GBD COLLOQUIUM ON
TARIFFS: TIME TO SAY GOODBYE?
March 21, 2001
Washington, DC
The following is a report of the proceedings, a virtual transcript, from the ninth in the series of trade policy colloquiums sponsored by the Global Business Dialogue with support from Market News International. It was held in the Holeman Lounge at the National Press Club on Wednesday, March 21, 2001. The program began at 9:30 a.m. and concluded shortly before 11 a.m.
The moderator for this event was R. K. MORRIS of the Global Business Dialogue. The speakers were EUGENE ROSENGARDEN, Director of the Office of Tariff Affairs and Trade Agreements at the International Trade Commission; SEAN DARRAGH, Associate Vice President of the Pharmaceutical Research and Manufacturers of America; CHRITOPHER A. PADILLA, Director, International Trade Relations, Eastman Kodak Company; and ANASTASIA CARAYANIDES, Counsellor (Commercial) at the Australian Embassy in Washington.
The proceedings contain the following elements:
Welcome and Opening Remarks by R. K. Morris, prepared from notes;
Remarks by Eugene Rosengarden, prepared from the tape of the proceedings;
Remarks by Sean Darragh, prepared from the tape of the proceedings;
Remarks by Christopher Padilla, prepared from the tape of the proceedings;
Remarks by Anastasia Carayanides, prepared from the notes of the moderator;
A General Question & Answer Session, from the tape of the proceedings.
Links to Papers. The Global Business Dialogue distributed two papers to those who attended the March 21 Colloquium. One of these was the paper by the National Foreign Trade Council entitled "Proposal for the Elimination of Industrial Tariffs."
The other paper we distributed was prepared by the Government of Australia for a WTO seminar in Geneva. It is available on this web site by clicking on this: Contribution by Australia: Negotiating Modalities.
Finally, Mr. Rosengarden’s remarks were largely keyed to a report that the U.S. International Trade Commission published in June 2000. The title of the report is SIMPLIFCATION OF THE HARMONIZED TARIFF SCHEDULE OF THE UNITED STATES. It can be found at the ITC’s web site at this address: ftp://ftp.usitc.gov/pub/reports/studies/pub3318/PUB3318.HTM.
This virtual transcript has been edited for readability only and has been reviewed by each of the speakers.
R. K. MORRIS
Global Business Dialogue
Welcome & Introduction
(Reconstructed From Notes)
MR. MORRIS: Good morning and thank you all for coming. If I might begin with an advertisement: The next GBD Colloquium will be held in this room – the Holeman Lounge at the National Press Club – on Tuesday, April 17. That program is likely to run from 9 to 11 a.m. Its subject will be the Summit of the America in Quebec City at the end of that week and the Trade and Investment Components of the Free Trade Agreement of the Americas.
Our focus today is not so much a negotiating venue, though I expect we will hear a lot about the WTO. Rather the topic is an issue, tariffs. This subject that has been part of trade negotiations from Chaucer’s day to ours. That’s right, Geoffrey Chaucer was not just the author of the Canterbury Tales; from 1374 to 1386 he was Comptroller of the Customs.
Actually, there is a rich literary tradition associated with tariffs and customs, one that goes from Chaucer to Nathaniel Hawthorne and Edwin Arlington Robinson, but we will save that for another occasion. Few modern writers are choosing the customs house route to greatness, and perhaps we should get even more people out of the business of collecting tariffs.
Before asking the panelists for their views on tariffs, a few notes of appreciation are in order. First, I would like to thank Merck & Co., Inc., not only for their early support of the Global Business Dialogue but for their encouragement of a program on this topic.
As one of the papers notes, the consponsors of this program are the Global Business Dialogue and Market News International. As many of you know, it is through the energy and generosity of Denny Gulino, the Washington Vice President of Market News International, that we have the use of this room.
While on the subject of sponsoring organizations, only two are listed but in a larger sense there are three. I think it only appropriate to consider the National Foreign Trade Council as one of the cosponsors of this event. We are indebted to them for allowing the Global Business Dialogue to host an event that will, in large part, be the discussion of a major new paper by the National Foreign Trade Council or NFTC. I am particularly pleased that NFTC’s president Frank Kittredge is here, as is Mary Irace, the NFTC vice president for international policy.
At this point, I would like to ask our speakers for their views, beginning with Gene Rosengarden of the International Trade Commission.
