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Do Sensitive Products Undermine Ambition?

Report by Vanzetti, David, Peters, Ralf, 2011

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The long-running WTO negotiations remain unresolved. Agriculture is a main stumbling block. Members have agreed to linear tariff reductions within bands, but proposed exemptions for sensitive products, while providing for much needed flexibility, threaten to undermine the ambition. A detailed partial equilibrium global agricultural trade model is used to analyse the likely impact of exemptions from the formula tariff reductions. Applying one third of the formula cuts to the 5 per cent of lines with the highest tariffs increases the final developed country average agricultural tariff from 16 to 24 per cent but the negative impacts on trade and welfare are less dramatic.

UNCTAD series on assuring development gains from the international trading system and trade negotiations


U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


DO SENSITIVE PRODUCTS UNDERMINE AMBITION?




New York and Geneva, 2011


UNCTAD series on assuring development gains from the international trading system and trade negotiations


U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


David Vanzetti and Ralf Peters




ii DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


NOTE


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or regarding its economic system or degree of development.


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to the UNCTAD Secretariat at the following address: Palais des Nations, 1211 Geneva 10, Switzerland.


Series Editor:


Ms. Mina MASHAYEKHI


Head, Trade Negotiations and Commercial Diplomacy Branch


Division of International Trade in Goods and Services, and Commodities


United Nations Conference on Trade and Development


Palais des Nations


CH-1211 Geneva 10


Copyright © United Nations, 2011


All rights reserved. Printed in Switzerland


UNCTAD/DITC/TNCD/2011/5




iiiACKNOWLEDGEMENTS


ACkNOwlEDgEMENTS


The report was prepared by David Vanzetti, Crawford School of Economics and Government, Australian National
University, Canberra, and Ralf Peters, Trade Negotiations and Commercial Diplomacy Branch, Division on Trade
in Goods and Services and Commodities, UNCTAD, with guidance from Mina Mashayekhi. When the note was
prepared Mr. Vanzetti was a staff member of UNCTAD.


Paula Genoud-Villegas designed the cover page and other graphics and performed the text formatting for this
publication.




iv DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


ABSTRACT


The long-running WTO negotiations remain unresolved. Agriculture is a main stumbling block. Members have
agreed to linear tariff reductions within bands, but proposed exemptions for sensitive products, while providing
for much needed flexibility, threaten to undermine the ambition.


A detailed partial equilibrium global agricultural trade model is used to analyse the likely impact of exemptions
from the formula tariff reductions. Applying one third of the formula cuts to the 5 per cent of lines with the highest
tariffs increases the final developed country average agricultural tariff from 16 to 24 per cent but the negative
impacts on trade and welfare are less dramatic.


JEL subject codes F13, Q17.
Key words: agriculture, trade, tariffs, WTO




vCONTENTS


CONTENTS


Note .................................................................................................................................................................. ii


Acknowledgements .......................................................................................................................................... iii


Abstract ........................................................................................................................................................... iv


I. INTrODuCTION ......................................................................................................................................... 1


II. AMbITION VErSuS FLExIbILITy ............................................................................................................ 2


III. ThE MODEL .............................................................................................................................................. 4


IV. ThE DATA .................................................................................................................................................. 4


V. ThE rESuLTS ............................................................................................................................................ 5


A. Change in Tariffs ...........................................................................................................................5


b. Trade Impacts ...............................................................................................................................7


C. Welfare ...........................................................................................................................................7


D. Producer Impacts .........................................................................................................................8


E. New Access Opportunities...........................................................................................................9


VI. IMPLICATIONS AND CONCLuSION ..................................................................................................... 10


references ...........................................................................................................................................12


Appendix ..............................................................................................................................................13
Appendix 1. ATPSM Commodities ......................................................................................................... 13
Appendix 2. ATPSM Model Documentation............................................................................................ 14


Tables


Table 1. Standard Liberalization Scenario ......................................................................................................... 3


Table 2. Initial and Final Bound Tariffs at Various Levels of Exemptions for Sensitive Products ........................... 5


Table 3. Change in Imports as Exemptions Increase ......................................................................................... 7


Table 4. Change in Exports as Exemptions Increase ......................................................................................... 8


Table 5. Change in Welfare as Exemptions Increase.......................................................................................... 8


Table 6. Change in Producer as Exemptions Increase ....................................................................................... 9


Table 7. Change in Tarriffs and Imports for Selected EU and Japanese Products ............................................ 10


Figures


Figure 1. Tariff Structure in the EU ..................................................................................................................... 6






1I. INTrODuCTION


INTRODUCTIONI.


The World Trade Organization’s (WTO’s) Doha
Round of multilateral trade negotiations is in a
stalemate. Agriculture continues to be a central pillar
of its development dimension, and will be a major
development challenge in developing countries in the
coming decades. Agriculture is also a socially and
politically sensitive area which frequently leads to the
exclusion of a certain number of agricultural products
from tariff liberalization in regional and multilateral
trade negotiations. This note analyses the effects
of excluding sensitive products using the approach
discussed in the Doha round negotiations and outlined
in the latest draft modalities text of the Chair of the
negotiations (WTO, 2008).


Sensitive products remain a contentious element in the
WTO agricultural negotiations because although they
provide necessary flexibility, they have the potential
to undermine the overall ambition to reduce tariffs
substantially. Ironically, the greater the ambition, the
greater the potential effects of exemptions for sensitive
products to undermine it. On the other hand, it has
repeatedly been shown that WTO members require
some flexibility to protect politically sensitive sectors.


