Memorandum submitted by the Department for International Development and the Department for Trade and Industry (WTO-HK 05)

 

SUMMARY

 

1.1. We welcome the Committee's decision to hold an inquiry on Making Trade Work for Development: The WTO Hong Kong Ministerial; and the opportunity it gives us to set out the Government's commitment to ensuring a successful outcome to the Conference, as a key step towards completing the Doha Development Agenda which will bring with it real gains for developing countries.

 

2.2. The UK Government is committed to the development of an open and rules-based international trading system that fulfils its potential to contribute to the reduction of poverty in poorer countries. Our key policy commitments on trade and development are set out in the Government's White Papers, Making Globalisation a Force for Good (July 2004) and Eliminating World Poverty: Making Globalisation Work for the Poor (December 2000).

 

3.3. Building a freer and fairer multilateral trading system has the potential to lift millions out of poverty. A pro-development outcome in the DDA would result in improved participation by developing countries in the world trading system, particularly through substantially increased market access and the dismantling of trade-distorting subsidies by industrialised countries. A development-friendly result will also ensure poor countries are given the flexibility to decide, plan and sequence trade reforms as part of a wider poverty reduction and development strategy.

 

4.4. The UK's objectives for the WTO meeting in Hong Kong, and the current Round of trade negotiations on the Doha Development Agenda (DDA), were set out to Parliament by the Secretary of State for Foreign and Commonwealth Affairs, and by the Prime Minister to the European Parliament, on 23 June this year, while announcing the wider objectives the Government has for our current Presidency of the European Union. Specifically, the Prime Minister said about the DDA:

 

"The WTO Ministerial meeting in Hong Kong in December will aim to take forward the current round of trade talks (the Doha Development Agenda). We will want to work with our EU partners, the Commission and the European Parliament to achieve the best possible result at that meeting. We want an outcome which leads to global economic growth, including through better access to markets for developing countries, in particular for the poorest nations in the world. We want an outcome which reflects the Millennium Development Goals, and which allows the DDA to be completed during 2006."

 

5. Although the level of ambition for the outcome from the Hong Kong Ministerial has now been reduced by many players, the level of ambition for the Round as a whole remains high. The serious offers that have been made in recent weeks by the EU and the US have brought important momentum to the negotiations. But the poorest and other vulnerable members of the WTO have indicated that they feel that their concerns are being marginalized. Delivering a good development package, such as greater market access, with duty and quota free access for Least Developed Countries; special and differential treatment across all the issues, for example special products and a special safeguard mechanism in agriculture; cotton - will be critical in ensuring a good outcome from Hong Kong.

 

 

6. The WTO cannot deliver everything which developing countries need - it is not a development organisation - but there are measures that developed countries can take inside and outside WTO negotiations, which would provide real development and trading opportunities. For their part, in order to take full advantage of a global trading environment which is more liberal, LDCs and other developing countries need more aid to become competitive and to improve their supply side capacity. The recent agreements to increase international aid by about $50bn per year by 2010 - from $80 to $130bn - with half of this increase going to Africa, and to write off a significant amount of poor country debt will have wide benefits and allow developing countries to better finance their own poverty reduction strategies. More resources will therefore be are available that can be allocated to boosting trade, growth and investment. It is up to developing countries to include ambitious and credible proposals in their national development plans to unlock increased funds to build their supply-side capacity and export competitiveness through 'aid for trade' -- for trade-facilitation, diversification, infrastructure development, etc.

 

 

7. In answering the questions posed by the IDC, this memorandum seeks to explain inter alia why the Government believes that an open trading regime in agriculture, services and industrial goods can be a positive force, but that developing countries need flexibility in designing their trade reforms, as well as in deciding their pace and sequence. That is why the rules that underpin preferential market access, such as Rules of Origin, must support rather than detract from the objectives of that access; and why it is important to design policies that reflect the particular circumstances being faced by developing countries - one size does not fit all:

 

Detailed Evidence on THe International Development Committee's specific points of interest

 

The Implications of differentiation between development countries for the outcomes of the Ministerial. To whom should Special and Differential Treatment be applied?

