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PRACTICAL EXERCISES IN NAMA In general, the goods exported from one country to another have to be allowed unrestrained entry into the latter. However, a country may apply tariff, i.e., customs duty, on a product at the point of import. Tariff has three functions: (i) it provides revenue to the government, (ii) it protects the domestic product from competition with the imported product as the latter becomes more costly because of the tariff and (iii) it is an instrument in development policy for discouraging non-priority import like, luxury goods, while encouraging priority imports like capital goods and industrial intermediates. As the imported product becomes more costly with the levy of tariff than what would be the situation without it, the tariff has a restraining effect on the import. When a country undertakes the obligation in the WTO to "bind" tariff on a product , it cannot raise the tariff on that product beyond the "bound" level. At its own discretion, it may apply tariff lower than the bound level. If a country has not "bound" the tariff on a particular product, it is.free to put any level of tariff on it The bound levels for a country are included in that country's tariff schedule which is kept in the WTO as record. A key challenge for trade negotiators and trade policy makers in formulating a country 's negotiating strategy in multilateral and bilateral trade negotiations lies in identifying and reconciling diverse range of interests of stakeholders. To illustrate, lowering the customs duty on raw materials is likely to be supported by industries downstream that would- benefit from using cheaper raw materials. However, domestic producers of raw materials would oppose reducing the tariff on these products to avoid losing market share or experiencing price suppression or depression on account of cheaper imports. Thus, the same measure lowering the customs tariff in this case -would affect different segp' nts of stakeholders differently. This is likely to result in different groups of stakeholders seeking to influence trade policy in different directions, often conflicting with each other. While the above example of a divergent impact of a reduction m customs tariff on stakeholders can be viewed as being simplistic, there is hardly any subject in international trade negotiations that does not involve a clash of interests in the domestic economy. Before a particul ar trade policy option can be decided, this issue requires a comprehensive examination so that the various interests involved are properly weighed and a balanced position can be worked out in the best interest of the country as a whole . There may also be a need to weight the short- and long-term interests of the domestic economy. Such a detailed examination of trade issues must be based on economic and social considerations, with a view to the balancing various interests and analyzing linkages among different aspects of the economy as well as to overall macroeconomic factors. It calls for serious research and wide consultations with different government bodies, interest groups, and economic operators. The practical exercises seek to illustrate how trade policymakers and trade negotiators need to balance and resolve various types of potentially conflicting interests in the context of NAMA negotiations at the WTO - interest of producers and consumer interest; short-term 1

and long-term interest; big producers and SMEs; efficient industry and inefficient industry; income generated by the industry and employment provided etc. As there is generally a numerical ceiling on the number of products that can be shielded from applicable tariff cuts, trade policymakers and trade negotiators also need to prioritise products that need tariff protection. In the practical exercises unless otherwise stated, wherever a domestic industry exists, the existing level of tariff protection through the applied customs duty is just adequate to neutralise the cost disadvantage faced by the domestic product s compared to imported produ cts.

Group A Economy of country A is predominantly agricultural. Main crops grown include rice, wheat, cotton and sugarcane. In addition, the country is also rich in natural resources, which include coal, iron ore and bauxite. It has a thriving mining industry. It is blessed with beaches with white sand, which attract 1 mn. foreign tourists annually. Most of the foreign tourists arrive by airlines and an insignificant minority by road. Sectoral distribution of employment is shown in table 1. Table 1: Sectoral distribution of employment Crop/ Sector Rice Wheat Cotton Sugarcane Coal Iron ore Bauxite Others % of employment 25 25 10 5 5 5 5 20

Tax revenue is an important source of total government revenue. Revenue from customs duty accounts for almost 20% of total government revenue. In its official document on national economic policy, the government has clearly articulated the need for attracting foreign investments to accelerate industrialisation in the country. However, these efforts did not bear fruits in the past, mainly on account of unstable policy regime. The government has recently assured potential investors that the policy regime would not change significantly during the next five years. It has also promised liberal incentives for establishing manufacturing facilities for cotton textiles. No records exist from which it can be discerned why the government has kept high customs duty on some of the products. Keeping the above facts in mind, country A has not engaged actively in NAMA negotiations. Not only is the government constrained by inadequate resources, some of its economic advisors are of the view that reducing customs duty on NAMA products would benefit consumers. These officials, therefore, have adopted a position that NAMA reductions would be in the overall interest of the country. They have also argued that reducing bound rates would not adversely affect the country as it does not have any industry that needs tariff protection . As a key policy official in the government, you have to advise your permanent secretary on the need, if any, to change the existing approach to NAMA negotiations. As a part of this exercise, you have to suggest which of the products shown in table 2 should be excluded from NAMA cuts. You are also required to give economic justification for your 3

