A PRESENTATION ON WTO SECTORAL NEGOTIATIONS

1. A PRESENTATION ON WTO SECTORAL NEGOTIATIONS CHAPTER 28 & 29 CHLOR ALKALI INDUSTRY (ALKALI MANUFACTURERS’ ASSOCIATION OF INDIA) By CA. ATAL BIHARI BHANJA, FCA,DITL(ICAI) A.B.B. & ASSOCIATES Web: www.abbassociates.net 45, 1ST FLOOR, MAHENDRA CHAMBERS 146 – D.N. ROAD, FORT, MUMBAI – 400001. Email: abbassociates@yahoo.co.in contact@abbassociates.net Cell: 09821321005 A.B.B. & ASSOCIATES

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6. WTO AGREEMENTS A.B.B. & ASSOCIATES

7. FREE TRADE AGREEMENTS ( FTAs ) A.B.B. & ASSOCIATES

8. DEFINITIONS Ad valorem (AV): A tariff rate charged as percentage of the price. Applied rates: Duties that are actually charged on imports. These can be below the bound rates. Bound rates (tariff binding): • Commitment not to increase a rate of duty beyond an agreed level. • Once a rate of duty is bound, it may not be raised without compensating the affected parties. Harmonized System: • World Customs Organization’s system of code numbers for identifying products. The codes are standard up to six digits. Beyond that countries can introduce national distinctions for tariffs and many other purposes. • The Harmonized System consists of 21 sections covering 99 chapters. These INCLUDE: Section VI (Chapters 28-38, chemical products). MFN (most-favoured-nation) tariff: Normal non-discriminatory tariff charged on imports (excludes preferential tariffs under free trade agreements and other schemes or tariffs charged inside quotas) A.B.B. & ASSOCIATES

9. ARTICLE II OF GATT 1994 • Article II provides that the Schedule of Concessions would be an integral part of the GATT. • It obliges the WTO Members to adhere to the commitments offered in their Schedule of Concessions. • It restricts WTO Members to charge higher customs duties and other charges in excess of those set forth and provided for in the Schedules. • An important aspect of Article II:2 is that it allows Members to impose on imports from any other Member • a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III (National Treatment); • any anti-dumping or countervailing duty applied consistently with the provisions of Article VI; and • Fees or other charges commensurate with the cost of services rendered. A.B.B. & ASSOCIATES

10. GOODS SCHEDULES – SCHEDULES OF CONCESSIONS • WTO negotiations produce general rules that apply to all Members and specific commitments made by individual Member governments. • The specific commitments are listed in documents called “schedules of concessions”, which reflect specific tariff concessions and other commitments given by the members. • For trade in goods in general, these usually consist of maximum tariff levels which are often referred to as “bound tariffs” or “bindings” (GATT Article II). • All WTO Members have a schedule of concessions which is either annexed to the Marrakesh Protocol to the GATT 1994 or to a Protocol of Accession. • The content of the schedules change over time to take account of different modifications, such as GATT Article XXVIII negotiations or rectification procedures. • One of the achievements of the Uruguay Round of multilateral Trade talks was to increase the amount of trade under binding commitments. • In agriculture, 100% of products now have bound tariffs. The result of all this: a substantially higher degree of market security for traders and investors. A.B.B. & ASSOCIATES

11. STRUCTURE OF THE SCHEDULES OF CONCESSIONS • Part I : Most-favoured-nation or MFN concessions, maximum tariffs to goods from other WTO members. Part I is further divided into: • Section 1A — tariffs on agricultural products • Section 1B — tariff quotas on agricultural products • Section II — Other products • Part II: Preferential concessions (tariffs relating to trade arrangements listed in GATT Article I) • Part III: Concessions on non-tariff measures (NTMs) • Part IV: Specific commitments on domestic support and export subsidies on agricultural products A.B.B. & ASSOCIATES

12. DISCLOSURES UNDER THE SCHEDULES OF CONCESSIONS • Tariff item number • Description of the product • Rate of duty • Present concession established • Initial Negotiation Rights (or INR, such as main suppliers of product) • Concession first incorporated in a GATT Schedule • INR on earlier occasions • Other duties and charges • For agricultural products special safeguards may also be defined A.B.B. & ASSOCIATES

