In early May the Doha Round of trade talks under the World Trade Organization (WTO) achieved a breakthrough with a tentative agreement on converting specific agricultural tariffs and other non-ad valorem tariffs into ad valorem equivalents. The agreement was reached among 30 key trade ministers attending a meeting of the Organization for Economic Cooperation and Development. The agreement needs to be approved by the 148 member countries of the WTO when they meet in early June.
An ad valorem tariff is calculated as a percent of the value of the commodity imported. The proposed conversion procedure would put all tariffs on the same basis for consideration for tariff cuts as part of the negotiations. This was a technical issue that had to be resolved before talks could move forward on other agricultural issues. While it was a technical issue, it had to be resolved at a political level. As U.S. Trade Representative Rob Portman said to the press after the agreement was reached, “In the end this is about political will. This was a technical issue today, but ultimately had to be resolved, as I mentioned earlier, by the ministers at a political level.”
The technical issue was straight forward. In last summer’s framework agreement for negotiations, the parties agreed to convert all tariffs to ad valorem equivalents (AVEs). The tariff rates would then be divided into tiers and higher tariffs would be reduced more on a percentage basis than lower tariffs. The technical issue was how to calculate the market value of the products and then calculate the AVE. Using a higher market value for the product would result in a lower AVE and less need to cut the rate. Under the tentative agreement commodity products would have higher AVEs than processed products. The negotiators still have to work out how many tiers of tariffs there would be and what percentage to cut each tier.
The WTO estimates that 34 countries have about 8000 tariff lines that will be covered by the agreement. The European Union (EU) has the most non-ad valorem tariffs followed by Switzerland. The EU needed political will to take the lead and agree to the technical details for calculating the AVEs. Japan, South Korea and Switzerland also had to sign on. They are primarily food importers with agricultures that would face increased competition.
Many developing countries have seen the agricultural talks as a free ride on tariff reductions where they demand that other countries make concessions on market access, but they do not make changes. Studies have repeatedly shown that developing countries gain more from removing their own tariffs than they gain from having developed countries remove tariffs. A 2003 study from the International Monetary Fund showed that developing countries would gain $12.5 billion per year if developed countries removed all agricultural tariffs. If the developing countries removed their own agricultural tariffs, they would gain $21.4 billion per year.
A 2004 study from the World Bank came to similar conclusions. This study looked at the income impacts for the year 2015 if all agricultural and nonagricultural tariffs were eliminated in all countries. Total income would be $385 billion higher, with high income countries gaining $188 billion and middle and lower income countries gaining $197 billion. Removing protections in agriculture would account for $265 billion of the income gains.
The studies show what many economists have argued for the past 30 years. Developing countries hurt themselves by restricting imports. Developing countries will need the political will to give up their victim status and begin making an orderly transition to a low-tariff domestic economic policy.
More political will is needed to keep the negotiations moving forward. The agricultural trade portion of the Doha Round is centered on three issues: market access (tariff and non-tariff issues), export subsidies and domestic support programs. By most estimates, 90 percent of the exports subsidies in agriculture are used by the EU. There has been a consensus that the EU will need to eliminate export subsidies if the round is to continue to progress.
The United States will also be required to exercise some political will on export subsidies. The U.S. export credit programs are considered to have subsidies in them and changes have been talked about for several years. The WTO ruling on the Brazilian cotton case requires changes in both the export credit programs and the Step 2 cotton program by July 1 of this year. Once the U.S. makes its announcements on those changes, the remaining decisions on exports subsidies in the negotiations may move forward.
Movement on market access and export subsidies will then lead to major commitments of political will by the U.S., EU and Japan on domestic subsidy issues. Virtually all developing countries and a few developed countries like Australia and New Zealand have made trade distorting domestic supports a major issue in the Doha Round. The EU is already implementing a new “single payment” program, except for sugar, that they believe will meet the requirements of the new WTO agreement. Details on a new sugar program should come out in mid-June.
The U.S. position has been that major changes have to occur in market access and export subsidies before domestic support issues are discussed. With movement beginning on market access and export subsidies, the U.S. government will soon need political will on domestic support programs.