recommendations. Which are the 6 products/ product groups of high priority for excluding them from NAMA cuts? Table 2: Impact of NAMA cuts
Descript ion of product I product group Marine products Iron ore Coal Bauxite Crude petroleum Av iation fuel Paper and paper board Cotton yarn Synthetic yarn Cotton fabric Synthetic fabric Cotton shirts Cotton skirts Shirts synthet ic Leather footw ea r Consumer electronics Textile machinery Optical instruments Auto components Automobiles Existing bound rate % Existing customs duty % New bound rate after Swiss cuts % Recommendation with reasons

S No.

1 2 3 4

30

20 40 7S 60

1 2.69 lS.28 1 8.03 1 7.01 6.88 1 1.70 8.92 8.92 8.92 1 0.48 6.88 1 1.70 1 1.70 1 1.70 8.92 10.48 10.48 1 2.69 1 5.28 1 7.01

so
1 00 7S 10 25 1 5 1 5 1 5 20 10 25 25 25 1 5 20 20 30

s
6 7 8 9 10
11

s
25 lS 1 5 1 5 20 1 0 25 25 25 1 5 1 5 1 5 20 35 60

12

13 1 4
1 5 16 1 7 1 8 1 9 20

so
75

Group B Historically, the economy of country B has been mainly dependent on agriculture and mining. However, over the past decade the contribution of manufactures to the national GDP has increased from 8 % to 17%. New industries have been established in the marine sector for processed fish products. However, processing capacity in excess of the domestic demand has been created and the domestic producers are exploring export markets for their products. Export prospects appear bright, particularly on account of the cost advantages. Domestic catch of fish will be inadequate to meet the export demand. Traditional textile mills have upgraded their technology and have gradually become the engine of growth in some of the regions of the country. However, there appears to be a conflict of interest between producers of yam and fabric producers on one hand, and apparel producers on the other. Both have demanded tariff protection, although the fabric produced is of good quality and at competitive cost. However, high customs duty for protecting the yam and fabric industry will hurt the apparel producers as they import 10% of their total requirement of fabric. Realising the locational advantage associated with iron ore and coal mines, foreign investors have articulated their desire to establish steel plants in the country. At present no steel plants exist in the country. Periodically, the country has been facing balance of payment crisis. During the pa st two years, there were occasions when the foreign exchange reserves were not adequate to cover imports for even two weeks. Thus, an important objective of the government is to conserve foreign exchange. Controlling imports through customs duty is one policy instrument being used by the government for this purpose. Sectoral distribution of employment is shown in table 1. Table 1: Sectoral distribution of employment Crop/ Sector Rice Wheat Cotton Fishermen Processed marine products Coal Iron ore Yam and fabric Apparel Others % of employment

25 15 5 10 5 5 5 5 15 10

All sectors of the domestic industry have lobbied actively for according tariff protection to their products. As a key policy official in the government, you have to advise your permanent secretary on the approach to NAMA negotiations . As a part of this exercise, you have to
5

suggest which of the products shown in table 2 should be excluded from NAMA cuts. You are also required to give economic justification for your recommendation s. Which are the 6 products/ product groups of high priority for excluding them from NAMA cuts? Table 2: Impact of NAMA cuts
S No. Desc Existing bound rate % Existing customs duty % New bound rate after Swiss cuts % Recommendation with reasons

1 Marine 2
products Iron ore

30 50 100 75 10 1 5 1 5 20 1 0 25 25 25 20 20 75 50 30 1 8Raw hides and

20 40 75 60 5 1 5 1 5 20 1 0 25 25 25 1 5 1 5 60 25 1 5 10 25 15 1 5

1 2.69 1 5.28 1 8.03 1 7.01 6.88 8.92 8.92 1 0.48 6.88 11.70 11.70 11.70 1 0.48 10.48 1 7.01 1 5.28 1 2.69 10 6.88 11.70 1 1.70
l

3 Coal 4 Bauxite 5 Crude 6 7 8 9 10 11 12

13 petroleum Cotton yarn Synthetic yarn Cotton fabric Synthetic fabric Cotton shirts Cotton skirts Shirts synthetic