Members have agreed on the approach to tariff cuts.
There shall be linear cuts within four bands, with the
higher tariffs attracting greater reductions. To date the
specific thresholds and tariff reductions have not been
agreed, although in recent months the likely range
appears to have narrowed. Developed and developing
country groups would have different thresholds and
linear reductions. Members have also agreed on the
need for exemptions for so-called sensitive products.
Countries will be able to designate their own products,
but not agreed is the number of such exemptions, nor


their treatment. Sensitive products will not be totally
exempted from tariff reductions, and countries that
make use of such exemptions will be required to
provide additional access in some alternative fashion
such as increasing the import or tariff rate quota
where these exist. A formula for increasing the quota
as compensation for a lesser tariff reduction has
not been agreed.


As to be expected, opinions vary on the selection and
treatment of sensitive products. The United States has
proposed a very low number of tariffs (1 per cent of
all tariff lines), as it maintains its exporters require a
real improvement in market access if they are to forgo
domestic support as called for by other members.
The G-10 group of agricultural importers,1 such as
Japan and Switzerland, which have high tariffs, are
pressing for a high proportion of tariffs and lower
reductions. The G-20 group of developing countries,2
which includes China, Brazil and India, have taken an
offensive position on agricultural tariffs of developed
countries. The G-33 group of developing countries
with defensive interests focuses on flexibilities for
developing countries.3


In this paper we review the current positions on sensitive
products and examine the conflicting proposals.
One way out of the impasse may be to increase the
import quotas.4 In particular we look at how increasing
the flexibility undermines the trade and welfare
effects. We also comment on the compensatory
expansion of quotas as outlined in the Chair’s draft
and assess its feasibility.


Other models have been used to analyse sensitive
products. Using the general equilibrium model GTAP
a World Bank study (Anderson et al. 2006) shows that
global welfare gains, a measure of national economic
benefits, from further liberalization shrink by three


G-10 economies: Bulgaria, Chinese Taipei, Iceland, Israel, Japan, Liechtenstein, Mauritius, Norway, Republic of Korea and 1


Switzerland.


G-20 countries: Argentina, Plurinational State of Bolivia, Brazil, Chile, China, Cuba, Egypt, India, Indonesia, Mexico, Nigeria, 2


Pakistan, Paraguay, Peru, Philippines, South Africa, United Republic of Tanzania, Thailand, Bolivarian Republic of Venezuela and


Zimbabwe.


G-33 countries: Antigua and Barbuda, Barbados, Belize, Benin, Botswana, China, Congo, Côte d’Ivoire, Cuba, Dominican 3


Republic, Grenada, Guyana, Haiti, Honduras, India, Indonesia, Jamaica, Kenya, Mauritius, Madagascar, Mongolia, Mozambique,


Nicaragua, Nigeria, Pakistan, Panama, Peru, Philippines, Republic of Korea, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and


the Grenadines, Senegal, Sri Lanka, Suriname, United Republic of Tanzania, Trinidad and Tobago, Turkey, Uganda, Bolivarian


Republic of Venezuela, Zambia and Zimbabwe.


Members have not yet been able to agree on the method or magnitude of specifying quotas as compensation for exemptions.4




2 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


quarters with the inclusion of 2 per cent and 4 per
cent sensitive products in developed and developing
countries, respectively. The substantial reduction
in welfare gains reflects an ambitious base scenario
that does not allow for exemptions under the special
product provision. Developing countries welfare gains
are positive in that scenario but they lose as a group
in the scenarios with exemptions. A study undertaken
by UNECA (Ben Hammouda et al. 2007) also shows
that exemptions have a negative impact on developing
and African countries’ welfare though the impact
is smaller and the group’s welfare remains positive.
Polaski (2006) also uses a version of the GTAP
model. In a scenario with linear cuts of 36 and 24
per cent for developed and developing countries,
respectively, the developing countries experience
welfare losses and flexibilities (implemented only
by developing countries in her scenario) have only
a modest impact on the results. This result is a
consequence of the initially low level of ambition for
developing country cuts and the absence of flexibilities
for developed countries in the scenario.


The different model applications show a common
tendency. Within the group of developing countries
there are net winners and losers from liberalization,
depending on initial trade and protection patterns.
Developing countries as a group may gain or lose
with a tendency for greater gains in more ambitious
scenarios, especially if reductions in applied tariffs are
specified. Countries that do not undertake reductions
in applied tariffs tend to lose in these modelling
exercises. Furthermore, the higher the initial ambition,
the greater the impact of exemptions. The exemptions
can turn potential gains of developing countries into
losses. Some developing countries such as net-food
importers may be net-losers but could benefit in terms
of lower losses from exemptions of sensitive products
as the level of ambition is reduced.


AMBITION VERSUS II.
FlExIBIlITy


Flexibility was accommodated in the Uruguay Round


by allowing countries to reduce some tariff lines by only
15 per cent so long as the average cut exceeded 36
per cent. However, the cuts were unweighted, so a 15
per cent cut on an initial tariff of 100 per cent could be
offset, for example, by a 57 per cent on a 10 per cent
initial tariff which gives a simple average cut of 36 per
cent. As a result the improvement in market access
was a lot less then it appeared at first. Agricultural
exporters are keen to avoid this being repeated in the
current round. On the other hand, importers are keen
to retain such flexibility.


The Hong Kong (China) Ministerial Declaration
acknowledges the need “to agree on the treatment of
sensitive products” (WTO 2005, paragraph 7), which
would be subject to lesser tariff cuts than specified
by the formula.5 Proposals for the number of sensitive
products range from 1 per cent (G-20 and the United
States) to 15 per cent (G-10) of tariff lines. The
European Union proposed 8 per cent. A simulation
undertaken by Australia (WTO 2006a) shows that the
average reduction of applied tariffs using, for example,
the G-20 formula with 8 per cent of sensitive products
would be less than 1 per cent in Brazil and less than
5 per cent in India. More recently, the Chair’s draft
modalities paper of 6 December 2008 (WTO, 2008)
suggested a range for sensitive products to be within
the range of 4 to 6 per cent for developed countries
and one third more, that is 5.33 to 8 per cent, for
developing countries (WTO 2008, para. 71). In April
2011 the Chairperson reported about the lack of
progress made since 2008 (WTO, 2011) and attached
a virtually unchanged draft modalities text with no
changes in numbers proposed for sensitive products.