 

8. Special and Differential treatment (S&DT) for all developing countries applies across all the negotiating dossiers of the Doha Development Round. It should provide an enabling process of integration into the global trading system, and not wholesale and long-term exemptions which could lead to a two-tier or multi-tier WTO system. Rules should be designed so that they are sufficiently flexible for developing countries to operate them, with flexibility built in according to need. Needs vary in the different parts of the negotiations and a good outcome should recognise this and be tailored accordingly. This tailored approach to differentiation is emerging. For trade facilitation, for example, countries lacking the capacity to implement rules will either receive assistance in response to their needs or will not be required to comply. The EU has laid stress on the needs of Least Developed Countries across the negotiations, and has called on others to do so, including the more advanced developing countries.

 

9. Least developed countries (LDCs) are eligible for extra help and flexibilities. For example, their agreement specific proposals on S&DT are being prioritised in the Committee on Trade and Development Special Session; they are first and foremost the beneficiaries of Aid for Trade to help build supply side capacities, and they are exempt from any new industrial tariff reduction commitments. Perhaps most significantly, the EU is asking all developed countries as well as developing countries in a position to do so to agree at Hong Kong to grant full duty and quota free access to all products from LDCs.

 

 

 

 

The extent to which tariff escalation and outdated rules of origin harm prospects for industrial development

 

 

10.10. It is difficult to isolate the effects of tariff escalation (where tariffs on final manufactured goods are higher than tariffs on intermediate and raw inputs) on the prospects for industrial development from the overall harmful effects of tariff protection. But we know that it is an area of concern to developing countries. The WTO Agricultural and Non Agricultural Market Access (NAMA) negotiations both aim to agree on tariff reductions that reduce the phenomenon of tariff escalation by applying more than proportional tariff cuts to the higher tariffs. The Doha Ministerial Declaration makes this a clear objective of the tariff reduction negotiations and the Framework Agreement from July 2004 reaffirmed its importance.

 

11.11. Higher tariffs on processed products discourage developing countries from graduating from the production of lower value added goods. This results in lower returns from trade, smaller positive dynamic effects (such as transfer of technology), and less diversification of their economies.

 

12.12. UNCTAD have recently carried out studies looking at different scenarios currently being negotiated in the WTO. These show that developing countries stand to gain substantially from reductions in NAMA tariffs (see below). Some of these gains can be attributed to the fact that the scenarios under discussion in the WTO all tend to reduce the escalating tendency of tariffs.

 

Rules of Origin

 

13.13. Although preferential rules of origin are not part of the DDA negotiations, simplifying and relaxing rules of origin requirements, particularly cumulation provisions, have the potential to bring real economic benefits to developing countries. Reform will enable greater use of preference schemes, like the Generalised System of Preferences (GSP), generating employment and export revenue in the poorest countries that struggle to compete in world markets.

 

14. Rules of origin are necessary to determine whether developing country exports qualify for preferential treatment (if we give preferential treatment to Mexican goods, we have to have a set of rules that make sure that, for example, US goods which do not qualify for preference cannot simply be exported more cheaply to the EU via Mexico.) But restrictive rules of origin are believed to be the main reason for the relatively low take-up of preferences (52.5% of all eligible imports). The current EU preferential rules of origin apply to the GSP and EBA schemes but create a disincentive to exporters because of their complexity and overly bureaucratic nature.

 

15. The EU Commission has proposed limited regional cumulation to encourage regional economic integration. This means that for a product to qualify for the GSP scheme, developing country exporters have to source any inputs from suppliers in their region, irrespective of whether these suppliers offer the most competitive prices.

 

16. Our research (supported by that of the World Bank, UNCTAD and Inter-American Development Bank) shows that wider cumulation has much greater developmental benefits than regional cumulation. This is because it helps developing countries improve their export competitiveness on a more sustainable basis.

 

17. There is an ongoing review of EU preferential rules of origin. Legislative proposals are expected from the Commission in the early part of 2006.

 

18.18. More liberal rules of origin will be key to enabling greater integration in international trading system. For example, Lesotho has been able to benefit from the relaxed rules of origin under the US Africa Growth and Opportunities Act (AGOA) preference scheme. These allow Lesotho to source textiles at the most favourable prices from any developing country and its exports are still classified as originating in Lesotho. Since 2001 Lesotho's exports to the US have quadrupled to US$320 million, making the garment industry the largest employer in the country.

