Trade Note July 22, 2004 Market Access in Agriculture: Beyond the Blender A fundamental requirement with many hidden problems. To avoid for success in any trade introducing similar problems as the framework negotiation is finding a is converted into detailed modalities in the The balance between flexibility next stage of the negotiations, it is important World Bank and discipline. Because to understand the problems with the blended Group countries have very different formula. www.worldbank.org interests, and all major decisions at the World Trade Superficially, the blended formula appears to Organization must be made strike a balance between discipline and by consensus, any agreement flexibility by creating three groups of tariffs-- must have the flexibility one group subject to the Uruguay Round needed to address the specific approach of an average-cut target and a needs of each member, while minimum cut in all tariffs; one group subject imposing enough discipline to to a rigorous tariff-cutting rule known as the yield the gains in export Swiss formula; and one group to be set to market opportunities that are zero. Unfortunately, it is likely that International the raison d'être of trade governments would assign the most sensitive Trade negotiations. tariff lines to the Uruguay Round approach-- introducing flexibility, but at the cost of Department Countries have been virtually abandoning the objective of struggling to strike this increasing discipline, and raising great balance under each of the uncertainty amongst members about the extent three pillars of the agricultural of their potential gains in market access. agreement ­ market access (i.e, import barriers), domestic In addition to cutting within the three groups support, and export subsidies. of tariffs, industrial countries would have had Of these three, market access a maximum tariff level to be negotiated, a goal By Will Martin holds this largest potential of reducing tariff escalation, and an average- gains for developing cut requirement spanning the three groups of countries, but yet is the most tariffs. difficult area to establish a balance. In the Derbez Text, the same broad framework These notes summarize applied to developing countries, except that recent research on global trade issues. They reflect The mid-July draft framework they were allowed smaller reductions in a solely the views of the for agricultural market access group of special products, and to reduce the author, and do not (WTO 2004) seeks to achieve third group of tariffs to between zero and five necessarily reflect the views of the World Bank this balance through a tiered percent, instead of to zero. Group or its Executive approach with larger cuts in Directors, or the countries higher tariffs. This framework While a tiered approach potentially provides they represent. is much more general than the more discipline than the blended formula, the previous basis for negotiation, mid-July draft framework (WTO 2004) Trade Note 17 the "blended formula" incorporates a potentially major weakening of approach in the Derbez Text market access disciplines by proposing to treat (WTO 2003b)-- an approach the Tariff-Rate-Quota (TRQ) commodities-- or roughly 20% of tariffs in countries using access, while claiming credit for a substantial these measures--as "sensitive". The results average-cut. This is why the World Bank presented in this paper suggest that this could (2003, p92) described the average-cut substantially reduce the impact of reform on approach as "the cut you have when you're market access. not having a cut". To understand the situation, this brief reviews To the extent that any non-trivial tariffs are the mechanisms for tariff reductions under the cut, there will be a strong tendency for blended formula to assess the overall effect on relatively low tariffs to be cut more than market access. We divide the discussion into higher tariffs--since both count equally, and the average-cut group, the Swiss formula., and cuts in lower tariffs are likely to encounter the zero group, and then consider the overall much less political resistance. If anything, the effect. average-cut approach tends to increase tariff escalation, and the protection provided to The Average-Cut Group higher processing stages. These outcomes are completely inconsistent with the goals set out Under the blended formula, countries could in the draft framework, or other proposals choose which tariffs went into each group. such as the AU/ACP/LDC position paper This was justified by a need for flexibility in (WTO 2003a)-- of increasing market access; dealing with "sensitive products", but reducing tariff peaks and tariff escalation. involved an unnecessary evisceration of the key goal of expanding market access. The (The confusion created by the average-cut basic problem with the average-cut approach conjuring trick is both linguistic and statistical. is easily illustrated by considering the case An average-cut sounds very similar--in where a country such as Japan chooses to put English at least--to a reduction in average two tariffs--a one percent tariff, and a tariff tariffs. However, a reduction in an such as the levy of $2820 per ton