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AGRICULTURE NEGOTIATIONS: BACKGROUNDER

Market access: tariffs and tariff quotas

Nowadays, among WTO members, agricultural products are protected only by tariffs.1 All non-tariff barriers had to be eliminated or converted to tariffs as a result of the Uruguay Round (the conversion was known as “tariffication”). In some cases, the calculated equivalent tariffs — like the original measures that were tariffied — were too high to allow any real opportunity for imports. So a system of tariff-rate quotas was created to maintain existing import access levels, and to provide minimum access opportunities. This means lower tariffs within the quotas, and higher rates for quantities outside the quotas.

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UPDATED 1 DECEMBER 2004

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This briefing document explains current agricultural issues raised before and in the current negotiations. It has been prepared by the Information and Media Relations Division of the WTO Secretariat to help public understanding about the agriculture negotiations. It is not an official record of the negotiations.


The discussion since the Uruguay Round has focused broadly on two issues: the high levels of tariffs outside the quotas (with some countries pressing for larger cuts on the higher tariffs), and the quotas themselves — their size, the way they have been administered, and the tariffs charged on imports within the quotas.

By the time of the 2002-2003 preparations for “modalities”, the discussions cover six headings: tariffs; tariff quotas; tariff quota administration; special safeguards; importing state trading enterprises, and other issues. Within each heading, are a list of subheadings such as: general comments; scope/definitions/product coverage; stages/timetables; transparency and notification; and so on. Special and differential treatment for developing countries and non-trade concerns are discussed under all of them, and again members differ as to whether the Doha declaration treats these as equals or whether non-trade concerns have a lesser priority.

During the discussion, new members and transition economies repeatedly argue for special and differential treatment for countries in their position, because of the state of their economies and because the new members are still implementing market-access commitments under their membership agreements.

Again, some important players have not proposed specific numbers, and this has led to criticism from others.

Proposals containing positions on market access submitted in Phase 1
(see also proposals on developing countries and on non-trade concerns)

 

Tariffs: Phase 1  back to top

The discussion of tariffs covers both tariffs on quantities within quotas and those outside. Traditionally, the tariff reductions that resulted from trade negotiations came from bilateral product-by-product bargaining, or they were based on formulas that applied over a broad range of products, or combinations of the two. How the reductions will be handled in the present negotiations is hotly debated. Some countries — such as Canada and the US — are advocating that in addition, “sectoral liberalization” should be negotiated. In some sectors in past negotiations, this has sometimes meant “zero-for-zero” deals. It would include negotiating the complete elimination of tariffs (and possibly other measures such as export subsidies or subsidized export credits) by at least the key WTO members in specific sectors such as oilseeds, and barley and malt. Some countries — for example Japan — have said they do not support this.

One country, the US, has gone so far as to argue that because so many agricultural tariffs are high, the negotiations to reduce tariffs should start with “applied rates” (the tariffs governments actually charge on agricultural imports) and not the generally higher “bound rates” (the legally binding ceilings committed in the WTO as a result of previous negotiations). This has proved quite controversial because it would break a tradition of basing negotiations on bound rates. A number of countries have also countered that they should be given credit for unilaterally applying tariffs that are more liberal than the negotiated bound rates, instead of being forced to make even deeper cuts than countries that kept to their higher bound rates. Some countries that recently joined the WTO also feel that they accepted low tariffs in order to become members and therefore should not have to reduce them much further.

A number of developing countries also complain that they face difficulty if they try to increase their incomes by processing the agricultural raw materials that they produce. This is because the countries they see as potential export markets impose higher duties on processed imports than on the raw materials — known as tariff escalation — in order to protect their own processing industries.

Some countries see tariffs and other import barriers as necessary in order to protect domestic production and maintain food security. For this reason, some countries are linking lower import barriers with disciplines on other countries’ export restraints and export taxes — if producing countries do not restrict their exports, then importing countries can feel more secure about being able to obtaining food from them. Some developing countries say they need flexibility in deciding the level of import duties they charge to protect their farmers against competition from imports whose prices are low because of export subsidies.

