exemption, this paper cross-

the more specific SP list from the Honduras country

referenced the results of the analysis above with

study commissioned by ICTSD, this number substantially

information from the ICTSD country studies on SP and

escalates to 57 percent, indicating that more than half

SSM. Figure 13 compares the percentage of products

of the country’s potential special products have minimal

with minimal tariffs overhangs based on two sets of

tariff overhang, and as such can benefit greatly from a

13

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

zero cut treatment. The same is true in the case of

In Figure 14 below, countries such as Fiji, Ecuador, Peru

Barbados and the Philippines, where the number of SPs

and the Philippines will have a higher percentage of

that need to may be exempted from tariff reductions

special products that can benefit from a tariff cut

increases significantly from 18 percent to 73.33

exemption if the acceptable minimum tariff overhang is

percent, and from 31.25 percent to 81 percent,

set at 20 percentage points.

respectively, once the country-specific ICTSD list of special products is used in the evaluation. Figure 13 also

In terms of products, those most commonly identified as

shows that nine countries, or close to two thirds of the

having minimal tariff overhangs across all 16 ICTSD

16 countries covered by the ICTSD study, have products

studies are beef or bovine meat, pork, milk, dairy

that may need to be exempted from tariff reductions.

products, potatoes, poultry meat and sugar. Other possible potential SPs that have no, or narrow, gaps

However, countries that generally have high tariff

between bound and applied rates are: cabbages,

bindings and relatively lower applied import duties

carrots, onions, rice, sheep meat, beans and peas,

yielded the same results when analysed using the 16

coffee, garlic, lettuce, maize among others. Figure 15

proxy special products as well as the ICTSD SP list.

below lists potential special products from across the 16

Overall, the percentage of special products to total

country studies that registered negative, zero or

special products, that may need to be exempted from

minimal tariff overhang, given existing bound and

tariff cuts on account of the limited difference between

applied rates.

applied and bound tariffs increased from 23.85 percent to 34.90 percent. However, as pointed out earlier, the

In sum, across the 16 ICTSD country studies, there are

wide difference in the tariff structures of developing

45 instances when potential special products have

countries makes this average almost irrelevant.

negative, zero or minimal tariff overhangs. This indicates that many developing countries may have a

Setting the minimum tariff overhang at 20 percentage

need for maximum flexibility in the treatment of

points will qualify a greater percentage of special

products that are important to their food security,

products requiring maximum market access flexibility.

livelihood security and rural development objectives.

Figure 15: Minimal Tariff Overhang for possible Special Products 5

4 Number of Countries

14

3

2

1

0

ICTSD – June 2008

15

3. EFFECT OF PROPOSED MODALITIES ON TREATMENT OF SPECIAL PRODUCTS ON SELECTED G-33 COUNTRIES (i) Evaluation Based on the 16 Proxy Special Products

are reduced. The paper simulated zero percent, 8 percent, 12 percent, and 15 percent, based on the above-mentioned proposed modalities on the treatment

The draft modalities on agriculture issued in May 2008

of special products. Figure 15 shows the results of the

by the chair of the agriculture negotiations, Ambassador

simulations.

Falconer,

outlines

possible

treatment

of

special

products. Paragraph 118 of the said document provides the following:

tariff overhang progresses as tariff cuts increase.

As

indicated earlier, nine of the 16 countries covered by

Developing country Members shall be entitled to self-designate

Special

Products

guided

by

indicators11 based on the criteria of food security,

Figure 16 shows that the extent of a country’s loss of

livelihood

security

and

rural

development. There shall be [a maximum

the ICTSD studies have products that have zero or narrow tariff overhangs and as such are in a position to benefit from exemption from tariff reductions. These are Barbados, Cote d’Ivoire, China, Grenada, Guyana, Honduras,

Jamaica,

Nicaragua,

Peru

and

the

Philippines.

entitlement of 20 per cent and a minimum entitlement12 of] 8 per cent13 of tariff lines

Once tariffs on special products are reduced by 8

available

Special

percent, the number of SPs with tariff overhangs les

Products. Within this entitlement, [forty per

than10 percent increases for Barbados and Ecuador but

for

self-designation

as

14

cent of those ] [no] tariff lines shall be eligible for no cut. For the remaining tariff lines, there shall be an overall average cut of 15 per cent achieved with a minimum cut of 12 per cent and

remains unchanged for the other countries. A 15 percent tariff cut on special products will increase the percentage of SPs with minimal tariff overhangs for the Philippines from 81.81 percent to 90 percent, in addition to the two countries mentioned earlier.

a maximum cut of 20 per cent on each tariff line.