In addition to the selection of sensitive products, also
contentious is their treatment. Members have agreed
that sensitive products would not be totally exempt
from tariff cuts, and more recently the consensus
seems to coalesce around reductions for developed
countries of between one and two thirds of the formula
cuts. This implies, for example, that a tariff of 100
per cent, that would perhaps be cut by (say) 75 per
cent as it is in the top tier, would instead be reduced
by between 25 and 50 per cent. For developing
countries, the reduction would be “no less than two


The key documents in the negotiations are the 5 Doha Ministerial Declaration (WT/MIN(01)/DEC/1), the Framework Agreement of


1 August 2004 (WT/L/579), sometimes called the July Framework, the Hong Kong Ministerial Declaration (WT/MIN(05)DEC), and


the Revised Draft Modalities for Agriculture from July/August 2007 (TN/AG/W/4 and Corr.1) and December 2008 (TN/AG/W/4/


Rev.4). On 21 April 2011 the Chairperson proposed few corrections to the December 2008 draft modalities text (TN/AG/26).




3II. AMbITION VErSuS FLExIbILITy


thirds” according to the suggestion put forward by the
Chair’s draft.


To counter this erosion of ambition some countries
have proposed that each designated sensitive product
shall be subject to an expansion of the import quota6


as compensation. Indeed the Framework Agreement
(WTO 2004) states that “some MFN-based tariff quota
expansion will be required for all such products”. The
difficulties are well recognized. Where imports are
a small proportion of domestic consumption, any
increase in imports based on initial levels does little
to improve market access. A variety of variables were
put forward as a basis for expansion. These include:
(i) domestic consumption, expressed in terms of
physical units, (ii) current bound tariff quota volumes;
and (iii) base year imports. These would give different
results depending on the ratio of imports to the quota
or to consumption. Nonetheless, the Chair’s draft
paper of 17 July refers to “new access opportunities
equivalent to no less than [4][6] percent of domestic
consumption” (para. 57). (The square brackets in the
Chair’s text refer to items that remain to be negotiated.)
The quota expansion is to be reduced if the quota is
more than 10 or 20 per cent of consumption. Finally,


the additional quota shall be allocated on an MFN
basis.


The selection and treatment of sensitive products can
make a significant difference to the level of ambition. The
first task is to assess how different degrees of flexibility
will affect liberalization. We examine exemptions
applying to the highest 1, 3, 5, 7 and 10 per cent
tariffs in each country and report the changes in tariffs,
trade and welfare effects. The results will depend on
the formula reductions. As a benchmark we take a
standard scenario as proposed in the draft modalities
text (WTO 2008), which is somewhere between the
conservative EU proposal and the more ambitious US
offer. We also look at quota expansion and assess
whether this may compensate for the exemptions. The
standard scenario, without exemptions, is described
in Table 1. There are five more scenarios with varying
levels of exemptions.


The exemptions are selected by tariff levels at the
6-digit level, with the assumption being that the most
sensitive products attract the highest initial tariffs.7


In developing countries the percentage difference
between applied and bound rates was taken as the
criteria with products having the lowest difference


Table 1. Standard Liberalization Scenario


Countries
Tariffs Export


Subsidies Domestic SupportBand Cut


Initial tariff, % % % %


Developed
Countries


If >75•
If >50 and ≤75•
If >20 and ≤50•
If ≤ 20•


-70


-64


-57


-50


-100
EU -80•
US and Japan -70•
Others -55•


Developing
Countries


If >130•
If >80 and ≤130•
If >30 and ≤80•
If ≤ 30•


-47


-42


-38


-33


-100 -55


LDCs - 0 0 0


Some countries have tariff-rate quotas which imply low tariffs for imports below a specified amount of imports and higher tariffs 6


for imports above the quota.


An alternative approach is to select products according to tariff revenue, which combines the tariff and the trade flows. However, 7


a possible anomaly with this approach is that sensitive products with prohibitive tariffs, such as Japanese rice, have low tariff


revenue and are not selected. The approach that is adopted by Anderson et al. (2006) is to take the tariff revenue forgone through


implementation of the formula as the selection rule.




4 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


being selected as sensitive products. This reflects the
likely approach that developing countries apply the
flexibilities in such a way to make as little changes in
their applied rates as possible. The sensitive products
in developing countries were not selected among
maize, rice and wheat because these products were
in all scenarios determined as special products (SP)
which were totally exempted from any tariff cuts or
quota expansions.8


ThE MODElIII.


To assess the impact of WTO agricultural trade policy
reform we use ATPSM, a static global agricultural
trade model jointly developed by UNCTAD and
FAO. The model distinguishes between bound and
applied tariffs and includes tariff rate quotas (where
the tariff rate depends on whether imports exceed a
specified quota), two important features of the post
Uruguay Round tariff structure. The model results
are driven by changes in policy variables (tariffs,
export subsidies, domestic support and tariff rate
quotas) which determine changes in domestic prices,
consumption and production. This in turn leads to
a change in imports and exports, which feed into
world prices. The model solves by finding a set of
world prices that equate global imports and exports.
Intersectoral effects are captured through cross-
elasticities, but there are no constraints on the use of
resources such as capital, labour or water. Nor is there
account of changes in stocks. Imports are assumed
to be homogeneous, with consumers and importers
indifferent to the source of their products.9 The results
indicate the effects of the policy changes assuming
a constant base, 2002-2004. There is no account of
exogenous growth over the implementation period. The
model is well-documented (Peters and Vanzetti 2004)
and is downloadable from the UNCTAD website.10
One limitation is the model commodity coverage,
shown in Appendix 1, which does not include all the
products covered by the Agreement on Agriculture.
For example, wool is not included. However, the


included commodities account for most of global
agricultural trade.


