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The WTO negotiations on industrial tariffs: What is at stake for developing countries?

Yilmaz Akyuz1

Third World Network

May 2005

SARPN acknowledges the Third World Network site as the source of this document.
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A key item on the agenda of the Doha Round of trade negotiations is liberalization of trade in industrial products or, in the terminology of the WTO, “non-agricultural market access”, NAMA. Despite its significance for industrialization and development, and the difficulties encountered in negotiations, this issue has not attracted much public attention in large part because the recent discussion has focussed primarily on agriculture. The framework adopted for modalities for negotiations for NAMA, as contained in Annex B of the so-called July Package (WTO 2004b), and based primarily on the proposals made by developed countries, stipulates reduction of industrial tariffs in both developed and developing countries according to a formula yet to be agreed. There are several proposals on the table, including linear formulas wherein tariffs would be cut by a certain rate regardless of their levels, and non-linear formulas which would reduce higher tariffs by greater rates, thereby bringing harmonization both across countries and tariff lines. Almost all the formulas so far proposed would entail deep cuts in bound and/or applied industrial tariffs of developing countries. But this is much more so in formulas proposed by developed countries.

In the debate on the implications of cuts in industrial tariffs for developing countries attention has focussed on two issues. First, their impact on imports, exports, production and employment in the sectors affected by tariff cuts and increased market access. Second, their implications for government revenues from trade taxes, particularly where such taxes account for an important part of the budget. Less attention has been paid to the implication of tariff cuts for industrialization in developing countries and their participation in the international division of labour. While it is generally agreed that there may be temporary costs, there is also a widespread belief, in accordance with the prevailing orthodoxy, that proposed tariff reductions would be beneficial to developing countries when adjustment to a more liberal trade regime is completed and existing resources are fully redeployed and utilized according to new incentives.

However, for developing countries what matters is not one-off welfare gains or losses resulting from reallocation of existing resources, but the longer-term implications of proposed tariff cuts for capital accumulation, technical progress and productivity growth which hold the key to narrowing income gaps and catching up with richer countries. Even if there could be an instantaneous, costless adjustment to a new set of incentives allowing developing countries to fully realize the benefits of their comparative advantages as determined by their existing endowments and capabilities, an irreversible commitment to low tariffs across a whole range of sectors would carry the risk of locking them into the prevailing international division of labour.

It is true that tariff protection is not always the only or even the best way to promote technologically advanced and dynamic industries. However, many of the more effective and first-best policy options successfully used in the past for industrial upgrading by today’s mature and newly-industrialized countries are no longer available to developing countries because of their multilateral commitments in the WTO, notably in agreements on subsidies, TRIMs and TRIPs. The loss of freedom to use policy tools in these areas increases the risks entailed by narrowing policy autonomy further through irreversible commitments for deep cuts in industrial tariffs.

This paper focuses on the implications of the negotiations on industrial tariffs for longer term industrialization in developing countries. The following section gives a brief overview of the NAMA framework without getting into technical details of various proposals with which the trade negotiators in Geneva grapple on a daily basis and which have been examined in various documents and papers prepared in the WTO, UNCTAD and elsewhere.2 This is followed by a brief review of the historical experience of today’s advanced countries regarding the use of tariffs in the course of their industrialization, and compares and contrasts it with the actual situation prevailing in developing countries today and the proposals put forward. Section D discusses the sectoral pattern and evolution of tariffs that may be needed in the course of industrial development in comparison with the constraints that would result from the proposals made by developed countries, and advances a simple alternative formula that can help reconcile policy flexibility with multilateral discipline. This is followed by an evaluation of various estimates of benefits of tariff cuts to developing countries. Section F turns to the question of reciprocity from a broad developmental perspective. The paper will conclude with a brief summary of the key points on how the negotiations could accommodate both the immediate needs and longer-term interests of developing countries.

  1. Former Director of Division on Globalization and Development Strategies, UNCTAD. This paper was prepared for the Third World Network (TWN). I am grateful to Ha-Joon Chang, Bhagirath Das, Martin Khor, Richard Kozul-Wright, Kamal Malhotra, Jorg Mayer, Chakravarthi Raghavan and Irfan Ul Haque for helpful comments and suggestions. They are not responsible for remaining errors.

  2. For a discussion of issues related to NAMA, modalities for negotiations, and various formulas and their implications for tariff cuts see UNCTAD (2003), Laird et al. (2003); Fernandez de Cordoba et al. (2004b); WTO (2003a, b and c), Khor and Chien Yen (2004), and Das (2005).

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