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EUGENE A. ROSENGARDEN
Director, Office of Tariff Affairs and Trade Agreement
U.S. International Trade Commission
MR. ROSENGARDENT: I will begin with the usual caveat. I am with the International Trade Commission, as you know. It is not a policy organization. We work with USTR very closely on trade questions, but we tend not to take policy positions. So anything I say will be my own view and will not necessarily reflect the views of the Commission or individual commissioners.
I noticed in the introduction to this program that there was an indication regarding bound and unbound rates in the WTO. One of the observations was that many countries have very high rates, sometimes 50 percent or more. I generally only work one side of the street. That’s the import side. I can say that the situation with respect to the United States is very different. I will demonstrate that with some of the observations and numzers that I will give you in a few moments. A lot of our trading partners have a similar situation, particularly the developed countries.
I thought it would be useful, in view of the subject and in view of balance of the program, to put the tariff situation in context. I would like to do this by giving you some information from a report that we did in June this last year. We completed a study on the simplification of the Harmonized Tariff Schedule. It was requested by the Ways and Means Committee in 1997. Frankly, it took two years for the Committee to get the request to us. I don’t know the reason for that, but obviously simplification wasn’t high on their list of priorities, at least not at that time.
More lately, in the early part of 2000, the Senate Finance Committee joined in that request. So, that was good news in that respect. The report is on our web site. It is very long. The first 30 or so pages is the narrative part, from which I got a lot of the information I will be presenting. That part of the report can be downloaded separately from the body of the tariff itself. I wouldn't recommend downloading the body of the tariff. It is about 900 pages.
TARIFF LINES & REVENUE
Let me give you some numbers and observations from the report and perhaps some information about updating. The question was, Is it time to go to zero in terms of industrial goods? That was one of the issues presented. Let me give you a sense of the size of and the significance of the tariff. I will begin in 1964. That was the first full year that we had the Tariff Schedule of the United States (TSUS), which replaced the old Tariff Act of 1930. The TSUS had 6,400 rate lines, 64 hundred categories of mechandise. Total imports that year were $18.6 billion. Thirty-eight percent of our trade was free of duty then. The average rates of duty on total trade were 7.4 percent ad valorem. (These are trade weighted averages that I am giving you.) The average rate on dutiable goods was about 12 percent ad valorem.
Move up 24 years to 1988, which was the last year of the old tariff, the TSUS. Then we had 7,500 categories of goods; total imports: $437 billion, an increase of 23 times from the 24 years previous to that. Average rates for total trade in 1988: 3.4 percent; average rates on dutiable trade: 5.3 percent. This reflected the tariff cuts of the Kennedy Round and of the Tokyo Round.
In 1989, just the next year, the first year of the Harmonized System of tariff nomenclature, there were 8,700 rate lines, 1,200 more than the previous year. Trade had gone up another 10 percent from the pervious year to $468 billion. Thirty-three percent of that trade entered the United States free of duty. Average tariff rates were about the same: 5.2 percent for dutiable; 3.4 percent on total trade.
The year 2000. This is after the Uruguay Round and the NAFTA agreement. We have 10,200 rate lines. This is in chapters 1-97 of the U.S. tariff schedule. That is up 60 percent from 1964. Total imports in 2000 were $1.2 trillion, two-thirds of which, 66 percent, are free of duty. The average rates on dutiable goods are 4.8 percent; average rates on total trade, 1.6 percent. In the pervious year, the rate on total trade was 1.8 percent.
By the year 2004, when the last stage of the Uruguay Round and [the final] NAFTA rates come into effect, there will probably be another significant drop in average tariff rates.
Because the notice indicated industrial goods, I did some simple cuts here. If we take the figures only for chapters 25 through 97 – excluding chapters 1-24 which are considered to be agricultural goods – we get a similar picture. Average rates are 5.0 percent on dutiable goods, and 1.7 percent on total trade. If we also exclude textiles, chapters 50 through 63, the average rates would be 3.3 percent on dutiable goods and 1.0 percent on total trade.
Obviously, these are trade weighted averages. So, when you look at agriculture, it looks like a similar situation. In agricultural, however, we have some very high rates, and a trade weighted average masks these high rates to some extent because, in a trade weighted average, you don’t see the protective effect of very high rates because you don’t get that trade.
What I didn’t mention is that when I came to government in 1969 the tariff was about 400 pages. Now it is about 2,300 pages.
GREATER COMPLEXITY
The obvious conclusion is that we have greater complexity in the tariff but as an economic barrier it is obviously going the other way.
