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The EU 28th October trade offer: one step forward, one step back, and one promising step slightly forward

Written by Dirk Willem te Velde

An ambitious WTO trade round will benefit most developing countries, but they need to have the tools and time to benefit from further liberalisation. The Zurich proposals, and most recently a revised offer by the EU on 28th October, have given new impetus to the Doha Round. What is in it for developing countries? Here we analyse the movement from 10 to 28 October 2005 and argue that for developing countries it constitutes one step forward, one step back, and one promising step slightly forward. The poorest developing countries would be helped if, in the remaining weeks to the Hong Kong Ministerial, they did not need to move backwards, and were able to make the promising step forward in full.

Agriculture, market access: Step forward
There are three pillars in the current WTO negotiations (the terms used here come from the EU offer).

Domestic Support: The EU has offered a reduction of AMS (Aggregate Measure of Support, both blue and amber box) of 70%, and is conditional on countries such as the US, Japan, Canada, Korea, Switzerland and Norway making proportionate cuts. This is not a change from its 10 October offer. Much of the decline would be a binding of the transferral of subsidies into the green box as agreed in the 2003 CAP reform. The proposed cuts would leave 22bn Euros in the amber box sufficient to run the CAP. The US had asked for 80% cuts.

A reduction of de minimis support by at least 65% would not do much to the EU, and the EU is willing to go up to 80% reduction (which would have an effect in the US) and work with product-specific gaps. The EU does not want a change to green box support which would be contrary to CAP reform, even though such support is likely to distort trade and affect developing country exports to some extent (see also Ian Gillson blog).

Market access: The EU is essentially interested in gaining market access abroad, while keeping protection for a number of sensitive products. The cuts proposed in several bands will (according to the Commission) lead to an average cut of 46% from 22.8% to 12.2% (though it is not clear whether this includes an allowance for sensitive products). This is much higher than the 25% offered in the Zurich proposals, so this is a significant step forward for developing countries who will gain from this as a group. It falls short, though, of the 54%-75% asked by the G-20, or the more ambitious cuts asked by the US. There is also the thorny issue that the EU now argues that up to a maximum of 8% of its agricultural tariff lines should be designated as ‘sensitive products’ and subject to reduced tariff cuts. While CAP reform did lead to a decoupling of subsidies from production, it did not reduce the comparatively high tariffs on dairy, poultry and beef products. Developing countries (and the US) will be interested in reducing the 8% (which was not yet specified in the Zurich proposals) to a much lower percentage. Some countries argue for a maximum of 1%.

Export competition: The EU repeated its commitment to end export subsidies made originally in 2004 and in the 10 October proposals, but has failed to specify a date, and is conditional on actions on trade-distorting practices (in areas such as state trading enterprises, food aid) in the US, Australia, Canada, etc, which developing countries are also likely to see removed.

Services: step backwards
The EU’s position has become substantially stronger over the past weeks and seems to go contrary to the flexible approach of GATS so far. Admittedly, developing could make more bindings if only to bind the status quo without it having large effects on their economy (perhaps a positive effect by showing that developing countries are serious about developing their services sector), but it would be a minefield to set mandatory targets for developing countries. The whole point about GATS is that countries can commit services sector when they are ready to do so, and support might help in the process to help make services negotiations work for development, but now the EU wants to see negotiations complemented by ambitious mandatory country targets for services sectors to be liberalised - agreed at Hong Kong; for developing countries a lower target would apply that is equivalent to two thirds of the target (139) for developed members, i.e. 93 sub-sectors. Instead a plurilateral, voluntary approach is expected to be much more fruitful for developing countries so that they can discuss in groups, sectors of their interest, and with the help of assistance, without the requirement to make offers, which they can do in request/offer approaches.

Aid for Trade: half a step forward 
The 28 October proposals are hopeful and more specific than the Zurich proposals from 10 October. The EU is seeking agreement for a “commitment by all members to address the issue of preference erosion, including in the context of the negotiations on NAMA and agriculture, through a combination of trade related and supply-side related responses in Hong Kong, so as to provide the countries concerned with at least the outlines of a substantial package of measures to be finalised in the remainder of the DDA and that will be part of the end-result of the Round. And agreement by developed Members on an aid-for-trade package in Hong Kong along the lines of the Gleneagles G8 summit, subsequently jointly proposed by the IMF/World Bank. This package would be based at a minimum on improving the Integrated Framework and start building up this programme to be in place no later than 1 January 2007, together with commitments from donor Members to increase their trade related aid”. This will need to be supported, maximised, clarified by developing countries (and made mandatory), in particular by those countries that would otherwise not stand to gain much, or would lose out.

Reducing developed country domestic subsidies for agriculture will benefit most developing countries (and the current EU offer is a step in the right direction), but not all will have net gains; reducing tariffs on goods globally will benefit developing countries as a group, but some countries will see their preferences eroded (in this context, it is unclear what the EU intends to achieve by defining new groupings of developing countries in its latest offer); services liberalisation may help developing countries, but only when they are ready to liberalise, and setting them mandatory targets seems to go against the spirit of what developing countries have asked for in GATS.

The EU (but also the US) will need to introduce further details on, and devote significant resources to, proposals on Aid for Trade. This will need to be followed by specific details on how to support trade capacity building and supply side capacities, support regulatory reform and services impact assessments, and how to deal with the issue of preference erosion. Without this level of detail and boldness, several developing countries might feel that they are not equipped to benefit sufficiently from the packages currently on offer.