Evaluating effects of world trade agreements on tariffs affecting manufactured goods

Context

Following the Uruguay Round Agreement of the World Trade Organization (WTO), the average tariff level in Quad-4 OECD countries (Canada, EU, Japan and US) was less that five per cent on manufactured imports. In other OECD countries the average is close to 20 per cent. In developing countries the average rate is much higher, at almost 40 per cent for a sample of large developing countries. A principal achievement of the Uruguay Round in respect of developing countries was to impose tariff bindings on more than half of the imports of developing countries.

The MultiFibre Agreement (MFA) provided for the phased withdrawal of quantitative restrictions and tariff cuts, on textiles and clothing imports, to be completed by 2005. However, the degree of liberalisation implementation has been limited. Tariffs on textiles and clothing remain high relative to those in industrial products generally, and developed country importers have been slow to eliminate MFA quota restrictions (in the EU, 7 per cent of notified quota lists have been eliminated, in the US the figure is one per cent).

The European Union seeks a comprehensive, 'single-undertaking' approach to tariff negotiation aimed at harmonising the tariff structures of WTO members across all non-agricultural products. The specific measures being proposed are: (1) a set of tariff bands, combined with average tariff objectives that are differentiated according to an economy's level of development. All non-agricultural products tariffs would fall within the appropriate band; (2) non-tariff market access negotiations, to cover horizontal issues such as customs valuation, licensing, rules of origin, product safety standards and certification procedures; (3) simplification of members' tariff structures by reducing the tariff differentiation to the six-digit HS level; (4) recognition of the specific concerns of least developed countries, by a commitment from all developed countries to implement tariff and quota free access for products from least developed countries; and (5) continuation of non-reciprocal preferences for developing countries in product areas of particular export interest to these countries.

Implementation

Despite the progress made in lowering the overall average bound mean tariff rates in developed and developing countries, the tariff structure of WTO members continue to show considerable variation in the level of market access granted to manufactured imports. Tariff peaks affect a number of sectors in OECD countries, including textiles and clothing, footwear and leather goods, which tend to be sectors of greater export interest to developing countries. Tariff escalation remains prevalent in many sectors and increases the level of effective protection.

The use of antidumping has increased since the Uruguay Round Agreement was finalised, with a growing number of developing countries initiating cases against other developing countries. A significant number of initiated investigations lead to a restrictive outcome (price undertakings by exporters or increased tariffs).

It has been traditional to assume that liberalisation of manufactures trade is in the interests of developed countries, and that developing countries' interests lie predominantly with primary commodities. This is no longer the case, and as a result of the global restructuring and redistribution of world industry that have occurred in recent decades, manufactures now account for almost three quarters of developing country exports. Tariffs on developing country exports of manufactures to high-income country markets are almost four times higher than the same tariffs facing industrial country exporters to the same markets, due to the composition of trade with higher tariffs levied on products which are imported mainly from developing countries. At the same time, almost 40 per cent of developing country manufactured exports are to other developing countries, where average import tariffs are higher, at 13 per cent. Many developing countries still have many tariff bands, relatively high average tariffs, significant tariff dispersion, and many 'sensitive' products subject to high tariffs.

The loss of MFA quotas will affect producer countries differently. Relatively high income producers who benefit from existing quotas (e.g. Hong Kong, Mauritius) will lose economically, but low cost, high volume producers that are quota-constrained (e.g. Bangladesh, Pakistan) are likely to gain. The social gain, in terms of income and employment, is likely to be positive, as the greatest gains accrue to relatively poor countries. The environmental impact may be adverse (many textile industries pollute water sources and the atmosphere).

Further liberalisation of textiles and garments, and non-agricultural products generally, should lead to improved production efficiency and consumer gains from lower prices. There may be short and medium term social costs, associated with adjustment and restrictions in the manufacturing industries. The negative environmental impact is likely to increase, and only partly offset by the adoption of improved resource saving and pollution controlling technology which can enhance international competitiveness and meet environmental standards in export markets.

There will be a negative short to medium term social adjustment impact, which may be significant in those developing countries that assume increased MFN tariff bindings, and which have previously followed a protectionist policy towards the domestic manufacturing sector. This implies the need for social safety nets and social adjustment programmes as flanking measures.

Claim

A liberalisation scenario would involve the removal of essentially all tariffs and market access restraints on trade in manufactured goods.

The inclusion of tariffs within a band would reduce, however, existing tariff peaks and escalation. European consumers would gain from the associated increased access of developing countries to the EU market. EU exporters would also benefit economically from increased access to developing countries markets.

The net social impact associated with reduced tariffs will be determined by the balance between lower-income household gains from lower prices, and the loss of employment in sectors which are unable to compete with imported products.

The economic impact of a comprehensive liberalisation of trade in manufactures would increase the net economic gain to the EU. However, since average tariff levels are already low, the increase in gain as compared to the intermediate scenario is unlikely to be large. The increase would accrue mainly from improved access to foreign markets, especially in developing countries.

The overall environmental impact is likely to be negative in resource-based industries, if increased trade liberalisation encourages increased rates of depletion of natural resources, such as fish stocks and forests.

The economic gain to the least developed countries is unlikely to be significant, since these countries already receive preference treatment on manufactured goods, and in many cases face effective supply-side constraints on increasing their exports.