Journal Issue

The MTN and tariff reduction: An analysis and updating on the Tokyo Round of Multilateral Trade Negotiations being held in Geneva

International Monetary Fund. External Relations Dept.
Published Date:
December 1975
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S. J. Anjaria

Over two years ago, in September 1973, ministers of over 90 governments meeting in Tokyo launched the current round (the Tokyo Round) of multilateral trade negotiations (MTN) whose principal objective, according to the Tokyo Declaration adopted by the ministerial meeting, is “the expansion and ever-greater liberalization of world trade.” The substantive phase of the negotiations commenced early in 1975 following the passage of enabling legislation in the United States. The discussions thus far have been concerned primarily with establishing a sound procedural and organizational basis for the complex bargaining that will take place during 1976 and possibly beyond. An assessment of the progress achieved on the issues under negotiation would be premature at this stage. However, the objectives of the negotiations and the issues under discussion can be outlined.

The objectives

The Tokyo Round is the seventh in a series of trade and tariff negotiations conducted under the auspices of the General Agreement on Tariffs and Trade (GATT) since its inception in 1948. Participation in the negotiations is not limited to GATT contracting parties; of the 89 countries that were members of the Trade Negotiations Committee in mid-1975, 20 were not contracting parties. However, participating countries have agreed to negotiate within the framework of the GATT. Thus the Tokyo Declaration stipulates that the negotiations will be conducted “on the basis of the principles of mutual advantage, mutual commitment, and overall reciprocity, while observing the most-favored-nation clause, and consistently with the provisions of the General Agreement relating to such negotiations.”

Within this broad framework, the Tokyo Declaration lists six areas of negotiation in the Tokyo Round: tariff reduction or elimination; liberalization of non-tariff barriers to trade; examination of the multilateral safeguard system and particularly GATT Article XIX (which authorizes the Contracting Parties to take emergency import-restricting measures if it can be shown that there is actual or threatened injury to domestic industries); special and priority treatment of tropical products; liberalization of international trade in the agricultural sector; and coordinated reduction or elimination of all trade barriers in certain sectors as a complementary technique. The feasibility of the “sector approach” is still under preliminary discussion.

the Tokyo Round provides for “the MTN to be conducted on the basis of overall reciprocity”

Organization of the negotiations

Six groups have been established under the aegis of the Trade Negotiations Committee to conduct negotiations in each of these areas. Two of these groups, namely, the group on nontariff measures and the group on agriculture, have in turn established subgroups to conduct discussions on particular aspects of the general negotiating mandate of each of these groups. The Trade Negotiations Committee, under the chairmanship of Mr. Olivier Long, Director-General of the GATT, is charged with overseeing the work of the individual groups and their subsidiary bodies, approving negotiating procedures, reviewing the progress of the negotiations, and creating additional negotiating groups as the need arises.

Apart from the formal group meetings, important discussions among interested delegations take place frequently on a private basis. To cover the negotiations some of the larger nations maintain sizable special MTN delegations in Geneva while others rely on personnel drawn from their regular UN missions in Geneva. In addition, countries frequently call upon experts from their own capitals to discuss and negotiate particularly complex, technical issues.

The concept of reciprocity

The concept of reciprocity, or mutual advantage, has been central to all trade negotiations in the postwar period and, indeed, is the fundamental basis for establishing the balance of rights and obligations of contracting parties under the General Agreement. By adhering to the GATT a country undertakes certain commitments of which the most important is the “binding” or “consolidation” of its tariff in a schedule which forms part of the General Agreement itself. While GATT members are not authorized to increase their tariffs on GATT-bound items above the multilaterally agreed levels except under specified conditions, Article XXVIII (bis) of the Agreement authorizes the Contracting Parties to sponsor from time to time negotiations aimed at reducing tariffs “on a reciprocal and mutually advantageous basis.” Tariff bindings of each contracting party when it joins the GATT and any tariff reductions negotiated subsequently and bound under GATT rules are termed “concessions.”

