Swiss miss NAMA-nam

After articles about Christmas reindeer and frappuccino wimps, I’ve been asked by friends to write again about trade. Thus, as exciting as the US primaries are, I’ll instead discuss the Zen-like world of the Swiss formula. The Swiss formula (and its variants) has taken center stage in the Non-Agriculture Market Access (NAMA) talks in the still ongoing WTO’s Doha Round. As the term indicates, NAMA involves products that are not considered agricultural or services. Interestingly, fishes and fish products, as well as forestry products, are not considered agricultural for the present discussions.

The NAMA negotiations, despite all the attention that the agriculture talks have been getting, are highly important, particularly relating as it does to the export interests of developing countries. At the heart of the NAMA discussions is the mode to be employed for tariff reductions. It must be emphasized that tariff cuts cannot be uniform for all countries, as some (usually the developing countries) still have high tariffs whereas other countries have quite low tariffs already.

The NAMA talks decided to go with a formula approach rather than the linear or product-by-product approach that were adopted in previous Rounds. At this point, it may be useful to remember paragraph 16 of the Doha Declaration (“reaffirmed” in the Ministerial Declaration adopted on 18 December 2005 in Hong Kong), which says in part:

“We agree to negotiations which shall aim, by modalities to be agreed, to reduce or as appropriate eliminate tariffs x x x The negotiations shall take fully into account the special needs and interests of developing and least-developed country participants, including through less than full reciprocity in reduction commitments.”

Eventually, the discussions boiled down to whether to use the "Swiss formula" or another approach altogether. The Swiss formula is a progressive non-linear formula for which high tariffs are cut more than low tariffs. It is called the Swiss formula because it was proposed by Switzerland during the Tokyo Round of the GATT years and is described as follows: tf = ax/(a+x) -- where x is the initial tariff rate; a is the maximum final tariff rate and the coefficient agreed to represent the level of cuts; tf is the final tariff rate that results. Thus, as one illustration puts it, a coefficient of 30 (representing a maximum final tariff of 30%) applied to an initial tariff of 100% would result in a final tariff of roughly 23%. The same cut applied to a tariff of 15% would result in a tariff of 10%. Notably, the country with the higher initial tariff made a cut of 77%, while the country with the lower initial tariff has cut by 33%. The final cut can be phased in over a certain pre-determined number of years.

The Swiss formula, advocated by the developed countries such as the US, EC, and Japan, has been considered "aggressive" in its approach to tariff cuts, in certain instances drastic and definitely deeper particularly for higher tariffs. As such, it has been considered to affect developing countries more and has accordingly been opposed by such countries. These countries, led by Argentina, Brazil and India, argue that the Swiss formula simply does not provide consideration of poor countries’ “development needs”.

Indeed, it must be remembered that in paragraph 14 of the 2005 Hong Kong Ministerial, it was stated that the tariff reduction formula to be adopted shall have “coefficients” at levels which take fully into account the special needs and interests of developing countries.

Accordingly, another non-linear type formula (sometimes referred to as the “modified Swiss formula”), which presents two coefficients that have the effect of softening the tariff cuts for developing countries, have been propounded. It can be described as follows: t1 = (a or b) x t0/(a or b) + t0 -- where t1= final bound tariff; t0 = base rate; a = coefficient for developed countries; and b = coefficient for developing countries.

That, in a nutshell, is the trade negotiators’ world of the Swiss and modified Swiss formula. It must be emphasized that after agreeing on the formula, the actual value of the coefficient must then be determined. Assuming that has been done, it must next be considered, among a heap of others, whether indeed tariff cuts in the export market help developing countries or will the effect of such cuts be mitigated by the erection of non-tariff barriers. NTB’s are actually more pernicious than tariffs for the simple fact that they are harder to identify. Another question is whether protecting domestic industry is helpful at all for the developing country. Taking it all in, one can see how difficult trade and development policy is. That is why, Swiss or modified Swiss formula aside, there is no easy formula for economic success for developing countries. All the more reason for us Filipinos to work harder and smarter.


ASEAN not so fine

After all the high praises and self-congratulations that our government made relating to the recently concluded ASEAN Summit, it’s time to take stock and get back to earth.

Yes, the blueprint for an ASEAN charter is good and, yes, the call for an acceleration to achieve an ASEAN community could also be good but we do have to remember one essential fact: what may be good for ASEAN may not necessarily be good for the Philippines.

