A Quantitative Assessment of the Derbez Text

 IPC Seminar

Achieving Agricultural Development through Agricultural Trade Johannesburg, 29 January 2004

David Vanzetti

Trade Analysis Branch

UNCTAD, Geneva

United Nations Conference on Trade and DevelopmentUnited Nations Conference on Trade and Development

Presentation Overview

• State of Play in WTO Negotiations

• The Cancun text

• The Model

• Results

• Implications

State of the Play

• Doha Programme: Negotiations on a range of subjects, including agriculture

• Divergent positions between EU, US, Developing Countries, …

• Negotiations were deadlocked for months: Harbinson (WTO chair) draft was found inadequate

• Deadline to agree on modalities was missed• EC-US proposal galvanised the process• Cancun: Negotiations about the draft Cancun Ministerial text

failed• Members expressed their commitment to a multilateral

approach and continue with negotiations

Alliances and interests

EUEU

JapanJapanSwitzerlanSwitzerlan

ddNorway Norway KoreaKorea

Level of ambition

Eliminateexport

subsidies“Multi-

functionality”

Cuts in domestic support

Reduceexport credits

Developing Developing countriescountries

Deg

ree

of s

pec

ial a

nd

dif

fere

nti

al t

reat

men

t

USAUSA

• Blended formula proposed by EC-US– Swiss formula

– Uruguay Round approach

– Duty free access

• Text does not contain specific targets, but paragraphs like “[…]% of tariff lines shall be subject to a […]% average tariff cut and a minimum of […]%, …”

Cancun draft Ministerial Text

Application of the Blended Formula

1. Uruguay Round high tariffs*

2. Swiss Formula small tariffs

3. Duty-free very small tariffs

* Given that countries want to protect their own markets

Assumed tariff cuts

1. Tariff reductions and tranches not specified2. Assume linear cuts 36 (min 15) and 24 (min

10) %.3. Swiss coefficient 25.4. Apply to 40, 40 and 20% of lines

Hypothetical tariff reductions

Swiss coefficient: 25, Average reduction 36%, minimum 15%, (20% of tariff lines cut by 15%, thus, 15% and 41% gives average of 36%)

Percentage Reduction New Tariff

PercentageReduction New Tariff

5 17 4.2 41 3.010 29 7.1 41 5.9

14 36 9 36 9.0

20 44 11.1 41 11.850 67 16.7 41 29.5

100 80 20 15 85.0

Uruguay RoundSwiss Formula

Initial Tariffin per cent

Blended formula: Anti-harmonizing

40% UR, within this category 28% minimal (15%), remaining 72% reduced by 44% (average 36%), 40% Swiss (coefficient 25), 20% duty-free; tariffs equally distributed

The blended formula

0

20

40

60

80

100

120

140

0 50 100 150 200

New tariff

EU bound rates

EU bound tariffs

0

20

40

60

80

100

120

140

160

0 100 200 300 400 500 600 700

Two outliers over 200% have been deleted

Small number of large tariffs

Typical developing country

Kenya bound and applied tariffs

0

20

40

60

80

100

120

0 200 400 600 800

bound

applied

Little variation in bound, but large gap to applied

Typical developing country

Three outliers over 150% have been deleted

Mauritius bound and applied tariffs

0

20

40

60

80

100

120

140

0 100 200 300 400 500 600 700

Bound

Applied

Selected Developed Countries:Cut in bound tariff rates

Initial values Blended formula Harbinson approachAverage Tariff

Percentage Reduction

Percentage Reduction

% % %

EU 17 22 35

US 6 16 31Japan 21 20 34

Lesser cuts than Harbinson

Selected Developing Countries:Cut in bound tariff rates

Initial values Blended formula Harbinson approachAverage Tariff

Percentage Reduction

Percentage Reduction

% % %

Cameroon 78 4435

Egypt 96 32 28

Kenya 100 43 35

Mauritius 120 50 40Nigeria 150 50 40Zimbabwe 141 55 39

Greater cuts than Harbinson

Selected Developing Countries: Cuts in applied rates

Initial values Blended formula Harbinson approachAverage Tariff

Percentage Reduction

Percentage Reduction

% % %

Cameroon 23 21

Egypt 52 14 9

Kenya 24 0 0.1

Mauritius 29 0.4 3Nigeria 33 5 0.2Zimbabwe 26 0.1 0.5

Minimal cuts in applied rates

Remarks on the blended formula

• Three parts (UR, Swiss, duty-free) allow for flexibility

• Blended formula is rather anti-harmonizing

• Countries with dispersed tariffs can take advantage of flexibility

• Countries with (high) uniform tariffs cannot use flexibility and have to make bigger cuts

• Countries with “water in the tariff” can take advantage of flexibility so that applied rates are little affected

• Conclusion: Formula does not serve the main objectives ? (simplicity, transparency, effectiveness, efficiency, equity/fair)

• Static global trade model 161 x 36

• Partial equilibrium model with Armington structure

• Two way trade

• TRQs and quota rents

• UNCTAD, FAO, DFID

Agricultural Trade Policy Simulation Model

ATPSM commodity aggregation (1)

• Bovine meat

• Sheepmeat

• Pigmeat

• Poultry

• Milk, fresh

• Milk, conc.

