The Chairman of the Non-Agricultural Market Access (NAMA) Negotiations, Ambassador Donald Stephenson, tabled his new draft modalities text [note 1] on 19 May 2008. It is worth noting that this is a Rev.1 text – unlike that for agriculture which is Rev.2 – since the preceding February paper was less of a redraft than a discussion of differences in the first Draft Modalities presented as a JOB document [note 2]. The new text is more complex, more disputed and illustrates a higher degree of polarisation among the participants than either of the earlier texts.

Ambassador Stephenson has understandably admitted frustration and bemoaned a lack of negotiating engagement on NAMA. While Ambassador Falconer felt himself free to arbitrate on many previously-disputed aspects of the agriculture text, the NAMA Chairman has done little more than make obvious just how far apart the negotiators are and how much remains to be done. The reactions have been predictable and highly contrasted: from ambitious US business associations, unhappy at the degree of flexibility provided to their target markets, especially China, to Argentina and India. On the other extreme, these emergent economies decry the limitations on flexibility for developing countries and the links evident in this text between that flexibility and acceptance of lower coefficients in the Swiss formula. This note seeks to identify and explain the key new features in the NAMA modalities text and only what has changed. For a clearer understanding of these changes and to compare with the previous texts (February 2008 and July 2007), see the previous AITIC Background Notes on the subject [note 3].

I. Product Coverage

1. Paragraph 2 of the Preamble returns to the July 2007 formulation, contained in Annex 1, which defines coverage as all non-agricultural products plus several listed fish products, and products based on agricultural production excepted from HS chapters 25-97. Deviations affecting the EU, Mexico, Tunisia, Turkey and Switzerland remain bracketed in a footnote to Annex 1.

II. The Formula

2. In essence this has not changed although the options for approaches other than the “Swiss formula”, noted in the February text, have been wholly abandoned. The key changes lie in the coefficients. That for developed members has moved from 8 – 9 to a slightly more ambitions 7 – 9. For developing members, three coefficients – x (19-21), y (21-23) and z (23-26) – are now included and relate directly to developing country flexibilities (below).

3. All coefficients remain to be determined through negotiation. The Chairman appears to have taken seriously calls from developing participants for a more ambitious outcome on developed country tariffs, but held tight to practically the same coefficients for developing nations that were contained in the July 2007 draft. The possible acceptability of such a range of coefficients is clearly tied to more generous flexibilities for developing WTO members. The immediate reactions do not indicate that those previously seeking coefficients above 30 are impressed. At the same time, a more-ambitious commitment by developed economies seems a remote possibility given the likely reaction from the US and EU textiles industries and political unwillingness to accept what are seen in Brussels and Washington as generous terms for China through the Recently Acceded Members (RAMs) provisions.

III. Elements Regarding the Formula (Paragraph 6)

4. The issue of “mark-ups” to determine a tariff-reduction starting point for unbound tariffs has become more complicated in the new draft (Paragraph 6(b)).   Thus, members with such unbound tariffs would take their relevant applied tariff and add either 20 percentage points or 30 percentage points to establish the starting rate on which the formula cuts would be applied. A third option provides for a mark-up dependent on the level of the current applied rate. Thus, the mark-up is 30 percentage points if the applied rate is equal to or less than the half the coefficient (i.e. 30 is added to an applied rate of 10 or less if the coefficient is 20). If the applied rate is more than half the coefficient then the mark-up is 20 percentage points or half the coefficient plus 30 points, whichever is the larger. Assuming a coefficient of 20 and an applied rate of 15 the first calculation would give a starting rate of 35 and the second a starting rate of 40: the second calculation would be the one adopted.

5. The second formula-related issue that is now in question concerns implementation and phasing. It is to be decided whether developed members get 4 or 5 years to implement formula cuts through 5 or 6 equal rate reductions. Except as otherwise provided, developing members would get between 8 and 10 years for implementation through between 9 and 11 equal rate reductions.

IV. Coefficient and Flexibilities for Developing Members Subject to the Formula (Paragraph 7)

6. This section represents the crux of the work that has been pursued in recent months. The so-called “sliding scale” gears additional flexibilities for developing countries subject to the formula to their willingness to accept lower coefficients in the formula. Thus, instead of the single developing-country coefficient (b=[19-23]) in the July text there are now three ranges of possible coefficients – x, y and z with different accompanying levels of flexibility.