 

The degree to which liberalisation of industrial and manufacturing sectors threatens to undermine development. What aspects of the Non-Agricultural Market Access negotiations would benefit developing countries?

 

19.19. The UK Government has rejected the mercantilist approach to trade negotiations which treats any opening of Western agricultural and other markets as a "concession" for which developing countries must pay a price. The UK also recognises the importance for developing countries of maintaining flexibility. The UK is working hard within the EU to ensure no new obligations are imposed on LDCs and that any NAMA agreement for developing countries respects the principle of less than full reciprocity and Special and Differential Treatment.

 

20.20. If these principles are respected, the UK Government does not believe that liberalisation of industrial and manufacturing sectors threatens to undermine development. Rather, we believe that properly sequenced trade liberalisation is an ally in the fight for development and against poverty. The DFID 2000 White Paper Make Globalisation Work for the Poor, and the DTI 2004 White Paper Trade and Investment lay out the UK Government policy and the rationale behind it.

 

21.21. Some argue that developing countries need to be able to impose high tariffs in order to create the space for new industries to develop and grow. However, the conditions under which such infant industry protection can be successfully used to promote development are stringent. Firstly, governments need to know which domestic industries are likely to succeed. Secondly, governments need to be able to reduce protection and introduce competition as industries mature (or as it becomes clear that they are unlikely to do so). These conditions are both technically and politically difficult to meet. Most economists therefore believe that infant industry protection is in general more likely to do harm than good, as protection creates unavoidable costs to consumers.

 

22.22. The evidence shows that trade openness (as long as it is introduced in an appropriate way) is generally strongly associated with higher growth. Trade promotes growth by providing export and diversification opportunities and improving access to cheaper imported goods, investment and technology. However, in order for trade liberalisation to promote development, it must be embedded in a broader environment of economic reforms including macroeconomic stability, a favourable environment for businesses (including well functioning markets for labour and capital) good infrastructure, and also short and medium term adjustment policies for those adversely affected by liberalisation. This is why we believe that developing countries need longer time periods to be able to properly sequence reforms.

 

23.23. A recent UNCTAD study suggests that developing countries stand to gain about two thirds of the total expected welfare gains from industrial tariff liberalisation in the Doha round. Many of these gains come from liberalisation in developing countries themselves. Where developing countries chose to avoid cutting tariffs then they actually stand to benefit comparatively less. We want Least Developed Countries in particular to enjoy complete flexibility over if and when to cut tariffs - but this in no sense means that cutting tariffs will not be strongly in their interest in many cases. LDCs are encouraged to bind tariff levels (to a maximum rate of their own choosing) at the WTO. In this way they can preserve flexibility to increase tariffs up to whatever maximum rate they feell they need, but can also strengthen their economy (by increasing certainty for exporters and investors and by reducing the scope for lobbying by vested interests to increase protection to levels that are socially and economically unjustifiable).

 

24.24. The UNCTAD study results take preference erosion in account. With the exception of a small number of countries, the overall gains from multilateral liberalisation in industrial products are expected to outweigh the negative impact of preference erosion.

 

25.25. The benefits from the NAMA negotiations vary across countries and between sectors. Asia will see greater gains than other developing country regions.

 

 

Textiles

 

The textile and clothing sector, representing 5.6% of world merchandise exports, remains one of the most protected industrial sectors. The average tariff in OECD countries is 9.4% on textile and 16.1% on clothing, compared to 6.2% on manufactures (OECD, 2004).

 

Overall the liberalisation of trade in textile and clothing is expected to generate very significant benefits. Even relative to agricultural trade liberalisation and services, benefits from liberalisation in textile and clothing loom relatively large: in the order of 11% of global welfare gains.[1]

 

However, the gains will not be even. Tariff reductions in the WTO will be agreed on a Most Favoured Nation basis, meaning that all exporters benefit from the reduced tariff. There will be an adverse impact upon the exporters that benefit from preferential (often duty free) access to the markets that will liberalise. The competitive advantage given to the preference receiving country will be eroded. Their exports run the risk of being displaced by more efficient producers.

