In a May 25 paper Crawford Falconer, Chairman of the agricultural negotiations in the Doha Round of WTO trade talks, continued his “honest talk” of “the objective facts staring us in the face” begun in a paper released on April 30. This second paper dealt mostly with what could be called minor market access issues. The assessment is not positive, but it may have a silver lining in focusing efforts more on across the board tariff reductions.

One issue of concern for developing countries, though some developed countries are also impacted, is tariff escalation, the application of higher tariffs on processed goods than on the raw and semi-processed commodities that are used to make those processed goods. These tariff spreads deny the countries producing the raw product the opportunity to add value by performing one or more processing functions. They protect domestic processing industries in importing countries using imported raw products or compensate manufacturers for using higher priced domestic raw materials.

Cocoa is a classic example of tariff escalation. The EU has a zero bound tariff on cocoa beans, a 7.7 percent ad valorem (simple percentage of the imported value) duty on cocoa powder and 15 percent on chocolate crumb containing cocoa butter. Japan also has a zero tariff on cocoa beans, a 10 percent tariff on cocoa paste wholly or partly defatted, and a 29.8 percent duty on cocoa powder containing added sugar. On soybeans Japan, the U.S., EU and Canada have zero bound tariffs on whole beans and tariffs on crude soybean oil of 25.6 percent, 19.1 percent, 6.4 percent and 4.8 percent, respectively. China has a 3 percent tariff on whole soybeans and a 9.0 percent tariff on crude soybean oil.

Progressive tariff reductions in a tiered approach where higher tariffs are reduced more than lower tariffs help to reduce tariff escalation, but do not eliminate it. The WTO Framework Agreement of July 2004 committed to establishing a formula to reduce the disparities of tariff escalation. Falconer reported, “This issue is scarcely anywhere in serious negotiating terms.” Part of the problem is defining primary products and processed products. Whole soybeans and soybean oil are easy to see; Falconer uses the example of pizza where it is difficult to compare raw and processed tariffs. Negotiators have to make lists of products or allow individual member countries to decide which processed products are made from which raw products. Even after that is decided, the issue of how to cut the tariffs on the processed products will remain. The only hope is to have a simple formula that is widely applied.

The almost mirror image of tariff escalation is a differential export tax used by developing countries to discourage exports of primary products and encourage processing and exporting of value-added products. Unless government policies provide an offset, it results in lower incomes for farmers who produce the raw products and is a source of revenue for the government. Argentina applies an export tax of 27.5% on whole soybeans, 24% on soybean oil and soybean meal, and 5% on soy bio-diesel.

Differential export taxes are among issues listed in the Framework Agreement as “issues of interest but not yet agreed.” Falconer noted that he had nothing to add since there had not been negotiations. The U.S. position is to prohibit the use of export taxes, including differential export taxes, for the purposes of competitive advantage or supply management.

Falconer also raised the issue of tariff simplification. The Framework Agreement says tariff simplification remains under negotiation. Falconer has not heard opposition to the idea that complex tariffs need to be simplified, but that binding agricultural tariffs in ad valorem only, “in plain English, it is not going to happen.” The best we can hope for is, “that no tariff may be bound in a form more complex than the current binding and that complex matrix tariffs will be simplified in a transparent and verifiable way.”

Specialization in processing agricultural products across international borders will occur with or without a new WTO agreement, following industrial products like computer chips, automobile parts and call centers. Economies of scale and quality control in modern plants will be the driving forces.

The Doha Round of talks has two ways of gaining economic efficiencies for agriculture through increased market access. The upfront approach is to reduce agricultural tariffs by putting them in the much talked about four bands with larger reductions for tariffs in the higher bands. The other way is to work through issues like tariff escalation and simplification and sensitive and special products covered in the earlier paper. The assumption from the start of the talks was that a combination of the two ways would increase market access while recognizing the unique circumstances in each country.

The progress of the talks as reviewed by Chairman Falconer would lead even an optimist to conclude that working through the second way is too complicated a task for 150 countries struggling with hundreds of other issues inside and outside of agriculture. If meaningful market access is to be achieved in agriculture, it will likely come from the upfront approach of direct tariff reductions.

While many participants in the talks will resist the loss of the second way, it is a gain in an economic policy sense. Markets are attracted to policy certainty and reject policy uncertainty. Straight forward reductions in tariffs by the upfront approach provide economic policy certainty for investors and other market participants. Countries that choose to retain complicated and economically inefficient tariff schedules will simply be left out of the economic growth facilitated by upfront tariff reductions.