Much of the complexity has arisen, not deliberately in my opinion, but as a result of the negotiating process. There has been the need to split hairs to satisfy industry on the one hand and the need to respond to the pressures from the other side on the other hand. So, we get more categories as time goes on. To a very great extent then, we have got rates that are negotiated rates, and that process of negotiation creates a lot of complications.
The study that we did was based on the rates in the year 2004, and it proposed a reduction of about 2,100 rate lines, which would be a about a 20 percent reduction in the total number of rate lines. It is a 40 percent reduction in the total number of categories or rate lines where we have discretion. We still have to live with the 5,000 or so harmonized system categories that everybody uses.
Finally, let say what the situation is from another perspective. What are the rate structures looking like? Of the 10,200 rates, 3,000 are free of duty. 5,000 have rates of 3 percent or less; 6,600 have rates of 5 percent or less.
One telling point is this: If you look at the trade of other developed countries, the European Community and Japan, this importing profile probably is mirrored in those countries. The rates are low, the tariff barriers are quite low.
DEVELOPING COUNTRY PROFILES
This same situation doesn’t exist, however, with respect to developing countries. This is in part because they have been given special and differential treatment over the years [and] owing to the fact that their taxing systems are not sophisticated, as ours are. They don’t have the options that developed countries have in terms of bases for taxation. So, they use the tariff for revenue purposes, more than to ensure protection. That is going to be difficult to change.
At the same time, you will find that our trading partner across the Atlantic has undertaken regional agreements with 160 other countries – not the major developed countries, but other countries. The question is raised: Which direction does one go in? Obviously, if you read the paper you see that many are of the view that we should concentrate more on regional agreements. I don’t know what that will mean for the WTO, but I will be interested to hear what the other speakers say.
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SEAN DARRAGH
Associate Vice President
Pharmaceutical Research and Manufacturers of America
THE AIDS CHALLENGE
MR. DARRAGH: HIV aids in Africa is an enormous problem. I am sure that that statement doesn’t surprise any of you here. What may surprise you is that it is also an enormous challenge in most of the developing world. From Asia, to Latin America to India, large numbers of people become infected with HIV on a daily basis. You have not heard much about these developments because of the gravity of the situation in Southern Africa, but you will. These kettles are simmering and will soon come to boil as well.
You might ask yourself, how is this issue relevant to a discussion on tariffs? Why is a person from the pharmaceutical industry talking to me about this?
What impact will this issue have on the industry that I represent? I hope in the next few minutes to answer some of those questions.
MEDICINES & DEVELOPMENT
The issues that lie before us are extremely complex. How do we get medicines to those in the developing world who are dying of diseases that are easily curable and treatable in the developed world, yet are lethal in the lesser developed world? Diseases like TB, diarrhea, and malaria. And, how do we get AIDs medications to these same populations who are infected with HIV, while we wait and hope that the research based pharmaceutical industry finds a cure or a vaccine for this horrible disease?
The research based pharmaceutical industry is front and center in seeking answers to these questions. As you have probably seen in the last year, the pharmaceutical industry has dropped its prices dramatically and put numerous donation programs in place to make drugs more accessible to those who need them in sub-Saharan Africa. One major company has agreed to sell its medications for close to the cost of production, another for the cost of production, and a third for below its cost of production. Yet the prices still remain out of range for most in the less developed world. Industry has stepped up to the plate, but it is time for governments around the world to do the same. In many developing countries there are still high VATs [value added taxes], customs duties, sales taxes, import taxes, etc. Sometimes, as many as seven taxes are levied on a medicine before it can reach the hands of a patient. These are taxes on the poorest and weakest among us. And this is flat wrong.
WTO TARIFF PUSH
WTO member governments should press for tariffs elimination under the auspices of the WTO system on pharmaceuticals globally, especially in the developing world. We firmly believe that this would be a constructive way for the community of nations to contribute positively to improving access to medicines in the developing world.
Tariff elimination on medicines won’t solve the problem by itself, but it will be a step in the right direction. Many poor countries are tempted to keep these barriers to access in place because they are revenue generators. However, countries should not garner revenues on the backs of their weakest and most vulnerable. Instead of urging WTO members to lower tariffs on imported medicines, many in the world health community are arguing that undermining the WTO system, especially the TRIPS agreement [on trade related intellectual property rights] is the best way forward to help the developing world. They suggest that the WTO system of rules itself prevents improved access to medicine in the developing world. They argue that progress will only come through a less disciplined approach to the application of WTO rules. Such an approach would be ill advised. WTO rules are not a barrier to access to medicines. Moreover, developing countries benefit greatly from the impact of WTO rules at home and abroad.