 

The loss of preferential access in textile and clothing has already impacted on some countries with the elimination of the quotas agreed in the Uruguay Round Agreement on Textile and Clothing, which was completed at the end of 2004. Comparatively, preference erosion from industrial tariff reductions will be more modest and will be counterbalanced in some instances by market access opportunities in other sectors.

 

China will be the main beneficiary from liberalisation in textile and clothing. These sectors are estimated to account for 13% and 21% of China's predicted total export growth. India is another expected beneficiary: textile and apparel are expected to account for respectively 15% and 14% of the total export growth, according to UNCTAD (2005).

 

On the other hand, preference receiving countries, under trade agreements such as the Generalised System of Preferences or the USA's Africa Growth and Opportunities Act, such as Bangladesh, Mauritius and Zambia will see some, and in some instances all, of the gains from textile and clothing liberalisation eroded by the loss of preferences. In general textile is predicted to suffer more than clothing, as the latter benefits from the comparative advantage of these countries in cheap low-skilled labour.

 

 

 

 

The benefit of including GATS Mode IV, the temporary movement of labour, in the services negotiations for developing countries. Whether or not developing countries should be making more 'ambitious' offers in the services sector

 

26.26. The General Agreement on Trade in Services (GATS) sets out four different ways of supplying services: Mode I is cross-border trade e.g. financial trading; Mode II is consumption abroad e.g. tourism; Mode III is, commercial presence e.g. direct foreign investment in electricity supply; and Mode IV is the temporary movement of natural persons.

 

27.27. More specifically, Mode IV is the movement of workers from one country to another to provide a service for a limited period. It is important to distinguish it from issues relating to immigration, citizenship or residence. Under Mode IV workers are neither migrating on a permanent basis, nor seeking entry into foreign labour markets. At the end of the contract period temporary services providers are expected to return to their country of origin. As such, the establishment of a partnership approach between trade and immigration officials in both domestic and host countries is essential in order to build trust and confidence and to ensure adequate enforcement and returns guarantees.

 

28.28. Mode IV is the main area in which developing countries believe that they will benefit from the WTO services negotiations. They have a comparative advantage in supplying labour intensive services given relatively lower labour costs, and they are also producing highly skilled and well educated services professionals able to compete in a broad range of service sectors.

 

29.29. Greater liberalisation under Mode IV could bring significant benefits to developing countries. Temporary workers send back a greater percentage of their earnings as remittances - in some countries these constitute up to 9% of GDP[2]. Temporary movement increases knowledge about foreign markets and helps to establish connections between host countries and local business networks. It facilitates the transfer of new technology and skills to developing countries. Temporary presence of service providers makes it easier to agree to, and enforce contracts because of better knowledge of local business law and practice. More liberal conditions for Mode IV mobility increase the possibility of out-sourcing services. Networking through temporary exchange of skilled personnel could be useful in expanding trade by allowing firms to promote their services and reputation abroad.

 

30.30. Developing countries want to include GATS Mode IV in the negotiations on trade in services because it would offer them a legally predictable and enforceable environment for trade, and help to increase transparency with regards to visa and renewal requirements, professional and experience qualifications and limitations on duration of stay.

 

 

31.31. Given the undoubted economic and social benefits of services liberalisation, the UK government would like to see a high overall level of ambition for the WTO services negotiations. However, it is vital that the current flexibilities in the GATS are maintained. The current arrangements in the WTO work on a voluntary basis, through the "request/offer" process; meaning countries are entirely free to choose which service sectors to liberalise - if any. The UK government strongly supports this voluntary structure precisely because it allows liberalisation of services to take place in a way that supports national development plans.

 

32.32. The UK government believes that services liberalisation has a huge potential to benefit developing countries. The share of services in world trade has been among the fastest growing components of world trade over the last 15 years. A study by the WTO Secretariat estimates that services account for up to 50-75% of GDP both in developing and developed countries and 20% of international trade.[3] It is estimated that a 50% cut in barriers in service markets would deliver an annual welfare gain to the world economy of $250billion.[4] It is therefore appropriate for the UK government to encourage developing countries to participate in the services negotiations.

 

33.33. However, in any particular country, services liberalisation will only be beneficial under the right conditions. For example, a country contemplating liberalisation of its financial services sector would need to ensure that it is able to regulate the sector adequately. Therefore an appropriate institutional and regulatory framework is needed to seize any substantial economic benefits arising from liberalisation.