ThE DATAIV.


Price and production data are an average of 2002
to 2004 and are compiled from FAO statistics.
Elasticities are from FAO’s World Food Model.
These are based on a trawling of the literature and
are not econometrically estimated specifically for the
model. Some of the elasticities were modified by the
authors to reflect homogeneity, symmetry and other
conditions. Inquota tariffs, outquota tariffs and global
quotas, notified to the WTO, are obtained from the
AMAD database where available and aggregated to
the ATPSM commodity level. For the quad countries
plus Norway and Switzerland ad valorem equivalents
have been calculated based on the guidelines agreed
to at the Mini-Ministerial in Paris in May 2005. Export
subsidy data are notified to the WTO and modified by
UNCTAD (Peters 2006). Bilateral trade flow data relate
to 2004 and are from the United Nations Comtrade
database. These are used to allocate global quotas
to individual countries. The WTO/ITC/UNCTAD World
Tariff Profile database is the source of information on
applied and bound tariffs. Ad valorem equivalent tariffs
(AVEs) are, however, calculated using the Paris Mini-
Ministerial method for agricultural products so that the
placement in the tiers is correct. Data can be accessed
through the WITS software.


The present version of the model covers 150 individual
countries plus two regions, the European Union, which
includes 25 countries, and the Rest of World, which
includes countries, mostly small island economies,
not covered explicitly. Developing countries include
the Republic of Korea, and Taiwan, Province of China.
A third group is the least developed countries (LDCs).
There are 35 commodities in the ATPSM data set,
including meat, diary products, cereals, sugar, edible
oils, vegetables, fruits, beverages, tobacco and
cotton (see Appendix 1). This includes many tropical
commodities of interest to developing countries,


Special products can be designated only by developing countries but their selection is most likely subject to criteria related to 8


food security, livelihood security and rural development.


An Armington approach is used on the demand side to differentiate domestic and foreign products, but there is no differentiation 9


between imports from different sources.


The standard version of ATPSM is downloadable from www.unctad.org/tab.10




5III. ThE MODEL / IV. ThE DATA / V. ThE rESuLTS


although many of these have relatively little trade in
comparison with some of the temperate products.


Some markets include production quotas. These
include EU raw sugar and dairy products, Canadian
dairy and poultry and Japanese rice and dairy. In the
absence of better information, in most cases the rent
is assumed to be 20 per cent, with the exception
of EU sugar (30 per cent).11 These quotas are quite
significant, with implicit rent (quantity times price
times assumed percentage rent) on these products
alone amounting to $13 billion. The significance of
production quota rents is that changes in domestic
prices driven by tariff changes may have no effect on
production until all the rent has been eroded.


ThE RESUlTSV.


First, we present initial and final bound and applied
tariffs under alternative assumptions regarding
exemptions for each WTO members. Later we show
the trade and welfare effects of various degrees
of flexibility.


Changes in TariffsA.


Table 2 shows initial and final tariffs at varying levels
of sensitive products, including zero. Norway and
Switzerland’s sensitive levels are two percentage
points above the other developed countries because
they have more than 30 per cent of their initial tariffs in
the top tier.12 Developing countries have one third more
sensitive tariffs than developed countries (than what
is indicated in the table). Tariffs in Table 2 are bound,
except for the last row which shows applied tariffs for
developing countries. For developed countries bound
and MFN applied tariffs are practically the same. The
first row shows that the European Union has an initial
simple average tariff of 22 per cent, and this would
be reduced to 8 under the tariff cutting formula
used here if there were no exemptions for sensitive
products. However, as the exemptions are increased
as indicated, the average tariff rises to 14 per cent. For
most countries shown here the formula cuts reduce
average tariffs to around 30 to 40 per cent of the base,
while the 10 per cent exemptions raise the average
to between a half and three quarters. This is reflected
in the average for developed countries as a group,
where the initial average of 48 per cent is reduced to


The EU dairy quota rent estimate of 20 per cent is supported by Requillart, V., INRA http://www.defra.gov.uk/foodrin/milk/11


supplychainforum/capinfluences.pdf, and the OECD’s PEM model.


This follows a suggestion in the 12 Draft Modalities text (WTO 2007) paragraph 54.


Table 2. Initial and Final Bound Tariffs at Various Levels of Exemptions for Sensitive Products


Groupings Initial SeP 0% SeP 1% SeP 3% SeP 5% SeP 7% SeP 10%


% % % % % % %


European Union 21.6 8.2 10.2 11.3 12.1 12.8 13.5


United States 6.2 2.7 3.4 3.8 4.0 4.1 4.3


Japan 31.3 10.6 13.2 16.6 18.4 19.6 21.1


Canada 15.4 5.4 7.3 8.8 10.0 10.7 11.1


Switzerland 64.7 20.9 30.7 32.9 34.6 36.2 38.5


Norway 148.6 45.0 55.3 59.5 63.5 67.4 72.6


WTO Developed 48.5 15.6 20.2 22.3 24.0 25.4 27.1


WTO Developing 59.7 39.1 39.3 39.7 40.2 40.5 41.0


WTO Developing applied 17.2 15.0 15.1 15.3 15.4 15.5 15.6


Source: Simple averages derived from WTO/ITC/UNCTAD World Tariff Profiles 2006; but WTO CoA method used to calculate
AVEs; data in Table 2 based on entire tariff universe of agricultural products; analysis below based on ATPSM coverage
of agricultural products (see Appendix 1).




6 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


16 per cent under the formula cuts and 27 per cent
with 10 per cent of tariff lines exempted. The significant
impact of a relatively small number of exemptions on
the average tariff in developed countries results from
the typical developed country tariff schedule with most
tariffs bound at low levels and a few very high tariffs
(Figure 1).


