Hong Kong,

The WTO’s Hong Kong Ministerial Conference has resulted in an imbalanced
outcome to the disadvantage of developing countries.

The developing countries gave in on the key market access issues of services and
non-agricultural market access. In return they did not receive any significant gain
in cotton, market access for LDCs, or “aid for trade”, the three main components
of a so-called “development package”.

As for the 2013 end-date for elimination of agricultural export subsidies, the most
publicized claim of benefit from Hong Kong, it was no victory. This
greatest-distorting subsidy of all should have been eliminated many years ago, and
no price should have been asked for it. It should have come with apologies. The
date, 2013, was the furthest possible, and it was a shame that the EU would not
agree to 2010 (a date acceptable to everyone else) which would have been barely
“credible”.

That the EU should have held back till the last minute before agreeing to this
inferior alternative, so that it could extract even more from developing countries,
showed to what a low level the Ministerial, and the Doha negotiations overall,
have fallen in terms of development content.

After the closing session, a senior Ambassador from a developing country
reflecting on what had transpired in the Green Room, revealed that Peter
Mandelson, the EU Trade Commissioner, had thrown in his 2013 offer at the last
hour of the meeting, when those present were preparing to leave.

If it is so hard to get so little from the developed countries, the negotiations will be
very tough when they resume in Geneva, he said. "They wanted to extract such a
lot from the developing countries, until there is blood on the floor."

The real prize that the major developed countries wanted out of Hong Kong was a
change in the negotiating modalities in services, so that they would have new
instruments to pressurize developing countries to open up their key services
sub-sectors. Despite massive opposition from a very large number of developing
countries, including the G90, for five days, the developed countries eventually got
what they wanted.

The plurilateral approach, which will incorporate sectoral and modal approaches
as well, is now set not only to “complement” but to replace the bilateral
request-offer approach as the main negotiating method. It threatens to erode the
existing flexibilities of the GATS and is aimed at accelerating the liberalization
process in the South.

The services transnational companies, whose representatives were present and
active in Hong Kong, and which expressed delight at the outcome on services, are
already preparing themselves and their governments to launch a first round of
plurilateral negotiations involving many key sub-sectors. The Hong Kong
Declaration says the plurilateral requests should be submitted to other members by
28 February 2006.

As a bonus, the developed countries also extracted important concessions from
developing countries on the last day and in the last hours of Hong Kong on
NAMA. Ministers have now agreed that the Swiss formula, with coefficients,
would be used to cut industrial tariffs. The final language ("we adopt a Swiss
formula") is much stronger than the Geneva text, which only notes that there is a
working hypothesis to use a Swiss formula.

It was also agreed that applied rates would be used as the basis for treating
unbound tariffs. The 18 December final text adopts a "non-linear mark-up
approach to establish base rates for commencing tariff reductions." This had not
been in previous drafts, and was thus included at the last minute. The applied rates
will be “marked up” to base values, which would then be cut by the formula and
bound - a very drastic treatment of unbound tariffs that would result in low bound
tariffs.

These NAMA commitments extracted from developing countries are
unprecedented in the history of the multilateral trading system. When
implemented, they will have severe de-industrialization effects.

How did the developing countries get to make such commitments, and in return
for what, if any?

From the start, the EU’s Peter Mandelson went on an aggressive campaign to get
developing countries to agree to its services and NAMA proposals, threatening
that he would not offer anything in agriculture otherwise. This in itself would not
have worked, however, if the developing countries felt they had nothing to gain
from the Declaration.

Recognizing this, the major developed countries, aided by the Secretariat, sought
to offer (or seem to offer) something for each group of developing countries, early
on in the Conference. Each group was embroiled in negotiations to get its bit of
benefit. By the last day, each group - the G20, G33, LDCs, cotton countries, the
ACP - was convinced that what it got was valuable enough to give up its fight on
services or NAMA, and thus all the groups were persuaded (or persuaded
themselves) that they could accept the whole package.

