Special Products Exemption Sharply Reduces Market Access Gains
September 2008
At the July 2008 Mini-Ministerial, the Director General of the WTO, Pascal Lamy, proposed a compromise package intended to form the basis for further compromises and discussions with respect to both agricultural and non-agricultural trade negotiations. The tentative agreement among the members to use that package as a basis for discussions broke apart primarily on the issue of developing country demands for a Special Safeguard Mechanism that would, in certain situations, authorize Members to raise their tariff rates to levels that would be above Uruguay Round bound rates.
However, the Lamy Package concerning Special Products is likely even more troubling for U.S. agriculture. The Lamy Special Product provisions would allow developing countries to shield approximately 90% of their agricultural imports from the formula tariff cuts that supposedly are the foundation of the Falconer negotiating text. The Lamy Package turns the Special Product exemption into the central component of the market access package with respect to developing country markets -- effectively depriving most U.S. agricultural export interests of any material gain in market access in those markets.
The Special Products exemption would clearly impact significant U.S. export interests such as soybeans, cotton, and wheat (see the table at the end of this white paper). The breadth of the exemption, however, insures that other important products will be labelled as Special by developing countries. Because countries have not been required to announce which tariff lines they would designate as special products it is impossible to know what level, if any new market access is provided for US commodities under this package.
According to data from the WTO International Trade Statistics 2007, developing country markets show the largest growth in imports. Since 2000, average annual growth rates for developing and developed markets were 12% and 7%, respectively. The Special Products exemption will effectively prevent much of U.S. agriculture from benefiting from this growth.
It appears that should the Lamy Package form the basis for a Doha Agreement, developing countries would be responsible for applying formula tariff cuts on 10% or less, by value, of their current agricultural imports. This is without the application of the provisions on Sensitive Products, which will provide even more exemptions.
The following charts apply the Lamy Package provisions on Special Products to several selected developing country markets.
Unfortunately, the Lamy Package was easily derived from the underlying Falconer text and demonstrates that it is virtually impossible for the existing text to be turned in favor of the interests of U.S. agriculture. From this vantage point, it appears the US is giving up $34 billion in allowable domestic support while getting virtually no market access in return and while allowing China to essentially take a free ride through these negotiations.
The major interests in this negotiation have fundamentally different beliefs about what the Doha Round should accomplish. The United States believes this negotiation is about trade liberalization. Developing countries, led by India, look at the less than reciprocal market access language agreed to in 2004 and believe that an already skewed world tariff system should be even more skewed in their favor after this round is concluded.
Liberalized world markets are important for agriculture around the world. If markets are liberalized, there must be corresponding reductions in trade distorting subsidies, and U.S. agriculture has conceded this trade-off. But a trade negotiation that is founded on providing less than reciprocal market access can't be fixed until the foundation is mended. U.S. agriculture has a chance, now, to use this untenable outcome to justify a different approach to the negotiations -- possibly one that would calculate the impact of all market distortions, thereby acknowledging the significantly larger impact on trade flows generated by tariffs and non-tariff trade barriers. Such an approach would focus on reducing overall distortions in the various commodities. It would prevent an outcome that slashed subsidies but did little for market access, because the focus would be on overall distortions. Agriculture should use this opportunity to put forward this or other suggestions that will move these negotiations to a path where there is at least some chance of success for an outcome that will benefit U.S. agriculture. The following table lists just the top ten import articles for the listed countries. In all cases, the Lamy Package provides flexibility for even more articles to be subject to the exemption.
Failure of the Falconer Formula
The Falconer draft text, and the formula approach to tariff cuts and subsidy cuts contained in it, have veered in a direction that seemingly cannot return substantive gains to U.S. agriculture and will hamper export growth in many smaller developing countries as well.
In addition to the incredible breadth of the Special Products exemption discussed above, the ability of Members to claim between 6% (developed) and 8% (developing) of their tariff lines as Sensitive Products and also subject to less than formula cuts further undermines any positive impact of the formula tariff approach.
The mechanism contemplated in the Lamy text is not just a problem for US agriculture. The safeguard could also harm other developing countries and their imports into the major developing, importing countries. Given that India and China were the most vociferous in support of SSM, it is reasonable to assume while an SSM might be directed against major exporters, it would catch smaller developing countries. This would subvert the alleged purposes of the Doha Development Agenda and sharpen the divide between advanced developing countries and smaller less developed ones.
Press reports this morning paint a picture of a Secretariat that is determined to steer the current negotiating text to port before the end of the year. In doing so, most appear to assume the special products provisions are agreed. In listing important outstanding issues, Chairman Falconer did not even mention Special Products.
A failure to agree on bad modalities is not a set-back. As the difficulty clearing what should be simple hurdles attests, the foundation of this process -- a commitment to less than reciprocal market access, instead of a focus on reducing all distortions to trade -- is faulty. Trade negotiators should be encouraged to concentrate on a WTO agreement that will liberalize world trade. They should not be encouraged to settle for one that will ultimately increase distortions.
by William A. Gillon