on rice appropriately weighted average tariff has (Wailes 2004)-- into this set and then important implications for market access. By undertakes a 50 percent average-cut: contrast, as we have seen, an average-cut is a meaningless concept if initial tariffs are very Table 1. Use of the average-cut routine to avoid different and if countries are able to choose disciplines on tariffs which tariffs are to be subjected to an average- Tariff 1 Tariff 2 cut routine--as they were under the blended- % % formula approach.) Initial tariff 1 1400 Final tariff 0 1400 Of course, the extent to which the average-cut Cut 100 0 trick can be used to avoid disciplines depends Average Cut 50% on the proportion of tariff lines in the average- cut group of sensitive products--an issue that As is clear from the table, a 50 percent was to be negotiated in the modalities stage of average-cut can be achieved by cutting the the negotiations. very low tariff, without changing the peak tariff at all. In our example, the average tariff The numerical example in Table 1 shows why is cut from 700.5% to 700%. While a industrial countries with high and variable substantial average-cut has been made, the agricultural tariffs might wish to use the average tariff has not changed significantly. average-cut routine for their own tariffs. The Market access-- which is much more nearly attraction is much less clear for those determined by the reduction in the average countries--such as most countries in Africa-- tariff-- has not improved significantly. The where bound tariffs are relatively uniform average-cut conjuring-trick allows countries across all agricultural products. In this whose current tariffs vary substantially to situation, an average-cut requirement imposes avoid giving any improvement in market real discipline. A given percentage cut in each tariff contributes equally to reductions in the included in the first group of tariffs, it is average tariff, and hence to reductions in difficult to make cuts that are totally protection and increases in market access. meaningless. However, this approach still treats 50 percent cuts in 90 percent tariffs as While an average-cut approach would allow equal to 50 percent cuts in 1400 percent an African country the flexibility to choose tariffs--when the cut in the 1400 percent tariff exactly which tariffs to cut, it would have to clearly has much greater potential to provide reduce its average tariff in line with the increased market access. average-cut requirement. A third approach to the average-cut problem is Under the Derbez draft, developing countries to move to a line-by-line tariff-cutting rule. would have had the flexibility to exempt This is the approach taken by the G-20 in their certain products from reduction commitments proposed revision to the Derbez text (ICTSD through designation as Special Products 2003), and in the Non-agricultural market subject to smaller, line-by-line tariff cuts. This access component of the framework (WTO is a mixed blessing, since it is far from clear 2004). This has an advantage over the how reduced tariff reductions would help average-cut approach in that it moves away contribute to goals such as food security. The from totally illusory commitments-- such as key to food security is ensuring that poor agreements on average-cuts in tariffs. people, in particular, have access to food, and However, as in the case of negotiations on increases in protection frequently reduce the minimum tariff cuts, proposals for larger food security of vulnerable consumer groups. proportional cuts in tariffs are likely to If uncertainty about the effects of encounter strong resistance from countries that liberalization is a concern, perhaps the claim a need for flexibility. proposed Special Safeguard would be a better approach to dealing with this problem. A fourth option would be to specify reduction goals in terms of reductions in average tariffs. Improving on Average-Cuts One approach to An agreement to reduce average tariffs by 36 mitigating the average-cut problem is to have percent has some meaning, in contrast with a a minimum-cut condition for each tariff line, worthless commitment to bring about a 36 as in the Derbez draft. In the Uruguay Round, percent average-cut in tariffs. Agreement to this was done by combining a 36 percent cut the average tariff provides the flexibility so average-cut requirement with a 15 percent vigorously demanded by proponents of minimum-cut criterion. A difficulty with this average-cuts, while preserving incentives to approach-- in a situation where countries can reduce high tariffs and to increase market choose which tariffs to include with their peak access. If peak tariffs are not reduced, a price tariffs--is that the minimum-cut is the only must be paid through worthwhile reductions in discipline on cuts in these tariffs. Raising the lower tariffs. Reductions in trivial tariffs, as in minimum cut to the level needed to create Table 1, will simply not suffice substantial increases in market access is likely to be very difficult, since the proponents of the Another potentially useful way to balance average-cut routine have argued strenuously disciplines and