13. NAMA - NON-AGRICULTURAL MARKET ACCESS • Relates to trade negotiations on non-agricultural or industrial products.  • WTO Members discuss the terms or modalities for reducing or eliminating customs tariff and non tariff barriers on trade in industrial products. • Product coverage includes marine products, chemicals, rubber products, wood products, textiles and clothing, leather, ceramics, glassware, engineering products, electronics, automobiles, instruments, sports goods and toys. • Negotiations take place on the bound tariff which are the bindings taken during the negotiations at the WTO. • Bound tariffs are the upper limit of the applied customs tariffs. • There are ALSO tariffs on which no bindings have been taken - unbound tariff lines. • Based on the commitments taken by India, at the commencement of the Doha Round in 2001, India has more than 31% of it NAMA tariff lines as unbound. A.B.B. & ASSOCIATES

14. ELEMENTS OF NAMA NEGOTIATIONS The main elements of the NAMA negotiations are: • Coefficient for the tariff reduction formula • Flexibilities for protecting sensitive NAMA products • Sectoral initiatives for elimination of customs tariff in specific sectors • Non Tariff Barrier (NTB) textual proposals • In this presentation, only Sectoral Negotiations related to Tariff are discussed. • NAMA Negotiations related to NTBs are not part of this presentation A.B.B. & ASSOCIATES

15. TARIFF PEAKS AND TARIFF ESCALATION During the WTO Ministerial Meeting at Doha in November, 2001; Trade Ministers had agreed on the reduction or elimination of tariff peaks, high tariffs and tariff escalation on NAMA products. • Tariff peaks (also known as national peaks): • Average tariff levels in a country are low but on sensitive domestic products or on products that need specific tariff protection the rates are high. • In general tariff above three times the national average are deemed to be national peaks while internationally tariff rates above 12% are called international tariff peaks. • Tariff peaks are typically found in developed country tariff structures, in the US for example where the average tariff is less than 5%, on sensitive items like some textiles, footwear and ceramic items the tariff rates go above 50%. • In Japan also, where they use specific duties instead of ad valorem rates the equivalent percentage tariff rates on silk and some leather products go above 200% with an average tariff of less than 4%.  A.B.B. & ASSOCIATES

16. TARIFF PEAKS AND TARIFF ESCALATION • Tariff escalation is the difference between the customs tariffs on finished products, intermediates and raw materials. • Tariff escalation is the measure through which tariff on raw materials and basic products are kept low and as the processing level involved in the manufacture of a product increases the tariff rate also increases. (Step wise Increase) • The impact of tariff escalation is that raw materials crucial for further manufacture in a country are allowed without any tariff related hindrance but manufactured good imports are discouraged, thus protecting the manufacturing or ‘ wealth adding’ sector of the domestic industry. • Tariff escalation is most typically found in textiles and clothing sectors; leather and footwear; marine products; and transport equipment. A.B.B. & ASSOCIATES

17. EFFECTS OF TARIFF PROTECTION • The basic effect of an import tariff is the rise in domestic price in the country imposing the tariff. • The extent of price rise depends on the concerned country’s ability to impact international prices. • In countries that do not have an influence on international prices, the price rise due to tariffs will be equal to the tariff imposed. • Whereas, the rise in countries that can impact international prices, the price rise somewhat less than the hike in tariff because part of the tariff is reflected in a reduction in international prices. • A tariff-induced price rise creates an artificial producer’s surplus for the domestic producers whose production increases, as does their profits, while the demand falls which in turn reduces imports. • Tariff also replaces production by an efficient foreign manufacturer to an inefficient domestic one. • Additionally, import tariffs generate revenue/ income for the government of the importing country. • In totality therefore, tariff benefit the government and producers of the importing country in the form of tax revenues and producer surpluses. • This is done at the expense of the domestic consumers, who have to face higher prices and have to purchase inefficiently produced more expensive goods. A.B.B. & ASSOCIATES

18. INDIAN SCENARIO • India has some of the highest tariff rates in the world. • Tax Reforms Committee set up in 1986 under the chairmanship of Dr. Raja Chelliah gave its report in 1991. • These recommendations formed the basis for the tariff commitments undertaken by India in the Uruguay Round. • Since then other Expert Groups have also recommended simplified tariff structures with two or three levels at the most. • The Kelkar Committee, in its recommendations has suggested a three tier tariff structure: • 0% - for items like life-saving drugs, Government imports for defence, security and atomic energy, imports for Reserve Bank of India. • 10% - for raw materials, inputs and intermediate goods. • 20% - for final goods. • Higher duty rate upto 150% for specified agriculture produce and demerit goods. • The peak tariff rate have been brought down to 20% in 2004-05, the road map suggested by the Kelkar Committee has already been implemented. A.B.B. & ASSOCIATES