 

34.34. So the UK government believes that developing countries should maintain the ability to decide for themselves when, and whether to open their services sectors to foreign competition based on their national and development interests.

 

35.35. The UK government is committed to assisting developing countries build the necessary capacity to participate fully in the WTO negotiations. It is vital that developing countries are able to identify and analyse their export and import interests in services sectors. The UK is also well placed to share its expertise with regards to ensuring a sound regulatory environment. DFID is helping developing countries to enhance their capacity to negotiate and undertake their own services assessments. DFID has provided support both in Geneva and at country level, including funding the United Nations Conference on Trade and Development (UNCTAD) to develop tools to assist developing country delegations in Geneva in the GATS negotiations. DFID is also funding the World Bank to undertake impact assessments of services trade liberalisation in developing countries. This is aimed at better informing developing countries of the opportunities and challenges they face. DFID has also recently commissioned work to assess what more needs to be done to enable developing countries to participate actively in the negotiations.

 

 

The extent to which developing countries will gain from agricultural trade liberalisation

 

 

36.36. The UK Government supports an open, rules based system of international trade in agricultural commodities that would be beneficial to developing and developed countries. This is one of our priorities for the WTO Doha Development Agenda, and to which the Hong Kong Ministerial should make a positive contribution.

 

37.37. Agricultural protectionism severely distorts world markets and effectively excludes exports from many developing countries. Within the OECD, markets are insulated with high prices, which encourages overproduction that can depress world prices. Extremely high tariff barriers which deny access, further insulate OECD markets. At the same time, developing countries face subsidised competition in their own domestic markets and those of third countries, which make it difficult to compete. The combination of high tariff barriers and various forms of subsidy mean that many developing countries are effectively excluded from markets in which they would enjoy a comparative advantage in a less-distorted trading system.

 

38.38. The liberalisation of agricultural markets and the reduction in barriers to trade would benefit developing countries with a productive and internationally competitive agricultural sector. The potential gains to developing countries resulting from liberalisation are significant and the liberalisation of the agricultural markets of the developed world remains key to unlocking the development benefits of trade. The World Bank estimate that 62% of the $280 billion in estimated global welfare gains resulting from complete liberalisation of all international commerce would be in the agricultural sector. The World Bank also estimate that, of the $182 billion global welfare benefits from fully removing agricultural tariffs and subsidies, $47 billion would go to developing countries. These gains will not be distributed equally between developing countries. The degree to which they will benefit depends on how they can respond to the changes outlined below.

 

39.39. As a result of agricultural liberalisation we expect to see[5]:

·· increased demand for imports from all countries, including developing countries with sufficient trade capacity, as a result of a decline in tariffs;

·· reduction in developed country production and export of those commodities- which are less competitive on world markets without the benefit of a subsidy;

·· increase in production in those developing countries no longer facing subsidised competition in their own domestic markets and/or in third country markets;

·· fall in food and commodity prices within the EU and elsewhere as protection and subsidies are removed, leading to a decline in artificially inflated prices;

·· increased food prices on world markets, as they are no longer depressed by over-production in developed countries and their various "dumping" practices. This will vary according to the commodity;

·· Overall -

oo an increase in world trade in agricultural products;

oo an increased share of world trade represented by developing country exports.

 

40.40. However, determining the nature and the scale of the impacts is not straightforward. Firstly, it is precisely the complexity, depth and entrenched nature of protectionism and the extent of its trade-distorting effects, which makes estimating the likely impacts of reform so difficult. Secondly, it is the net impact of reform - accounting for the losses, which might be offset by gains elsewhere, and vice versa. Thirdly, we need to get beyond aggregate figures. Developing countries are not a homogeneous group. The way in which agricultural liberalisation impacts on a particular developing country will depend on its current level of integration into the global economy, its capacity to respond to international market signals, existing preferences that it might receive, as well as the agricultural products in which it is competitive - or might be in a less distorted agricultural trading system. The way that agricultural liberalisation impacts poverty reduction within a particular country - notwithstanding any aggregate net benefit - will depend on a range of domestic conditions, including labour mobility and regulation, access to and control of resources, production patterns, and many other factors.