flexibility is by allowing that their need is for flexibility to deal with the countries to choose which tariffs to treat situation of particular sectors. leniently, while incorporating a "cost" for exceptions. Konandreas (2004) proposed such A second approach to dealing with the an approach within the blended formula, by average-cut problem is to eliminate the ability capping all tariffs subject to the average-cuts of countries to choose which tariffs are subject at the average of the tariffs included in this to average-cut (in)disciplines. This was done group. Countries could choose how many in the Harbinson draft (WTO 2003c), where tariffs to include in this group, but adding tariffs were placed in tiers dependent on their more tariffs would lower the cap--as would level. When only tariffs above 90 percent are blending low tariffs in with the peaks in order away with very small reductions in average to avoid the average-cut discipline. tariffs in this group. The extent of this problem can only be determined through careful Francois and Martin (2003) suggested analysis of actual tariff schedules, but it providing more flexibility while introducing a clearly could be serious if a sizeable cost by first applying a line-by-line formula, proportion of tariffs were allowed in the and then allowing renegotiation with average-cut group. compensation, beginning from the formula outcome. This has the advantage of providing An examination of the EU tariff schedule confidence to exporters that they will achieve highlights the importance of allowing only a worthwhile gains in market access. small share in the Uruguay Round group if the discipline imposed by the Swiss formula is not The Second Group--the Swiss formula to be diminished. Assuming the Uruguay Round group is to be subject to a 36 percent The Swiss-formula approach proposed for the average-cut with a 15 percent minimum, we second group of tariffs has a number of critical assume that sufficient low or zero tariffs advantages. It reduces high tariffs by more would be blended into the Uruguay Round than low tariffs, and it reduces all tariffs to category to eliminate any discipline imposed below an agreed level, determined by the by the 36 percent cut, leaving only the 15 ceiling parameter in the Swiss formula. percent minimum cut effective. Under these Alternatively, a Swiss formula could be used circumstances, Table 2 shows the highest tariff to bring about an agreed reduction in a that would need to remain in the Swiss- country's average tariffs, while ensuring that formula group for different percentages of its high tariffs are brought down by more than tariff lines allowed in the Uruguay-Round lower tariffs (Francois and Martin 2003). A formula group. Swiss formula also automatically reduces tariff escalation--wherever a processed Table 2. The Highest Tariff in the Swiss-Formula product has a higher tariff than an unprocessed Group product, the tariff on the processed product is Share of tariff lines Highest tariff subject to automatically reduced by more than the tariff in Uruguay Round the Swiss formula on the unprocessed product. Further, the Swiss Group formula has been shown to work in market % % access negotiations. In the Tokyo Round, it 2 103 brought about a transformation of world trade 4 79 barriers in manufactures, with most tariffs 6 71 being reduced to below 16 percent, creating 8 60 opportunities for dramatic expansion of 10 50 manufactures exports from developing 20 27 countries (World Bank 2002). 30 20 40 17 As is noted by the IPC (2004), the 50 13 effectiveness of the Swiss formula in the blended formula could potentially be undercut by countries selecting only low tariffs for The key implication of Table 2 is the inclusion in this category. The extent to which importance of ensuring that only a small share countries could do this would depend on the of tariffs is included in the Uruguay Round proportion of tariff lines included in the first formula group if the effectiveness of the group--those subject to the average-cut Swiss-formula group is not to be diminished. "disciplines". Since the Swiss formula reduces With only 2 percent of tariffs in the Swiss low tariffs by more than high tariffs, countries formula group, tariffs as high as 103 percent that were able to include only low tariffs in the would be subject to the disciplines of the Swiss-formula group might be able to get Swiss formula. With 10 percent of tariffs included in the Uruguay Round group, the during the Uruguay Round. To avoid another peak remaining tariff would be 50 percent, and round of "dirty tariffication" and large, covert with 20 percent of tariffs allowed, the highest increases in protection during the conversion tariff subjected to the Swiss formula would be of specific tariffs into ad valorem form, it 27 percent. While this tariff would be roughly would be vital to ensure that a simple, halved, the majority of the remaining tariffs transparent process is followed. It would seem would be subjected to smaller reductions, important to include in the modalities resulting in a much smaller reduction in something like Paragraph 9 of the Harbinson average tariffs within the Swiss-formula Draft