19. SECTORAL INITIATIVES FOR ELIMINATION OF CUSTOMS TARIFF IN SPECIFIC NAMA SECTORS - DOHA ROUND • Tariff negotiations can be held by two of more Members either on the sidelines of a general tariff conference or at any other time. • The procedures only require notification to other Members about the date and place of negotiation and circulation of the request lists exchanged between Contracting Parties proposing negotiations. • Other Members are given the right to join in these negotiations. • The procedures provide for selective, product-by-product negotiations. • Sectoral Initiatives are proposals for the elimination of customs tariffs in specific NAMA sectors by WTO Members who comprise a specific percentage of total trade (90%) in that sector (also known as the critical mass). • In the initiative, the participants agree to eliminate customs tariffs on imports from the sectoral participants and other WTO Members in that NAMA sector. A.B.B. & ASSOCIATES

20. SECTORAL INITIATIVES FOR ELIMINATION OF CUSTOMS TARIFF IN SPECIFIC NAMA SECTORS - DOHA ROUND • Developing countries can negotiate for • Better and more favourable (also known as special and differential) terms, • Removal of sensitive NAMA products from the sectoral initiative, • Longer period than developed countries for implementing the reduction commitments etc. • The December, 2005 Hong Kong Ministerial Declaration states that participation in sectoral initiatives should be on a non mandatory basis. • However, developed countries have highlighted the importance of large developing countries like India joining sectoral initiatives. A.B.B. & ASSOCIATES

21. LAST STATUS OF SECTORAL NEGOTIATION • In the NAMA text of 6 December, 2008,  14 sectoral proposals are annexed to the draft modalities. • This includes automotive and related parts; bicycle and related parts; chemicals; electronics/ electrical products; fish and fish products; forest products; gems and jewellery; hand tools; enhanced healthcare; industrial machinery; raw materials; sports equipment; textiles clothing and footwear; and toys. • In terms of the number of proponents, the sectoral initiatives on chemicals, industrial machinery and electrical/ electronics have the maximum support. • Specified group of countries are to agree to participate on a self-identified basis in negotiating the terms of sectoral tariff initiatives, with a view to making them viable. • Developed countries pressurising large developing countries like Brazil, China and India to participate in sectoral initiatives of their interest namely chemicals, industrial machinery, health care products (medical devices), electrical and electronics. A.B.B. & ASSOCIATES

22. FUNDAMENTALS OF TARIFF REDUCTION • In the WTO negotiations Members initiate their reduction offers from what is called a ‘base rate’. • Base rate is the rate from which fresh reduction commitments would be implement by Members. • Base rate usually is the bound rate for tariff lines already bound in earlier GATT negotiations or the applied rate as on the date of commencement of the sectoral negotiations, in case a tariff line has not yet been bound. • Another term used in the WTO negotiations is ‘nuisance tariff’. • Nuisance tariff are very low levels of tariff rates, generally below 5% ad valorem, which do not even recover the cost of administering and collecting the duty. • Nevertheless these nuisance duties are imposed for various reasons including ensuring capture of the imports in the trade data collection systems, as duty free imports are usually cleared without too many procedural requirements. A.B.B. & ASSOCIATES

23. PROPOSALS FOR TARIFF CUT & SWISS FORMULA At the Tokyo Round several proposals for non-linear formulae were received: • Japan proposed a linear reduction formula where 3.5 percent is added to 70% of the base rate, i.e. where the base rate is 20 percent, a reduction by 70 percent gives a rate of 6 percent. Adding 3.5 percent, the final rate comes to 9.5 percent. Higher the base rate, greater the reduction • Canada proposed that; • duties lower than 5 percent should be abolished, • those between 5 and 20 percent reduced by 50 or 60 percent, and • those higher than 20 percent brought down to 20 per cent; • United States suggested that; • there should be a linear reduction with an element of harmonization, subject to a maximum reduction of 60 percent. • The proposal was to cut tariffs by an amount equal to one and a half time the amount of the tariff plus 50 percent, up to maximum cut of 60 percent. • The formula proposed was y = 1.5 x + 50 where y was the rate of reduction and x the initial rate of duty; A.B.B. & ASSOCIATES

