With the ongoing struggles over agricultural trade issues, casual observers of the WTO negotiations could conclude that the talks are all about agriculture. In terms of the amount of trade, goods and services are much more important than agricultural trade, but agriculture gets most of the attention because of the politics. The recent agreement on zero tariffs for “multi-chip integrated circuits” has brought trade in manufactured goods and services to the center of the WTO negotiations.
The U.S. Trade Representative’s office announced that the U.S., EU, Japan, South Korea and Taiwan have agreed to reduce tariffs to zero for multi-chip integrated circuits (also known as multi-chip packages (MCPs)) that are used in cell phones, digital cameras and personal digital assistants (PDAs). The U.S. will eliminate its applied duty of 2.6 percent and South Korea and the EU will eliminate their respective bound duties of 8 percent and 4 percent. Japan currently does not have duties. The agreement is expected to take affect on January 1, 2006 for the five countries. They currently produce about 70 percent of the world’s output of MCPs and want other countries to reduce tariffs to zero as part of the WTO negotiations.
The announcement of an agreement did not come as a surprise. In previous rounds of negotiations countries have reached agreements on easier issues to build momentum for the more difficult challenges that are addressed near the end of the talks. Production of MCPs began in 1999, three years after the WTO Information Technology Agreement of 1996 eliminated duties on most semiconductors. There are few industry participants with an interest in protecting the status quo through trade barriers. Other items that have been suggested as possible sector agreements include chemicals, wood products, medical devices and non-tariff barriers for automobiles.
Given that the U.S. and the EU are heavily involved in the agricultural trade negotiations and also have major non-agricultural issues for the WTO, they would be expected to be involved in efforts to promote agreements outside of agriculture. The other three countries are part of the G10 group of major food importers with high agricultural tariffs. They have either remained silent on agricultural issues or stated that they cannot further reduce agricultural tariffs. Some G10 members have been silent on agricultural tariff cuts while advocating reductions in tariffs for manufactured products.
The U.S. and EU have also conditioned their proposals for changes in agricultural programs on substantial changes in market access for manufactured products and services. They must show their respective business communities that they have something to gain from the WTO talks. Without strong business support, a new trade agreement will not pass in the U.S. or the EU.
To further advance the talks, sector agreements among the U.S., EU and advanced developing countries like India and Brazil are needed. India has a major focus on trade in services that use its high-skilled, English speaking workers. The U.S. and EU have interests in expanding trade in financial and insurance services where they have competitive advantages. Reaching agreements in these areas could give the countries some political operating room back home.
There is talk that some technical issues, like a four-tier formula for tariff reductions, could be agreed to even though the actual percentage reductions for each tier are still in dispute. Since there is general agreement on eliminating export subsidies in agriculture, some participants believe that issue could be resolved fairly quickly.
U.S. Trade Representative Rob Portman is on a trip to Burkina Faso in Africa, then to India and China before arriving in South Korea to meet with other members of the Asia-Pacific Economic Cooperation (APEC) forum. Treasury Secretary John Snow is in India talking about opening up investment and insurance markets and reforms in agricultural tariffs. Japan will also be at the APEC meetings and has been characterized lately as being more cooperative on tariff issues. These countries are all potential partners for further negotiations or announcements of sector agreements.
The role of manufactured goods and services cannot be over emphasized. They account for 85 percent of the trade of the EU and 70 percent for the U.S. Manufactured goods account for 75 percent of the trade for developing countries. Trade in manufactured goods and services is growing more rapidly than trade in agricultural products. Average trade weighted bound tariff for manufactured goods for all WTO members is 39 percent compared to 3.6 percent in the U.S., with 71 percent of the duties on U.S. goods paid by developing countries. As EU Trade Commissioner Peter Mandelson said when he released their proposal on trade reform, “Any lasting boost to world economic growth depends on an agreement to cut these tariffs, not just agriculture.”
From the start of the current round of negotiations the three main issue areas have been agriculture, manufactured goods and services. Each one has a different role to play in the negotiation of a complete agreement and in the ratification of the agreement in each member country. Despite the ongoing media reports that the talks are failing because of agricultural issues, successful movement in other sectors indicate that the process continues to grind forward. As more tentative sector agreements in manufactured goods and services are reported, a clearer picture of the final agreement will develop. More countries must become a part of the process so they all have a stake in a balanced final agreement.