7. Paragraph 7(a) sets out the terms for a developing member accepting a low coefficient (x=[19-21]). This represents a situation in which the member accepts the most significant general cuts through the application of the formula [note 4]. In such a situation the member is entitled to the highest levels of flexibility which would be available in two forms.

• First, (Paragraph 7(a)(i)), permits less than formula cuts for between 12 per cent and 14 per cent (to be agreed) of non-agricultural tariff lines. The conditions are that the cuts are not less than half the formula cuts and that the products concerned do not represent more than between 12 per cent and 19 per cent (to be agreed) of the total value of the members non-agricultural imports.
• Second, as an alternative, Paragraph 7(a)(ii) permits the member to keep unbound and/or not apply the formula at all (i.e. zero cuts) for a maximum of 6-7 per cent (to be agreed) of non-agricultural tariff lines. The condition is that whatever approach is taken – or a combination of both – the tariff lines affected must not exceed between 6 per cent and 9 per cent (to be agreed) of the total value of the member’s non-agricultural imports.

8. Paragraph 7(b) sets out terms for a coefficient y=[21-23], the pivotal point between high and low levels of flexibility. Again there are two forms of flexibility which shadow those for coefficient x but at a lower level.

• First, (Paragraph 7(b)(i)), less than formula cuts on 10 per cent of tariff lines. The conditions are: cuts no less than half the formula cuts and the tariff lines concerned must not represent more than 10 per cent of imports.
• Second, (Paragraph 7(b)(ii), keep unbound and/or apply no formula cuts on up to 5 per cent of national tariff lines. The condition: whatever approach is taken – or a combination of both – the tariff lines concerned cannot account for more than 5 per cent of the member’s imports.

9. This approach is precisely what was proposed in the July text when the developing country coefficient was b= [19-23] – i.e. where the mid point was 22, as it is for y=[21-23].

10. Paragraph 7(c) represents the situation where a member chooses the highest possible coefficient – z=[23-26] but is left with no recourse to flexibilities. Such a member would simply apply the formula at whatever level z is finally settled.

V. Other Elements and Targeted Flexibilities for the Application of the Formula

11 In line with the SACU proposal, Paragraph 7(d) provides that South Africa benefit from additional flexibility as a means of protecting the value of advantages in the SACU internal market. This added flexibility applies to the mid-range of possible coefficients (y) and the first of the two options (Paragraph 7(b)(i)). If accepted – and there remains significant opposition – South Africa would be provided between 1 and 6 additional percentage points (i.e. less than formula cuts on between 11 per cent and 16 per cent of tariff lines).

12. Other customs unions (including Mercosur) would be provided special flexibility – and therefore the opportunity to further defend their internal preferences - through Paragraph 7(h). Like almost everything else in this section of the paper, the proposed provisions are in square brackets which reflect considerable dissent among members. The provision affects the manner in which the share-of-trade conditions in Paragraph 7(a) and (b) are calculated for customs unions that present a single list of flexibilities. Thus, the customs union would presumably need to choose either coefficient x or y; identify the qualifying number of tariff lines in the common external tariff; and then check the value-of-trade (VOT) percentage such that the proportion of total imports impacted does not exceed the conditions set out. The percentage VOT is the total amount of customs union NAMA imports under flexibilities divided by the total of NAMA imports.

13. Yet more controversial is the claim for especially favourable flexibilities by Venezuela. The Chairman has provided (Paragraph 7(e)) that Venezuela apply essentially the treatment envisaged for small, vulnerable economies (SVEs). According to the WTO Secretariat [note 5], Venezuela’s simple average bound tariff is 33.8 per cent which would place it in the second tier for SVE flexibilities (Paragraph 13(a)(ii), see below).

14. More generally, in calculating the percentage value-of-trade limitations (VOT) members would be given a choice on base period; either 1999-2001 or the most recent three-year period for which data is available (Paragraph 7(g)).

15. A particularly troubled area of negotiation concerns the issue of excluding entire HS chapters through recourse to developing country flexibilities (Paragraph 7(f)). There has been heavy pressure from developed members to narrow the possibility of all key imported products within a particular tariff heading being excluded from full formula cuts. There are now two options. The first simply eliminates the possibility of excluding an entire HS chapter. The second digs down to the four-digit level and establishes two conditions. First, not more than half the six-digit sub-headings could be excluded. (If any national tariff line is shielded through flexibilities, it is assumed that the six-digit sub-heading in which it falls is excluded.) Second, no combination of six-digit sub-headings and specific national tariff lines that account for more than 50 per cent of imports classified within the four-digit heading could be excluded.