The persuasion aspect was important in the final hours. When finally on the last
day the EU agreed to the 2013 end-date for export subsidies, the G20 leaders
(India, Brazil, China) went on a persuasion drive to get other developing countries
and their groupings to agree to the services text.

Kamal Nath, the Commerce Minister of India, which is a demandeur of the
services text, persuaded other Ministers that Annex C on services was harmless,
agreeing with the US argument that according to the text, participation in
plurilateral talks is voluntary.

This is contrary to the view of many trade and legal experts, that the revised
language in paragraph 7b of Annex C would require a developing country that is
requested by a group of other countries to participate in plurilateral, sectoral or
modal negotiations.

Most developing countries that spoke at the last heads of delegation meeting gave
the “OK” to the last draft Ministerial text. Venezuela and Cuba, however, persisted
in their objections to the services annex and to parts of the NAMA text, but they
were by themselves too few in number and influence either to have the relevant
parts of the draft amended, or to block consensus of the whole draft.

They did succeed, however, in making their point that they had reservations and
that they had the right to put their reservations on record in a dramatic intervention
at the closing session, despite the arrangements in the hall that made it almost
impossible for delegations to voice their opinions (See SUNS #5940.)

A reading of the approved text shows serious commitments by developing
countries in services and NAMA, while they obtained little in agriculture or in the
“development package” issues.

The worst outcome for developing countries is in services. The controversial
Annex C on services which had been drafted by the Chair of the services
negotiations and was hotly contested in Geneva, was nevertheless transmitted to
Hong Kong.

At the Ministerial, it was again hotly contested, with most developing countries
rejecting its key provisions for almost the whole duration of the Conference. The
revised drafts of 17 and 18 December left the annex fundamentally unchanged in
substance. Thus, the final outcome in services opens the way for the modalities of
GATS negotiations to be steered towards the direction demanded by the EU and
other developed members. The new methods of negotiations (plurilateral, sectoral,
modal) are agreed to that will erode the flexibilities available to developing
countries to liberalise only in sectors they choose to and the extent they want to.

The alternative services proposal of the G90 developing countries, which they
submitted mid-way through the Conference, was not reflected in the Ministerial
Declaration. The textual changes proposed by the developing countries were
rejected. The EU’s amendments were taken up instead, and these changed the
language but retained the substance of the original.

The result is that developed countries have been given additional leverage to
subject the developing countries to negotiate with the “Friends of Services” (there
are such Friends groups for 19 sub-sectors) in a plurilateral setting, when the
services talks resume.

In NAMA, the Swiss formula has been confirmed by the Ministers. For the first
time in the multilateral trading system, developing countries will have to be
subjected to a tariff reduction formula, and a harsh Swiss formula at that, and
worst of all, on a line-by-line basis (affecting all products). The flexibilities and
exemptions are minimal and even these are under threat. The treatment of unbound
tariffs - using applied rates as the basis, which has never been done before and
should not be done - has been adopted by the Ministers. These elements together
spell a devastating effect on the industrial development prospects of developing
countries.

In return for these major concessions from developing countries, the developed
countries had to give up very little.

After protracted negotiations, the EU finally agreed to eliminate export subsidies
by the end of 2013. It should have been eliminated many years ago. The target date
of latest 2010, acceptable by all others, would have been the minimum but that
was not agreed to by the EU. It waited till the last hour of Green Room
negotiations to accept 2013 so that it could extract more concessions from the
developing world.

According to Tim Rice of ActionAid (UK), the EU had already committed
internally to reducing export subsidies anyway and by 2013 the cut would amount
to one billion euros. In contrast, the EU gives 55 billion euros in domestic
subsidies each year.

Moreover, as the French economist Jacques Berthelot points out, the ending of
direct export subsidies does not mean the end of these, as a large part of domestic
subsidies enter into exported products and are thus export subsidies in disguise.
According to Berthelot: "For example, formal export subsidies to EU cereals were
reduced from Ecus 2.2 billion in 1992 to 121 million euros in 2002. But domestic
support in the form of direct payments that benefitted exported cereals rose from
117 million euros in 1992 to 1.3 billion euros in 2002.

