News and Analysis • Volume 10 • Number 7 • November 2006

The Impact of Sensitive Products on Trade and Development

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The exclusion of a certain number of ‘sensitive’ agricultural products from full tariff cuts is more likely to limit effective market opening than the additional flexibilities available to developing countries alone.

When the Doha Round was suspended in July, inadequate progress in domestic agricultural support and market access was cited as the main reason for the breakdown, and some delegations singled out liberalisation exceptions in the market access pillar for particular blame. While a lot of attention has focused on the ‘special’ products and the new special safeguard mechanism for developing countries, a closer look at WTO Members’ tariff structures suggests that the flexibilities provided by ‘sensitive’ products are more likely to restrict market access.

Paragraphs 31 to 34 of the July 2004 Framework Agreement provide details on the selection and treatment of sensitive products (available to all WTO Members). Although the outcome of the negotiations should reflect ‘the sensitivity of the product concerned’, countries designating products as ‘sensitive’ would have to improve market access substantially “through combinations of tariff quota commitments and tariff reductions applying to each product.”

Members’ proposals regarding the number/percentage of sensitive tariff lines have varied significantly, with the US seeking to limit such products to one percent of tariff lines, and the EU seeking an eight percent limit. The G-10 group of countries with highly-protected agricultural sectors, such as Japan, Norway and Switzerland, have proposed that 15 percent of tariff lines be covered by the mechanism. The G-20 group of developing countries has argued for a limited number of tariff lines, the precise number of which is to be negotiated, but which should not exceed one percent.

The graph below provides an overview of the 200 highest bound tariff lines, in ad valorem equivalents, in selected G-33 and G-10 countries. The highest tariffs applied by the larger developing countries such as India for the most part do not exceed 300 percent, with Chinese tariffs at a substantially lower level. In many cases, however, applied rates are much lower than bound rates as a result of autonomous liberalisation in most developing countries. By contrast, several developed countries such as Japan or Switzerland still maintain prohibitive tariff peaks concentrated in a small number of lines at between 1500 and 2000 percent.

These are probably the areas where the Doha Round could contribute most effectively to generating real new market opening. However, in the absence of any selection criteria, it is likely that several WTO Members will designate as ‘sensitive’ many of those products that currently enjoy the highest levels of protection. Given that three percent of tariff lines would already allow several countries to shelter all lines with tariffs at over 400 percent, some have argued that neither designating fifteen percent of tariff lines as sensitive (as proposed by the G-10) nor eight percent (as proposed by the EU) would make a great deal of difference to market opening for the most highly-protected products.

Indeed, even if these tariff peaks were reduced according to the general tariff cut formula, i.e. by about 50 or 60 percent, the resulting tariffs would remain prohibitively high. From this perspective, a tariff cap might be the most effective way of reducing the discrepancies between WTO Members on the most protected products. Both the G-20 and the EU have proposed a tariff cap of 100 percent for developed countries, and 150 percent for developing countries. The US has suggested a 75 percent cap for developed countries with a developing country cap to be negotiated. However, the G-10 continues to firmly reject any tariff cap at all.

It remains unclear whether a tariff cap would apply to products designated as sensitive under the EU and US market access proposals (under the G-20 proposal, the cap – 100 percent for developed countries and 150 percent for developing countries – would apply to sensitive products as well). If sensitive products are not included, the usefulness of a maximum tariff would probably be significantly compromised. Products with the highest tariffs – those targeted by the tariff cap in the first place – are also those that are most likely to be protected as sensitive products.

An analysis of the EU’s tariff structure reveals the extent of the discrepancies between protection levels on different products, as well as the characteristics of those products which are subject to the highest levels of protection (see graph overleaf ).

Products protected by tariffs of over 200 percent include bovine and pork meat, garlic, bananas, processed cereal grains, mushrooms, wine and starch. Dairy products and sugar are just below the 200 percent mark. A number of developing countries are competitive exporters of these products. However, prohibitive tariffs – particularly when combined with quota restrictions – significantly distort markets for these products and diminish potential development gains through limiting developing countries’ ability to make full use of their comparative advantage.

Furthermore, there is often a correlation between products protected by high tariffs and those that are heavily subsidised in OECD countries through domestic support and export subsidies. Insofar as these tariffs and subsidies maintain agricultural over-production in developed countries, such protection is likely to undermine poor farmers in developing countries.

Arguably, some similar market access issues might arise due to the flexibilities for the ‘special products’ that developing countries may designate to safeguard their food and livelihood security and rural development needs – even though, as mentioned earlier, tariff peaks in most developing countries are significantly lower than those maintained by developed countries.

However, if WTO Members take seriously the concept of special products, the selection will be based on genuine public policy objectives, while sensitive products have no such criteria, at least as they have been considered to date in the WTO negotiations. Given this arbitrary basis for designation, sensitive products are more likely to reflect protectionist interests or rent-seeking behaviour, both of which will perpetuate inefficiencies.

For the Doha Round negotiations to resume soon, Members may have to reconsider their positions on domestic support, as well as market access. However, the role played by sensitive products in improving market access is such that the number and treatment of eligible tariff lines will be vital components of any outcome that delivers substantial benefits for both trade and development.