GENEVA, April 29 (Reuters) - The European Union has launched a bid to rescue stalled global free trade talks with a compromise proposal on the main sticking point -- industrial tariffs. Below is a full text copy of the proposal obtained by Reuters:
Non-paper: a compromise on sectorals?
Introduction
Negotiations on sectoral tariff liberalisation are at this moment the biggest obstacle to an Agreement in the Doha Round. Negotiations on sectorals are a mandated part of the Doha undertaking.
"Tariff elimination" was part of the initial Doha mandate. The Hong Kong declaration confirmed sectorals would be part of the package, but also specified they would be voluntary in nature, or "non-mandatory".
At the same time, all proposals specify that sectorals will only come into force when countries representing a "critical mass" of trade are willing to participate. The reason for the critical mass provision is the legitimate wish to avoid "free riders", countries which do not participate in the sectoral arrangement, but benefit from the tariff reductions.
The critical mass is usually defined as 90% of trade, although certain sectorals have come into force with a smaller share of trade covered, at least initially. However, the concept of voluntary participation combined with the critical mass concept has lead to a situation of blockage in the Round.
In practice, no sectoral can come into force without the participation of major world traders, such as EU, US, China and Japan, but also need the participation of a number of other Members, developed and developing, in order to reach the threshold.
So far no sectoral proposal has gathered enough support to come into force, with even the more successful proposals stuck at around 60 percent of world trade.
Considerations
The product basket approach has been presented as an attempt to bring the parties together, but there have been no concrete proposals by Members as to how to fill the baskets. The sectoral negotiations have focussed so far mostly on tariff elimination, or 0/0, which has been the traditional approach in sectoral agreements, including those that came from the Uruguay Round.
However, these sectorals were much smaller in scope. For instance the pharmaceutical arrangement covers only one chapter out of chemicals chapters 28-39.
Sectorals in machinery were so far limited to construction and agricultural machinery only. Even the largest (and most successful) sectoral agreement, the Information Technology Agreement (ITA) is only a limited subsector of the electronics and electrical machinery sectoral which has been proposed in the Doha Round.
Also, changes in world trade patterns have shifted trade flows significantly in the favour of developing and emerging countries, which now cover the majority of world trade. Some of the major emerging countries whose participation is now required for sectorals have significantly higher bound and applied tariffs than the traditional trading powers, such as the EU, US and Japan.
Therefore, participation of these countries in a purely 0/0 arrangement would require steeper tariff reductions, and thus be challenging. At the same time, in those sectors where developing countries now cover the large majority of world trade, developed countries can hardly be expected to lower tariffs to 0 without reciprocity from their main competitors.
Another aspect of sectorals is preference erosion. Specific provisions in the agreement have been designed to soften the impact of erosion of preference margins for some of the poorest WTO members.
Studies by the Secretariat show that most of the lines most sensitive to preference erosion are in fish and clothing. Tariff elimination in these sectors would undermine the benefits of the preference erosion provisions in the NAMA-text.
General principles
A compromise on sectorals would have to take all of these factors into account. Sectoral liberalisation has to be substantial, but realistic and negotiable. If a compromise is to stand a chance of success, participating countries should accept the following guiding principles:
* Recognising the principle of Special & Differential Treatment, developing countries should be allowed to exercise their rights to take flexibilities, as provided for in the par. 7 of the NAMA-text, also in sectorals.
* Modalities and product baskets cannot be the same for all sectors, as trading interests and conditions differ per sector, but arrangements should not be overcomplicated. The simpler the modality, the higher the chance of success.
* All major traders should participate in a sectoral, but contributions can be different and depend on a Member's level of development, export performance and tariff levels in a sector.
* Sectors where preference erosion is particularly strong for LDC's and other groups of countries benefitting from preferences should be avoided, as tariff elimination would worsen the erosion of preference margins.
A possible compromise
The core of a compromise on sectorals will have to consist of the three biggest, commercially most important sectors: chemicals, machinery and electronics. The following modalities are proposed for these sectors:
Chemicals and Machinery (a combination of 0/0 and 0/X): developed countries move to 0 across the board. Developing countries are also expected to participate in a 0 basket for some products, in particular where sectoral arrangements are already in place (for machinery: construction and agricultural machinery). A 0/0 basket in chemicals could cover at least the existing 0/0 arrangement (pharmaceuticals).
For other products, Developing countries would have access to additional Special & Differential Treatment by applying X, where X = the result following the application of the Swiss formula cut plus a further reduction of a fixed percentage point. This modality takes into account the fact that tariff levels are generally already lower in developed countries than in developing ones.
It also recognises that to fully eliminate tariffs, Members with relatively high protection after the application of the Swiss formula would have to do a very large effort. X for developing members would be calibrated in a way that delivers significant liberalisation, proportionate tariff reductions and efforts commensurate with those of developed members.
The contribution of developing countries will be equivalent, but not the same; end rates would be different, depending on the base level after formula. For chemicals tariff reductions should lead at least to the existing Chemicals Tariff Harmonisation Agreement (CTHA) levels for all developing country participants.
Those developing Members already applying the levels of the CTHA should reduce their tariffs by the Swiss formula cut plus a fixed percentage point cut, with new end rates ending up between the CTHA levels and 0.
Electronics & electrical machinery (0/0): in this sector the overwhelming majority of world exports come from developing countries.
Therefore it seems reasonable to expect that those developing countries with a strong export performance in the sector join the effort of developed countries and eliminate tariffs in the sector. This also corresponds to current practice in the ITA, which covers a large number of products in this sector.
However, recognising the sensitivities in the audiovisual sector in several Members, the audiovisual sector should be excluded from the sectoral.
Other sectors could also be considered, but progress would first have to be made on the three biggest sectors. For all other sectors, more limited in scope and coverage, and more similar to the original sectorals from the Uruguay Round, the only meaningful modality would be 0/0.