 

41.41. Not surprisingly, the countries that stand to gain the most are the larger more advanced developing countries such as Brazil, Argentina, Uruguay and South Africa amongst others. Whilst these countries are not LDCs they are highly populous and wealth distribution is unequal; this means they are home to a high proportion of the world's poorest people. Recent World Bank[6] research suggests that a reasonably comprehensive but plausible Doha liberalisation scenario could cause agricultural output growth to increase from 2.9% to 3.5% for Argentina, from 3.3% to 4.4% for Brazil, from -0.1% to 0.4% for Thailand, and from 4.4% to 5.3% for Other Latin America & the Caribbean (not including Argentina, Brazil, or Mexico) by 2015.

 

42.42. Reforms to each of the three pillars of agricultural support (domestic support, export subsidies and market access) will be important in delivering benefits for developing countries. Cotton is one area where trade distorting domestic support, predominantly but not exclusively in the US, is undermining competitive production in West Africa and where reform is urgently needed.

Cotton

 

Subsidies to US and EU cotton producers are one of the clearest and most high profile examples of where developed country agricultural subsidies negatively affect African producers. The West African countries successfully brought their situation to the world's attention by their efforts at the WTO Cancun Ministerial. DFID provided €50,000 to support their advocacy though the NGO "Ideas Partnership for Development".

 

The US, which produces around 18% of the world's cotton, makes the largest total subsidy payments. The EU, in Greece and Spain, produces only 2% of world output but farmers get far higher individual payments at 160% of production costs as opposed to 40% in the US. This is significant because global trading patterns mean that EU production tends to be in competition with West Africa. In 2004 the EU reformed its support to cotton farmers, decoupling (ie, breaking the link between subsidy and production) 65% of support. It also proposed establishing a monitoring mechanism to determine the impacts of EU cotton subsidies on developing countries, particularly on African farmers.

 

Reducing and ultimately eliminating cotton subsidies in the developed world therefore remains a key priority to safeguard the livelihoods of West African cotton producers. For this reason the US should implement the WTO panel ruling on cotton that found a number of their subsidy programmes to be in contravention of WTO rules. The UK supports the European Commission proposal, to "fast track" cotton in the agricultural negotiations putting it "first in the queue" for implementation in the single undertaking of the Doha Development Agenda.

 

43.43. Market access reforms in agriculture have been estimated by a number of researchers, including the World Bank, the French research institute CEPII and UN Economic Commission for Africa to yield the greatest welfare benefits for developing countries. However, a number of developing countries are concerned that reducing MFN tariffs will erode the preferential access that they currently enjoy to developed country, particularly EU, markets.

 

44.44. Determining the impact of preference erosion requires detailed analysis. The broad conclusion of the research on preferences is that they have been of limited value but with some important exceptions. Negative effects of preferences include increased commodity dependency and a distorted and inefficient use of resources. The uptake of access apparently offered by preferential schemes has often been severely hampered by onerous conditions, such as rules of origin requirements. Moreover, preferences impose costs on those developing countries that do not receive them.

 

45.45. A recent study carried out by the Commonwealth Secretariat estimates the annual value of OECD agricultural preferences (as measured by quota rents/income transfers to preferred exporters) for three of the most protected tariff-peak products - sugar, bananas and beef - at $536 million, with estimated transfers from sugar alone ranging from 71%-91% of that total. The table below shows the extent to which sugar, bananas and textiles contribute to preference margins. The countries benefiting the most are listed. There are 18 countries with average preference margins of over 5%. The importance of sugar, bananas and textiles is very clear.

 

Table 1: Contribution of Major Export Products to Preference Margin

		Percent of margin accounted for by preferences for:
	Total Preference Margin 1/	Sugar	Banana	Textiles and clothing	Other products
Middle-Income Countries 2/	4.9	42	19	12	27
Largest beneficiaries 3/	15.6	51	24	8	17
Mauritius	39.9	84	0	13	3
St. Lucia	32.9	0	94	2	4
Belize	29.3	47	23	0	30
St. Kitts and Nevis	28.7	94	0	0	6
Guyana	24.2	95	0	1	4
Fiji	24.1	96	0	1	2
Dominica	15.9	0	97	0	3
Seychelles	12.2	0	0	0	100
Jamaica	9.7	67	8	7	18
St. Vincent and the Grenadines	9.4	0	89	0	11
Albania	8.9	0	0	48	52
Swaziland	8.2	97	0	1	2
Serbia and Montenegro	7.6	28	7	10	56
Honduras	6.7	56	9	19	15
Tunisia	5.9	0	1	79	20
Côte d'Ivoire	5.7	8	51	2	38
Morocco	5.7	0	4	64	33
Dominican Republic	5.5	23	16	27	34
1/ As a percent of the trade-weighted average world market price of the country's exports. 2/ Average for 76 middle income developing countries, weighted by margin. 3/ 18 countries with average preference margins greater than 5 percent.