At the heart of the concept of reciprocity is the notion that unilateral tariff reductions by a single country would have a negative net impact on its trade balance, while multilateral and simultaneous tariff reductions could, in principle at least, be such as not to result in significant net trade effects, whether negative or positive, on individual countries. Thus in GATT negotiations the concept of “reciprocal and mutually advantageous” tariff reductions ensures that the concessions of each participant are at least roughly equal, so that no country secures an apparent gain at the expense of its trading partners by giving up, overall, smaller concessions than it in turn receives from them.

In the past, the notion of reciprocity has frequently been applied in practice by valuing a concession in monetary terms as the volume of imports of a particular product in a base period multiplied by the change in the tariff rate for that product. Thus, if country A imports 10 million units of product X (priced at $1 a unit in a base period) from country B, the value of the concession resulting from a cut in its tariff from 10 per cent ad valorem to 5 per cent (a 50 per cent reduction) would be $0.05 a unit, or $0.50 million, so that country A would be justified in seeking a concession of $0.50 million from country B. Since most past trade negotiations—except the Kennedy Round negotiations of 1964-67—were concerned almost entirely with the reduction of industrial tariffs, which were negotiated item by item, this method of assessing reciprocity was found generally acceptable and appeared to work well.

Possible problems

The assessment of reciprocity of concessions becomes more difficult, however, when reductions in tariffs are based on formulas applied across the entire tariff schedule rather than on the traditional item-by-item basis and the scope of the negotiations is broadened to encompass both tariff and nontariff barriers. In the current discussions in the Tokyo Round, quantitative restrictions and other non-tariff barriers are generally acknowledged to be of greater importance in the agricultural sector than in the industrial sector. Hence it is doubtful if countries exporting primarily agricultural products would consider a multilaterally agreed solution as fulfilling the criterion of reciprocity if it consisted of tariff reductions on agricultural and industrial products but did not incorporate some element of assurance that the effects of the tariff cuts on agricultural products would not be nullified by increased or more stringently administered nontariff barriers. In this situation, a “fair” or “mutually reciprocal” bargain might include both tariff reductions as well as a commitment—in the form of a code of conduct or agreed principles—not to impose or intensify certain types of import restrictions. Since the value of any concession involving such commitments cannot be readily measured, the question of whether reciprocity or balance has been achieved from the viewpoint of each participant becomes a matter of subjective assessment. Similarly, there are no agreed methods of assessing what constitutes a fair balance of rights and obligations in the field of safeguards.

Recognizing these difficulties, the Tokyo ministerial meeting provided for the MTN to be conducted on the basis of overall reciprocity. Thus the outcome in each area of the negotiations will be assessed in relation to the outcome in other areas.

Harmonization vs. linear reduction

Prior to 1964, reductions in tariffs were achieved in simultaneous bilateral negotiations on an item-by-item basis between the principal importing and exporting countries concerned. The benefits of concessions agreed in this way were then extended to all GATT countries through the application of the most-favored-nation clause. In the Kennedy Round negotiations beginning in 1964, the participating countries felt that the item-by-item method was too cumbersome and was not likely to result in tariff reductions of sufficient depth and scope, especially since further tariff cuts would for the most part entail reductions below levels which were already relatively low in relation to historical standards as a result of previous tariff negotiations. Participating countries thus sought agreement on a general formula which would apply across the board to a wide range of tariffs. After much discussion of alternative approaches, the industrialized countries participating in the Kennedy Round agreed to aim for a 50 per cent linear reduction (an equal percentage reduction on all items under negotiation) to be applied to existing tariffs on industrial products. However, because countries introduced “exceptions lists” the final result was a somewhat smaller average reduction.

“there is a general recognition that the scope of exceptions (lists) should be limited”

A general tariff reduction

Negotiators at the Tokyo Round have also been concerned with agreement on a general tariff reduction formula which would result in a significant lowering of tariffs. The United States and the countries of the European Economic Community (EEC) have proposed specific formulas based, as in the Kennedy Round, on the linear reduction and the harmonization techniques, respectively.

The United States has stressed that a linear tariff-cutting formula would be simple, flexible, multilaterally reciprocal, and result in substantial across-the-board reductions. The EEC and other countries advocating the harmonization of tariffs consider that the central problem in this field is the disparities in the tariff structures of the major trading nations. These countries have emphasized that, since the national tariffs of countries such as the United States have a large proportion of relatively high rates, linear reductions would enable these countries to protect their domestic industries even at the reduced rates, while their own industries with relatively low initial tariffs would lose virtually all protection. In their view, tariff harmonization, involving reduction of higher tariff rates by a larger proportion than that of lower rates, would reduce or eliminate the existing tariff disparities among countries.

