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Contributions from
the Column
Focus
The risk of a rerun: little progress since Cancún
Business: chances for poor and rich countries alike
Rural development is not on the WTO agenda
Why NAMA threatens industrialisation
11/2005
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The dangers of NAMA
If poor countries reduce their industrial tariffs to the levels demanded by rich countries, they risk undermining their long-term potential for development. Infant industries need protection – and have always done so. History shows, that none of the advanced nations initially thrived on opening its borders.
[ By Ha-Joon Chang ]
The importance of the NAMA (Non-Agricultural Market Access) negotiation in the World Trade Organisation (WTO) cannot be over-emphasised, for the result of this negotiation can make or break the future of development. The key issue in NAMA is the lowering of industrial tariffs.
Of course, lowering industrial tariffs has always been the key goal of the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT). However, the tariff cuts proposed in NAMA are on a historically unprecedented scale. And coming on the heels of the increased WTO restrictions on the use of other industrial development measures, such as subsidies, regulation on foreign investment, and technological copying, a severe restriction on the use of tariffs could leave the developing countries almost powerless to promote industrial, and thus economic, development. Especially if the most radical US proposal is implemented, the tariff cuts could be truly drastic. For example, according to the calculation done by the Indian government, the (simple) average tariff for most developing countries will become five to seven percent, down from the current 10 to 70% by 2010 (Khor & Goh, 2004, pp. 28-9) and would be cut to zero by 2015. The EC proposal will bring it down to five to 15%, while the Korean and the Indian proposals will bring it down to 10-25% and to 10-50% respectively.
This means that average industrial tariffs in developing countries will become the lowest since the days of Unequal Treaties in the 19th and the early 20th century, when the (still-independent) weaker countries were deprived of tariff autonomy and were forced to impose a flat tariff rate of no more than 3-5%. They will be also lower than the rates that prevailed in any of today’s developed countries until the Second World War, with only a few exceptions such as Britain and the Netherlands between the late 19th and the early 20th centuries and Germany briefly in the late 19th century (see the table). Japan had 5% average tariff rate in the late 19th century, but this was the result of a series of unequal treaties that it was forced to sign upon opening up to the outside world in 1853.
If industrial tariffs are indeed cut to zero by 2015, this will be the first time in human history that such a thing happens. The effects of such drastic reduction in tariffs on the developing countries could be truly monumental.
At the moment, much of the NAMA negotiation seems to focus on which formula – US, Korean, Indian, Chinese, or the EC – to use in cutting the tariffs. However, before wracking our brains on which formula to use, we need to take a step back and ask why we need industrial tariff cuts in the first place.
Unproven belief
The presumption underlying the WTO is that freer trade (lower tariffs, lower non-tariff barriers) is always better. However, in reality, what happens following the tariff cut very much depends on where and how it is done. If the magnitude of the tariff cut is large and domestic producers accordingly need to increase their efficiency very quickly in order to survive, the result may be the closure of the relevant producers, destroying income and jobs, rather than their efficiency rising. And given that resource mobility is not perfect in the real world, the resources that come out from the bankrupt enterprises may not find alternative employment opportunities that will allow them make as large contributions to the national economy as before. For example, if a reduction in steel tariff results in the closure of steel mills, the blast furnaces are likely to be sold as scrap metal and the laid-off steel workers are likely to end up unemployed or working in unskilled jobs like security guard or janitor.
Of course, even if tariff cuts lead to the destruction of domestic producers and the resulting “waste” of resources, the whole society may gain, if the costs from the destruction of income and jobs are lower than the benefits to the consumers. However, even in this case, the distributional question still remains, as there is no automatic trickle-down from the gainers to the losers from trade liberalisation. In the developed countries, there are well-established mechanisms to re-distribute wealth – the welfare state – but in the developing countries such mechanisms are at best weak and often non-existent.
More importantly, tariff cuts may damage long-term economic development. In the short run, it may indeed be more efficient for developing countries to get rid of those industries that cannot survive without tariffs and other protective measures and rely on agriculture and some labour-intensive industries (although the question of protection of these sectors by the developed countries still remains). However, in the long run, it is extremely unlikely that the countries can develop on that basis – as history shows.
Most of today’s developed countries relied on tariff protection, subsidies, and other measures, in order to promote their “infant industries” in the earlier stages of their development (Chang, 2002). In particular, the UK between the early 18th century and the mid-19th century and the USA between the mid-19th century and the mid-20th century relied heavily on tariff protection. As we can see from the table, the industrial tariff rates that prevailed in these countries during the periods in question were around 40 to 50% – rates that are higher than those prevailing in many developing countries today and rates that are several times higher than what will prevail in most developing countries if the developed countries have their way.