to ensure that a transparent approach is group, as well as a very minor (15 percent) followed in this conversion. reduction in average tariffs within the Uruguay Round formula group. The Approach for the Third Group While the discussion on the blended formula The requirement under the blended formula did not reach consensus on the number of that some fraction of tariffs in the industrial products in the "sensitive" group, the draft countries be tariff-free (and developing framework (WTO 2004, para 32) suggests countries set these tariffs between zero and limiting these to the number of tariff lines five percent) has some appeal, although currently subject to tariff-rate-quotas in the economic principles generally favor focusing industrial countries. These account for 20% of on reducing the highest tariffs, partly because tariffs in countries using TRQs, and cover an reductions in low tariffs are likely to reduce estimated 55% of OECD agricultural tariff revenues disproportionately. production at domestic prices. There is an enormous difference in the Special and differential treatment could be implications of this provision for industrial included in the Swiss formula quite and developing countries. In the industrial transparently either by providing different countries as a group, for instance, close to 30 ceilings for a conventional Swiss formula, or percent of tariffs are already duty-free, so that with different reduction targets for a formula setting, say, a third of tariffs to zero would targeted to achieve a given percentage require close to a zero reduction in current reduction in tariffs. bindings. By contrast, in developing countries with uniform tariff bindings, setting one-third One potential concern with the use of the to zero would require a one-third reduction. Swiss formula is that it requires tariffs in ad valorem form. Unfortunately, over 40 percent Reducing low tariffs to zero is also likely to be of industrial-country agricultural tariffs costly in terms of tariff revenues. Low tariffs involve specific tariffs (World Bank 2003; on important items frequently generate Gibson et al 2001), and these tariffs are substantial tariff revenues. Unless reducing generally much higher than the simpler and low, "nuisance" tariffs to zero substantially more transparent ad valorem tariffs generally reduces the transactions costs associated with used in developing countries. The conversion customs clearance, the economic case for of specific tariffs into ad valorem form raises focusing large amounts of negotiating capital many of the risks that were involved in the on the objective of reducing already-low conversion of non-tariff barriers into tariffs tariffs is weak. The Overall Average-Cut The Maximum Tariff Condition The Derbez text requires requires that the The maximum tariff condition in the Derbez overall average-cut across the three groups of text--and continued in the recent framework-- tariffs be at least some target level. This is is potentially important for developing retained in the G-20's proposed revision (see countries. Many of the products of interest to ICTSD 2003) despite its otherwise ambitious developing countries are subject to extremely attempt to ensure that industrial countries high tariffs once the effects of specific, provide increased market access. Because this compound and mixed tariffs are taken into constraint is expressed in the slippery average- account. As Hoekman (2004) has noted, peak cut concept, it would likely have been applied tariffs in the OECD countries are worthless in ensuring that developed countries around 40 times the average tariff, as against provide increased market access. five times in Sub-Saharan Africa. Assuming that industrial countries generally Since the costs of such peak tariffs to the put a mixture of high and low tariffs in the importing countries are always particularly average-cut group, they could easily generate large, there is a good case from the point of a substantial average-cut for this group-- view of the importer to reduce such tariffs. without much liberalization. The Swiss- However, such peak tariffs are generally formula group would probably involve both a supported by strong interest groups. substantial average-cut and cut-in-the-average unless the coefficient in the Swiss formula was A maximum tariff might be set either in set very high, or the average-cut group made absolute terms--say 40, 50 or 100 percent--or large enough to allow high tariffs to be kept as a proportion of the average tariff in a out of the Swiss-formula group. Finally, the country. However, it seems likely that the third group, where all tariffs are set to zero, special interests benefiting from the very would arguably involve a 100 percent highest levels of protection will resist this average-cut, even if it contained only tariffs approach particularly strongly. However, even that were initially very low1, and hence had no a relatively high maximum tariff would help impact on market access. The overall average- by bringing down some of the mega-tariffs of cut would likely be quite large, particularly if importance to developing countries, such as a substantial number of tariffs