Consumer electronics 1 4 Textile machinery 1 5 Automobil es

1 6 Chemica l 1 7
products Plastics skin

1 9 Capital goods 2 0 Steel products 25

l_

Group C
In Country C the contribution of agriculture sector to the economy is around 25%. However, the agriculture sector provide s employment to 55% of the work-force. Over the last two decades, industrial production has considerably diversified. The country embarked on the path of industrialisation by encouraging steel and textiles industries. Subsequently, petrochemicals became another important industrial sector. This sector is capital intensive. The production of petro-chemicals is controlled by one business group. In the absence of downstream industry, most of the petrochemicals was exported earlier. However, over the past one decade a thriving industry of plastic products, using petrochemical s as their inputs, has emerged. Most of the producers of plastic products belong to small and medium enterprises. A decade ago, the textiles and clothing industry was a thriving sector. Over the years, its contribution to the national GDP has progressively declined. However, it remains the main source of employment in the industrial sector. While the yarn and fabric segment is declining in terms of cost competitiveness, the apparel sector remains internationally cost competitive. A robust textile machinery industry has also emerged in the past 5 years. The country has emerged as an important hub for production of niche footwear and fashion leather products, most of which is exported. The exporters import almost of 90% of their requirement of raw hides and skin. It may be noted that domestic producers of raw hides and skin belong to socially disadvanta ged groups, with extremely limited prospect of alternate employment. Although the paper and paper board industry does not have a significant presence, there is considerable potential for developing this sector. In fact, one of the main players in the agroprocessing industry has invested in a plant for making paper and paper board. This ic:: likely to give a fillip to establishment of packaging industry. At present, the packaging industry relies on imported paper and paper board for meeting its needs. The paper and paper board industry, when established, is likely to have a higher employment multiplier than the packaging industry. During the initial years of industrialisation , the steel industry relied on domestic iron and coal for its inputs. However, metallurgical grade coal has rapidly depleted and the steel industry is forced to import high grade coal. Similarly, reliance on imported haematite ore with high-iron content has steadily increased over the years. Sectoral distribution of employment is shown in table 1. Table 1: Sectoral distribution of employment Crop/ Sector Agriculture Petroleum and Petrochemicals Plastics Mining % of employment 55 1
4

Yam and fabric 5 Apparel 10 Raw hides and skin 1 Leather products and footwear 3 Textile machinery and other 1 capital goods Steel 3 Others 12 All sectors of the domestic industry have lobbied actively for according tariff protection to their products. As a key policy official in the government, you have to advise your permanent secretary on the approach to NAMA negotiations. As a part of this exercise, you have to suggest which of the products shown in table 2 should be excluded from NAMA cuts. You are also required to give economic justification for your recommendations . Which are the 6 products/ product groups of high priority for excluding them from NAMA cuts? Table 2: Impact of NAMA cuts
S No. Desc Existing bound rate % Existing customs duty % New bound rate after Swiss cuts % Recommendation with reasons

1 Raw hides and 2 3 4 5 6 7

skin Iron ore Coal Crude petroleum Paper and paper board Cotton yarn Synthetic yarn

10 50 100 10 1 5 1 5 1 5 20 10 25 25 25 1 5 20 20

10 40 75 5 1 5 1 5 1 5 20 10 25 25 25 1 5 1 5 1 5 35 60 25 1 5 1 5

6.88 1 5.28 1 8.03 6.88 8.92 8.92 8.92 10.48 6.88 11.70 11.70 11.70 8.92 10.48 10.48 1 5.28 1 7.01 1 5.28 1 2.69 1 1.70

8 Cotton fabric 9 Synthetic fabric 10

Cotton shirts

1 1 Cotton skirts 12 Shirts synthetic

13 Leather footwear Consumer electronics Textile machinery Auto components Automobiles Chem ica l products Plastics Steel products