16. In Paragraph 7(i), the Chairman holds open the possibility that developing members subject to the formula could gain extra credit in applying flexibilities if they participate in sectoral agreements (see below). Some developing countries see this as a means of levering them into sectoral agreements that they oppose in principle. They also see no reason for a right to flexible terms should be made conditional on acceptance of unrelated provisions.

VI. Flexibilities for Developing Members with Low Binding Coverage (Paragraph 8)

17. The 11 members concerned by these provisions – those with less than 35 per cent of their NAMA tariff lines bound – also now have significantly more complicated and disputed proposals in front of them. The simple approach in the July draft – a requirement that they bind 90 per cent of their tariff lines at an average not exceeding 28.5 per cent – has been replaced by a sliding scale. Thus, Paragraph 8(a) provides three bands of current binding coverage and three ranges of possible new binding commitments. The only element that remains constant is the commitment to a 28.5 per cent average level of newly-bound duties.

18. Also now in question is the implementation period (Paragraph 8(d)). The first option is essentially that in the July 2007 draft except that the target average duty level would be arrived at through between 9 and 11 equal rate reductions; the first, on January 1 of the second year following the entry into force of the results of the Doha negotiations. In practical terms, this equates with an implementation period of between 9 and 11 years. The second option allows for a simple ten-year implementation period, without stipulating any annual reduction rate – equal or otherwise.

VII. Sectoral Negotiations (Paragraph 9)

19. This aspect of the NAMA mandate remains as polarised as ever. Several developed members – pushed by industries that see no other benefits coming out of Doha – are pressing as hard as ever for significant results. Many developing countries see the initiative as a diversion from the central plank of the mandate to achieve particular advantages for poorer nations, few of which (with the exception of China) are competitive in most of the sectors so far identified. The text remains as it was in February 2008 and, with one small scheduling exception, as it was in July 2007 also. Although it continues to refer to “progress in a variety of sectoral initiatives”, it is not entirely clear what that signifies in practice. The issue has become especially problematic with the attempt (see above) to tie additional flexibilities for developing countries to their participation in sectoral initiatives; something quickly and strenuously rejected by India and Argentina.

VIII. Small, Vulnerable Economies (Paragraph 13)

20. Conditions for SVEs remain unresolved and essentially much as in the February 2008 paper. The three-tiered scale for tariff reduction (Paragraph 13(a)) is, however, now complicated by an additional option in each tier. Thus, to take the first tier as an example, SVEs with current bound tariff averages at or above 50 per cent will be required to reduce that average to between 22 per cent and 32 per cent, depending on what is finally agreed. To that would be added a further option: simply to reduce their average bound tariff by 40 per cent. Naturally, they would apply the lesser reduction. Similar alternatives are offered for the remaining two tiers. Clearly, in the negotiations there will be a link made between settling the levels of the overall averages in the first option, in each tier, and the existence of a second option.

21. Exceptional treatment for Bolivia, as an SVE, is now allowed for in the text but not specified. However, this element remains in square brackets despite having attracted support from other developing countries.

22. The implementation period for SVE tariff reductions (Paragraph 13(d)) is also now in question with between 9 and 11 annual equal rate reductions, subject to negotiation, rather than the nine instalments envisaged in the July and February papers. (Paragraph 13(e)) confirms the 3-year grace period for RAMs first flagged in the February 2008 text.

IX. Market Access for LDCs (Paragraphs 15-17)

23. Although the text, related to the Hong Kong Ministerial decision, remains largely as it was in February 2008, two modest attempts to toughen the language are provided in square brackets. With respect to rules of origin (Paragraph 15(b)), language that would require (not simply urge) members to make use of the proposals [note 6], originally tabled by the LDC group, to provide disciplines when members design autonomous preference programmes. Given the troubled history of seeking GATT/WTO disciplines on rules of origin in preferential agreements, it seems unlikely that this will be agreed.