 

46. Sugar is clearly a key product where liberalisation is leading to preference erosion and one where the UK is working hard to ensure adequate, timely assistance for those that need it.

 

Sugar

 

The most significant change in the sugar sector currently underway is the reform of the EU sugar regime, which will have a range of effects for developing countries. In general developmental terms it will be beneficial: the current EU regime stimulates over-production which causes the EU to export up to 5 million tonnes of subsidised sugar each year onto world markets. This drives down prices, and forces more efficient developing country producers out of markets in which they would otherwise be able to compete.

 

EU reform will also have some negative effects for developing countries however. ACP countries that were signatories of the Sugar Protocol will suffer preference erosion, as the price that they receive for sugar exported to the EU will fall by up to 39%. The European Commission will be providing transitional assistance to these countries to help them make the adjustment to the new regime. Reform also affects LDCs, as these countries previously had little if any access to the EU market (apart from those that were also signatories to the Sugar Protocol). The Everything But Arms initiative (EBA) will give the LDCs duty-free and quota-free access to the EU market, (access that is being phased in over time, leading to completely free access by 2009), but the price cuts involved in sugar reform will make this access less lucrative - although the EU price after reform will still be double the world price.

 

Whilst it is not an issue as such in the DDA, sugar is linked to the WTO negotiations in two ways. Firstly, the ACP countries that are losing most from EU reform view the EU's response to their transitional needs as a test of the extent to which developed countries (and the EU in particular) are prepared to address issues affecting developing countries. This will affect the atmospherics of the DDA. Secondly, trade in sugar could be affected more directly through agricultural market access negotiations in the DDA. MFN producers are effectively excluded from the EU market at present by prohibitively high tariffs. Large cuts in bound rates on high tariffs such as sugar could change this. One of the issues currently being discussed in the DDA is the use of 'sensitive products'. If the EU were to declare sugar to be a sensitive product, as some commentators believe is likely, then this could significantly reduce any market opening in this sector.

 

 

47.47. In terms of the impacts of preference erosion on the LDCs, the IMF[7] estimates that the aggregate potential loss from a 40% reduction in tariffs would amount to only 1.6% of their total exports. This would be partially offset by an expansion of duty and quota free access to developed country markets, as called for in the DDA. Some LDCs would suffer disproportionately due to the concentration of their exports in products that enjoy deep preferences. For example, a loss of 6.6% of total exports is predicted for Malawi due mainly to erosion of sugar and tobacco preferences. However, the main problem for LDCs, particularly in Africa, is their limited ability to respond to the preferential market access that they do have. This points to the importance of transitional assistance to cope with balance of payments difficulties and the need for supply side capacity building to help them take advantage of new opportunities.

 

48.48. The DDA commits WTO members to 'reducing, with a view to phasing-out, all forms of export subsidies'. While it is widely recognised that these are the most distortionary and unfair form of agricultural support, developing countries and LDCs that import the bulk of their food needs are concerned that they will suffer as a result of a rise in world food prices. This was recognised in the Uruguay Round of trade negotiations and the Marrakech Mechanism was established to help address potential problems. This mechanism has not worked effectively to date and its improvement is essential to help net-food importing developing countries deal with any food price increases as a result of the DDA.

 

49.49. It is difficult to define exactly which countries are the most likely to face severe difficulties from rising food prices. The likely extent of the problem will depend in part on what happens to world prices. It has been estimated that full liberalisation of all OECD farm policies (including an end to export subsidies), would boost the volume of agricultural trade by more than 50%, but would cause real international food prices to rise by only 5% on average. In addition the potential for higher food prices in developing counties to stimulate production is often not factored into analysis.

