Shadow of deindustrialisation falls over industrial tariff proposal
By Martin Khor

A major section of the draft Doha Ministerial Declaration deals with “Market Access for Non-Agricultural Products”, or in short, “industrial tariffs.”
Paragraph 16 of the “Harbinson draft” (27 October) has Ministers agreeing to negotiations to reduce or eliminating tariffs in industrial products, with product coverage to be “comprehensive and without a priori exclusions.”
An earlier draft (26 September) had allowed “less than full reciprocity” for developing countries, but this was dropped in the present text. Business sources in the US cheered the striking off of the phrase as they felt it would have “skewed tariff negotiations in favour of developing countries,” according to a news report from “Inside US Trade” (dated 9 November).
But more than that phrase was excluded. The least developed countries group as well as a grouping of seven African countries had proposed in Geneva that the first draft be amended: instead of initiating negotiations, the Doha Ministerial should initiate a study process to determine how previous industrial tariff cuts have affected the local industries and jobs in developing countries. This process should be completed before the WTO decides on negotiations. A similar view had been expressed by African Trade Ministers in their Abuja meeting in September.
Despite such major parts of the WTO Membership adopting this position, it has not been reflected at all in the draft that is now before the Doha Ministerial. Neither has a “facilitator” been appointed to discuss this issue---implying that there is no divergence of views on this topic, when in fact there is a substantial defference.
Behind the LDCs’ and African countries’ concerns is the disastrous record of the effects of over-rapid liberalization in many African and other developing countries.
Evidence of extremely damaging “deindustrialisation” was presented by Kenya, Mozambique, Nigeria, Tanzania, Uganda, Zimbabwe and Zambia in a proposal dated 19 October which they submitted to the Chairman of the WTO General Council as a replacement for the paragraph in the draft on industrial tariffs.
The African countries stated that many developing countries had already liberalised their imports of industrial products (as a result of structural adjustment) and this had led to serious problems, such as local industries losing market share and closing down, causing unemployment, and governments losing revenue.

The proposal provided many examples of African countries that had suffered deindustrialisation, closure of local industries and serious loss of manufacturing jobs. The countries cited included Senegal, Cote d'Ivoire, Nigeria, Sierra Leone, Zambia, Zaire, Uganda, Tanzania, Sudan, Kenya, Ghana, Zimbabwe, Mozambique, Cameroon, Malawi. The experience of Latin American countries such as Peru, Nicaragua, Ecuador and Brazil was also mentioned.
The proposal cited a study published by Cambridge University Press authored by Professor Edward Buffie (2001), entitled "Trade Policy in Developing Countries" which collated what he calls "the most disturbing evidence" of post-1980 liberalization episodes in the African region. According to information collected in the book (page 190-191):

-- Senegal experienced large job losses following a two-stage liberalization program that reduced the average effective rate of protection from 165% in 1985 to 90% in 1988. By the early nineties, employment cuts had eliminated one-third of all manufacturing jobs.

-- The chemical, textile, shoe, and automobile assembly industries virtually collapsed in Cote d'Ivoire after tariffs were abruptly lowered by 40% in 1986. Similar problems have plagued liberalization attempts in Nigeria. The capacity utilization rate fell to 20-30%, and harsh adverse effects on employment and real wages provoked partial policy reversals in 1990, 1992, and 1994.

-- In Sierra Leone, Zambia, Zaire, Uganda, Tanzania, and the Sudan, liberalization in the eighties brought a tremendous surge in consumer imports and sharp cutbacks in foreign exchange available for purchases of intermediate inputs and capital goods. The effects on industrial output and employment were devastating. In Uganda, for example, the capacity utilization rate in the industrial sector languished at 22% while consumer imports claimed 40-60% of total foreign exchange.

-- The beverages, tobacco, textiles, sugar, leather, cement, and glass products
sectors have all struggled to survive competition from imports since Kenya initiated a major trade liberalization program in 1993 (African Development Bank, 1998; Ministry of Planning and National Development, 1998). Contraction in these sectors has not been offset by expansion elsewhere in manufacturing. The period 1993-1997 saw the growth rates of output and employment in manufacturing fall to 2.6% and 2.2%, respectively (Ministry of Planning and National Development, 1998).

-- Manufacturing output and employment grew rapidly in Ghana after liberalization in 1983 and generous aid from the World Bank greatly increased access to imported inputs. But when liberalization spread to consumer imports, employment plunged from 78,700 in 1987 to 28,000 in 1993 (African Development Bank, 1995, p. 397). The employment losses owed mainly to the fact that "large swathes of the manufacturing sector had been devastated by import competition" (African Development Bank, 1998).