 

Tariffs: Phase 2 back to top

Two proposals have emerged for tariff reductions in general. One would copy the formula of the 1986-94 Uruguay Round negotiations which used an average reduction over all products, allowing some variation for individual products provided a minimum reduction was met. This would be “simpler” to implement, advocates say. Another, known as a “cocktail” approach envisages a flat rate percentage reduction for all products (the percentage so far unspecified), with additional “non-linear” reductions on higher tariffs, expanding quotas, and special treatment for developing countries. Advocates have described this as “fairer”. Other methods are also discussed, but these two are the most popular.

Part of the discussion focuses on special treatment for developing countries, countries that recently joined the WTO, and countries in transition to market economies. Some developing countries say their tariff cuts would have to depend on developed countries reducing trade-distorting domestic supports and export subsidies. Smaller island or land-locked countries depending on few export commodities are calling for their trade preferences in developed countries to be preserved, and given greater legal certainty. But other countries say that certain preference schemes discriminate against other developing countries. Participants generally recognize, however, that preferences cannot be eroded or removed suddenly, and that transition periods might be needed.

Other points discussed include: whether or not to balance disciplines on import tariffs and restraints with export taxes and restraint; whether or not to give special treatment for specially sensitive products; and how to take account of non-trade concerns.

Phase 2 papers or “non-papers” from: Australia, MERCOSUR (plus Chile and Bolivia), and Japan

 

Tariffs: preparations for ‘modalities’  back to top

For more information:
Fact sheet explaining tariff reduction formulas.

What kind of formula for reductions?

  • “Swiss formula” or similar, which would produce much steeper cuts on higher tariffs. Supporters include countries previously advocating the “cocktail” approach. Two proposals from several countries would also have the effect of leaving a maximum tariff of 25% after five years in developed countries. Critics say this would be too ambitious, requiring too much adjustment, and some say it would be inequitable because countries with lower tariffs would not have to do much. Some also argue that a Swiss formula would be too complicated because it would require converting specific tariffs into ad valorem tariffs (see below). Some other variants of a non-linear approach are also proposed. Supporters say a Swiss formula or something similar is needed in order to deal with extra high tariffs (“tariff peaks”) and to narrow the gaps between tariffs on finished products and raw materials (“tariff escalation”)
  • (The Swiss formula was first proposed by Switzerland in the Tokyo Round negotiations in the 1970s, and was for negotiations on industrial tariffs. Switzerland does not support this approach in the current agriculture negotiations.)

  • “Uruguay Round approach”, which is “linear”, i.e. the same percentage reductions no matter what the starting tariff rate is. Variations are allowed for specific products so long as a simple average across all products meets the target. The rate would be negotiated along with reduction rates for export subsidies and domestic support, and other issues, proponents say. Supporters say this approach is simple and flexible. Critics say it could produce insignificant improvement in market access and would not deal with tariff peaks and escalation.

Both include special and differential treatment for developing countries. (Uruguay prefers the Swiss formula, Switzerland prefers the Uruguay Round approach!)

Ad valorem (percentage of price) or specific (dollars per ton, etc) tariff rates?

A number of countries criticize specific tariffs as being untransparent and for providing increased protection when prices fall. They want to get rid of all or most specific tariffs. Others say specific tariffs have advantages (for example, traders know what they are going to pay without having to refer to prices), and converting them to ad valorem tariffs would be too complicated.

Exempting certain products: several developing countries say they should be exempt reduction commitments on staples, for food security.

 

The revised first draft ‘modalities’ on tariffs  back to top

The draft proposes a compromise between the “Uruguay Round approach” and the harmonizing “Swiss formula”, the two approaches receiving the most support in the negotiations so far. It envisages a Uruguay Round approach that is applied in bands with steeper cuts at higher levels, making it a kind of harmonizing formula, but with flexibility — actual cuts can vary around the averages so long as they are above the minimums set for each product (“tariff line”). This approach is also intended to go someway towards reducing tariff peaks and tariff escalation. It is sometimes called a “banded” approach.