Although it is essential to continue work to get medicines to those who need them in the developing world, we should resist doing so in a manner that sacrifices these countries economic development and stability. The debate that is currently raging on access to medicines is about more than pharmaceuticals. It is about the global trading system writ large. It is about the legitimacy of capitalism and the future of many of the industries that are represented in this room.
Currently, the research based pharmaceutical industry is enduring the heat of the crucible of globalization. It is not comfortable being in this cauldron. I humbly suggest that many of you in this room will be similarly uncomfortable if we do not work together to support the WTO structure and its rules-based system. The elimination of tariffs on pharmaceuticals globally, but especially in the lesser developed world, would be a small step forward. But it would represent a meaningful improvement without sacrificing adherence to international trade laws.
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CHRISTOPHER A. PADILLA
Director, International Trade Relations
Eastman Kodak Company
Co-Chairman of the NFTC Working Group On Tariffs
MR. PADILLA: Thank you all for coming out on a rainy morning to listen to a discussion about tariffs. I am here representing the National Foreign Trade Council. Since last fall, I have been co-chairing, along with Tim Richards of General Electric, a working group on tariffs at the NFTC.
We have done an extensive look at the subject of industrial tariffs, and today we are releasing a major proposal on industrial tariffs in the new round that I would like to talk with you about this morning.
TARIFFS STILL CRITICAL
It seems to have become popular in some circles lately to assert that tariffs no longer matter in trade policy. That is not what Gene was saying. As he pointed out, the problem still exists in developing countries. But in some quarters you hear that tariffs are an old issue. It was solved. We should move on to focus on other, new subjects in the WTO.
In fact, though, tariffs remain a prevalent instrument of trade protection and impose a significant financial burden on consumers and producers of industrial goods. Tariff reduction has been a central goal of the GATT system since it was created in 1947. Despite some significant progress over the past 50 years, as we enter the 21st Century, industrial tariffs are the WTO’s single most obvious piece of unfinished business.
Average industrial tariff rates in many countries remain prohibitively high. We estimate that they impose at least $64 billion a year in added costs on global industrial trade. A recent OECD [Organization for Economic Cooperation and Development] study of post-Uruguay Round tariffs found that the average of bound industrial tariffs, in the representative sample of developing countries, was 39 percent, less than 4 percent in developed countries.
The problem of high rates is especially acute in Asia, where India at 59 percent, Indonesia at 38 percent, and Thailand at 28 percent have some of the highest average bound tariff rates. In Latin America, no major country except Chile has a bound, mean tariff rate of under 30 percent. Even on a trade weighted basis, post-Uruguay Round average industrial tariffs remain well above 25 percent in important markets, including: Argentina, Brazil, India, Indonesia, Mexico, Thailand, Turkey, and Venezuela.
PREVALENT PEAKS
In developing countries, so-called tariff peaks – high rates of tariffs, usually defined as above 15 percent – often make up the majority of the tariff schedule. In many cases, they make up to three-quarters of the tariff lines in many developing country schedules. According to a GATT study, after the Uruguay Round, about 40 percent of all imports into developing countries are made under tariff lines that are not bound at all. This problem, again, is particularly acute in Asia.
AND HIGH VOLUMES
But tariffs, we found, are not just a problem in developing countries. In fact, in absolute dollar terms, a significant portion of tariff payments is made on trade between developed countries. This is because, as Gene explained, while tariff rates on industrial products in developed countries are very low – bound rates average less than four percent on a trade-weighted basis after the Uruguay Round – the sheer volume of trade among developed countries means that there are much as $21 billion in annual tariff payments on trade between developed economies.
These tariffs are largely leftovers from the Uruguay Round. They impose an enormous cost on consumers and producers, and they do not serve a protective or trade policy purpose. In fact, a number of NFTC members noted during our work that tariff payments on developed-country trade make up as much as 40 percent of their annual tariff burden. That is the case, for example, in my company, Kodak.
We typically focus on high rates in countries like India or Indonesia. But when we look at what we are actually paying, forty percent of it is on routine flows of semifinished materials between production facilities in the United States and Europe. This is nothing more than a tax. It doesn’t protect anything. And it is a tax borne by consumers. And it is a tax on industrial sectors that neither desire nor need trade protection.
Of course, we cannot talk about developed country tariffs without talking about peaks there as well. Developed countries still maintain tariff peaks in a number of sectors. These are most prevalent in textiles, apparel, footwear, fish products and motor vehicles. The World Bank last month estimated that if developed country tariff peaks were eliminated, this would cause an immediate 11 percent jump in the exports of least developed countries, the poorest of the poor.