24. PROPOSALS FOR TARIFF CUT & SWISS FORMULA • EEC’s harmonization formula had four stages y = x (4 times) where y = rate of reduction and x = initial rate of duty. With a base rate of 20 percent, the result obtained is 10.28 percent, as explained below: • 1st stage (20% of 20% = 4%) 20% - 4% = 16% • 2nd stage ( 16% of 16% = 2.56%) 16% - 2.56% + 13.44% • 3rd stage (13.44% of 13.44% = 1.81%) 13.44% - 1.81% = 11.63% • 4th stage (11.63% of 11.63% = 1.35%) 11.63% - 1.35% = 10.28% …This formula reduced the higher tariffs by a much larger margin than the lower tariffs; • Switzerland suggested the following harmonization formula: Z = AX /(A + X) A = coefficient (14 or 16) X = initial rate of duty Z = resulting rate of duty • Application of this formula to different base rates brings about a progressively larger reduction for higher duties. • The Swiss formula was eventually accepted by most industrialized countries as a working hypothesis for reduction of tariff on industrial products. • The Untied States, Japan, Switzerland and Czechoslovakia made their offers on the basis of the coefficient of 14, whereas the European Community, the Nordic countries, Australia, Austria and Hungary used the coefficient of 16, which resulted in slightly lower reductions. • This formula in WTO parlance is commonly called the “Swiss Formula’. A.B.B. & ASSOCIATES

25. SWISS FORMULA & COEFFICIENT FOR TARIFF REDUCTION • Finally at the WTO Ministerial Meeting at Hong Kong during December, 2005, the Trade Ministers adopted a Swiss formula with coefficients that would reduce or eliminate tariff peaks, high tariffs and tariff escalation. • The simple Swiss formula with coefficients is : Tf = (Ti x A)/(Ti + A) where Tf  is the final bound customs tariff, Ti is the initial bound customs tariff and A is the Swiss coefficient.   • The Swiss formula is non linear formula; reduces tariff peaks, high tariffs and tariff escalation; and has the following effect in trade negotiations. • Since most developing countries have higher average bound customs tariff than developed countries; • The same Swiss coefficient would lead to higher percentage reductions for developing countries than developed countries. • All the final bound customs tariffs would be below the Swiss coefficient “A”. A.B.B. & ASSOCIATES

26. SWISS FORMULA & COEFFICIENT FOR TARIFF REDUCTION • The mandates also mention the need to take into account the special needs and interests of developing countries, including through less than full reciprocity (LTFR) in reduction commitments. • This is a clear indication that developing countries would not undertake the same reduction commitments as developed countries. • Therefore, the issue of two coefficients, a lower for developed countries and the higher for developing countries has been proposed in the negotiations. Current Status: • During the WTO Mini Ministerial Meeting from 21-29 July, 2008, Mr Pascal Lamy, Director General of the WTO had brought out an informal text on 25 July, 2008 proposing a coefficient of 8 for developed countries and a 3 tiered coefficient of 20,22 and 25 linked to flexibilities for developing countries. • These numbers are also reflected in the NAMA modalities of 6 December, 2009. A.B.B. & ASSOCIATES

27. FLEXIBILITIES FOR PROTECTING SENSITIVE NAMA PRODUCTS • Flexibilities under NAMA are intended for protecting the sensitive industrial products of the developing countries both from the Swiss formula cuts and from taking a binding commitment. • In the negotiations, one of the options for the developing countries is to take at least half the formula cuts on a specified percentage of tariff lines subject to a limitation of imports. • The other option is take no formula cuts or binding commitments on a specific percentage of tariff lines subject to a limitation on imports. • For India, flexibilities are important for protecting its infant and vulnerable industries. • These include the micro, small and medium enterprises (MSME); employment intensive sectors; industries employing socially and economically vulnerable sections such as women, traditional artisans and fishermen; industries in the rural, semi urban, economically disadvantaged and geographically inaccessible  regions of the country. • There are 4712 NAMA tariff lines of India under the HS classification. A.B.B. & ASSOCIATES

28. ANTI CONCENTRATION CLAUSE ON FLEXIBILITIES • The flexibilities  provision could be used by developing countries to concentrate their sensitive tariff lines under specific NAMA product groups. • It was  agreed in the Framework Agreement that flexibilities could not be used to exclude entire HS Chapters. • This clause is also known as the anti-concentration clause since the clause prevents a developing country from concentrating its flexibilities under a specific HS Chapter. • The anti concentration clause for flexibilities mandated that a minimum of either 20% NAMA lines or 9% of the imports within an HS Chapter must take the full formula cuts. A.B.B. & ASSOCIATES

29. ANTI CONCENTRATION CLAUSE ON FLEXIBILITIES • During the WTO Mini Ministerial Meeting from 21-29 July, 2008, Mr Pascal Lamy, Director General of the WTO had brought out an informal text on 25 July, 2008 proposing a 3 tiered coefficient linked to flexibilities for developing countries as mentioned in the table: • Subsequently, in the 4th revision of the draft modalities on 6 December, 2008 which reflected the Swiss coefficients;  flexibilities and related anti-concentration/ de – minimis clause as proposed by DG in the July, 2008 Mini Ministerial. • Therefore, for the tariff lines bound at 40%, the final bound rates would be in the range of 13.3% to 14.2% depending on whether the Swiss coefficient was 20 or 22 respectively. A.B.B. & ASSOCIATES