were reduced to the 1400 percent tariff on rice in Japan noted zero. Only an extremely high average-cut above. criterion would suffice to impose any discipline. Assessment of the Overall Impact The draft framework (WTO 2004) does not It is difficult to assess the implications of an include such an overall average-cut constraint. approach such as the blended formula because Were such an overall constraint to be it depends so strongly on the distribution of included, it could be made much more initial tariffs and the way that countries utilize effective, and consistent between developed the flexibility inherent in the blended formula. and developing countries, by recasting it to Martin and Wang (2004) attempted to do this require a reduction in the weighted-average by assembling a dataset on applied and bound tariff, rather that a meaningless (for industrial agricultural tariffs for 103 countries. With this, countries) average-cut. they assessed the implications of a formula involving 36(24)% average-cuts in industrial (developing) countries subject to a 15(10)% minimum cut. They assumed that a Swiss formula was applied with a 25 (37.5) percent 1"Reductions" in initially zero tariffs to zero have ceilings, and that 10 percent of tariffs were set no practical value and it would be important to at zero. Under these assumptions, they ensure that these were not defined as involving a 100% average-cut. examined the average-cut in applied agricultural tariffs, and the corresponding Uruguay Round group. The lower cuts-in- cuts-in-average tariffs. Results are depicted for average tariffs in developing countries are the industrial and for developing countries in result of the substantially larger binding Figures 1 and 2. overhang in developing countries, as well as Fig. 1. Agricultural Tariff Cuts: Fig 2. Agricultural Tariff Cuts: Industrial Countries Developing Countries 40 35 35 30 30 25 25 noitcude 20 20 R 15 % 15 10 10 5 5 0 0 2 5 10 20 2 5 10 20 Average-cut Aver age-cut %oflines in Uruguay Round Group Cut-i n-average % of Tar if f s in Ur uguay Round Gr oup Cut-in-aver age of the small share to be set to zero in this From Figure 1, it is clear that the reduction in particular analysis. The 19.3% reduction in industrial country average tariffs--and hence average tariffs would likely have a comparable the overall expansion in access to their impact with the larger cut-in-the-average in markets--would be extremely sensitive to the industrial countries because initial tariffs in share allowed in the Uruguay Round group. developing countries are higher. However, a When the share allowed in this group was held share of 20% or higher of developing country to 2 percent, both the average-cut and the cut- tariffs in the Uruguay Round group would in-the average were quite substantial at over clearly lead to quite small increases in market 30%. As the share included in the average-cut access in developing countries. This would group rises, the measured average-cut rises, impact particularly on developing countries, but the reduction in the average falls sharply. whose agricultural exports to other developing With a 20% share included in this group-- countries have been rising in recent years roughly the share apparently envisaged in the (World Bank 2003, p110). draft framework (WTO 2004)-- the reduction in average tariffs is under 17%, less than half Conclusion: Market Access that Promotes the reduction achieved in manufactures tariffs Development during the highly successful Kennedy Round (Francois and Martin 2003). Perhaps the most important problem for developing countries with the "blended From Figure 2, it is clear that the reductions in formula" is the combination of the average-cut average tariffs in developing countries are approach for the more sensitive industrial- likewise very sensitive to the share of tariffs country products with the ability of countries included in the Uruguay Round group. The to choose which tariffs they include in this meaningless average-cut measure begins just group. Allowing countries to blend low tariffs under 30% and falls only to 27.7%. The more along with peak tariffs allows industrial meaningful reduction in the average tariff countries to render any agreed average-cut begins at 19.3% when the Uruguay Round meaningless. Only the minimum cut in this group is only 2%, and falls to just under 12% part of the blended formula would matter for when 20% of tariffs are included in the achieving improvements in market access, and increasing the minimum would be difficult seriously compromised, with the reduction in because the entire average-cut approach has average tariffs falling by more than half, while been justified as a means of obtaining the meaningless average-cut measure rose. In flexibility. developing countries, the reduction in average tariffs would be smaller, although higher For developing countries with uniform tariff tariffs in developing countries make this bindings, the average-cut condition imposes reduction potentially more important for just as much discipline as a requirement to cut market access than the larger reduction in their average tariffs. Many developing industrial countries. countries