Treatment of Special Products: Implications of the Chair’s May 2008 Draft Modalities Text
by Riza Bernabe
Agricultural Trade and Sustainable Development Series • Issue Paper 14
Recent studies and discourse on special products (SPs) have focused mainly on developing acceptable indicators for food security, livelihood security and rural development, which are the criteria for designating SPs. However, the coverage and selection of special products comprise only one aspect of negotiations on this trade facility. Equally important is the question of what treatment or market access flexibility should be accorded to commodities that are designated as SPs. Central to this discussion is the debate on whether or not SPs should be excluded from tariff reductions.
The G-33 is the main proponent of the need to exempt special products from tariff cuts. It maintains that the delivery of this flexibility for developing countries is an essential step in ensuring that the outcome of the agricultural negotiations is faithful to the mandate of the Doha Development Agenda. On the other hand, countries such as the US, Malaysia and Thailand argue that special products should not be exempted from tariff reductions because all Members are expected to have market access commitments, as a contribution to the Doha Round. These countries propose that flexibilities for special products be limited to smaller tariff cuts and lesser tariff rate quota (TRQ) expansion compared to non-special products.
To assess developing countries’ need for market access flexibility, this paper looks into the difference between applied and bound duties, or the tariff overhang, for 16 proxy special products which are the most commonly identified potential special products from the 19 country studies on SP and Special Safeguard Mechanism (SSM) conducted by ICTSD. These products are: rice, corn, wheat, beans, milk, dairy products, bovine meat, goat meat, sheep meat, pork, chicken, potatoes, tomatoes, onions, vegetable oils and sugar (ICTSD 2007).
This paper focuses on commodities that have either a zero or a very minimal gap between applied and bound rates for each country. These have the most need for maximum market access flexibility, as any tariff reduction for these products will result in effective cuts on both bound and applied duties, as well as the narrowing down of the difference between bound and applied tariffs for commodities that are important to developing countries’ food security, livelihood security and rural development objectives.
The paper examines the tariff structures for special products of 30 developing country Members of G-33, excluding least-developed countries (LDCs).1 An analysis of current tariff bindings and applied rates shows that nine have zero or negative overhangs, which means that any tariff cut on the bound rates of special products will result in a further narrowing down of the already limited difference between bound applied tariffs. These countries – Barbados, China, Cote d’Ivoire, Grenada, Guyana, Honduras, Jamaica Nicaragua, the Philippines and Venezuela – need to exempt some of their products from tariff reductions. The most common products that have zero or negative tariff overhangs across these countries are rice, chicken, corn and onions.2 Seventeen of the 30 countries covered by the study have tariff overhangs below 10 percentage points, while twenty have tariff overhangs below 20 percentage points.
In approximating the number of special products that should be exempted from tariff reductions, one logical option is to identify countries and commodities that have no or minimal tariff overhangs (not exceeding 10 percentage points) as these will have effective tariff cuts once the proposed tariff reduction for special products is implemented. Based on this criterion, the percentage of SPs that should be excluded from tariff cuts varies widely with each country from 6.25 percent of total SPs in the cases of Grenada and Guyana, to as much as 100 percent in the cases of China and Cote d’Ivoire. Taking all country data together, the percentage of special products that needs maximum flexibility ranges from a minimum of zero to a maximum of 100 percent, at an average of 23.85 percent. Expanding the minimum tariff overhang to 20 percentage points will slightly increase this average to 26.34 percent. There is great disparity in the distribution of overhangs that the above averages fail to capture.
These figures can be viewed as a minimum approximation of developing countries’ need to exempt SPs from tariff reductions, because the analysis is based on the use of the 16 proxy special products across G-33 countries. However, each country has its own SP list, which will more accurately reflect its need for market access flexibility. To have a more realistic evaluation of a country’s need for tariff cut exemption, this paper cross-referenced the results of the analysis above with information from the ICTSD country studies on SP and SSM.3 Data show that some countries’ need for maximum market access flexibility is indeed actually greater, and this becomes more apparent as the SP list becomes more accurate. For instance, for Honduras, the analysis based on the use of the 16 proxy special products showed that 12.5 percent of products need to be exempted from tariff reductions; however, once the analysis is done using the more specific SP list from the Honduras country study commissioned by ICTSD, this number increases to 57 percent, indicating that more than half of the country’s special products have minimal tariff overhang and as such can benefit greatly from a zero cut treatment. The same is true in the case of Barbados and the Philippines where the number of SPs that need to be exempted from tariff reductions increases significantly from 18 percent to 73.33 percent and from 31.25 percent to 81 percent respectively once the lists of special products from the individual ICTSD country studies are used in the evaluation.