The products for which more countries are folded into the list of those having zero or minimal tariff overhangs

The brackets refer to specific areas where more focused negotiations are required. The text identified the range of tariff cuts that may be applied on special products. It also raised the possibility of exempting some products from tariff reductions. However, the provision for this type of treatment is enclosed in a bracket, indicating that the principle of exempting special products from tariff reductions is, in itself, still subject to debate and discussion. In order to accurately evaluate the implications of the proposed treatment on special products for developing countries, the paper used the more specific SP listing from the 16 country studies in determining the percentage of potential special products that would have minimal tariff overhangs every time import duties

also increases with each tariff cut. Figure 17 lists the number of countries that register zero or a narrow gap between bound and applied rates for each commodity, as tariff cuts are applied. The number of countries with minimal tariff overhangs increases for milk, pork, poultry meat, sugar, coconut, tomatoes, groundnut and vegetable oil, as tariff cuts are applied on special products. Figure 17 indicates that the instances in which special products are left with minimal policy space increase as tariff cuts are applied on these commodities. A further cut is expected to result in a reduction of tariff overhang for many products that are important to developing countries’ food security, livelihood security and

rural

development

objectives.

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

Figure 16: Percentage of Special Products with Minimum Tariff Overhang Affected by Tariff Cuts 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

0%

8%

12%

15%

Number of Countries

Figure 17: Countries that Registered Minimal Tariff Overhangs for Special Products for Each Tariff Cut 5 4 3 2 1 0

0%

2000

8%

12%

15%

Figure 18: Comparison of Domestic and Import Prices of Possible Special Products in the Philiphines, 2004

1800 1600 (in US $/tonne)

16

1400 1200 1000 800 600 400 200 0

Import price with bound tariffs

Domestic Prices

ICTSD – June 2008

Figure 19: Comparison of Domestic and Import Prices of Possible Special Products for Ecuador, 2004 2500 2000 (in US$/tonne)

1500 1000 500 0

Import Price with Bound Tariff

Domestic price

Figure 20: Comparison of Domestic and Import Prices of Possible Special Products for Fiji, 2004 6000 5000 (in US $/tonne)

4000 3000 2000 1000 0

Import Price with Bound Tariffs

Domestic Price

Figure 21: Comparison of Domestic and Import Prices for Possible Special Products for China, 2004 1800 1600 1400 (in US$/tonne)

1200 1000 800 600 400 200 0

Import Price with Bound Tariffs

Domestic Price per Ton

17

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

4. ASSESSING THE ADEQUACY OF BOUND RATES IN BRIDGING THE GAP BETWEEN DOMESTIC AND IMPORT PRICES The difference between bound and applied tariff rates

products range from 20 percent to 70 percent, while for

only provides one dimension in assessing developing

China bound rates vary, from as low as 3 percent, up to

countries’ need for maximum market access flexibility.

65 percent. Still, what these countries have in common

Another criterion is the capability of current tariff

is the fact that in many instances, their tariff bindings

bindings to cover the gap between the domestic price

are not sufficient to bridge the gap between domestic

and import price of special products. This is an

and import prices for their potential special products.

important

be

Figures 18 to 21 show the comparison of domestic prices

effective policy tools, tariffs should afford governments

and import prices with bound rates on selected special

the flexibility to protect producers from displacement

products.

consideration

because

in

order to

due to liberalisation, by giving the state the capacity and option to equalise domestic prices with import

The inadequacy of current tariff bindings to bridge the

prices through the application of tariff bindings. This

gap between domestic and import prices is apparent,

flexibility is important in view of the continued use of

not only for 2004, but also over a period of time.

subsidies which distort prices of important agricultural

Figures 22 to 24 track domestic prices with bound tariffs

commodities in the international market.

of a particular special product for China, Ecuador and the Philippines, as these interact with import prices.

As can be expected, countries with low tariff bindings are more likely to have inad equate bound duties, and

The graphs indicate that the tariff bindings of some

as such, narrower capability to address price gaps for

developing countries for some special products are

special products to help them safeguard their small

insufficient to equalize local and import prices over a

agricultural producers from the effect of importation.

longer period. Also, the graphs show that tariff

Examples of these countries are China, Fiji, Ecuador and

bindings, in some instances, are not enough to provide

the Philippines.