NON-GLOBAL AGREEMENTS
A final factor that we noted in our study is the rapid proliferation of bilateral and regional free-trade agreements. These are a catalyst toward zero-tariff trade, because they are by definition free-trade agreements, but they also are creating a growing web of discriminatory, complex tariff regimes. The result is a confusing proliferation of rules, rules of origin and preferential rules. It is often difficult to determine which countries qualify for which rates and to know, with any accuracy, what the current rates of preferential duty are on a global basis.
The costs of tariff compliance are growing in developed and developing countries alike and are a special burden on small and medium sized business. This irony was pointed out by Gene mentioned when he talked about the growth in the size of our tariff schedule. This is due, I would guess, in some measure, to an increased number of tariff lines made necessary by preferential trade agreements, or done in the context of the Uruguay Round.
ELIMINATE INDUSTRIAL TARIFFS
That brings me to the proposal that we are sharing today. The NFTC is calling for the elimination of all tariffs on industrial products, through a series of progressive reductions, leading to zero, in all WTO members by a definitive end date. This initiative will provide significant new market access to the products of developing countries. It will eliminate distortions and high tariff payments on intra-developed country trade. And it will build on the foundation of tariff-free trade already established by the major regional, bilateral, and sectoral FTAs.
We call on negotiators to make this ambitious goal a centerpiece of a new WTO round of negotiations, finally finishing the work begun on tariffs by trade negotiators more than fifty years ago. Some will say this goal is too ambitious. But I ask you to consider this: We now have existing political commitments to zero-tariff trade in the Western Hemisphere through the FTAA and the NAFTA. In Asia by 2010 and 2020, through the APEC process, in Europe, through the European Union and a growing number of EU association agreements, and through over 100 other free-trade agreements that have been notified to the WTO, especially EU free-trade agreements with other regions.
With this broad commitment to zero trade in all of these major regions of the world, the next logical step must be a multilateral agreement to zero-tariff trade. If we fail to make that commitment, we risk creating a patchwork quilt of preferential free-trade agreements, which distort trade, are enormously complex to administer, and which, ultimately, will leave developing countries behind.
The NFTC recognizes that the success of the zero-tariff initiative depends on the launch of a new round of WTO negotiations this year, in order to allow negotiators to make the broad requests and concessions necessary to achieve the goal of zero tariffs. Within the scope of these tariff negotiations, we say that no products or industrial sectors should be excluded, nothing should be taken off the table in advance. The Round must be sufficiently broad to offer a balance of concessions to developed and developing countries. It must therefore include, at a minimum, negotiations in such areas as agriculture, textiles trade, antidumping, government procurement and services.
Importantly, a tariff elimination initiative must also be accompanied by aggressive efforts to eliminate non-tariff barriers, which, if ignored, could mitigate the benefits of tariff elimination.
FOUR PRINCIPLES
Our proposal for tariff elimination establishes a goal, an aggressive goal. And we set forth for major principles for accomplishing that goal:
- First, we call for comprehensive coverage of all industrial products by all WTO members.
- Second, we endorse the principle of differential phasing. Very simply, this means that developing countries would have a longer period of time in which to phase out tariffs, and so would developed countries for particularly sensitive products. Lower tariffs would be phased out earlier.
- The third principle is progressive elimination. Once we have got the concept of comprehensive coverage and differential phasing, it is important that all WTO members reduce tariffs by some amount each year after a round is completed, preferably in equal annual installments. These increments will be different, based on the differential in the phase-out schedules, but it is important that tariff reductions begin after the conclusion of a new round. It is also important that the tariff reductions not be back-end loaded or have grace periods.
- Fourth, we endorse the principle of short-term, duty-free access to the products, all products, of the least developed countries. We note that about 95 percent of the imports of the least developed countries already receive duty-free treatment in the United States under the GSP program, and we support the recent EU initiative granting them duty-free access to the EU on "everything but arms". But it remains important that tariffs in all industrial sectors be covered and be eliminated.
DEVELOPING COUNTRY GAINS
Developing countries have much to gain from comprehensive tariff elimination. The World Bank recently demonstrated that the greatest relative gains from trade can be made by poor countries which open their markets. Indeed, trade among developing countries is growing at a faster rate than North-South trade. IMF statistics show that, from 1995 to 1999, intra-developing country trade grew approximately 11 percent, while developing country imports from the developed world grew only 5 percent during the same period.
