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«Chapter - 3 AGREEMENT ON AGRICULTURE: MARKET ACCESS Krishna P. Pant Yogendra K. Karki Pradyumna R. Pandey Market access is one of the three main ...»

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Chapter - 3

AGREEMENT ON AGRICULTURE: MARKET ACCESS

Krishna P. Pant

Yogendra K. Karki

Pradyumna R. Pandey

Market access is one of the three main pillars of the AoA – the other two be-

ing domestic support measures and export competition. It deals with rules and

commitments related to import of goods. Its purpose is to expand trade by prevent-

ing various non-tariff barriers and by binding and reducing tariffs. Besides tariffs,

other trade policy instruments covered by the market access pillar include Tariff Rate Quotas (TRQs) and Special Safeguard (SSG) as a trade remedy measure.

In the WTO context, “market access” is about both obligations and rights14.

Nepal’s obligation as a WTO member is to provide market access to other Mem- bers in return for her “right” of access to others’ markets for Nepalese goods on multilaterally agreed terms. Thus, a balanced analysis of market access provisions would cover both obligations and rights. The focus of this chapter is on the “obliga- tion” side of this equation, i.e. on the likely implications of the market access provi- sions of the AoA on Nepal's agricultural trade policies and on the Nepalese agricul- ture. As Nepal does not have any TRQ commitments, and does not have access to the SSG, the most important instrument for managing imports is applied tariffs, within the limit set by Nepal's WTO bound rates. Given that these bound rates are already agreed upon, the key question to be asked is: what would be the most ap- propriate structure of the applied tariffs in order to safeguard the interest of the Nepalese agriculture?

The chapter, organized in four sections, introduces the AoA provisions on market access; discusses some theoretical and conceptual issues on border pro- tection and tariffs to understand why and how the WTO membership matters in this area; analyses Nepal’s applied tariffs on selected major commodity groups drawing upon the experience for recent years and in relation to the corresponding bound rates; and draws some conclusions.

THE AOA PROVISIONS ON MARKET ACCESS

Prohibition of quantitative restrictions on imports One significant achievement of the AoA was prohibition of border measures other than “ordinary customs duty”. A WTO Member is no longer allowed to limit trade through import bans or quantitative restrictions, or other similar measures, except under such specified situations as safeguards, food safety and adverse bal- ance of payment situation. The only border instrument permitted is “ordinary” cus- toms tariff, which includes ad valorem and specific duties. Article 4.2 of the AoA spells in detail the measures that are prohibited, e.g. quantitative trade restrictions, 14 The FAO Resource Manual on Agreement on Agriculture provides introductory analysis of various market access provisions. See the chapters by Elamin (2000), Pearce and Sharma (2000), Sharma (2000a) and Sharma (2000b), available on-line at www.fao.org/trade.

41 variable import levies, minimum import prices, discretionary import licensing, nontariff measures maintained by state trading enterprises, voluntary export restraints and similar border measures other than ordinary customs duty. Table 1 shows the main market access provisions of the AoA.

–  –  –

Tariff binding and reduction During the UR negotiations, modalities were developed to convert existing non-tariff barriers to “equivalent tariffs”, which would be the new bound rates (see Sharma 2000a for these modalities). Countries that had non-tariff barriers were required to compute tariff equivalents based on the gap between domestic and world prices.15 The developing countries could also choose this tariffication process. They also had the option to “offer” what is called as “ceiling binding” of tariffs. That is, they could offer ceiling rates as they chose. If not objected by other WTO Members that would be the WTO bound rates. Most developing countries chose this method to establish the bound rates. They included all South Asian WTO members. In the case of Nepal this choice was not available. Like other newly acceding countries Nepal bound its tariffs through negotiations.

Bound versus applied tariffs In the WTO terminology, bound tariffs are the rates that a country commits not to exceed at any point in time (except in some specified situations). By contrast, “applied rates” refer to tariffs that are actually applied at any given point in time.