Note that the three countries most enthusiastic for greater integration (i.e., Malaysia, Thailand, and Singapore) have one thing in common: strong economies that keep getting stronger. The Philippines is not in that league. In the end, by allowing ourselves to join in the ASEAN integration hoopla we may, in the end, be just used in preparing a feast that only others could enjoy.

It must be emphasized that the things we signed into last weekend with such enthusiasm are international agreements, meaning international obligations that we need to comply with. The question that we need to ask is: do we have the capabilities in meeting the demands of these obligations and, succeeding this, do we have the capabilities to attain the benefits that we expected to receive when we entered into these agreements? [the recent finding of the Heritage Foundation regarding the Philippines is relevant in this regard: "The Philippines is relatively weak in business freedom, investment freedom, monetary freedom, property rights, and freedom from corruption. The government imposes both formal and non-formal barriers to foreign investment. Inflation is fairly high, and the government subsidizes the prices of several basic goods. The judicial system is weak and subject to extensive political influence. Organized crime is a major deterrent to the administration of justice, and bureaucratic corruption is extensive." - jemy]

Some facts: our utilization of ASEAN-CEPT benefits only amount to around 20% of our trade. This does not provide a pretty picture insofar as our ability to take advantage of international rules considering the fact that we have to concede something in order to qualify for those benefits. Note that ASEAN is not even the biggest destination of our exports. With regard to garments for example, ASEAN only amounts to perhaps half of 1%. Around 80% goes to the US, with substantial exports going to Japan and the EC as well.

It is for the latter reason that I advocate focusing our attention on the WTO and the present Doha Round. There is still a small chance for the Round to be successfully concluded within the next few months. Failing that, we should then focus our attention in building up our institutions: creating a Philippine Trade Representative Office, legislating a competition policy law, and amending some of our trade remedy laws.

We should also develop a more consistent economic and trade policy. One of the things I found baffling over last weekend’s Summit is that our government was enthusiastically lauding the steps towards more integration (which involves the quickening of the lessening of our tariffs) while at the same time, just several months back, our government embarked on a review of our tariff program (with such review resulting in the increase of tariffs). This same lack of consistency can be found with regard to JPEPA: we rejected the Singapore issues in the WTO’s Doha Round (in effect saying no to the US, EC, and Japan), saying that such issues should be left to each countries’ individual discretion, and then we turn around and agree to Japan by including the Singapore issues in JPEPA.

We also have to consider that the idea of a closer ASEAN integration (which apparently is to be modeled somewhat on the EC) would entail that we surrender - again - more of our sovereign rights. This, after all, is the point of a stronger ASEAN organization, with added calls by some quarters for an ASEAN parliament and common currency. Are we really prepared, are our people prepared, to accept the idea of Singaporean, Thai, Malaysian, Indonesian civil servants determining how we run our country? Are we prepared to surrender our prerogative in setting taxes and tariffs? Are we ready to give up the Peso as our currency? Note that the British aren’t ready to surrender the Pound for the Euro. In essence, are we really ready to surrender certain portions of what the Philippines is for benefits we are not really sure we are capable of attaining? That is why we have to get it into our heads that when we think about trade policy (as well as foreign policy), we think about it in terms of decades and generations, not merely a few years. Indeed, less enthusiasm and more restraint is called for on the part of our officials.

Add to all that the fact that our government trade and economic personnel are not exactly underwhelmed by work. Add also the fact that there seems to be something wrong with our trade negotiating process as can be witnessed over the public outrage regarding JPEPA. Take all that and one can really find it strange that our government seems so enthusiastic at the fact that ASEAN is heading towards FTA discussions with Australia/New Zealand, Japan (this is distinct from JPEPA), US, and EC, apart from FTAs discussed with South Korea and China. Add, as well, the really strange fact that our government is vigorously pursuing FTA discussions with the US (after publicly rejecting the notion, to the embarrassment of US trade officials).

In the end, the biggest casualty that all the inconsistencies, lack of thought, lack of consultation, lack of restraint, lack of persistence in following through on policy, and lack of system is the people’s belief in the benefits of freer trade. When one really looks at it, what our policymakers and government officials have been doing for almost the past decade is to say they will engage in free trade, then either executes the policy badly or do the opposite (i.e., revert to protectionist measures), and then blame free trade for the bad things that happened to our economy. In the end, our people suffers, our country suffers.

So, after all the hoopla, praise, and congratulations for a well run Summit (ignoring for the moment the food poisoning that downed nearly a hundred), we should take a step back and re-examine how we proceed on trade, trade in ASEAN and (more importantly) at the WTO.