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Your Move, Mr. Jaitley!

Arvind Panagariya

For more than four decades, developing countries have sought to eliminate developed-country barriers against such labour-intensive products as textiles, clothing and footwear. Until recently, they have had little success.  Instead, during 1970s and 1980s, they saw the barriers rise. Bigger developed countries including the United States, European Union and Canada created a system of country-by-country quotas on the imports of textiles and apparel under the so-called Multi-fiber Arrangement. They also maintained unduly high customs duties, referred to as "tariff peaks," on labour-intensive products.

As a part of the Uruguay Round Agreement, developed countries finally agreed to dismantle the MFA quotas by the end of 2004. This process has been under way albeit at a snail’s pace since 1995. But no agreement exists as yet on the elimination of tariff peaks.

Recently, as a part of their Doha Round offers, EU and the US have tabled proposals for far reaching cuts in tariffs on all industrial products. These products account for 70% of all developing-country exports. EU has proposed that WTO members significantly reduce all tariff duties by compressing them into a flatter range within which tariff peaks and high tariffs are eliminated. The US has gone much farther by proposing that the member countries bring all tariffs on industrial products down to 8%by 2010 and to zero by 2015.

These proposals offer Arun Jaitley, India’s newest commerce minister, an unusual opportunity. He stands to score a major victory by countering these offers with one that modifies the US offer in two significant ways.  First, developing countries should be given a longer phase out such that they move to the 8% duty by 2015 and to the zero rate by 2025.

Second, the World Bank and other agencies should provide significant amount of grants-in-aid to developing countries to smooth out adjustment and industrial restructuring that will accompany the liberalisation. Adjustment assistance to workers who must move from declining industries to the vibrant ones is not only necessary to make liberalisation politically more acceptable but will also help make aid more effective.

The case for such a counter proposal is truly impeccable. For starters, India has long sought to eliminate tariff peaks against labour-intensive products in developed countries. Though top World Bank officials and many NGOs have recently raised hopes that repeated public exhortations to the effect that developed country barriers cost developing countries more than what they give the latter in aid might shame them into dismantling these barriers unilaterally, last 40 years of experience leads to a different conclusion.

UNCTAD, developing country leaders, trade and development experts and even World Bank reports have condemned the barriers against developing country exports for decades. As early as 1965, developing countries had successfully deployed moral suasion to add Part IV to the General Agreement on Tariffs and Trade which explicitly committed developed countries to "accord high priority to the reduction and elimination of barriers to products currently or potentially of particular export interest to less developed contracting parties" and to "refrain from introducing, or increasing the incidence of customs duties or non-tariff barriers on products currently or potentially of particular export interest" to them.

Yet, since developing countries insisted on one-way concessions, little progress was actually made. On the contrary, textiles and apparel imports into developed countries came under severe restrictions through 3,000 bilateral treaties as a part of the MFA. Likewise, footwear and steel were frequently subject to "Orderly Market Arrangements" by the US while tariff peaks systematically discriminated against developing country exports. The only "concession" developing countries received was the Generalised System of Preferences, which now even NGO Oxfam (correctly) cites as evidence against the US sincerity to open its markets to developing countries.

The main substantive break developing countries got in achieving improved market access for themselves in the last 40 years was the agreement to end the MFA. And that came through reciprocal bargaining as a part of the UR Agreement. India will be deluding itself by hanging on to the notion that hardcore developed country barriers can be eliminated without reciprocity and just through moral suasion.

India also gains a tactical advantage through the proposed initiative. In one stroke, it will knock down its image as "obstructionist" in the negotiations and announce its emergence as a truly confident player on the world economic stage as it has already done on the world political stage. Indeed, it would have put the US on the defensive since, according to some, the latter put forward the zero-tariff proposal despite immense political pressure against it from domestic lobbies precisely in the hope that developing countries will refuse to go along with it. India can call this bluff and turn the US tactical advantage into its own.

There are at least three additional reasons why India stands to benefit big from the proposed initiative. First, India’s own liberalisation, to which it will be committing as a part of the deal, benefits it. India have now fully recognised this fact in its economic reforms programme with the Kelkar taskforce recommending that virtually all tariffs be brought down to 10% or less by 2006-07. All India will be doing under the proposed initiative is bind this liberalisation with WTO and push it to its logical conclusion of zero tariffs by 2025.

Second, with NAFTA, EU and numerous preferential trade areas between EU and its neighbours and within Latin America, Africa and even East Asia in existence, India’s products face discrimination in virtually every major market. Through the zero-tariff option, in one stroke, India would have eliminated this discrimination. Finally, under the proposed initiative, India has the opportunity to mobilise financial aid to smooth out adjustment. These resources will have to be mobilised internally under a purely unilateral liberalisation programme.

Mr. Jaitley can ill afford to miss such an opportunity for India!

February 26, 2003