MODALITIES
Now the question is, What modalities should we use in a new round to get to zero? There has been a great deal of discussion about modalities. The NFTC looked at a variety of different methods to accomplish the goal of tariff elimination. We did not rule out any approach to accomplish this objective. But, to start the process, we have offered a few suggestions.
First, we call on WTO members to agree to a standstill arrangement on applied tariffs during the pendency of a new round, with negotiations on tariff-elimination time frames to proceed from the bound rates. This is an effort to solve the difficult problem of whether to negotiate from bound or applied rates, recognizing that many developing countries actually have MFN applied rates that are considerably lower than their bound rates. We call for a stand-still arrangement to freeze in place applied rates as they currently stand. In exchange for that stand-still, we believe that these negotiations can proceed from bound rates.
With regard to the method of reaching zero, we think that a formula approach, which differentiates phase outs depending upon the existing bound tariff rate, offers the benefits of simplicity, breadth and fairness. The way this would work is very simple. Items currently bound at high rates would have a relatively longer period – not to exceed fifteen years – to phase down to zero in equal, annual reductions. Tariffs on products bound at lower rates would phase out earlier.
This approach effectively grants longer phasings for developing countries and for sensitive products from developed countries, where tariffs tend to be bound at high rates. It would not require a detailed, line-by-line, request-offer negotiation or a country-by-country negotiation.
A number of countries, including the European Union, have proposed tariff band or harmonization approaches. We think these ideas have considerable merit, perhaps as an interim step before the final phased reductions to zero. But, importantly, we do not believe that harmonization or a tariff-band approach is sufficiently bold as an objective for a new round.
SECTORAL AGREEMENTS
Let me say a word about sectoral agreements. We think that sectoral agreements – so-called zero-for-zero agreements, have been extremely successful in acting as a catalyst for broader tariff elimination. Tariffs on information technology goods, pharmaceuticals, medical equipment, chemicals, furniture, and distilled spirits have been substantially reduced or eliminated through multilateral, sectoral agreements. We support the use of such agreements, even to be implemented early on a provisional basis, as part of a new round of negotiations.
In conclusion, if a new round is launched this year, and it is my hope that it will be, it may be our only chance for the next decade or so to go for tariff-free trade on a multilateral basis. The worldwide movement toward regional and bilateral zero-tariff agreements is very strong. As we have seen, it is moving forward at a rapid pace. If we do not embrace the challenge of multilateral tariff free trade, we may not get another chance for a decade or more. In the meantime, we may become enmeshed in an ever more complex web of preferential arrangements. Now is the time to complete the work begun over fifty years ago. Now is the time to say goodbye to industrial tariffs.
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ANASTASIA CARAYANIDES
Counsellor (Commercial)
Embassy of Australia (Washington)
Unfortunately, the GBD tape did not pick up the remarks of Ms. Carayanides. Briefly, her remarks contained the following points:
- Tariff liberalization generally is important, both for developed as well as developing countries and in agricultural as well as industrial sectors.
- The proposal by the National Foreign Trade Council is very welcome, it is important that "business get out in front on this issue."
- It is "extremely important" that a new round of multilateral trade negotiations be launched this year, and tariff liberalization must be an important part of the next round.
- With respect to the agenda for the next round, there should be "no a priori exclusions," nothing should be taken off the table.
- A recent World Bank study has shown that the developing countries have more to gain from the expanded trade associated with tariff liberalization than the developed countries.
- Prior to the Seattle Ministerial, APEC – the members of the Asia Pacific Economic Cooperation forum – had strongly endorsed the idea of accelerated tariff liberalization in certain sectors. APEC members continue to support this proposal.
- In the push for free-trade in industrial goods, one should not lose sight of the equally important need for tariff liberalization in the agricultural sector. Indeed, agricultural products often faces tariffs that as are much as eight times as high as some of the higher industrial tariffs, in some cases as high as 300 percent ad valorem.
- While there are advantages to some of the bilateral and regional agreements, the WTO is the best place for the negotiations that are needed to reduce tariffs in both the industrial and agricultural sectors.
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GENERAL QUESTION & ANSWER SESSION
Q: On tariffs and government revenues in development countries.
MR. ROSENGARDEN: With respect to developing countries, the problem basically is that they have a long history of using the tariff for revenue purposes, and it will be difficult to get these regimes to disappear. The other problem is the difficulty of creating new regimes for internal taxation. These system are expensive and the countries involved just don’t seem to have the infrastructure to do it.