Overall, the average tariff in each country seems to
show a relatively linear relationship with the rate
of exemptions, although the sharpest increase is
between zero and 1 per cent. However, there is no
indication that there is a particular threshold above
or below which flexibility is disproportionately gained
or ambition lost.


For developing countries, the exemptions for sensitive
products have very little impact on average tariffs for
the group as a whole. This is because developing
countries have access to special products exemptions.
The formula cuts reduce bound tariffs on average by a
third, from 60 to 39 per cent, but the exemptions hardly
change the average. For applied rates, the formula


cuts tariffs from 17 to 15 per cent, with exemptions
having little impact.


So far the results have been discussed in terms of
simple average tariffs. This doesn’t take account of
the effect of trade flows, nor of the changes in trade
flows in response to tariff reductions and exemptions.
Imports are highly concentrated on a low number of
tariff lines. Globally, 5 per cent of tariff lines account
for 63 per cent of agricultural trade.13 This figure is
53 per cent for developed countries and 67 per cent
for developing countries. Thus, a few well chosen
exemptions can potentially have a significant impact
on trade flows.


However, the tariff lines with the large trade flows are
not necessarily those with the highest tariffs. Indeed,
prohibitive tariffs have no trade flows. In the European
Union, for example, the trade weighted average at
15.7 per cent is almost one quarter below the simple
average (21.6 per cent). This results because the
higher tariffs are given a relatively lower weight.


Figure 1. Tariff Structure in the EU


Source: UNCTAD calculation of ad valorem equivalent tariffs based on WTO CoA method (Paris Mini-Ministerial); five products with
tariffs above 500% not plotted.



0


50


100


150


200


250


300


350


400


450


1 159 317 475 633 791 949 1107 1265 1423 1581 1739 1897 2055


Number of tariff lines


Ta
rif


fs
in


p
er


c
en


t


This estimate is calculated by UNCTAD from TRAINS data at HS6 level.13




7V. ThE rESuLTS


Trade ImpactsB.


The simulated modelling of trade flows in response
to tariff reductions suggests there is relatively little
reduction and global agricultural trade and welfare as
exemptions for sensitive products increase, because
the products with high trade flows are not those with
the highest tariffs. The driving force is the increase in
EU and Japanese imports, which amount to $14.8
billion and $4.3 billion under the zero exemptions and
declines to $13.9 billion and $4.0 billion under 5 per
cent exemptions, and to $12.7 billion and $3.5 billion
under 10 per cent exemptions. The major increase
in imports is wheat into the European Union, which
amounts to $4.1 billion in the standard scenario
without exemptions. The initial tariff on EU wheat is
56 per cent but this doesn’t rank in the top 5 per cent
of tariffs. Exemptions to formula tariff cuts for butter,
milk powder and cheese have relatively little effect
on the value of agricultural imports because initial
imports are relatively small. In absolute values, EU
beef and sugar imports comprise the most significant
changes. For Japan milk powder, butter, rice and
sugar are the exemptions that contribute most to the
change in imports.


A similar picture holds for exports, which are shown
in Table 4 for selected countries. Additional world
exports fall from $23 billion, 12 per cent of the base,
to $18.4 billion as exemptions are increased to 10
per cent. The figure of most interest is the decline
in additional developing country exports, from $20.0
billion to $16.3 billion with 10 per cent exemptions. The


countries that are most advantaged by the improved
market access are India and China, whose agricultural
exports increase significantly off a relatively low
base. Additional exports fall away in a relatively linear
fashion as exemptions increase with roughly 2 per
cent lower export increase for any additional 1 per
cent sensitive product.


welfareC.


Changes in exports do not reflect the costs of
producing for exports. A more complete measure
is welfare which is measured here as the change
in producer and consumer surplus plus change in
government revenue from tariffs and expenditure on
export subsidies and domestic support. This is shown
in Table 5. The first observation is that welfare gains
diminish as exemptions increase for most countries in
Table 5. This is also true for global gains. However, this
is not the case for many developing countries, as many
are net agricultural importers who lose from increasing
prices of imports or benefit from preferences. For
this reason many developing countries prefer a less
ambitious approach, as reflected in their negotiating
positions. For example, among all member states, ACP
countries proposed the least ambitious tariff reduction
formula, including for developed country cuts.


Looking at specific countries, the exemptions have
a big impact on the annual welfare gains for Japan,
Canada and Switzerland, but less so for the European
Union, the United States and Norway. This reflects the


Table 3. Change in Imports as Exemptions Increase


Groupings Initial
Change in Imports


SeP 0% SeP 1% SeP 3% SeP 5% SeP 7% SeP10%


$m $m $m $m $m $m $m


European Union 31 679 14 805 14 446 14 312 13 888 13 418 12 754


United States 22 434 367 377 328 358 353 342


Japan 14 748 4 237 4 233 4 084 4 006 4 004 3 532


Canada 6 100 156 158 156 160 163 142


Switzerland 1 272 584 412 396 384 370 358


Norway 747 362 320 309 309 309 293


WTO Developed 89 704 22 073 21 438 20 990 20 479 19 961 18 684


WTO Developing 102 350 383 316 414 270 203 116


World 200 942 21 949 21 260 20 922 20 275 19 695 18 337


Source: ATPSM simulations. Developing countries exclude LDCs.




8 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


Table 4. Change in Exports as Exemptions Increase


Groupings Initial
Change in Exports


SeP 0% SeP 1% SeP 3% SeP 5% SeP 7% SeP10%


$m $m $m $m $m $m $m


Brazil 21 776 3 367 3 210 3 109 3 002 2 866 2 789


China 8 348 3 008 2 858 2 847 2 742 2 685 2 426


India 4 152 3 086 2 893 2 748 2 630 2 545 2 463


Argentina 7 896 1 306 1 285 1 259 1 235 1 198 1 129


Australia 10 636 1 116 1 080 1 044 1 019 969 860


United States 33 989 662 583 547 507 564 406


WTO Developed 79 841 1 883 1 769 1 705 1 525 1 352 777


WTO Developing 116 745 20 032 19 134 18 609 17 960 17 314 16 337


World 200 942 23 436 22 382 21 760 20 866 19 993 18 379


Source: ATPSM simulations. Developing countries exclude LDCs.