Although there has been some preliminary discussion of the alternative formulas proposed in the Trade Negotiations Committee groups on tariff’s, agreement on the negotiating technique is linked to the discussion of the procedures by which trade barriers in agriculture will be negotiated. The U. S. negotiators have argued that any tariff-cutting formula should be applied as generally as possible and should include, in particular, tariff cuts on agricultural products which have been practically excluded from the scope of previous negotiations. The harmonization approach proposed by the EEC would apply to industrial products only, with the agricultural sector being considered, in the light of its special characteristics, in the separate negotiating group on agriculture. In the U. S. view substantial liberalization in the agricultural trade would be more likely if industrial and agricultural tariff reductions were combined in a single package.

The status of bindings

As mentioned earlier, a GATT member’s bound or consolidated tariffs are incorporated in one of the schedules to the General Agreement and may be increased only under conditions specified in it. In practice there are several major disparities in the proportion of bound tariffs: for example, while the tariff schedules in Switzerland and the United States are almost entirely GATT-bound, the proportion of tariff consolidation in the EEC countries, Japan, and the Nordic countries is roughly four fifths, and substantially lower in Australia and New Zealand. As might be expected, the countries with tariffs which are mostly GATT-bound have asked others to agree to raise their proportion of bindings. The argument underlying this position is that the existing disparities result in an unfair balance of obligations for the countries with a high number of bindings, since the latter have virtually no possibility of increasing tariffs without resorting to normal GATT procedures for renegotiation or compensation, while other countries have no similar obligation.

A related problem is that often the average tariff level is higher in countries whose tariffs are mostly unbound than in many other countries which restrict imports through nontariff barriers. Some of these countries are also principal exporters of primary products and consequently have a vital interest in seeking more secure access to the markets of the highly industrialized countries. Since participation in a general tariff-cutting formula would imply for these countries larger absolute tariff reductions than for other countries, it is very unlikely that they would both reduce their tariffs in accordance with a general formula and increase the number of bound tariffs significantly. They have therefore made their participation in any tariff-cutting exercise based on a formula of general application conditional upon the willingness of their major trading partners to undertake commitments in respect of nontariff barriers, on the grounds that they should not be penalized for relying entirely or mostly on the tariff as an instrument of commercial policy. They have also suggested that in the negotiations a new tariff binding, not necessarily at a lower level, should be considered as a concession equivalent to a tariff reduction itself. How this equivalence is to be assessed in practice will be one of the important issues in subsequent phases of the negotiations.

Scope of exceptions

In the Kennedy Round negotiations, individual participating countries were free to determine whether the agreed SO per cent tariff reduction would jeopardize particular sectors of the domestic industry and, if so, to include related tariff items in a list of exceptions. The scope and content of these exceptions lists were thus not formally limited, except for the understanding that exceptions would be kept to a minimum.

In the current negotiations there is a general recognition that the scope of exceptions should be limited. Several participating countries, including the major primary producing countries and the developing countries, have expressed concern about holding the length of exceptions lists to the bare minimum. A suggestion has also been made that agreed guidelines and specific multilateral procedures for dealing with exceptions should be devised to ensure that the exceptions lists do not exclude from the general formula items of export interest to countries participating in the linear reductions.

The discussion of exceptions has thus far been limited to procedural aspects. In particular, some countries have argued that it would not be helpful to discuss exceptions, or even possible multilateral procedures for assessing their justification, until the central elements of the general tariff-cutting formulas have been discussed and agreed. Some developed countries which depend heavily on exports of primary products and did not participate in the linear reductions on industrial tariffs in the Kennedy Round have, however, indicated that they would be reluctant to commit themselves to making any offers of tariff cuts on the basis of a general formula without obtaining assurances from other participants that exceptions would be considered an integral element of any tariff-negotiating plan.