What happens, obviously, is that, as you get economic development, sophistication and better record keeping, you can impose at least simple tax structures like a value added tax. This is helpful to them as compared with, say, and income tax, which is very difficult to impose. I don’t know the big answer for all of those countries, but it – reliance on tariff revenues – is a big problem for them.
We also find that if you look at it statistically, the countries with the highest trade barriers tend to have the lowest quality of material life and vice versa. All this does, to some extent, say something about a government’s policy toward competition. I don’t know the answer to that question about taxation.
Q: [Unclear]
MR. ROSENGARDEN: I know that the World Bank and the IMF and organizations like the World Customs Organization and some private organizations are trying to create a better atmosphere for alternative tax regimes, but this has been going on for many years now, frankly.
MR. DARRAGH: We have tried to get that message out [regarding the value to individuals and societies of lower tariffs on pharmaceuticals], but we haven’t had any traction with it. I am not sure that is because we have just been inept at getting the message out or for some other reason. It is not a sexy topic, and it is not something that resonates with people as solving the problem right away. I think that sometimes, when the pharmaceutical industry speaks, there is a lack of credibility because we have been pilloried so much. So even though we are speaking the truth, it doesn’t resonate.
MR. PADILLA: With regard to taxes, let me give you an example. The landed cost factor for a box of Kodak film is about 54 percent. That is the added charge to get that box of film on the shelf India and certain other countries. Only about 25 percent of that is import tariff. The rest is special charges, including value added taxes. I would say that the situation is basically the same in China, where an 18 percent VAT is added, usually at the time of importation.
These countries seem to have many places [techniques] to collect revenues. I am not convinced that tariffs are the best of these…. Clearly, though, this is an issue, especially for the poorest countries. The IMF and the World Bank are doing some work on this. The was work done by the IMF that shows that the revenue effects of Uruguay Round tariff cuts were actually not that great. … Gene mentioned the point about economic development. Certainly over the long term, countries with higher tariff barriers are the ones that are not doing as well. Tariff reduction is good for development. We can see that in the example of some enlightened developing countries. Chile, for example, springs to mind as do Singapore and others.
Finally, I would say that if developing countries don’t embrace tariff elimination, they will be left behind. Look at the pattern of the free-trade agreements that are being negotiated. The inclination of countries, in the absence of multilateral negotiation, has been to negotiate free trade agreements with their biggest trading partners. Those are not going to be the poorest countries. Those are going to be the Canadas, the Mexicos, perhaps US-Europe, Australia, Singapore, Chile.
The countries that are going to be left behind are the ones like India and poor countries in South Asia …I think it is in their interest to recognize the value of a multilateral trade negotiation. They are the ones standing on the outside of this complex web.
MR. ROSENGARDEN: I just wanted to supplement. First, I think that, to some extent, the World Bank gets a very bum rap here. They have taken a modernistic, holistic view regarding economic development that is beyond just pouring money into a problem or a country. I think in the long run this is probably a great approach. There are two other aspects to this, I think, that are important. One is the question of corruption. Companies have enormous problems getting goods into countries legally, frankly. Corruption has always been and problem, it is probably no better than it ever was.
The other problem is that countries with high tariff barriers nevertheless think that they are maintaining a high barrier in order to invite investment. But this is counterproductive. Companies tend to be risk averse; so they want to establish a market first before they establish an investment in a country. If they can’t trip over the tariff barrier and get into a country, they can’t measure the size of the market. Therefore, the high rates tend to be a bar to investment.
There have been some experiments by some countries, I understand, which have lowered their rates for particular products, with the idea that foreign companies will be able to establish markets. These countries then promote investment that way. This is, I think, a very big opportunity for these countries to realize that if they really do want better jobs and more investment in their countries, then lowering the barriers in fact might be the way to go.
MR. DARRAGH: To add to that, I think there is a distinction between the interests – at least the short term interests of governments – vis-à-vis the interests of consumers or patients. If you maintain these kinds of barriers and taxes, it is a guaranteed revenue stream for the people who are currently in power. What we are asking these governments to do is to open up the system. If your interest is control and power, that tends to preclude your ability to take the steps that we are asking them to take. I think it is understandable, but if they are not looking out for the interests of their consumers and their citizenry, they are being very selfish.
QUESTION: [This comment highlighted the problem of entrenched political elites in Pakistan and in other countries. The idea expressed was that elites in these system may see little advantage to the kinds of changes in the status quo that a zero-tariff negotiation would imply.]