"As cereals exports have halved (from 36.4 to 18.4 million tones), the subsidy per
exported tonne of cereals has increased 20% from Ecus 62.5 to 75.1 euro. In the
same way, the EU subsidies to the animal feed consumed by the exported poultry
or pork meat are larger than the export refunds which have been reduced
significantly.“Unless domestic subsidies are cut, export subsidization will continue even after the”elimination of export subsidies" in 2013 or their phasing out before that. The
Hong Kong conference would have been more meaningful if there had been a
decision leading to substantial cuts in total trade-distorting domestic subsidies to
levels below the current or planned applied levels, and serious disciplines on the
Green Box subsidies and their reduction, so that overall domestic support is really
decreased. This did not happen.

On the cotton issue, there was little comfort for the cotton producers of Africa,
whose organisation, present in Hong Kong, criticised the decision as having
achieved nothing. The Declaration offers the elimination of export subsidies in
2006. But export subsidies constitute only a small portion of the nearly $4 billion
subsidies the US gives to its cotton producers every year.

In contrast, there is no concrete action agreed for trade-distorting domestic
subsidies which amount to about $3.8 billion or 80-90% of total US support for
cotton. Domestic subsidies also make up almost all of the European cotton
subsidies.

The African Ministers had demanded that 80% of domestic subsidies for cotton be
eliminated by the end of 2006, and the rest within a few years. The Hong Kong
decision is miserly; it only endorsed the objective that, "as an outcome of
negotiations, trade distorting domestic subsidies for cotton production should be
reduced“. The African Cotton Producers Association’s response is that”there has
not been any concrete proposal on the most essential request".

For the first four days of the Conference, much of the focus was on providing
duty- and quota-free access for LDC products to developed countries’ markets.
There was unending rhetoric about the need for Hong Kong to benefit the LDCs.
But they were left with far less than was expected or that they had demanded.

The LDC Group had asked for bound duty- and quota-free market access to rich
countries’ markets for all LDC products and countries. But the developed countries
could not agree to that. In the end, the Declaration does not give a binding
commitment (which would have meant that a member that does not fulfil it can be
brought to dispute settlement) but only the vague term “access on a lasting basis”.

On product coverage, there is also an escape clause that countries having
difficulties providing such market access shall provide access for 97% of products.
This allows developed countries to continue to protect “sensitive products” that are
of export advantage to LDCs, such as textiles and clothing, rice, sugar, leather
products and fishery products.

Japan at its press briefing indicated that products sensitive to LDC imports cover
2% of the total, and thus the 3% exemption allows it comfortably not to include
those LDC products that could effectively enter its market. The US has also
indicated it cannot include textiles and clothing from Bangladesh or Cambodia.

In other words, the LDCs can have market access for products they don’t produce
at all or don’t produce competitively, but access can be blocked for those products
in which they are competitive. They are only given rights in areas where they
cannot realise these rights.

Besides the market access issue, there were four other LDC-specific decisions
adopted in Hong Kong, which had been battled over for many months in Geneva.
But there has been no movement on the many other special and differential
treatment proposals.

Neither is there any progress on the developing countries’ proposals on
implementation issues. The Hong Kong Ministerial confirmed that the
“development issues” mandated in Doha have been put in a corner in a state of
comatose.

This is also reflected in the time-lines given in the Declaration for finishing
negotiations in different areas. The deadlines for agriculture and NAMA
modalities are 30 April 2006. The review of outstanding agreement-specific
proposals on S&D treatment is December 2006, when the Round is supposed to
end. If the review is completed only by then, can the decisions be taken before the
Round ends?

The Hong Kong meeting thus produced an imbalanced result. The outcome will
make it more difficult for the developing countries when they negotiate on services
and NAMA in the new year.