• Butter

• Cheese

• Wheat

• Maize

• Sorghum

• Barley

• Rice

• Sugar

• Oil seeds

• Vegetable oils

• Pulses

• Roots, tubers

ATPSM commodity aggregation (2)

• Tomatoes

• Non-tropical fruits

• Citrus fruits

• Bananas

• Other tropical fruits

• Coffee green bags

• Coffee roasted

• Coffee extracts

• Cocoa beans

• Cocoa butter

• Cocoa powder

• Chocolate

• Tea

• Tobacco leaves

• Cigars

• Cigarettes

• Other tobacco - mfr.

• Cotton linters

ATPSM available from UNCTAD

• Available free from websidewww.unctad.org/tab

• E-mail: atpsm@unctad.org

Developing countries: applied rates

Initial values Blended formula Harbinson approachAverage Tariff

Percentage Reduction

Percentage Reduction

% % %

Cameroon 23 21

Egypt 52 14 9

Kenya 24 0 0.1

Mauritius 29 0.4 3Nigeria 33 5 0.2Zimbabwe 26 0.1 0.5

Remarks on the blended formula

• Three parts (UR, Swiss, duty-free) allow for flexibility

• Blended formula is rather anti-harmonizing

• Countries with dispersed tariffs can take advantage of flexibility

• Countries with (high) uniform tariffs cannot use flexibility and have to make bigger cuts

• Countries with “water in the tariff” can take advantage of flexibility so that applied rates are little affected

• Conclusion: Formula does not serve the main objectives ? (simplicity, transparency, effectiveness, efficiency, equity/fair)

Two simulations

Cancun Harbinson

• From bound rate

• 40%: average cut (36%, 15%)

• 40%: Swiss 25

• 20%: duty free

• DC: Special P.linear cut (24,10)

• From bound rate

• average cut 40-60% (25-40%)

• minimum cut 25-45% (15-30%)

• Special products?

AMS cut by 60% (20%)

AMS cut by 60% (20%)

Cut by 80% (70%), eventual elimination

Cut by 80% (70%), eventual elimination

ExportSubsidies

DomesticSupport

MarketAccess

Results

• Cancun more flexible, less ambitious, watered down.

• Smaller average tariff cuts, prices, exports and welfare effects.

• Many developing country losers

Change in world prices Cancun and Harbinson

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

%

Cancun Harbinson

Change in world prices of temperate goods, Cancun proposal

0123456789

10

%

Change in world prices of tropical goods, Cancun proposal

0

0.5

1

1.5

2

2.5

3

3.5

4

%

Change in producer surplus Cancun and Harbinson

-25'000-20'000-15'000-10'000-5'000

05'000

10'00015'00020'000

$m

CancunHarbinson

Change in welfare: Cancun and Harbinson

-2'0000

2'0004'0006'0008'000

10'00012'00014'000

$m

CancunHarbinson

Cancun and Harbinson proposal

Cancun Harbinson Cancun Harbinson Cancun Harbinson

Developed 20'032 34'735 -16'543 -24'403 7'220 11'983Developing -14'529 -18'023 17'707 19'204 163 1'040Least Developed -1'760 -2'455 1'600 2'230 -141 -199World 3'743 14'256 2'764 -2'970 7'242 12'824SSA -1'650 -2'157 1'502 1'951 -129 -210

Consumer Surplus Producer Surplus Welfare

$m

Note large transfer between producers and consumers

Winners and losers

• Net welfare gains $7.2 billion (EU, Jpn)

• Of 161 countries 112 losers (-$1.6 b) Pw quota rents– bound > applied tariffs, no cuts.

Conclusions

• Cancun text flexible but lacking ambition

• Fails test of effectiveness, efficiency , equity and simplicity

• Plenty of scope for improvements, but negotiated outcome probably hinges on EU reform

• Losers needed compensation in some form

THE END

Initial quota rents captured by SSA exporters

$414m

0

20

40

60

80

100

120

$m

Maurit

ius

Botsw

ana

Ivor

y Coa

st

Camer

oon

Malawi

Tanza

nia

Kenya

Ghana

Niger

ia

Ethiop

ia

Zambia

Madaga

scar

Niger

Comparison of Proposals

0

10

20

30

40

50

60

70

80

90

0 20 40 60 80 100 120 140

Old Rate (%)

New

Rat

e (%

)

EU Harbinson

USA