Fiji and the Philippines have fairly

developing countries with the flexibility to protect

linear tariff structures, with import duty bindings

sectors that are crucial to their food security, livelihood

pegged mostly at 40 percent. On the other hand, China

security and rural development. The data above provide

and Ecuador have more divergent tariff profiles as

arguments and support calls by farmers’ groups and civil

bound tariffs vary from one special product to another.

society organizations of the need to increase tariffs for

For Ecuador, for instance, tariff bindings

some special products beyond current tariff bindings.

on special

1,400.00

1,400.00

1,200.00

1,200.00

1,000.00

1,000.00

800.00

800.00

600.00

600.00

400.00

400.00

200.00

200.00

-

1996

1997

1998

Import price (US$/MT)

1999

2000

2001

Bound Tariff

2002

2003

2004

Domestic price (US$/MT)

Domestic price

Figure 22: Import price, bound tariff and domestic price of onions for the Philippines

Import price and bound tariff

18

ICTSD – June 2008

400.00

350.00

350.00

300.00

300.00

250.00

250.00

200.00

200.00

150.00

150.00

100.00

Domestic price

Import price and bound tariff

400.00

Figure 23: Import price, bound tariff and domestic price of bananas, China

100.00 2002

2003

Import price (US$/MT)

2004

2005

Bound Tariff

Domestic price (US$/MT)

250.00

250.00

200.00

200.00

150.00

150.00

100.00

100.00

50.00

50.00

Domestic price

Import price and bound tariff

Figure 24: Import price, bound tariff and domestic price of corn, Ecuador

-

2000

2001

2002

Import price (US$/MT)

2003 Bound Tariff

2004

2005

Domestic price (US$/MT)

5. SUSTAINING AGRICULTURE: SOME CASE STUDIES The study recognizes that developing countries are very

are crucial to the three objectives mentioned earlier.

diverse

The case studies from Indonesia and Kenya in the next

in

nature

and

that

considerations

and

sensitivities with respect to tariff setting as it interacts

section illustrate this point.

with development objectives vary from one country to another. Hence, it recognizes that some G-33 Members

To understand the importance to developing countries

may have high tariff bindings and overhangs, but still

of market access flexibilities for special products, this

require maximum market access flexibility on account

paper has evaluated the possible impact of exempting

of the fact that some of their commodity sectors are

SPs on countries’ food security, livelihood security and

highly strategic not only to their food security,

rural development. The paper now explores case studies

livelihood security and rural development, but to the

covering three G-33 Members, namely the Philippines,

whole economy. Moreover, some countries want to

Kenya and Indonesia.

preserve the existing difference between applied and bound tariffs, mainly as a tool and as a flexibility to help them develop or maintain commodity sectors that

19

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

(i) Case Study 1: The Philippines

producers’ capability to successfully compete with imported products in the market. Of course the

The Philippines can generally be classified as having low

assumption is that domestic production is sufficient to

tariff bindings. Import duties on most of its major

meet local demand for the products. With this

agricultural products are bound at 40 percent, except

consideration, the products that must be excluded from

for sugar, which has a higher bound rate. Because of

tariff reductions are pork in addition to chicken,

this, the government set its applied tariffs at levels that

potatoes and onions, which also have minimum tariff

are very close to bound rates, particularly for the most

overhangs.

important agricultural commodities. Of the 16 proxy products used in the study, the Philippines has no tariff

The significance of specific commodity sectors to the

overhang for chicken, onions and potatoes. These are

country’s food security, livelihood security and rural

the commodities that will have effective tariff cuts if

development is sometimes overlooked in broader

SPs are not exempted from tariff reductions. Hence,

analysis. In the Philippines, pork and chicken are the

these are also the products that have the most need for

backbone of the country’s livestock and poultry sector.

maximum market access flexibility and that will benefit

Livestock and poultry production accounted for an

greatly from being exempted from tariff reductions.

average of 23.72 percent of total value added in the

Figure 25 below shows the tariff overhang for each of

sector between 2001 and 2005. These are important

the 16 proxy SPs through each of the proposed

sources of income for many people in rural areas,

modalities.

especially in the provinces where poverty incidence is highest and most prevalent. Many poor households in