30. PRODUCT BASKET APPROACH RELATED TO CHEMICAL SECTOR • Product Basket Approach (PBA) is a tool to construct sectorals with broad product coverages reflecting sensitive products. • It allows different form of tariff treatment within a specific sector to overcome difficulties faced by members doing tariff elimination. • S&D Treatment to developing countries is proctected and variety of options are given to them. • NAMA Flexibilities are allowed. • Chemical Sector is covered under PBA. • EU has proposed a combination of 0/0 and 0/X WHERE; • Developed countries to move to 0 across the board. • Developing countries to follow 0/0 for products already attracting zero duty and X duty cut (as per SWISS Formula) for other products. A.B.B. & ASSOCIATES

31. PRODUCT BASKET APPROACH RELATED TO CHEMICAL SECTOR • For chemicals, tariff reductions by developing countries should lead at least to the existing CTHA ( Chemicals Tariff Harmonisation Agreement) Level. • Developing countries already applying CTHA tariffs have to reduce tariff up to zero level. • Developed countries to eliminate tariffs on the identified products in six equal rate reductions. • Developing countries to eliminate tariffs on the identified products in eleven equal rate reductions. • Developing countries can bind up to Four percent of chemical tariff lines at four percent, provided they do not exceed four percent of the total value of chemical imports by the said countries. • Otherwise, developing countries can extend implementation period by additional five annual rate reductions on up to five percent of national chemical tariff lines. A.B.B. & ASSOCIATES

32. CTHA (CHEMICALS TARIFF HARMONISATION AGREEMENT) • The agreement ( Initiated by some WTO members only) came into force in 1995 AND is now being applied by 50 WTO members including EU ( 25 members). • The members include Armenia, Australia (de facto), Bulgaria, Canada, Chile (de facto), Ecuador, the European Union (25 members), Hong Kong China, Iceland, Japan, Jordan, Kirgizstan, Republic of Korea, Mongolia, New Zealand (de facto), Norway, Oman, Panama, People's Republic of China, Qatar, Singapore, Switzerland, Taiwan, Turkey (de facto), the United Arab Emirates and the United States of America. • It provides for the reduction of chemicals tariffs to 0%, 5.5% or 6.5% of the Harmonised System Chapters 28 to 39 and includes inorganic and organic chemicals, fertilizers and plant protection chemicals, soaps and cosmetics, other chemicals and plastics. A.B.B. & ASSOCIATES

33. CTHA (CHEMICALS TARIFF HARMONISATION AGREEMENT) • Tariffs on chemicals in some countries not participating in the CTHA remain as high as 60%. • A variety of flexibilities could be employed to account for the needs of developing countries. Possible options might include the following: • Longer implementation periods for all chemical products • Longer implementation periods in certain products/sub-sectors • Zero for “x” • Participation in certain sub-sectors • Implementation periods used in the CTHA are provided for Members’ reference: tariffs greater than 25% received 15 year staging; tariffs greater than 10 percent and less than 25 percent received 10 year staging; and tariffs less than 10 percent received 5 year staging. A.B.B. & ASSOCIATES

34. WHAT GOVERNMENT WANTS FROM CHEMICAL INDUSTRIES • IDENTIFICATION OF PRODUCTS FOR TARIFF REDUCTION • Domestic production is inadequate to meet domestic demand. • No significant domestic industry exists. • Domestic industries have not made significant investments for expanding capacity in recent years. • The domestic production is concentrated to one or two industries only signifying no competition exists in the domestic market. • The product concerned is an important raw material for down stream industry. A.B.B. & ASSOCIATES

35. WHAT GOVERNMENT WANTS FROM CHEMICAL INDUSTRIES • IDENTIFICATION OF PRODUCTS FOR PROTECTION FROM TARIFF CUT • Domestic capacity is adequate to meet domestic demand. • Significant spare capacity exists for concerned products. • Greenfield investments made in the recent years in India. • The sector provides more than 5 lakh employment. • Output from MSMEs constitute more than 20% of the total domestic output. • Indian industries are not competitive. • Increasing trend in domestic production of the product over the pass five years. A.B.B. & ASSOCIATES

36. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

37. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

38. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

39. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

40. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

41. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

42. SECTORAL NEGOTIATIONS: CHLOR ALKALI CHEMICAL PRODUCTS A.B.B. & ASSOCIATES

43. THANK YOU A.B.B. & ASSOCIATES