Table 5. Change in Welfare as Exemptions Increase


Groupings
Change in Exports


SeP 0% SeP 1% SeP 3% SeP 5% SeP 7% SeP10%


$m $m $m $m $m $m


European Union 6 511 6 482 6 372 6 234 6 037 5 944


United States 1 001 1 097 1 091 1 115 1 127 1 089


Japan 3 068 2 891 2 634 2 459 2 440 2 224


Canada 289 237 205 177 134 111


Switzerland 1 148 752 728 710 664 654


Norway 647 601 590 578 574 539


WTO Developed 12 456 11 939 11 479 11 151 10 881 10 387


WTO Developing -1 605 -1 389 -1 161 -899 -722 -688


World 13 484 12 725 12 307 12 041 11 795 11 321


Source: ATPSM simulations. Developing countries exclude LDCs.


particular combinations of tariff cuts and trade flows.
For developed countries as a whole the reduction in
welfare gains is almost a quarter, from $12.4 billion to
$10.4 billion, as exemptions increase to 10 per cent.


Producer ImpactsD.


In addition to trade and welfare effects, policy makers
are also concerned about particular groups in society.
Agricultural producers are one such group, as they
are large in number and contain many of the poorer
members of society. Hence, it is useful to look at how
producers fare from trade liberalization. There are two


contrasting effects to consider. A fall in a country’s
tariff will tend to reduce domestic prices and make
producers worse off. However, a reduction in other
countries’ tariffs will lead to an increase in world prices
which will flow through to domestic prices. Whether
the negative domestic effect outweighs the positive
world price effect depends mainly on the reduction in
one’s own tariff. In many developing countries there is
no change in applied tariff because of the gap between
bound and applied rates. In such cases producers are
worse off from an increase in exemptions because
world prices do not rise as much as otherwise.


In addition to price movements, there are also quantity




9V. ThE rESuLTS


effects and changes in costs of production. Producer
surplus is a measure of the returns to producers after
accounting for these factors, and is shown in Table
6. Developing country producer surplus is reduced
from $22.4 billion in the no exemption scenario to
$20.5 billion with 5 per cent and $18.6 billion with
10 per cent. Data for the more populous developing
countries are also shown. Agricultural producers in
these countries would be better off in the absence of
exemptions for sensitive products. The reverse is true
for producers in the agricultural importing countries,
including the European Union, Japan, Switzerland and
Norway. In these countries it is the consumers who
from increased exemptions because domestic prices
are substantially maintained.


New Access OpportunitiesE.


Given their influence on world trade, it is useful to look
at some of the EU and Japanese imports in more
detail. The commodities selected for exemption are
listed in Table 7. The initial, final and exempted tariffs


for 5 per cent sensitive products are shown in the first
three columns. The tariffs are aggregated from the six
digit level.14 The Chair’s draft refers to “new access
opportunities” of 4 to 6 per cent of consumption
where products are selected as sensitive, although
this would not apply where the initial import share
of consumption is more than 10 or 20 per cent. This
dispensation would apply to sheep meat, wheat and
rice for the European Union and milk concentrates,
sugar and coffee for Japan, as shown in the sixth
column of the table. The seventh column shows the
required expansion, calculated here as 5 per cent of
consumption. This compares with the final two columns
which are the estimated increase in imports with the
final and reduced tariff cut. For example, in the first
row the required TRQ expansion for EU bovine meat is
209 kt but the estimated increase in imports exceeds
this even with the one third tariff cut (426 kt). Where
EU imports are less than 20 per cent of consumption,
the increase in market access exceeds the required
amount for bovine meat and sugar but not for butter
and milk concentrates. For Japan, the expansion of


Table 6. Change in Producer Surplus as Exemptions Increase


Groupings
Change in Exports


SeP 0% SeP 1% SeP 3% SeP 5% SeP 7% SeP10%


$m $m $m $m $m $m


European Union -28 471 -28 006 -27 420 -27 168 -26 798 -26 354


United States -6 045 -5 865 -5 729 -5 712 -5 604 -5 597


Japan -10 446 -8 694 -7 854 -6 743 -6 429 -6 048


Canada -1 020 -836 -684 -557 -304 -282


Switzerland -2 749 -1 536 -1 470 -1 421 -1 314 -1 297


Norway -1 508 -1 295 -1 263 -1 225 -1 195 -1 120


Brazil 2 897 2 771 2 695 2 622 2 534 2 456


China 4 448 4 297 4 252 4 132 4 012 3 461


India 3 482 3 385 3 068 3 031 2 999 2 907


Argentina 1 124 1 121 1 099 1 079 1 048 990


WTO Developed -51 562 -47 390 -45 367 -43 659 -42 434 -41 509


WTO Developing 22 407 21 702 20 974 20 532 19 987 18 560


World -26 696 -23 309 -22 072 -20 893 -20 291 -20 899


Source: ATPSM simulations. Developing countries exclude LDCs.


For the analysis in this paper selection of SePs and formula application took place at the 6-digit level. It has not yet been decided 14


in the negotiations whether the designation of sensitive products can be made from 6-digit tariff lines as suggested by e.g. the


Cairns group or at a more disaggregated level as suggested by the sensitive products proponents such as EU.




10 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


butter and rice is inadequate. However, in no case


does the exemption reduce the share of imports from


above to below the 5 per cent threshold. The notion of


a tariff rate quota of 5 per cent of consumption, which


was used as a basis for TRQs in the Uruguay Round,


bears little relationship to compensation for lower


tariff cuts.