The results of the simulation show that bound duty

rural areas maintain hogs and/or chicken to augment

reductions of 8 percent and above will virtually

their income. They use their additional earnings from

eliminate the minimal tariff overhang for pork, and will

raising hogs and chickens to supplement their budget for

result in real tariff cuts for chicken, onion, goat meat

food, support their children’s education or finance their

and potatoes.

medical needs. This underscores the important role of

Rice is not included in the list above

because the Philippines has a quantitative restriction

these commodities not only to the country’s livelihood

against rice importation by virtue of Annex 5 of the

security and rural development, but also to the all-

Uruguay Round Agreement on Agriculture.

important goal of poverty reduction. In terms of food security, chicken and pork are significant sources of fat,

However, as pointed out earlier, in defining the list of

calories and protein for the population and are regarded

products that may be exempted from tariff reductions,

as basic components of every Filipino’s food basket

one must also factor in commodities for which current

(Montemayor and Bernabe 2006).

tariff

bindings

are

not

sufficient

to

cover

the

differential between domestic and import prices. Any

On the other hand, potatoes and onions may not be such

tariff cuts on these products will undermine local

significant contributors to overall economic output

Figure 25: The Philippines: Tariff Overhang of Proxy Special Products Under Various SP Treatment Options 35 30 Percent

20

25 20 15 10 5 0 -5 -10 -15 -20

0%

8%

12%

15%

ICTSD – June 2008

compared to chicken and pork. However, they are the

sec urity, livelihood security and rural development

main source of income for many communities in the

objectives.

Philippines. For instance, whole communities in the northern part of the Philippines, particularly in the

(ii) Case Study 2: Kenya

provinces of Benguet and Nueva Ecija, depend on potato and onion farming for their livelihood. The entry of

Kenya has a linear tariff structure, with relatively high

imported onions and potatoes in the domestic market

tariff bindings, mostly set at 100 percent while applied

has led to the drastic decline of income in these areas,

rates are lower, at 25 percent. The application of the

prompting local producers to call on the government to

proposed treatment for SPs, with cuts ranging from zero

address the problem of excessive importation by

to 15 percent, will result in uniform tariff reductions, as

ensuring adequate tariff protection for the sector.

well as overhangs for most of the 16 proxy SPs.

Potatoes and onions are also essential components of the Filipino diet.

Figure 26 shows the results of the simulated tariff cuts

Because the Philippines has zero tariff overhangs for these products, any tariff cut, no matter how small will lead to the further narrowing down of its almost nonexistent tariff overhang. This underscores the need for the country to have a great degree of flexibility with regard to special products and tariff reductions. Extending the analysis beyond the 16 proxy products, the paper applied the proposed tariff cuts on SPs using the list of special products identified through the ICTSD country study for the Philippines. Figure 25 shows the results of simulations of the proposed tariff reductions on some of these products.15 Most of the country’s possible SPs already have minimal tariff overhangs. Tariff reductions can be expected to result in effective tariff cuts for many possible special products. This indicates a further narrowing down of the country’s already limited difference between applied and bound tariffs for commodities that are important to its food

for special products on the tariff overhangs of the 16 proxy products. Kenya is one of the active proponents within the G-33 of the need to exempt special products from tariff reductions. Agriculture accounted for 25.2 percent of Kenya’s total economic output in 2003. The sector’s most important contribution to the country relates

to

employment

generation

is highest and agriculture is the main and most important source of income and livelihood. Hence, efforts to maintain livelihood security and address the poverty situation in the country cannot be divorced from initiatives to sustain the economic viability of agricultural producers (Miencha et al 2005).

80% 70% 60% 50% 40% 30% 20% 10% 0%

8%

poverty

population lives in rural areas where poverty incidence

Figure 26: Kenya's Tariff Overhang for 16 Proxy SPs under Various Treatment Options for Special Products

0

and

reduction. Seventy five percent of Kenya’s total

12%

15%

21

22

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

Figure 27: Indonesia's Tariff Overhang of Special Products under Various SP Treatment Options 250% 200% 150% 100% 50% 0%

0%

8%

12%

15%

Of the 16 products above, corn, wheat, sugar, rice, oil

If we look at the effect of the proposed tariff cuts on

crops and dairy products are some of the most

the tariff overhang of Kenya’s more specific product

significant to Kenya’s economy in terms of food

listing from the ICTSD country study, we will see that

security, livelihood security and rural development.

there is not much change in terms of magnitude of tariff

Corn is by far the most important staple food. It is

overhangs

widely produced throughout the country, and is

differences between the country’s bound and applied

consumed in 90 percent of households. It employs more

rates for many important commodities remain high.

than four million farmers and 300,000 stakeholders

Many of these products are vital to Kenya’s agriculture

engaged in agro-processing and distribution. Other food

and economy.

across

potential

special

products.