More contemporary experiences also confirm the importance of infant industry protection. Successful developing countries such as Korea, Taiwan, China, and India, all developed their industrial capabilities behind walls of tariff protection and other forms of government support. The growth records of the developing countries during the last two decades of trade liberalisation also suggest that the removal of protection and subsidies have led to a slowdown rather than an acceleration in economic growth. For example, during the 1960s and the 1970s, in the “bad old days” of import substitution, per capita income in developing countries grew at three percent per year. In the 1990s, after more than a decade of extensive trade liberalisation, growth rate fell to about half that rate, to 1.7%.
“Level playing field”
In the push for the reduction in industrial tariffs, the rhetoric of “level playing field” is deployed as the most important principle that justifies drastic cuts in industrial tariffs by the developing countries. The developing countries should “level the playing field”, it is argued, by making the access to their industrial markets by developed country exporters easier. “Level playing field” is like, as the Americans say, motherhood and apple pie. It is definitionally good and, therefore, difficult to oppose. But it is something that has to be opposed if we are going to build a world trading system that is truly pro-developmental.
Needless to say, level playing field is the right principle to adopt when the players are equal. However, when the players are unequal, it is the wrong principle to apply. For example, if a team of 13-year-old children is playing football against the Brazilian national team, it is only fair that the playing field is not level and that children are allowed to attack from up the hill. Indeed, in most sports, unequal players are not even allowed to compete against each other. In boxing, wrestling, and many other sports, they have weight classes. In many sports, including football itself and baseball (the “Little League”), there are age classes – adult teams do not play against children and juvenile teams. In sports like golf, we even have an explicit system of “handicaps” that allows weaker players to compete with advantages in (inverse) proportion to their playing skills.
There is, naturally, some unease with this rhetoric of level playing field among the developing countries, which the developed countries cannot totally ignore. This is why we have “special and differential treatments” (SDT) in the WTO and why the developed countries in the NAMA negotiation say that they are happy with “less than full reciprocity” (LTFR) from the developing countries. However, there are serious problems with these “concessions” in the forms of SDT and LTFR.
The problem with SDT is the word “special”. To call something “special treatment” is to say that the person getting the treatment is getting an “unfair” advantage. However, in the same way we wouldn’t call stair-lifts for wheelchair users or Braille writings for the blind “special treatments”, we should not call the higher tariffs and other means of protection we allow the developing countries “special treatments”. They are just “differential” treatments for countries with “differential” capabilities and goals.
The notion of LTFR should also be questioned. The notion implies that the developing countries will give “less” than do the developed countries in the NAMA deal. However, the notion of reciprocity cannot be discussed without some reference to the relative positions of the parties involved. We would not say that a poor friend is being “less than reciprocal” simply because he cannot buy champagne and caviar for his rich friend, as far as he is treating his rich friend often enough and generously enough, given his means. Likewise, even a small cut in tariff may be a lot to ask for a developing country desperate to preserve jobs, develop industrial capabilities, and collect government revenues. At the same time, a relatively large cut may not be such a big burden on countries with greater wealth, higher industrial capabilities, and a much more developed welfare state.
Irreversible decisions
Against these concerns, the developed countries argue that the WTO contains enough flexibility – mainly in the form of keeping some sectors off the agreements – and NAMA can be concluded on this basis. However, the notion of flexibility in the WTO is a very peculiar one. Once a sector is liberalised, there is no going back. If there is going to be genuine flexibility, countries should be allowed to “unbind” tariffs, if there is a reasonable ground for it. For example, if a country genuinely under-estimated the adjustment costs when it made a decision to cut the tariff in a particular industry – as it was in fact case with many developing countries in the Uruguay Round – it may be reasonable to allow that country to raise tariff ceilings. They should also be allowed to raise tariffs in sectors that are newly emerging and therefore need “infant industry” protection. Unfortunately, such genuine flexibility is not allowed in the current system.
In short, the developing countries should wake up to the realities of the NAMA negotiation. Instead of being bogged down in the technical details of tariff cut formulas, they should come out questioning the very justification of the NAMA. They should also question the fundamentally biased notions of what is “fair” in the international trading system, which are manifested in concepts like “level playing field”, “special and differential treatment”, “less than full reciprocity”, and “flexibility” used by the developed countries in the negotiation process.
If NAMA proceeds in the way it is at the moment, there may be no more industrial development in the developing world in the near future. This may sound like a very drastic assessment, but both theory and (historical and contemporary) evidence suggest that that is the only realistic assessment.
Ha-Joon Chang, PhD
is Reader in the Political Economy of Development at the
University of Cambridge’s Faculty of Economics.
hjc1001@econ.cam.ac.uk
References
Chang, H-J., 2002:
Kicking Away the Ladder – Development Strategy in Historical Perspective,
London, Anthem Press.
Khor, M. & Goh, C. Y., 2004:
The WTO Negotiations on Non-Agricultural Market Access: A Development Perspective, a paper presented at the Asia-Pacific
Conference on Trade: Contributing to Growth, Poverty Reduction and Human Development, Penang, Malaysia, 22-24 November, 2004.
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