Developed countries: three bands of tariff rates, cut over 5 years

Tariff rate

Average cut

Minimum cut
for any product

90%+

60%

45%

15-90%

50%

35%

0-15%

40%

25%

 

Developing countries: four bands of tariff rates plus a “special products” category, cut over 10 years

Tariff rate

Average cut

Minimum cut
for any product

120%+

40%

30%

60-120%

35%

25%

20-60%

30%

20%

0-20%

25%

15%

Special products

10%

5%

 

The draft frameworks on tariffs  back to top

(see Cancún ‘framework’ proposals)

Before Cancún: The US-EU framework switches to an alternative approach: a “blended formula” in which products are separated into three groups, the number of products in each to be negotiated. One group of tariffs would be cut according to the Uruguay Round approach, with the average and minimum reductions to be negotiated, and tariff quotas used to provide market access if tariffs remain high. A second would use the Swiss formula, again leaving for negotiation the coefficient that determines the final maximum tariff level. A third group would be duty-free. (A visual comparison of the banded and blended approaches can be found here.) If tariffs exceed an unspecified maximum, they would either have to be cut to that maximum or market access would have to be provided through negotiated tariff quotas. Developing countries would be allowed unspecified longer periods and smaller reductions.

Several other proposals follow this blended approach. Norway’s is similar, but without expanding tariff quotas or setting a maximum tariff rate. The G-20 follows the approach only for developed countries, adding that the cuts must offer meaningful market access in an “effective and measureable way”, and are higher on processed products (reducing tariff “escalation”). For developing countries the reductions would only be by a Uruguay Round approach with unspecified average and minimum reductions that would be gentler than those of the developed countries, and implemented over a longer period — Kenya’s proposal is similar on this, but IDA countries would not have to cut tariffs. (The IDA is the International Development Association, the World Bank’s concessional lending window, providing long-term loans at zero interest to the poorest developing countries; there are 81 IDA countries, not all of them WTO members — see www.worldbank.org.) Developing countries would be allowed additional exemptions by being allowed to designate products as “special” through negotiation. The four central American countries’ proposal is similar.

The European-East Asian group accept the blended approach so long as most reductions follow the Uruguay Round approach, tariff quotas do not expand, and there are no ceilings on the final tariffs. Japan proposes three categories without specifying the type of reduction in each, and calling for flexibility to deal with sensitive products that are closely related to non-trade concerns.

On developing countries’ “special products” category, the G-20 says criteria are “to be determined”. The other developing country groups call for self-selection by the eligible countries.

In Cancún: The African Union/ACP/least-developed countries’ group complain that the Pérez del Castillo draft does not propose steep enough cuts by developed countries, while allowing them to keep high tariffs on “sensitive” imports, and does not really deal with tariff peaks and escalation. On the other hand, the Caricom paper’s main concern is to ensure that developed countries are allowed more moderate tariff reductions on products for which developing countries are given trade preferences. The European-East Asian group’s Cancún paper (which includes Japan) wants to remove the Pérez del Castillo paper’s reference to expanding tariff quotas on sensitive products which have smaller tariff reductions.

The chairs: For developed countries, the Pérez del Castillo and Derbez drafts essentially follow the US-EU draft, but with some additional flexibility for sensitive products. For developing countries, the Pérez del Castillo draft offers the option of three groups of products all using the Uruguay Round approach but with different cuts, or two groups — one applying the Uruguay Round approach, the other using a Swiss formula. The Derbez draft chooses the second option with a cap on developed countries’ tariffs and measures to deal with tariff escalation.

Both envisage allowing developing countries to designate “special products” under circumstances to be determined.

 

Sectoral initiatives: Phase 2  back to top

Sectoral initiatives aim to reduce tariffs to zero for the same products when imported into all major importing countries. Advocates say this kind of agreement proved useful in the Uruguay Round and it should be explored again in the current agriculture negotiations. They add that it could also be combined with eliminating tariff quotas and domestic supports on those products. Private sector organizations are already exploring this for certain products such as oilseeds and oilseed products, and the moves should be encouraged, advocates say.

Several countries oppose the idea outright on the grounds that it would distract attention away from more comprehensive liberalization, and that it would be almost impossible to strike a sectoral deal that would benefit developing countries.

Some say they are unconvinced but will continue to look at the prospects.