The

staples are rice and wheat, which also employ thousands of people, including farmers and individuals involved

in

processing

and

marketing.

(iii) Case Study 3: Indonesia

Sugarcane

farming, on the other hand provides income and

Compared to Kenya and the Philippines that have a

employment to more than two million farmers and farm

fairly linear tariff structure, Indonesia has bound duties

workers, while dairy production supports more than 3.6

that are more variable. Tariff bindings for the 16 proxy

million people (Miencha et al 2005).

SPs, range widely from 40 percent to 210 percent. Rice, which is the country’s main staple, has a tariff binding

Although applied tariffs for these commodities are low,

of 160 percent.

Kenya wants to maintain the flexibility to adopt higher tariff duties on imports of these products when

Actual or applied tariffs are much lower, from zero to

necessary, given the strategic importance of these

10 percent across selected commodities. This is

commodities to the economy.

indicative of the degree of liberalisation the country has undertaken unilaterally. Consequently, the country’s

It is important for Kenya to preserve its present

current tariff overhangs, particularly for the 16 proxy

difference between applied and bound tariffs to sustain

SPs are also relatively wide, ranging from 25 to 200

commodity sectors that are important to its food

percentage points. Figure 29 shows the resulting tariff

security, livelihood security and rural development

overhangs under each of the various treatment options

objectives. This will give the country the flexibility to

for special products.

set import duties at levels that are sufficient to provide incentives to agricultural stakeholders to continue

As the lead of the G-33, Indonesia is at the forefront of

farming and production.

the lobby within the WTO to exempt some special products from tariff reductions. Its tariff overhangs are

Kenya, like most developing countries with high tariff

relatively high only because it has minimal, and in some

bindings, sets its actual import duties based on its

cases zero, applied duties. Bound tariffs on corn,

economic needs and sensitivities, and does not use up

chicken, potatoes, tomatoes, sugar and most of the

its full tariff bindings.

products above, except for milk and rice, are presently

ICTSD – June 2008

set at 40 to 50 percent. Increasing applied duties on

security, livelihood security and rural development

these products will effectively narrow down the

objectives.

country’s current tariff overhang.

CONCLUSION From the 16 proxy SPs above, some of the commodities that are highly significant to Indonesia’s food security, livelihood security and rural development are rice, maize, milk, chicken, sugar, potatoes, tomatoes and onions. All these commodities, except for corn and sugarcane, which are used mainly as inputs, albeit also for food products, are part of Indonesia’s basic food basket. Maintaining the economic viability of its food production systems is a highly strategic food security issue for Indonesia. It is very important for the country to sustain an agricultural sector that can readily and adequately meet the substantial food requirements of its people. Moreover, the bulk of the country’s population is still in rural areas, where much of the economic activity is generated from the production of the above-mentioned commodities. Indeed, the production of rice, maize, corn, vegetables, livestock and poultry, among others, are important to rural as well as total agricultural income and a crucial source of livelihood for millions of farmers. Rice, which is the country’s staple grain, accounted for nearly one third of total agricultural output and employment in 2000. It provides income and livelihood to more than 12 million people. On the other hand, the vegetable sector, which produces potatoes, tomatoes and onions, contributes 6.5 percent of total agriculture GDP and employs more than 5.8 million farmers. Sugarcane, which is used as input for the country’s food production sector, accounts for 6.6 percent of total agricultural production and 2.4 percent of total employment in the sector. Similarly, corn, which is mainly used as feed for the livestock and poultry sector, contributes 4.8 percent of total agricultural output, providing jobs and a livelihood to 2.4 million farmers and farm workers. These crops have substantial forward and backward linkages in the economy, particularly to the country’s agro-processing and food manufacturing sectors. Other potential special products, such as livestock, poultry and milk, collectively account for 16.7 percent of total output in agriculture and 8 percent of total employment in the sector. It is within this context that Indonesia is advocating for maximum market access flexibility for products that are crucial to its food