 

50.50. What the WTO Hong Kong Ministerial is likely to deliver in relation to this agenda is still under negotiation. In recent weeks the main negotiating groups have tabled proposals. The appended table gives an overview of the proposals. The most recent EU proposal is a significant step as we enter the end game for the DDA. The UK thinks this demonstrates the EU's commitment to a successful outcome at Hong Kong. The cuts proposed on market access go much further than the EU's original offer and are deeper than the cuts agreed in the Uruguay Round. We are looking to other countries to respond to this in order to come to the middle ground in the agriculture negotiations. While the reaction of the US is important, its is equally important for the groupings of developing countries to respond with their concerns

 

51.51. The EU has gone some way to meet G20 concerns by recognising the G20 request for developing countries to undertake 2/3 the cuts of developed countries in the market access part of the negotiations (the EU's figures for developing country tariff cuts are broadly consistent with this in their latest proposal); and also by meeting the G20 half way on tariff reductions (EU moved from its original proposal of average cuts of 24.5% to 39% when G20 would like 51-54% cuts). The EU and G20 also agree on levels of tariff capping (100% for developed and 150% for developing countries).

 

52.52. The Committee also highlighted that they wish to look at coffee as part of their agenda. As a tropical commodity, developing country coffee producers do not face the problems of developed country domestic support or export subsidies, rather it is competition between developing country producers and concentration in the supply chain that pose problems for developing countries, as well as oversupply - world production consistently outstrips consumption by a significant margin, depressing world prices. The issue of tariff escalation, where higher tariffs are levied on processed products, preventing countries moving up the value chain is often cited as a problem in the sector. However, in most OECD countries escalation is minimal compared to other agricultural products on an MFN basis (eg for roasted beans 7 -10% in the EU, 12% in Japan) and preference schemes remove this for most poor countries. The problems of the coffee sector in developing countries are therefore better dealt with outside of the WTO context.

Coffee

The effects of long-term declines and volatility in agricultural commodity prices are greater when a country remains particularly dependent on agricultural commodity exports. This is principally a problem of small developing countries, which have found it difficult to diversify due to political, economic or entrepreneurial obstacles. This has had serious implications for the world's 25 million coffee producers. Price falls and fluctuations have put exceptional strains on efforts to reduce poverty. Diversification away from coffee into other sectors is difficult for coffee producers because of the significant investments associated with tree crops such as coffee. For many governments, uncertainty of foreign exchange earnings combined with lack of access to credit that could smooth fluctuations in income makes long term planning of spending difficult. The impact price fluctuations and reductions have had on HIPC countries has been serious and has affected long term debt sustainability.

 

The international Coffee market has also been affected by a heavy concentration within the value chain. Producers of raw agricultural products, coffee included, are capturing less and less of the value of their markets compared to processors of coffee. This concentration of market power with processors is very noticeable - 4-5 branded processing companies jointly control 60-70% of world production. In the early 1990s coffee producing countries had earnings of $10-12 billion and the value of the coffee industry was $30 billion. Currently coffee producing countries receive only $5.5 billion whilst retail revenues are $70 billion.

 

Markets and prices for commodities, including coffee, were previously managed through International Commodity Agreements, which maintained physical buffer stocks to influence world prices. International Commodity Agreements collapsed as support from consumer countries was withdrawn, and hence the ability to manage markets in the context of increased productivity. For coffee farmers, the combination of deregulation, liberalisation and the shift to market based policies has yet to produce an improvement in the livelihoods of producers as prices have become more volatile and the long term decline in value has continued.

 

November 2005

 

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[1] This figure derives from a study that assumes full liberalisation in agriculture, manufactured goods and services.

[2] Ratha (2003).

[3] WTO -Council for trade in services

[4] Australian Ministry of Foreign Affairs and Trade (1999)

 

[5] Ruffer and Imber, (2003), The Impact of Agricultural Trade Liberalization on Developing Country Exports.

[6] Anderson, K. and Martin, W. Eds. forthcoming. Agricultural Trade Reform and the Doha Development Agenda, Paulgrave Macmillan.

[7] Based on a 40% reduction in tariffs among the QUAD and assumes expanded LDCs free access to these markets.