“undoubtedly the most complex and comprehensive trade-negotiating effort attempted to date”

The developing countries’ interests

Ever since the conclusion of the Kennedy Round, the developing countries have expressed a strong interest in the liberalization of trade barriers affecting their exports. In the tariff field, their attention has focused primarily on the Generalized System of Preferences under which most developed countries provide tariff preferences in the form of reduced import duties on certain products when exported by developing countries. However, the individual schemes of countries granting preferences are by no means uniform as to coverage or impact.

The margin of preference that results from these schemes is defined, for a given product, as the difference between the most-favored-nation tariff rate applied to imports of that item from countries other than the beneficiary countries, and the (lower) preferential duty under the Generalized System of Preferences. The preference margins would be automatically reduced if in the Tokyo Round negotiations tariffs were reduced on a most-favored-nation basis on items presently covered by the system of preferences. The developing countries have therefore suggested that the erosive impact on preferences of any general tariff-cutting formula should be examined and, where erosion cannot be avoided, that compensation should be granted, for example, by reducing the preference rates of duty to zero and removing any nontariff barriers on products included in the preference system.

The developing countries have also requested major improvements in the Generalized System of Preferences, including the binding of these preferential margins or tariffs under the General Agreement. They have argued that the improvements would provide greater stability of market access for the developing countries as well as a firmer legal basis for the preferential arrangements. A suggestion has also been advanced that if the binding of the system of tariff preferences proved difficult (for example, due to internal legal procedures in the preference-giving countries), the negotiations should aim at reaching agreement on binding preferential tariffs outside the preference system in special schedules of concessions annexed to the General Agreement. The binding of the system of tariff preferences or of preferential tariffs outside the preference system would be for a certain period during which the preferences could not be withdrawn unilaterally by the preference-giving countries. Other suggestions for improvements in the system of tariff preferences made by developing countries include harmonization and simplification of the rules of origin and deeper-than-average tariff cuts on a most-favored-nation basis on certain products which are not presently eligible or are unlikely to be included in the Generalized System of Preferences, and advance implementation of such reductions.

In the negotiations the developed countries have supported the view that the special interests of the developing countries should be borne in mind in the tariff negotiations, as provided for in the Tokyo Declaration. The notion of advance implementation of most-favored-nation tariff cuts on products of particular interest to the developing countries has also received support. On most of the other suggestions, however, the developed, preference-giving countries have adopted a cautious approach. They have argued that the agreed objective of maintaining and improving the system of tariff preferences should not hinder the efforts at achieving the maximum feasible tariff reductions on a most-favored-nation basis. Moreover, several of these countries have considered discussion of possible deeper-than-average tariff cuts as premature before the elements of general tariff reduction formulas are defined.

The suggestion for binding the preference system rates or other preferential arrangements has been opposed by nearly all developed countries. They consider the Generalized System of Preferences as an autonomous and unilateral measure in favor of the developing countries, and they question the feasibility and desirability of making preferences, whether within or outside the present system of preferences, an inflexible, permanent instrument of commercial policy. They have expressed the view that since preference schemes are under continuous review they could be easily improved and adapted to meet the needs of the preference-receiving countries without changing the legal basis of the Generalized System of Preferences. Thus while it is now generally accepted that developing countries should not be held to the principle of full reciprocity and that they should not be expected to reduce their own tariffs according to a formula of general application, it remains to be seen to what extent the developed countries are able to agree to introduce far-reaching modifications in the existing preference schemes.

The path ahead

The Tokyo Round is undoubtedly the most complex and comprehensive trade-negotiating effort attempted to date. Whether a substantially freer world trading system with balanced opportunities for countries with different economic and political systems and needs will in fact be achieved as a result of the negotiations is one of the fundamental questions in the field of international economic relations today.

It is evident that a good start has been made on some of the procedural and organizational issues. In the coming months, participating countries will focus on questions such as how overall reciprocity of concessions is to be achieved, how the negotiated results are to be implemented and whether some form of surveillance will be necessary to ensure compliance with agreed rules, to what extent trade liberalization in agriculture will prove feasible, and how the concept of differentiated treatment of developing countries is to be applied in practice. An interim assessment of the prospects for the negotiations may be possible after these crucial discussions have reached a more advanced stage.

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