Papers or “non-papers” from: Canada

 

Tariff quotas: Phase 1  back to top

Quota administration is a technical subject, but it has a real impact on trade — on whether a product exported from one country can gain access to the market of another country at the lower, within-quota tariff.

Methods used for giving exporters access to quotas include first-come, first-served allocations, import licensing according to historical shares and other criteria, administering through state trading enterprise, bilateral agreements, and auctioning. The terms can also specify time periods for using the quotas, for example periods of time for applying for licences, or for delivering the products to the importing countries. Exporters are sometimes concerned that their ability to take advantage of tariff quotas can be handicapped because of the way the quotas are administered. Sometimes they also complain that the licensing timetables put them at a disadvantage when production is seasonal and the products have to be transported over long distances.

Each method has advantages and disadvantages, and many WTO members acknowledge that it can be difficult to say conclusively whether one method is better than another. Several countries want the negotiations to deal with tariff quotas: to replace them with low tariffs, to increase their size, to sort out what they consider to be restricting and non-transparent allocation methods, or to clarify which methods are legal or illegal under WTO rules in order to provide legal certainty.

Who has tariff quotas?  back to top

43 WTO members currently have a combined total of 1,425 tariff quotas in their commitments. The numbers in brackets show how many quotas each country has.

Australia (2)
Barbados (36)
Brazil (2)
Bulgaria (73)
Canada (21)
Chile (1)
China (10)
Chinese Taipei (22)
Colombia (67)
Costa Rica (27)
Croatia (9)
Czech Rep (24)
Dominican Rep (8)
Ecuador (14)

El Salvador (11)
EU (87)
Guatemala (22)
Hungary (70)
Iceland (90)
Indonesia (2)
Israel (12)
Japan (20)
Korea (67)
Latvia (4)
Lithuania (4)
Malaysia (19)
Mexico (11)
Morocco (16)
New Zealand (3)

Nicaragua (9)
Norway (232)
Panama (19)
Philippines (14)
Poland (109)
Romania (12)
Slovak Rep (24)
Slovenia (20)
South Africa (53)
Switzerland (28)
Thailand (23)
Tunisia (13)
United States (54)
Venezuela (61)

For more details, see WTO Secretariat background paper “Tariff and other Quotas” TN/AG/S/5.

 

Tariff quota administration: Phase 2  back to top

Participants in the negotiations generally accept that there is no single “best” method of administering quotas. Some want the negotiations to sort out which allocation methods should be allowed and which should not. Others are looking for broad principles such as transparency and access for all-comers (at least for part of the quota allocation).

Some countries say that if part of a quota is unused (“underfill”), this is often a problem caused by the administration method. They propose various solutions to reduce underfill, including carrying unused portions over to subsequent periods, preventing imports at out-of-quota tariff rates until the quotas are filled, and closer monitoring. Others say underfill is often caused by supply and demand conditions, and should not be considered a problem.

Auctioning quotas is one method that has aroused a lot of discussion. One view is that the money governments raise from auctioning is equivalent to an additional tax and could violate tariff commitments (“bindings”). Another is that auctioning simply makes the additional value created by a quota (“quota rent”) more transparent, and shifts it to the government instead of to private companies. Supporters add that it meets the objectives of transparency and simplicity, while giving all importing companies the chance to participate.

A number of other methods are also examined and their pros and cons debated. These included first-come-first-served, historical allocation, etc.

Phase 2 papers or off-the-record “non-papers” from: The EU, Australia, Switzerland and Japan

 

Tariff quota expansion: additional issues (Phase 2)  back to top

A paper submitted late in the preparations for “modalities”, on tariff quota expansion, raises questions about the best formulation of expansion (e.g. how it might be based on domestic consumption). The debate hinges on whether this could be handled simultaneously with discussion on tariff quota administration methods or whether the discussion must be in two steps: dealing with legal uncertainty on administration first, before considering the creation of new quotas or expanding existing quotas.