MS. CARAYANIDES: (Inaudible.)
QUESTIONS: [Regarding customs classifications problems.]
MR. PADILLA: One of the things that came out of our work was the recognition of the incredible administrative burden associated with dealing with tariffs. Large companies do at least have the resources to deal with the problem. When you look at small and medium sized companies, the horror stories are unbelievable. There was an interesting letter to the editor in the Financial Times of a couple of weeks ago. The letter decried the closure of the NAFTA office in Dallas, Texas, that had been designed to helps small and medium sized companies comply with the NAFTA regulations. Because that office is no longer in service, the writer said, many small and medium sized companies cannot, in effect, afford to get the benefits of NAFTA, because the cost of hiring an attorney to assist with the process of complying with the regulations is greater than the benefits involved. That is just another argument in favoring eliminating tariffs.
QUESTION: Most speakers have referred to the number of bilateral or regional free-trade agreements and the fact that they complicate the system. Are there so many such agreements now that Article XXIV of the GATT, which in a sense puts some discipline on these agreements, says that they have to meet certain standards, is no longer relevant? Is it a dead letter because nobody can afford to challenge agreements under it? Are we all so involved with such agreements that we are too vulnerable to bring a challenge – the EU with its 100 agreements, the U.S. with NAFTA and so forth? Or are there countries that don’t have quite have enough and so might challenge some of these agreements under Article XXIV? Or is business interested enough to make sure that these FTAs are real agreements? Or do we just forget Article XXIV?
MR. PADILLA: There are some of us who thought that an Article XXIV challenge to some of the EU agreements would have made a nice response to the FSC case. But, alas, that was not to be. I think at this point, rather than raise Article XXIV challenges, it is just better to launch a new round. Let’s just get started. We don’t need to prenegotiate the outcome. We don’t need to have the words "zero tariffs" in the Doha declaration. We just need to launch and get going.
QUESTION: I am Mike Samuels of Samuels International Associates. Over the last couple of years, I have done several projects for both the WTO and UNCTAD in least developed countries. In so doing, I have discovered that many of them have actually, in relative terms, reduced their tariffs over the last five to seven years, rather impressively; even though they haven’t yet reached the stage of binding these reductions. One of the effects for these countries of having reduced their tariffs is what can be referred to as de-industrialization. That is, there has been, during the same period, a reduction of their manufacturing capability. This has coincided with their tariff reductions.
Whether or not there is any relationship, there is clearly a psychological effect upon them. Continued reduction of tariffs [they believe] will force further de-industrialization, thus making them dependent upon producing raw materials for the industrialized countries. How do you deal with that?
QUESTION: I would ask you what your advice is?
MR. DARRAGH: My question back to you would be, is there empirical evidence to suggest that that is the case. … There is.
MR. MORRIS: That’s another panel. That is a very good question.
MR. PADILLA: One of the things that we are hoping will happen as a result of this proposal is – I see some folks from think tanks in the back of the room – is to provoke some more studies. We made a very gross estimate – $64 billion – in potential savings from tariff reductions. My suspicion is that that number is actually a lot bigger, but we do not have the capability to do a rigorous economic analysis. We are hoping that others will take up the challenge. I think that your question, Mike, as well as the question about the revenue changes associated with tariff cuts are questions that we would like the scholars to take a closer look at. My suspicion is that there will be some arguments that will emerge that will lend weight to our proposal.
QUESTION: Sam Gilston with the Washington Tariff and Trade Letter. If you get very far with your proposal we may have to change the name on our newsletter. If somebody is paying $64 billion, somebody is getting $64 billion. Is there any thought here about what the developed world is going to offer the developing countries in terms of technical and financial assistance that they might need as a result of giving up tariffs?
MR. PADILLA: I don’t want to get too far down the road of …assuming that those who give up tariffs are making enormous sacrifices. One of the reasons for calling for a broad round is that in return for a series of tariff reductions by the developing countries they will get benefits in other areas like agriculture and textiles and so forth. Whether or not it is worth trying to share some knowledge with respect, for example, to the problem of building a better tax system, that’s fine.
I don’t want to go to far down the road though of assuming that somehow we would owe the developing countries a big favor if they were to decide to eliminate their industrial tariffs, which is manifestly in their interest. If they don’t do it, they will be left behind.
The countries that should be most worried about the proliferation of FTAs – and clearly the United States should be worried – but developing countries should worry [more]. I would wager than India and Indonesia are not party to many of these agreements and are not likely to be.
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