News and Analysis • Volume 11 • Number 6 • October 2007

Sensitive Products: The July Modalities Text Made Plain

Do More

See also

Echoing persistent differences in WTO Members’ positions, the market access pillar was far less developed than those for domestic support or export competition in the draft agricultural modalities circulated by chair Crawford Falconer in July.

In paragraph 13 of the Doha Declaration, ministers of WTO Member countries committed themselves to comprehensive negotiations aimed at ‘substantial improvements’ in agricultural market access. That improvement is being put into practice through a general ‘tiered’ tariff reduction formula, where the highest bound tariffs face the steepest cuts, with developing countries benefiting from smaller reductions. The resulting tariff will be the maximum duty permitted for a particular product and a particular country in future WTO disciplines.

Reflecting the compromise reached among WTO Members in July 2004 (Bridges Year 8 No.7 page 3), chair Falconer proposed two main deviations from the general reduction formula: ‘sensitive’ products (available to all WTO Members) and ‘special’ products, which only developing countries may designate to safeguard their food- and livelihood security, as well as rural development needs. This article focuses only on sensitive products.

Unlike their ‘special’ counterparts, sensitive products need not conform to any particular criteria. They will be self-designated by either developed or developing countries and will be subject to lesser tariff cuts than those required by the general formula. However, the smaller tariff reduction must be compensated through a corresponding tariff rate quota (TRQ) expansion for the product in question. The two main issues about sensitive products are the number of products that could be designated and the treatment accorded to those products.

How Will Sensitive Products Be Chosen?

While countries will be able to decide the products they whish to designate as ‘sensitive’ independently of any objective criteria, the number of tariff lines that may be selected will be limited. In chair Falconer’s proposal that number ranges from 4 to 6 percent of ‘dutiable’ tariff lines (i.e. those that are not already duty-free) for developed countries and between 5.2 and 7.8 percent for developing countries. Estimations made in Argentina show some examples of what this means for the EU, the US, Japan, China, India and South Africa (see table below).

Chair Falconer proposed two cases in which Members could choose a larger number of sensitive products. The first of these concerns situations where more than 30 percent of a country’s tariff lines (as set in out in its WTO schedule of commitments) fall within the highest tier of the formula. Here, the Member would be required to significantly reduce tariffs for a great quantity of protected agricultural products, which means that it would be in need of a broader exemption.

The second case has to do with Members whose import tariff commitments are bound at the six-digit level of the ‘harmonised system’ (HS) of tariff classification used at the WTO. This is an important point because the six-digit level comprises broad categories of products and allows protection for only a limited number of sectors. In such cases, the number of products that could be selected would be increased by up to 6 or 8 percent for developed countries and 8 or 10.6 percent for developing ones. These figures are yet to be finalised.

Many WTO Members, including the Cairns Group and the G-20, argue that since it has already been agreed that the compensation for a sensitive product designation is TRQ expansion (as opposed to TRQ ‘creation’), only products currently subject to TRQs in a country’s schedule of commitments should be eligible for a sensitive designation. On the other hand, Members such as the EU hold that any product may be subject to quotas regardless of its current TRQ status. This point still lacks of clarity, even if Ambassador Falconer’s proposal seems to lean towards the first point of view.

How Will They Be Disciplined?

Two aspects are important here: (i) how much smaller the tariff reduction required for sensitive products should be, and; (ii) the extent of compensation necessary to offset the deviation from the general formula.

Regarding the first issue, bound tariffs for sensitive products will be reduced less than those of goods falling under the general formula. Chair Falconer proposed a cut from one- to two-thirds of the tariff reduction formula that would be applicable to developed and developing Members’ non-sensitive products (paragraphs 56 and 57). That deviation, however, comes with a price tag; the bigger it is, the higher the compensation required.

The price is tariff-rate quota expansion. This leads to the second issue, which is the thorniest point because of the complexity of identifying how to implement this concept and, in particular, what criteria should be developed in order to ensure that the tariff cut deviation is duly compensated.

Developed countries with protectionist farm interests expect to grant minimal compensation for the lower tariff cuts while, logically, agricultural exporters look forward to a much more ambitious contribution.

For instance, the EU maintains that deviation should only be partially compensated to be coherent with the concept of sensitive products. Fully compensated deviation would present no gain for the sensitive-product designation, and thus the creation of the category would not make sense, the argument goes. Competitive farm exporters counter that the Doha Round mandate to achieve ‘substantial improvement’ in market access can only be accomplished by a full compensation for the smaller tariff reduction.