The paper concludes that many developing countries already have a limited tariff overhang and that the proposed tariff cut on special products based on the May draft modalities on agriculture will only serve to further narrow this down. At the same time, the case studies show that the need for maximum market access flexibility is not confined to countries with limited water between bound and applied rates. Some developing countries, despite having fairly comfortable tariff overhangs, need to maintain their flexibility and capability to safeguard the economic viability of specific commodity sectors in agriculture. For many developing countries that are faced with resource constraints, tariffs are the only policy tools that are readily available to them to help their farmers survive in the market. Developing countries are widely divergent in terms of tariff structure as well as in development status and needs. This makes it difficult to prescribe the number as well as percentage of special products that should be exempted from tariff reductions that can appropriately capture the sensitivities of all developing countries. Based on the evaluation of tariff data for the 16 proxy products across the countries covered by the study, as well as the country-specific listing of special products for each of these countries, the number of SPs requiring maximum market access flexibility ranges from zero to 100 percent of total SPs. The diametrical disparity between the two figures indicates the need for SP treatment options that are highly encompassing in order to meet the diverse needs and situations of developing countries. However, as can be gleaned from the case studies, one cannot determine the number of SPs that may be exempted from tariff reductions solely on the basis of tariff overhangs. For some countries, current tariff bindings are not sufficient to help equalise or bridge the gap between domestic and import prices. This gives countries

limited

flexibility

to

safeguard

small

agricultural producers from possible displacement due to importation. At the same time, there are countries that have considerable water between bound and applied tariff rates

that need to exclude special

23

24

Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

products from tariff reductions on account of the

the

special products’ strategic importance to their food

countries.

security,

products from tariff reductions is one of the flexibilities

livelihood,

food

security

and

rural

development objectives.

different

developmental needs of

developing

A high degree of flexibility on special

that can help developing countries pursue their food security, livelihood security and rural development

The paper underscores the need to implement market access flexibilities for special products that can address

goals.

ICTSD – June 2008

BIBLIOGRAPHY FAO. 2004. State of Agricultural Commodity Markets. Rome: FAO. FAO. 2006. FAO Briefs on Import Surges. Issues No. 3 “Import surges: What are their external causes?”. Rome: FAO. G-33. 2005. G-33 Ministerial Communiqué. Jakarta: G-33. ICTSD. 2007. Indicators for the Selection of Agricultural Special Products: Some Empirical Evidence. Geneva and Rome: ICTSD and FAO. Malaysia. 2006. Discussion on Special Products, Special Contribution by Malaysia. Miencha, F., Nyangito H. and N. Waiyaki. 2005. Identification od Special Products (SP) and Products for Eligibility under the Special Safeguard Mechanism (SSM) by Developing Countries – The Case of Kenya. Geneva: ICTSD. Mittal S. 2007. OECD Agricultural Trade Reforms Impact on India’s Prices and Producers Welfare. New Delhi: Indian Council for Research on International Economic Relations. Montemayor, R. and R. Bernabe. 2006. Study on Special Products and Safeguard Mechanism in Philippine Agriculture. Geneva: ICTSD. Thailand. 2006. Non-paper on Special Products. United Nations Conference on Trade and Development. 2004. Sao Paolo Consensus, Eleventh Session. Sao Paolo: UNCTAD. US. 2006. Communication on Special Products, Special Session of the Committee on Agriculture, JOB(06)137. Geneva: WTO. WTO. 2008. Revised Draft Modalities for Agriculture TN/AG/W4/Rev. Geneva: WTO.

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Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

ANNEX 1

Table 3 : Classification of Selected G-33 Countries According to Tariff Overhang for the 16 Proxy Special Products Grouping

Countries

Average

(Percent) 1 (1 to 20)

China, Cote d’Ivoire, Dominican Republic, Honduras, Mongolia, the Philippines, the Republic of Korea

10.08

2 (21 to 40)

Cuba, Nicaragua, Peru, Sri Lanka, Turkey

28.25

3 (41 to 60)

Barbados, Indonesia, Jamaica, Venezuela

55.9

4 (61 to 80)

Belize, Ghana, Grenada, Guyana, India, Kenya, Mauritius, Trinidad and Tobago

65.34

5 (80 above)

Antigua and Barbuda, Nigeria, Pakistan, St. Kitts and Nevis, St. Lucia, Zimbabwe

96.77

Table 4 Countries and products that have zero or negative overhangs

Country

Product

Range of Overhangs

Barbados

Chicken, milk, pork

(-12 to -9)