1 4 1 5 1 6 1 7 1 8 1 9 20

so
75 50 30 25

r;;..s -

Group D About four decades ago, country D was predominantly an agricultural economy. However, the contribution of agriculture to GDP has declined significantly and is now around 23 percent. The agriculture sector supports employment of 50 percent of the workforce . Over the past 35 years the country has developed a diversified industrial base, producing a wide range of products such as chemicals, paper and paper board, pharmaceuticals, textile and clothing, consumer goods, steel, automobiles, auto components and capital goods. Textile and clothing industry was responsible for initiating industrialisation in the country. However, the apparel sector is facing stiff import competition from low cost producers. It is apprehended that if tariffs are lowered, large segments of this industry will either be wiped out or the industry will have to undergo restructuring and modernisation. The latter is likely to result in severe employment losses. The country has emerged as an important producer of low cost generic medicines. This has helped implement the ambitious national health programme of the government, which mandates it to provide medicines at affordable price to socially and economically deprived citizens. Some patented drugs are also imported for meeting specific health needs. The pharmaceutical industry has sought lowering of customs duty on equipment used in manufacturing medicines. About a decade back, the government announced its intention to encourage capital goods industry in the country. Some incentives were given to this industry. However, the capital goods industry has failed to cope with import competition. This is mainly on account of exemptions on customs duty given by the government for imports of capital goods used in certain identified sectors such as textile and clothing and engineering goods. Steel industry has played a crucial role in industrialisation of the country. About four decades ago, the government entered into technology collaboration with Germany and Russia. This resulted in steel plants which used state of art technology, existing during that time. This technology was labour intensive. Over the years, the technology became obsolete and the steel products lost their cost competitiveness. However over the past one decade the steel plants have been modernised and cutting edge technology adopted. This has resulted in reducing the cost of production of the steel produced. However, it has also resulted in reducing the employment levels in the steel plants. Using the declining employment as an evidence, the steel industry has been actively lobbying with the government for seeking tariff protection. In addition to big steel plants, almost 50% of the steel is being produced by rerollers who use obsolete and polluting technology to produce steel. However, in certain provinces of the country, steel re-rolling is an important source of employment. Re-rollers would not be able to face import competition as the steel produced by them is generally costly and used by very few down-stream industries.

The demand of steel industry for tariff protection has been vigorously opposed by the automobile sector, which is a major user of steel products. The auto sector has alleged that the domestic steel producers have formed a cartel and are making abnormal profits. Hence, it has argued that lower customs duty on cold-rolled steel will reduce the cost of automobiles produced in the country. This would enable it to enter export markets in the developed countries. The automobile industry has further argued that expansion of this industry would also result in the growth of the domestic auto component suppliers. It may be noted that most of the producers of auto components belong to small and medium enterprises. The country joined WTO's Information Technology Agreement in 1998. Consequently, custom duty on about 500 IT products is bound at zero. Most of the producers of IT parts and components could not face import competition and were edged out of the market The country has established a vibrant manufacturing base for consumer electronic products. There is a demand in NAMA negotiations to bind customs duty on consumer electronic products at zero. Sectoral distribution of employment is shown in table 1. Table 1: Sectoral distribution of employment Crop/ Sector Agriculture Mining Yam and fabric Apparel Pharmaceuticals Capital goods Steel Automobiles Auto components Consumer electronics Others (mainly Services)
% of employment

50 5 5 14 5 1 1 1 2 1 15

All sectors of the domestic industry have lobbied actively for according tariff protection to their products. As a key policy official in the government, you have to advise your permanent secretary on the approach to NAMA negotiations. As a part of this exercise, you have to suggest which of the products shown in table 2 should be excluded from NAMA cuts. You are also required to give economic ju stification for your recommendations. Which are the 6 products/ product groups of high priority for excluding them from NAMA cuts?

1 0

Table 2: Impact of NAMA cuts

Desc Existing bound rate % Existing customs duty % New bound rate after Swiss cuts % Recommendation with reasons

S No.

1 Iron ore 2 Coal 3 4

Bauxite Crude petroleum Paper and paper board Cotton yarn Cotton fabric Cotton skirts

so
100 75 10 lS lS lS 25 2S lS 20 20

40 75 60

lS.28 18.03 1 7.01 6.88 8.92 8.92 8.92 11.70 1 1.70 8.92 10.48 10.48 lS.28 1 7.01 1 5.28 11.70 1 1.70 1 4.78 lS.28 1 1 .70

s
6 7 9

s
1 5 1 5 lS 2S 25 1 5 lS lS 3S 60 2S lS 1 5 20 20 2S

8 Cotton shirts 10 Leather footwear 11 Consumer electronics

Textile machinery 13 Auto components

1 2

so
7S

1 4 lS 1 6 1 7

Automobi les Chemical products Capital goods Steel products

so
2S 2S 4S 50 2S

1 8 A luminum sheets 1 9 Pharmaceuticals 20

Machinery for making medicines

1 1