The basic rule is: applied rates may be lower but must not exceed the bound rates.

Hence bound rates have special significance as they limit the ability of a country to vary tariffs. In the GATT, and now the WTO, tariff negotiations amounted to reducIn view of the short time available for verifying these tariff offers by trading partners, many countries, notably developed countries, were found subsequently to have bound tariffs at rates above actual tariff equivalents. This has come to be known as “dirty tariffication” (see Ingco and Hathaway 1996).

42 ing the bound rates. The experience of the past 10 years shows that applied tariffs of most developing countries are far below the bound rates, while they are closer in the case of the developed countries.

Tariff Rate Quota Quotas in the ordinary sense of the term were common trade policy instrument for a long time prior to the UR. In the UR, as countries tariffied non-tariff barriers, there was a concern that the resulting ordinary tariffs could turn out to be too high for any trade to take place. Moreover, there were many products that were little traded for various reasons, e.g. prohibitively high tariffs, binding quotas or import restrictions. As a result, it was agreed that there should be “minimum market access” commitment, e.g. 5% of total domestic consumption. This gave rise to the concept of the TRQ to facilitate minimum trade. A TRQ is a two-tired tariff instrument under which imports up to the quota level face low or no tariff while all imports above the quota level face the usual MFN tariff. In the UR, 36 countries made TRQ commitments on agricultural products for a total of 1,370 tariff lines. Although 19 of these are developing countries, the developed countries account for 67% of the TRQs. In the post-1995 period, the (unsatisfactory) administration of TRQs, and the issue of less than 100% quota fill rate, has attracted a great deal of discussion in the WTO.





Special Safeguard Measures This is another innovation of the AoA (Article 5). It is specific to agricultural products only. The general WTO trade remedy measures like anti-dumping apply to all products, including agricultural products (for details, see the chapter on import surges by Gautam et al in this volume). The SSG is a temporary measure that permits an importing country to charge duties higher than the WTO bound rate when faced with import surges. The SSGs are available only to those products that were “tariffied” and for which the right to resort to the SSG was reserved by placing the label “SSG” in country Schedules. There are two types of surges that trigger the SSG: (i) when import volumes surge beyond some defined threshold and (ii) when import prices fall below a previously defined threshold. The extra duty applicable depends on the extent of the surge, relative to the defined thresholds. In the UR, 38 WTO Members reserved right to the SSG measure for selected products. As the majority of the developing countries did not tariffy, and offered “ceiling bindings”, very few of them have access to the SSG.

In the case of Nepal, as shown in the last column of Table 1, the provision prohibiting all non-tariff measures applies. As a LDC, however, Nepal would not be required to reduce bound tariffs once the transition phase of the WTO accession process is complete. But applied rates cannot exceed the bound duties. Nepal does not have access to the SSG while there was no need for opening TRQs, which Nepal did not. There is a provision in the WTO rules called “initial negotiating rights” (INR). In Nepal’s tariff Schedule, some countries have been designated as INR holders for some products. This means that in future if Nepal wants to revise bound tariffs upwards, this must be first negotiated with the INR holder.

43

ECONOMIC AND POLICY ISSUES ON TARIFF PROTECTION

Nepal’s WTO Bound Tariffs and Other Market Access Commitments: The Issue and the Context At the time of the WTO accession, Nepal committed to bind all, i.e. without exception, agricultural tariffs, and all of them in ad valorem form. The simple average of the bound rates for agricultural products is 51% initially, and 42% by 200616.

About 80% of the bound tariffs are concentrated in the 30-50% range, with tariff on 90% of the tariff lines being at least 30%. So, for all practical and analytical purposes, the average bound rate may be assumed to be in the 30-50% range for most commodities. As said above, there are no other specific market access commitments other than that the general rules applying to a LDC also apply to Nepal.

A question that was frequently raised in Nepal was whether this was a “successful” negotiation for Nepal, or did she give in too much? This section discourses on that question at a conceptual level from two viewpoints.