China

Bovine meat, chicken, corn, onion, rice, sugar, oat meat, sheep meat and tomatoes

Cote d’Ivoire

All proxy special products

0

Grenada

Rice

0

Guyana

Rice

0

Honduras

Rice, sugar

-10

Jamaica

Tomatoes, chicken

-5 0

Nicaragua

Rice

-1

Philippines Onions, potatoes, chicken

0

ICTSD – June 2008

END NOTES

1

The countries covered by the study are Antigua and Barbuda, Belize, Cote d’Ivoire, Cuba, Dominican Republic,

Honduras, Mongolia, Nicaragua, Ghana, Indonesia, the Philippines, Kenya, Pakistan, Peru, St. Lucia, Senegal, Trinidad and Tobago, Zimbabwe, Guyana, Sri Lanka, China, Grenada, Jamaica, Mauritius, India, Barbados, Republic of Korea, Nigeria and Turkey. 2 Data on bound and applied tariffs were obtained from the WTO website. 3 The paper covered the ICTSD studies for 16 countries, namely Indonesia, Peru, Barbados, Ghana, Papua New Guinea, China, Nigeria, Pakistan, Sri Lanka, Honduras, Fiji, Indonesia, Cote d’Ivoire, the Philippines, Nicaragua, Kenya and Ecuador. Mali and Tanzania were not included because of their least-developed country (LDC) status, while Viet Nam cannot be included due to tariff data gaps. 4 Below this minimum entitlement of 8 per cent, the developing country Member concerned need not resort to guidance by those indicators. In the case of RAMs, the threshold level above which indicators are not required to be used shall be 2 percentage points higher. 5 Where a Member has an entitlement to use sensitive products under this Agreement and has not chosen to avail itself of either of the alternatives to general tariff quota expansion provided for developing country Members under paragraph 77 above, that Member may, in effect, "transfer" any unused Sensitive Products entitlement to obtain thereby additional Special Products, subject to the following: (a) that the maximum entitlement for transfer cannot be more than one third of its sensitive product entitlement; and (b) that the tariff reduction treatment for the tariff lines concerned shall be the twenty per cent cut specified for Special Products under this paragraph. 6 An additional 1 per cent of tariff lines without tariff cuts shall be available to RAMs. 7 ICTSD have undertaken country studies on SP and SSM for Barbados, China, Ecuador, Fiji, Ghana, Honduras, Indonesia, Kenya, Nicaragua, Nigeria, Pakistan, Papua New Guinea, Peru, the Philippines and Sri Lanka 8 Countries included in the study are Antigua and Barbuda, Barbados, Belize, China, Cote d’Ivoire, Cuba, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Mauritius, the Philippines, St. Kitts and Nevis, St. Lucia, Republic of Korea, Trinidad and Tobago, Turkey, Zimbabwe, Venezuela, Mongolia, Nicaragua, Ghana, India, Indonesia, Kenya, Nigeria, Pakistan, Peru and Sri Lanka. 9

Both the issue of policy space and the need for balance between national policy and international disciplines were

introduced in Paragraph 8 of the Sao Paolo Consensus and were expounded throughout the document. 10 All price data are sourced from Annex 1 of the FAO State of Agricultural Commodity Markets 2004

.

11 See Annex F. 12 Below this minimum entitlement of 8 per cent, the developing country Member concerned need not resort to guidance by those indicators. In the case of RAMs, the threshold level above which indicators are not required to be used shall be 2 percentage points higher. 13 Where a Member has an entitlement to use sensitive products under this Agreement and has not chosen to avail itself of either of the alternatives to general tariff quota expansion provided for developing country Members under paragraph 77

27

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Treatment of special products: Implications of the Chair’s May 2008 draft modalities text

above, that Member may, in effect, "transfer" any unused Sensitive Products entitlement to obtain thereby additional Special Products, subject to the following: (a) that the maximum entitlement for transfer cannot be more than one third of its sensitive product entitlement; and (b) that the tariff reduction treatment for the tariff lines concerned shall be the twenty per cent cut specified for Special Products under this paragraph. 14 An additional 1 per cent of tariff lines without tariff cuts shall be available to RAMs

.

15 The list of priority candidates for special products was indicated as Products A to K to maintain the confidentiality of the ICTSD individual country studies.