24. A further effort to achieve some predictability is made in Paragraph 16(a). In the February 2008 text this provision required developed members to inform the WTO of which products would be covered within the 97 per cent duty-free, quota-free requirement either by 2008 or “no later than the start of the implementation period”. Since 2008 is probably a lost cause, the second option would appear very late (although it fits with the reality of the US congressional process). Thus, a requirement, in square brackets, has been added that would require notification by the time final schedules are available.

X. Recently Acceded Members (Paragraphs 18-20)

25. For the most part the text remains as it was in February with continuing uncertainty (Paragraph 19(a)) over the grace period before implementation of cuts begin (2-3 years) and the additional implementation period (2-5 equal rate reductions). In an effort to provide a larger cushion, an alternative approach is now proposed to the February 2008 provision that applied the grace period to all tariff lines from the date on which full implementation of the accession commitment is achieved (thus, including items where full accession implementation may have been achieved up to three years before the Doha results enter into force but not more). The alternative would apply the grace period to those tariff lines that were still in the process of implementation as of 1 January, 2003 and would activate the grace period from the day the Doha results enter into force. Since the more recent RAMs are not required to make tariff reductions in addition to their accession commitments, this approach would appear to benefit China and safeguard its rights as a RAM even if the implementation of Doha is radically delayed. That might well be a reason why the major developed countries will not accept this drafting.

XI. Non-Tariff Barriers (Paragraphs 23-26)

26. The 13 proposals, draft decisions and draft understandings on Non-Tariff Barriers (NTBs) remain annexed as they were in the February 2008 text and there is little evidence of any substantive negotiating activity on them since then. The Chairman’s comments on each of them in the February paper probably remain entirely valid.

27. The drafting of the main text has been changed, however, and now calls for the finalising of text-based NTB negotiations, alongside negotiations on bilateral requests, before the submission of final draft schedules (Paragraph 24). Paragraph 25 provides a three-stage timetable for negotiations, with text-based negotiations starting at the point NAMA modalities are settled. In effect, five months are allowed for concluding all aspects of the NTB negotiations. Given that very little attention has been given to any of the proposals so far, it is not at all clear that any will emerge as deals in the final package.

XII. Non-Reciprocal Preferences (Paragraphs 28-30)

28. The tension between preference beneficiaries and other exporting developing countries remains, with little sign of an accommodation in this area of the NAMA text. Added to the mix is the interest of the EU and US textiles sectors to stave off tariff reductions through the advantages offered to preference beneficiaries (since all US preference products – in Annex 3 – are textiles items as are half of those for the EU – Annex 2).

29. Paragraph 28 now allows between 7 and 9 equal rate reductions for the preference products covered rather than the four or five years indicated for developed members in Paragraph 6(f). Further, the reductions would only commence two years after the Doha results enter into force. Thus, the adjustment period for preference beneficiaries would stretch to between eight and ten years.

30. However, Paragraph 30 deals with the disadvantages this arrangement would bring to two significant textile-exporting, non-preference beneficiaries, namely Pakistan and Sri Lanka. Via a waiver from GATT Article 1, these two countries would benefit from implementation of the normal tariff cuts in the preference granting markets at a faster rate than Paragraph 28 would otherwise facilitate. Thus, for these two suppliers only, and the products covered in Annex 3, the implementation period would be five or six years, starting January 1 the year after the Doha results enter into force.

Acronyms

Note 1: See Draft Modalities for Non-Agricultural Market Access – Second Revision, WTO, TN/MA/W/103/Rev.1, 20 May 2008. (return to text)

Note 2:See Negotiating Group on Market Access – Chairman’s Introduction to the Draft NAMA Modalities, WTO, JOB(07)/126, 17 July 2007. (return to text)

Note 3: See The Revised NAMA Modalities Text: One Step Forward, Two Steps Back?, February 2008 and NAMA takes Centre Stage – The Draft Modalities, September 2007, AITIC. (return to text)

Note 4: Remembering that the lower the coefficient the more substantial are the cuts and the lower the final maximum bound tariff. Thus, if x=19 –excluding products on which flexibilities are exercised, the highest bound rate will be 19% ad valorem.   (return to text)

Note 5: See WTO Members' Tariff Profiles, WTO, TN/MA/S/4, 11/09/2002 and Corr. 1, 15/11/2002. (return to text)

Note 6: See Least-Developed Countries' Proposal on Rules of Origin – Communication from Zambia on behalf of the LDC Group , WTO, TN/MA/W/74, 12 June 2006. (return to text)