First, by comparing Nepal’s market access commitments with other 19 new Members that joined the WTO after 1995 following the same accession process.

Table 2 summarises the commitments for these countries. Only three out of the 20 countries have access to the SSG measures. Thus, Nepal does not have much to complain on this account. The other commitment is on TRQs. Twelve out of the 20 new members do not have access to this provision, including Nepal. From a trade policy standpoint, this is not as important as, for example, the SSG and high bound tariff are. For Nepal, as is the case with most other developing countries, the level of the bound rate is the most important trade instrument, as will be discussed below.

Table 2 shows that Nepal’s simple average bound tariff rate of 42% is twice that of the new 20 countries. From this standpoint, this was a very successful negotiation.17 One could still argue that Nepal’s average bound tariff is lower than the global average (about 62%) and the rates for other South Asian countries. While this is so, it is appropriate to compare Nepal’s case be with those countries which became WTO Members through the accession process, not with the original WTO members.

A second way to assess the level of the bound tariffs would be to examine whether these rates provide necessary policy space to maintain some level of protection and to vary applied tariffs (upwards) when needed, for example to respond to import surges. One way to analyse this is to compare the bound rates for individual major commodities with applied tariffs for recent years. If the applied rates for recent years are consistently much lower than the corresponding bound tariffs, one could conclude that the bound rates do provide enough policy space. This aspect is discussed below with examples from Nepal.

16 See www.wto.org/trade topics/accession for details on Nepal’s bound tariffs and Annex 2 of this chapter for selected commodities.

17 Some analysts argue that having high bound rates is not necessarily a positive outcome; they would favour lower bindings on the ground of efficiency and trade predictability.

–  –  –

To illustrate this point, Table 3 shows average bound and applied rates for a good cross section of developing countries. It is to be noted that applied rates are much lower than the bound rates for most countries. There are some exceptions too, for example Thailand, where the gap is very small. For these 32 countries, the simple average applied rate is 20% while the average bound rate is four times higher, or 84%.18 A number of factors explain this. First, most developing countries went through a series of trade policy reforms prior to the conclusion of the UR and had consequently eliminated most non-tariff barriers and reduced applied rates considerably, capping them unilaterally and, probably in more cases, as part of the loan conditionality. By contrast, the bound rates which were typically set as ceiling bindings during the UR were on the higher side, but not so for all countries.19 Second, in several cases, applied rates were low because the Common External Tariffs of customs unions were set relatively low. Third, for many developing countries, especially with large populations at or near-poverty levels, it is not politically feasible to maintain high domestic prices on basic foods that high tariffs lead to.

18 By contrast, applied rates are closer to the bound rates for developed countries.

19 There are several exceptions, e.g. Egypt, Sri Lanka as well as several countries in Latin America have relatively low bound rates. This is also the case for new WTO Members.

–  –  –

Analytical Issues on Bound Tariffs and Applied Rates Before reviewing the structure of Nepal’s applied tariffs for major product groups, it would be useful to note some arguments made for and against high WTO bound rates, as well as for a particular structure of applied rates. What are some of 46 the main arguments made for having higher bound tariffs? Alternatively, one could ask what does a country lose if tariff bindings are low?

Arguments in favour of high tariff binding Protection: The primary purpose of a tariff is protection, i.e. keeping the domestic price above world price as an incentive to producers, albeit at the cost of consumers. The bound rate determines the maximum protection that is feasible – higher the rate, greater the scope for such protection. In practice, however, many developing countries are not known to provide protection to agriculture, at least not much.20 Nepal’s situation on this is not known for lack of studies. In the case of India various analyses have shown that domestic prices are generally below world prices for a majority of agricultural products, implying taxation (Gulati and Kelly 1999). If relative agricultural prices in Nepal are similar to those in India, as is often found, it is likely that the Nepalese agriculture is also not protected.

Safeguard: Many developing countries do not use tariff to protect agriculture.



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