However, countries that generally have high tariff bindings and relatively lower applied import duties yielded the same results when analysed using the 16 proxy special products as well as the ICTSD SP list. Overall, the percentage of special products that need to be exempted from tariff cuts, on account of limited difference between bound and applied tariffs, increased from 23.85 percent to 34.90 percent. In terms of tariff lines, the percentage of special products requiring market access flexibility ranges from zero to 11 percent of total 6 digit HS (harmonised system) tariff lines, based on data from countries that identified their special products at this level. However, the wide difference in the tariff structures of developing countries makes these figures less meaningful.
In terms of products, those most commonly identified as having minimal tariff overhangs across all 16 ICTSD studies are beef or bovine meat, pork, milk, dairy products, potatoes, poultry meat and sugar. Other possible potential SPs that have no or narrow gaps between bound and applied rates are: cabbages, carrots, onions, rice, sheep meat, beans, peas, coffee, garlic, lettuce and maize, among others.
Across the 16 ICTSD country studies, there are 45 instances when potential special products have negative, zero or minimal tariff overhangs. This indicates that many developing countries may negotiate for maximum flexibility in the treatment of products that are important to their food security, livelihood security and rural development objectives.
The paper also simulated the application of the proposed treatment for special products on commodities from the country specific SP listing from the 16 ICTSD country studies. The draft modalities on agriculture issued in May 2008 by Agriculture Committee Chairman Falconer outlined the possible treatment of special products. Paragraph 123 of the said document lays out the possible ranges, as described below:
There shall be [a maximum entitlement of 20 per cent and a minimum entitlement4 of] 8 per cent5 of tariff lines available for self-designation as Special Products. Within this entitlement, [forty per cent of those6] [no] tariff lines shall be eligible for no cut. For the remaining tariff lines, there shall be an overall average cut of 15 per cent achieved with a minimum cut of 12 per cent and a maximum cut of 20 per cent on each tariff line.
Guided by these draft modalities, this paper generated new bound rates, and overhangs of 8 percent, 12 percent, 15 percent, based on the proposed tariff cuts for SPs. In order to more accurately evaluate the implications of the proposed treatment on special products for developing countries, the paper used the more specific SP listing from the 16 country studies in determining the percentage of potential special products that would have minimal tariff overhangs every time import duties are reduced.
The results of the simulations show that for some countries, the difference between bound and applied tariffs decreases as tariff cuts increase. For instance, once tariffs on special products are reduced by 8 percent, the number of SPs with tariff overhangs not exceeding 10 percent increases for Barbados and Ecuador but remains unchanged for the other countries. A 15 percent tariff cut on special products will increase the percentage of SPs with minimal tariff overhangs for the Philippines, from 81.81 percent to 90 percent, in addition to the two countries mentioned earlier.
Similarly, more commodities stand to lose the difference between bound and applied tariffs across the 16 countries as tariffs on special products are reduced. In particular, more countries register minimal tariff overhang for milk, pork, poultry meat, sugar, coconut, tomatoes, groundnut and vegetable oil, as import duties on these commodities are cut, based on the proposed modalities on the treatment of SPs.
However, the difference between bound and applied tariff rates only provides one dimension in assessing developing countries’ need for maximum market access flexibility. Another assessment dimension is the capability of current tariff bindings to cover the gap between the domestic price and import price of special products. This is an important consideration because for tariffs to be effective policy tools they should afford governments the flexibility to protect producers from displacement by giving the state the capacity and option to equalise domestic prices with import prices through tariff bindings.
As can be expected, countries with low tariff bindings are more likely to have inadequate bound duties, and as such less capacity to address price gaps for special products to help them protect their small agricultural producers from importation. Examples of these countries are China, Fiji, Ecuador and the Philippines. Fiji and the Philippines have fairly linear tariff structures, with import duty bindings pegged mostly at 40 percent. On the other hand, China and Ecuador have more divergent tariff profiles as bound tariffs vary from one special product to another. For Ecuador, for instance, tariff bindings on special products range from 20 percent to 70 percent, while for China bound rates vary, from 3 percent to 65 percent. Still, what these countries have in common is the fact that in many instances, their tariff bindings are not sufficient to bridge the gap between domestic and import prices for their potential special products. For these countries, any tariff cut on special products will further whittle away their capability and option to bridge the gap in domestic and import price, and consequently their means to protect their small farmers and agricultural producers from liberalisation.
The treatment and selection of special products is a sensitive subject because of the divergent conditions and needs of developing countries. Some countries have negligible tariff bindings while others have high tariff bindings. The results of this study demonstrate that countries with high tariff bindings may rely too heavily on a few commodities to achieve their food security, livelihood and rural development objectives while others with low tariff bindings may face broad economic consequences that impact those objectives. The case studies conducted highlight the need for some countries to be able to exempt certain products from any cuts. An effective special product designation is an important negotiating objective for many developing countries and this may be contingent upon exemption from cuts for some products.