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.