The problem for some commodities, including EU dairy


products, is the existence of production quotas. These


imply that a given change in domestic price driven


by tariff reduction will have no impact on production


and imports. Up to a point, in the absence of other


policy changes, a change in tariffs will only change the


production quotas rents, with only a limited change


in imports.


IMPlICATIONS AND VI.
CONClUSIONS


The change in agricultural exports in developing
countries is driven by the change in imports in developed
countries, principally the European Union and Japan.
The exemption from formula cuts of the 5 per cent of
tariff lines with the highest tariffs increases the average
developed country tariff from 16 per cent to 24 per
cent and reduces the estimated growth in developed
country agricultural imports from an estimated $22
billion to $19 billion. There is little absolute impact
on developing country imports, as the increase in
imports under the most ambitious scenario is minimal,
reflecting the gap between bound and applied tariff
rates and exemptions for special products. On the


Table 7. Change in Tariffs and Imports for Selected EU and Japanese Products


Groupings Initial
Final


without
SeP


Final
with


5% SeP


Consump-
tion Imports


Import
share


of con-
sumption


Required
TRQ


expansion
range


Change in
imports
without


SeP


Change in
imports
with 5%


SeP


% % % kt kt % kt kt kt


European Union


Bovine
meat 77 24 39 4 184 194 5 209 489 426


Sheep
meat 61 20 25 2 513 1 358 54 126 244 211


Milk, conc. 110 35 59 50 022 3 039 6 2 501 1 0


Butter 115 35 88 2 069 116 6 103 61 2


Wheat 57 21 21 13 803 5 241 38 690 29 549 29 543


Rice 51 19 27 6 132 1 280 21 307 248 248


Sugar, raw 48 16 36 588 13 2 29 3 085 1 501


Sugar,
refined 76 24 36 20 844 12 0 1 042 4 258 3 663


Japan


Milk, conc. 173 52 91 321 46 14 16 76 51


Butter 463 139 355 87 4 5 4 0 0


Rice 503 151 364 8 044 654 8 402 43 43


Sugar, raw 146 44 112 2 479 1 514 61 124 806 242


Coffee,
proc. 106 33 80 34 25 73 2 16 6




11VI. IMPLICATIONS AND CONCLuSIONS


export side the growth in developing country exports
are reduced by 10 per cent, from $20 billion to $18
billion. Global welfare gains are likewise reduced
from $13.5 billion to $12.0 billion but developing
countries as a group are no worse off because many
net food importers among them benefit from the
reduced world price increases as tariff cuts are
reduced. Producers in developing countries tend to
lose from sensitive products.


The import quota expansion has the potential to
compensate to some extent for tariff reductions but
as it is envisaged in the Chairman’s draft the effects
are likely to be limited if an import share above 10 or
20 per cent exempted importers from expanding the
quota. More problematic is another class of products
where imports are a very small share of consumption.
In such cases the formula tariff cut would not bring
imports up to the 5 per cent share, and the tariff rate
quota would become non-binding.


Do sensitive products undermine ambition? Most
agricultural importers seem to require some flexibility
to protect political sensitive agricultural industries.
Although this flexibility undermines ambition to some
extent, the impacts estimated here suggest this
flexibility may be a reasonable price to pay to get an
agreement. Provisions for sensitive products make a
significant difference to average tariffs but the trade
and welfare impacts are less affected. This depends,
however, on the selection of sensitive products which
is uncertain since countries have not yet publicized


their strategy. Anderson et al. (2006) find a higher
negative impact of sensitive products on global gains
which are probably partly due to their selection rule
that is a combination of tariff height and imports.


Trade reform brings about an improved use of
resources, which implies more can be produced
for less. Most of the allocative efficiency benefits
are captured by the countries undertaking the
liberalization, although exporters also gain from
improved market access. However, while the efficiency
gains are unambiguously positive, the main effects are
distributional, with rising prices leading to a transfer
from consumers, and perhaps taxpayers, to producers.
Whether the overall effects are beneficial depends on
the weight policy makers attach to the various groups.
In developed countries it seems hard to justify support
to producers on economic, social or environmental
grounds, but in developing countries many producers
are poor, and support for them may be justified on
social grounds. This favours higher domestic prices
for agricultural products. On the other hand, many
countries are primarily net food importers and have
a sizeable share of poor urban consumers who are
favoured by low prices. Such countries may prefer
the status quo, especially if they receive preferential
access to protected markets. Whether the poor are
better or worse off following trade liberalization is an
empirical question beyond the scope of this paper,
but one which policymakers in individual countries
need to consider.




12 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


REFERENCES


Anderson, K., Martin, W. and van der Mensbrugghe, D. (2006). Market and Welfare Implications of Doha Reform
Scenarios. In Anderson, K. and Martin, W., (eds) Agricultural Trade Reform and the Doha Development
Agenda. World Bank, Washington, D.C.


ATPSM www.unctad.org/tab.


Ben Hammouda, H., Karingi, S.N., Oulmane, N. And Sadni Jallab, M. (2007). Sensitive Products in Trade
Negotiations: The devils are in the number. African Trade Policy Center, UNECA, Addis Ababa.


de Gorter, H., Ingco, M. and Ignacio, L. (2004). Domestic Support: Economics and policy instruments. In Ingco,
M. and Nash, J. (eds). Agriculture and the WTO: Creating a Trading System for Development. World Bank,
Washington D.C.


FAOSTAT http://faostat.fao.org/default.aspx.


Jean, S., D. Laborde and W. Martin (2006). Consequences of Alternative Formulas for Agricultural Tariff Cut. In
Anderson, K. and Martin, W., (eds). Agricultural Trade Reform and the Doha Development Agenda. World
Bank (2006). Washington, D.C.


Peters, R. (2006). Roadblock to Reform: The Persistence of Agricultural Export Subsidies. UNCTAD, Geneva.