-- Following trade liberalization in 1990, formal sector job growth slowed to a
trickle in Zimbabwe and unemployment rate jumped from 10 to 20%. Adjustment in the nineties has also been difficult for much of the manufacturing sector in Mozambique, Cameroon, Tanzania, Malawi, and Zambia. Import competition precipitated sharp contractions in output and employment in the short run, with many firms closing down operations entirely (African Development Bank, 1998).

The book also provides some information on other developing countries outside Africa. According to the author: "Liberalization in the early nineties seems to have resulted in large job losses in the formal sector and a substantial worsening in underemployment in Peru, Nicaragua, Ecuador and Brazil. Nor is the evidence from other parts of Latin America particularly encouraging: 'the regional record as it now stands suggests that the normal outcome is a sharp deterioration in income distribution, with no clear evidence that this shift is temporary in character.'

According to the African countries’ proposal, such information “indicates that for many developing countries the effects of import liberalization can be negative and sometimes devastating, reducing their prospects for industrialization and indeed in some cases destroying the domestic industrial base.There is thus a need for the WTO to review the basis of its policies, rules and guidelines in relation to industrial tariffs.”

The proposal added: “Developing countries have an interest in obtaining more access to the markets of developed countries, especially in product areas where developing countries are able to benefit in. Thus, the study process will identify area where further liberalization should begin and which products should be targeted. Should the study show that because of their limited productive capacity and weak industrial base developing and least developed countries are unlikely to benefit from further liberalization, then they should be exempted from further tariff reduction.

”While this measure may be necessary, it may also not be sufficient for the purpose of giving an opportunity for the affected countries to rebuild domestic industrial capacity in view of the closure of local firms and industries. In order to take full account of this extremely serious situation, action should be taken as soon as possible, even when the study process is progressing.
“We propose that the rules of GATT 1994 be revisited to take this serious situation into account. Developing countries, which have been adversely affected, should be allowed to reevaluate tariffs beyond their allowed threshold levels in respect of specific products and product areas, in order to enable them to rebuild the domestic capacity that had endured a decline, or to prevent a decline in such domestic capacity.”

The Africa countries then proposed that the paragraph in the draft Declaration relating to non-agriocultural market access be replaced with the following:
“We agree to initiate a study process to be conducted in a working group to examine the issue of market access for non-agricultural products. The study process shall take into account the special needs and interests of developing and least-developed country Members, including:
(1) the effects that previous liberalization and tariff reductions have had, including on domestic firms, employment and government revenue;
(2) the effects that tariff peaks and tariff escalation in developed countries
have had on the trade prospects of developing and least developed countries; and (3) the implications of these for future policies.

The study process shall focus on the reduction or elimination of tariff peaks and escalation in developed countries in sectors and products of export interest to developing countries. It should also clarify that, exemptions from further liberalization commitments shall be given to least developed countries and to developing countries that have been and would be adversely affected by such liberalization.

It should also clarify the appropriate framework, guidelines and rules that can cater to the different conditions and needs of Members, including non-reciprocity for developing countries, and the ability of developing countries to increase their tariff beyond bound rates in certain cases. The study process, based on an examination of these elements, may make recommendations for guidelines and modalities for any future negotiations.”
This proposal certainly deserves to be discussed as it is aimed at redressing the very serious problems of deindustrialisation that have resulted from over-rapid cuts in import tariffs in many developing countries.

At a meeting of the heads of delegations at the WTO before the second draft was issued, the Kenya Ambassador spoke on the subject and introduced a summary of the proposal. Her statement was supported by several developing countries.

At their Abuja meeting, Africa Ministers also stated that “agreement to engage in industrial tariff negotiations is made conditional on completion of a study process which should include the effect of previous and any future tariff reductions on African countries’ industries.”
And the same sentiment and proposal was made by the Tanzanian Ambassador on behalf of the LDC Group in his statement in the WTO General Council in early October in response to the first draft Ministerial declaration.
It is thus very surprising that these concerns and suggestions have not been reflected in the revised draft declaration.
According to the orthodox assumption commonly made by the IMF, World Bank and the WTO, trade liberalization is beneficial to poor countries.
In reality, over-rapid liberalization, carried out before a country is prepared to face the challenges, results in cheaper imports overwhelming the local industries.
Thus, before a new round of negotiations is launched on industrial tariffs, a deep study of the conditions needed to prevent further deindustrialisation should be undertaken, and the lessons from it applied to the modalities of future negotiations.
Otherwise, liberalization in this sector may ironically lead to further damage to some developing countries’ industries and their jobs.
Thus, paragraph 16 of the present text of the Ministerial Declaration should be looked at again.

ends