would likely have to make much larger reductions in tariff bindings for this Moving beyond the blended formula, it is group, even if they were allowed a lower extremely important to avoid mistakes average-cut than the industrial countries. The inherent in the blender-- such as the average- exact difference between the two approaches cut deception, that would frappé the central would depend upon the details of their tariff goals of increasing market access and regimes, including the non-transparent specific reducing tariff peaks and escalation. Many tariffs widely used in the industrial countries. other approaches to providing the needed flexibility without sacrificing these central The Swiss-formula element of the blended goals are available. The analysis in this note formula has the desirable feature of reducing also highlighted the importance of limiting the tariff peaks and escalation. A standard Swiss range over which flexibility is allowed, formula will also bring about larger reductions suggesting that a large allowance for in widely dispersed tariff schedules such as flexibility--such as the 20% of industrial those in the industrial countries, than in country tariff lines implied by treating all uniform tariff schedules like those typically tariff-rate-quota products as sensitive in the found in developing countries. A key concern draft framework--implies potentially serious with such a methodology will be to ensure that hazards for achieving the goals of the the conversion of specific, mixed and negotiations. compound tariffs to ad valorem form is done transparently and accurately. On balance, an approach that eliminates the average-cut problem by moving to a version of The zero-rate element of the blended formula the line-by-line tariff-cutting rule or otherwise is likely to require little liberalization in disciplines the flexibility needed to reach an industrial countries, because their tariff agreement would seem to have advantages schedules contain many tariffs bound at zero. from a development perspective. This would In developing countries with uniform, or dispel any illusions that could otherwise arise relatively uniform, bindings, a requirement to from the average-cut approach. Larger include any fraction of tariffs in this category proportional cuts on high tariffs are the key to requires a corresponding reduction in average unlocking the development potential of market tariffs. access in agriculture. Preliminary analysis makes clear that the effects of any blended formula on average- tariffs--and hence on market access--are extremely dependent on the percentage of tariffs included in the average-cut or Uruguay Round group. With only 2% of tariff lines in this group, the industrial countries would cut their average agricultural tariffs by around a third. If the share in this "sensitive products" group were permitted to rise to 20 percent, the goal of increasing market access would be References and Further Reading de Gorter, H. and Hranaiova, J. (2004), `Quota Martin, W. and Wang, Z. (2004), `Improving administration methods: economics and market access in agriculture: a quantitative effects with trade liberalization', in Ingco, evaluation of blended formulas', Mimeo, M. and Nash, J. eds Agriculture and the World Bank. WTO: Creating a Trading System for Development, World Bank and Oxford Wailes, J. (2004), `Rice: Global Trade, University Press, Washington DC. protectionist policies, and the impact of trade liberalization' in Aksoy, A. and Francois, J. and Martin, W. (2003), `Formula Beghin, J. eds Global Agricultural Trade approaches for market access and Developing Countries, World Bank negotiations' The World Economy and Oxford University Press, Washington 26(1):1-28. DC. Gibson, P. et al. (2001), Profiles of Tariffs in World Bank (2003), Global Economic Global Agricultural Markets, USDA/ERS Prospects and the Developing Countries: Agricultural Economic Report No. 796. 2004, World Bank, Washington DC. Hoekman, B. (2002), Economic development WTO (2003a), `Consolidated African and the WTO after Doha, World Bank Union/ACP/LDC position on agriculture' Policy Research Paper 2851, Washington World Trade Organization, Geneva DC. WT/MIN(03)/W/17. ICTSD (2003), `Annex A: Framework for WTO (2003b), `Preparations for the Fifth Establishing Modalities in Agriculture', Session of the Ministerial Conference: http://www.ictsd.org/ministerial/cancun/d Draft Cancún Ministerial Text' World ocs/G21_ag_text.pdf Trade Organization, Geneva, JOB(03)/150/Rev.2, 13 September. IPC (2004), `Twenty-five ways to improve the Derbez Draft on Agriculture', WTO (2003c), `Negotiations on agriculture: http://www.agritrade.org/Doha/Derbez/De first draft of modalities for the further rbez.htm commitments' World Trade Organization, Geneva. TN/AG/W/1/Rev 1. Konandreas, P. (2004), Incorporating constrained flexibility in tariff reductions: WTO (2004), `Doha Work Program: Draft a dynamic formula, Mimeo, FAO, 9 July. General Council Decision [] July 2004' World Trade Organization, JOB(04)/96. This trade Note was written William J. Martin, Lead Economist, Development Research Group. This Trade Note can be downloaded at http://www.worldbank.org/trade.