The general rule proposed by chair Falconer for TRQ compensation in developed countries is an expansion of 4 to 6 percent of domestic consumption if the deviation is two-thirds of what would be required by the general formula, and 3 to 5 percent if the deviation amounts to one-third (paragraph 58). The expansion would have to be extended to all WTO Members on a mostfavoured- nation basis (paragraph 64).

The application of this rule, however, presents a technical difficulty because domestic consumption data is only accessible at a level (such as like bovine meat, poultry meat or cheese) which encompasses many six- or eight-digit HS tariff lines. Importing Members, such as the EU and the G-10, argue that they would like to designate only a few tariff lines of all those included in a particular sector, so any criterion should be based on the domestic consumption regarding individual tariff lines. This approach is called ‘partial designation’.

The European Union has proposed that the share of imports in eight-digit HS tariff lines of a given sector should be used to allocate the share of consumption. This method, however, does not take into account the fact that the most heavily protected tariff lines are likely to have a smaller share of imports, and would therefore perpetuate existing distortions in a Member’s tariff schedule: the ‘partial designation’ approach clearly reduces the benefit of TRQ expansion for those WTO Members that are strong agricultural exporters.

The latter, including the Cairns Group, advocate for a ‘sectoral’ approach. In other words, they want all products contained within a given sector to be designated ‘sensitive’, which would mean that TRQ expansion would be required for each of them.

The Falconer proposal does not resolve this problem. The HS-level of sensitive-product designation was one of the main topics of discussion during the chair’s September consultations, and remains yet to be decided.

Flexibilities in TRQ Expansion

The implications of the Falconer draft become more complex when it proposes an array of exceptions to the general tariff-reduction formula that threaten to diminish its effectiveness. The first three of these would result in a smaller compensation for a deviation from the formula. The other two might lead to increases, but would be difficult to implement.

The first exception is intended for cases where out-of-quota imports represent more than 50 percent of those within the existing TRQ (paragraph 60). In such circumstances, chair Falconer proposed that TRQ-expansion could be reduced by a quarter if current bound duties exceed 50 percent, and by a fifth if current bound rates are lower than 50 percent. This situation could occur with regard to US imports of bovine meat, EU imports of wheat, bovine and poultry meat, and Mexican imports of wheat and corn.

The second exception addresses situations where existing TRQs already present 10 percent or more of domestic consumption and the minimum deviation is used (paragraph 61). In those cases TRQ expansion could shrink to 2.5 or 3.5 of domestic consumption. If a TRQ represents 20 percent or more of domestic consumption, expansion could be limited to 2 or 3 percent. This reduction could be relevant to TRQs for wheat, peanuts and skimmed milk powder in Japan, tobacco in the US and corn in China.

The third exception is a kind of safeguard in cases of abrupt surges in out-of-quota imports (doubling or tripling those within the TRQ) as a consequence of the implementation of the tariff reduction commitments agreed in the Doha Round (paragraph 62). In those cases the new TRQ could be reduced by up to a half.

The fourth and fifth exceptions (paragraph 59) outline an additional TRQ-expansion commitment for two specific categories of Members. The first group comprises countries that choose to designate a higher percentage of their tariff lines as sensitive, an option open to Members that have more than 30 percent of their import duties in the top tier. The second involves countries that still have more of the 5 percent of their tariff lines above 100 percent after the implementation of the Doha Round reduction commitments. In both cases, the Members in question should guarantee a ‘higher overall average TRQ expansion’ (4.5 percent or 6.5 percent of domestic consumption). This proposal also entails a technical problem because domestic consumption of products under various TRQs is expressed in different units of measurement, which makes it is difficult to build the ‘overall average TRQ expansion’.

All these exemptions are more generous for developing countries. Chair Falconer proposed that new quotas for their sensitive products should amount to two-thirds of those required from developed country Members, and specified that self-consumption by subsistence farmers would not be included in the calculation of domestic consumption (paragraph 63). In spite of the complex and detailed treatment developed by Ambassador Falconer for sensitive products, many aspects remain to be negotiated. The outcome of the those negotiations, together with the regulation of ‘special’ products and the special safeguard mechanism (see page 3), will tell what this round will provide in terms of improved market access for agricultural products.

Maria Marta Rebizo and Ariel R. Ibañez are, respectively, economist and legal officer at the Institute for International Agricultural Negotiations (Fundación INAI) in Buenos Aires. Any opinions expressed in this paper are their own and do not reflect those of INAI.