Peters, R. and Vanzetti, D. (2004). User Manual and Handbook on Agricultural Trade Policy Simulation Model.
UNCTAD, Geneva.


Polaski, S. (2006). Winners and Losers, Impact of the Doha round on developing countries. Carnegie Endowment
for International Peace, Washington, D.C.


UNCTAD TRAINS database http://www.unctad.org/trains/index.htm.


WITS www.wits.worldbank.org.


WTO (2001). Doha Ministerial Declaration (WT/MIN(01)/DEC/1), Geneva.


WTO (2004). Framework for Establishing Modalities in Agriculture. WT/L/579, Geneva, 1 August.


WTO (2005). Hong Kong Ministerial Declaration. WT/MIN(05)/DEC, Geneva, 18 December.


WTO (2006a). Applied Tariff Simulations – Agriculture Summary of Results. Committee on Agriculture, Special
Session, (JOB(06)/152), Geneva, 22 May.


WTO (2006b). Chair’s Reference Paper, Sensitive Products. Committee on Agriculture, Special Session Market
Access, Geneva, 11 May.


WTO (2006c). Draft possible modalities on agriculture. Committee on Agriculture Special Session, JOB(06)/199,
Geneva, 22 June 2006, revised 12 July and released as TN/AG/W/3.


WTO (2006d). Negotiations on Agriculture: Revised Consolidated Reference Paper on Possible Modalities on
Market Access. Geneva, 9 June.


WTO (2008). Revised draft modalities for agriculture. TN/AG/W/4/Rev.4, Geneva, 6 December.


WTO (2011). Report by the Chairman, H.E. Mr. David Walker,to the Trade Negotiations Committee. TN/AG/26,
Geneva, 21 April.




13rEFErENCES / APPENDIx


APPENDIx


Appendix 1. ATPSM Commodities


Livestock Cocoa beans


Bovine meat Cocoa, processed


Sheep meat Tobacco leaves


Pig meat Oilseeds, temp.


Poultry Oilseeds, trop.


Milk, concentrated Vegetable oils


Butter Pulses


Cheese Tomatoes


Hides & skins Roots & tubers


Wheat Apples


Rice Citrus fruits


Barley Bananas


Maize Other tropical fruits


Sorghum Tea


Sugar, raw Rubber


Sugar, refined Cotton


Coffee, green -


Coffee, processed -




14 DO SENSITIVE PRODUCTS UNDERMINE AMBITION?


Appendix 2. ATPSM Model Documentation


The Agricultural Trade Policy Simulation Model (ATPSM) is a comparative static partial equilibrium global trade
model with the following features:


1. A simultaneous equation system for all countries specifying production, consumption, exports and imports
that respond to domestic price changes, given a policy changes, complete price transmission and perfectly
competitive markets.


2. Tariff rate quotas and quota rents;


3. Distinction between bound and applied tariff rates.


4. Stocks remain unchanged.


The standard equation system for all countries has four equations:


;
1



1


1ˆˆ)1(
1 ,


,
,,


,


,
,,, ∑



= 






















+


++





















+


+=
J


ji
j rjc


rjc
jwrji


ric


ric
iwriiri t


t
P


t
t


PD hh


;
1



1


1ˆˆ)2(
1 ,


,
,,


,


,
,,, ∑



= 























+


++






















+


+=
J


ji
j rjp


rjp


jwrji
rip


rip


iwriiri t


t
P


t


t
PS ee


;)3( ,,, ririri SX ∆=∆ g


;ˆˆ)4( ,,,,,, riririririri XSSDDM ∆+−=∆


This paragraph is taken from the 15 ATPSM Handbook (Peters and Vanzetti, 2004), available from UNCTAD’s website at www.


unctad.org/tab.


where D, S, X, and M denote demand, supply, exports and imports respectively;


^ denotes relative changes and Δ absolute changes;


Pw denotes world price;


tc denotes the domestic consumption tariff and tp denotes the domestic production tariff;


ε denotes supply elasticity, η denotes demand elasticity, and γ denotes the initial ratio of exports to production;


i and j are commodities indexes; and


r is a country index.


Equation 3 requires that the change in exports in each market is some proportion of the change in production. This


proportion is determined by the ratio of exports to production. For example, if all the initial production is exported,


all the change in production is exported. If half the initial production is exported, half of the change in production is


exported. This implies that the proportion of exports to production is maintained. Equation 4 clears the market, so


that production plus imports equals domestic consumption and exports.15




15APPENDIx


For this application the standard version of ATPSM has been modified to include the following features:


(i) A land constraint that redistributes unused acreage. The production of wheat, barley, rice, maize and sorghum
in each country is raised or lowered by the average change in production multiplied by the ratio of land to other
primary factors. This assumes a ton of each crop in a country uses the some amount of land. Total production
of crop may fall or rise depending on the contribution of land compared with capital and labour.


(ii) Production quotas and quota rents. Production quotas are specified for EU raw sugar and dairy products, US
tobacco, Canadian dairy and poultry and Japanese rice and dairy. These quotas are assumed to be binding
unless the market price falls below the shadow price. Producers then respond according to the specified
supply elasticity. Quota rent contributes to producer surplus.


(iii) A producer response to changes in quota rents on exports. Here there is no shadow price specified. Producers
respond immediately to any change in rent. This implies the supply curve goes through the point at which
quantity and price are observed. This permits trade diversion when quota rents change as a result of mfn
reductions.


(iv) An enlarged European Union with 25 members.


(v) An Armington specification for imports so that the share of imports in consumption is determined by relative
domestic and import prices. The change in exports is determined by changes in consumption, production
and imports.


(vi) Revision of domestic support data to include amber box payments for the major users. The difficulty here
is the extent to which amber box payments are conflated with border measures, implying that if tariffs are
removed, the additional effect of reducing support is minimal. (See de Gorter, Ingco and Ignacio (2004) for a
comprehensive discussion.)




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