Phase 2 papers or “non-papers” from: New Zealand (Tariff quota expansion)

 

Tariff quotas: preparations for ‘modalities’  back to top

Volumes: Some want quotas to expand, and some say the final objective must be tariffs only. Some countries propose expanding quotas according to levels of domestic consumption, arguing that this would be more meaningful. Others say it would be simpler to expand from final bound import volumes under the tariff quotas. Some want some quotas to be recalculated to reflect more up-to-date levels of domestic consumption. Others oppose anything that would allow quotas to be reduced in size.

In-quota tariffs: Some want these to go to zero. Some others say keeping in-quota tariffs above zero will help narrow the gap between in- and out-of-quota rates, and ultimately bringing a tariff-only system. Another group opposes zero in-quota tariffs in general, except in preferences for least-developed countries.

Quota administration: Some members want to set principles: administration methods should be practical, predictable, transparent; they should allow trade to take place on a commercial basis; they should encourage full use of quotas; unused import licenses should be reallocated; allocations to specified countries should be phased out; imports from non-WTO members should be excluded from WTO quotas; etc. They also want auctioning outlawed because it means money going to governments, possibly exceeding their tariff bindings.

Others defend auctioning as transparent and efficient. Some would prefer an indicative list of methods that can be used, and some among these want the negotiations to clarify whether auctioning complies with WTO rules, so that governments can use these methods with confidence. Some argue that a range of allocation methods should be available to members for use in different circumstances. Some defend auctioning as transparent and efficient.

 

The revised first draft ‘modalities’ on tariff quotas  back to top

Tariff quotas: in-quota duties. The draft proposes no obligation to reduce in-quota duties, except:

  • for preferential tariff-free and quota-free programmes and for tropical products or those used to diversify agriculture
  • when less than 65% of the quota is used.

Tariff quota volumes. The draft proposes:

  • expanding the volumes to 10% of domestic consumption (6.6% for developing countries)
  • implementation: 5 years (10 years for developing countries)
  • flexibility — one quarter of total tariff quotas allowed to increase to 8% (5% for developing countries), but only if another quarter is increased to 12% (8% for developing countries).

Tariff quotas: special and differential treatment. The draft proposes:

  • developed countries would give duty-free access for key products
  • developing countries would not have to expand tariff quotas for selected “special products” (SPs) for food security, rural development, livelihood security.

 

The draft frameworks on tariff quotas  back to top

(see Cancún ‘framework’ proposals)

The US-EU draft refers to tariff quotas in two contexts: providing market access for products subject to Uruguay Round formula reductions; and for those ending up with tariff rates higher than a maximum. The G-20 draft says developed countries’ quotas should be expanded by a percentage of domestic consumption and in-quota tariffs should be eliminated, with additional expansion through negotiation. Developing countries would not have to make any commitments (also proposed by the four central Americans and Kenya). Japan, Norway and the European-East Asian group oppose any obligation to expand tariff quotas. The African Union/ACP/least-developed countries’ Cancún paper calls for simplified and more transparent quota administration to benefit developing countries.

The Pérez del Castillo draft adopts the US-EU approach, but for developed countries only, leaving quota expansion and in-quota tariff reductions under the broad heading of other “issues of interest but not agreed”. The Derbez text goes further. It adds some flexibility for products related to non-trade concerns, and proposes negotiating reductions in in-quota rates as well as quota expansion. Both envisage that developing countries would not have to expand their tariff quotas.

 

Tariff quotas and importing state trading enterprises: preparations for ‘modalities’  back to top

Among the key issues is the question of whether tariff quotas could be allocated to state trading enterprises. Some say the monopoly power and state ownership can allow the enterprises to disrupt market access through the quotas and want this outlawed. Others disagree.

There is broad support for improving transparency when state enterprises handle quotas.

 

The revised first draft ‘modalities’ on state trading import enterprises  back to top

This comes under draft Attachment 3. It would commit members to ensure that the importing enterprises do not undermine market access commitments, and to notify information on the enterprises’ operations regularly. Developing countries would be allowed some leeway to meet food and livelihood security objectives and for rural development.

 

Note:

1. Except for Chinese Taipei, Rep of Korea, and the Philippines for rice; and except when other WTO rules apply, for example sanitary and phytosanitary measures, technical barriers to trade, balance-of-payments conditions, general safeguards, etc. back to text

 

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