Voluntary Report - public distribution

**Date:** 8/18/2003

**GAIN Report Number:** E23155

E23155

**European Union**

**Trade Policy Monitoring**

**Tariff escalation**

**2003**

**Approved by:**

![](media/image1.wmf)Norval Francis

#### U.S. Mission to the European Union, Brussels

**Prepared by:**

Sandie Kipe

**Report Highlights:**

The basic concept of tariff escalation is that tariffs rise with the
level of processing, causing a relatively higher price for value added
imports. This report discusses the harmful effects of tariff escalation
relative to developing countries and cites cases of tariff escalation in
rice and cocoa.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Brussels USEU \[BE2\]

\[E2\]

#### Summary  {#summary-1}

The basic concept of tariff escalation is that tariffs rise with the
level of processing. This report will specifically focus on tariff
escalation on agricultural products in the European Union. The data on
tariff escalation and trade flows along the processing stages shows
evidence that the EU primarily imports raw products with zero to low
tariffs from developing and least developed countries, then as the
product moves up the processing stages higher tariffs allow fewer
imports.

Tariff escalation is not compatible with the EU objective of supporting
developing countries, as this system maintains them in a situation where
they can be competitive only on raw materials. The EU frequently
publicizes that it imports more agricultural goods from developing
countries than the United States, Canada, Australia, and Japan combined.
Much of these imports, however, are bulk products or only minimally
processed. Thus Arlindo Cunha, a member of the European Parliament, in a
speech to the Confederation of Food and Drinks Industry (CIAA), cited
the fact that the EU is the largest importer of raw materials. Pascal
Lamy, EU Trade Commissioner, stated that in the last 15 years growth in
exports of processed agricultural products from the EU have increased
twice as rapidly as the growth in primary agricultural products. These
statements by EU officials iterate the market effects of tariff
escalation. In general, the EU is importing low priced goods from
developing countries, adding value, and exporting the finished good.
This process is facilitated by a well-developed tariff escalation
scheme, which aids to maintain European food processors competitiveness.

#### Background

The theory behind tariff escalation is that tariffs rise with the level
of processing; this causes the price of value added imports relative to
the raw product to increase dramatically, decreasing demand for
processed products in the importing country. Tariff escalation is a
significant problem in terms of market access for developing countries,
particularly in agricultural trade. Tariff escalation can keep poor
countries trapped as raw material providers in the agricultural trading
system and prevents them from diversifying exports.

The EU provides preferential market access to developing countries
through several means. The Cotonou Agreement, a continuation of the Lome
Convention, includes 77 countries in the Africa, Caribbean and Pacific
(ACP) region and gives these countries preferential market access to the
EU. Secondly, the Everything But Arms (EBA) initiative with the 49 least
developed countries, of which 39 overlap with ACP countries also
provides zero duty access. The primary aim of these agreements is to
promote development through increased exports and export
diversification. The EU also uses a Generalized System of Preferences
(GSP), giving special and preferential treatment to developing
countries. The GSP consists of general arrangements, which this report
will focus on, as well as preferences to increase labor standards,
environmental standards, and help fight drug trafficking. Preferential
market access is allocated uniquely within each agreement; this report
will analyze the appropriate preferences where they may apply in terms
of tariff escalation.

#### Rice

The EU rice import regime provides a classic case study in tariff
escalation. For rough (or paddy) rice, the EU import tariff is €211/MT.
For the two further stages of processing, the rice tariff is based on a
margin of preference type scheme, whereby tariff varies to bring the
landed price (i.e. the price of the rice plus the tariff) of rice
imports up to a multiple of the EU rice intervention price.

For husked (or brown) rice, the landed price of rice is 180% of the
intervention price (188% for indica varieties), and for milled rice it
is 267% of the intervention price. The EU rice intervention price is
currently €298.35/MT, giving a maximum duty paid import price (landed
price) of €537 for brown indica rice. Where the tariff calculated by
this system is higher than the bound tariff, the bound tariff is
applied, as is currently the case. The bound tariff rate for husked or
brown rice is €264/MT and for milled rice, €416/MT.

Only limited import preferences are granted for rice. Rice was one of
only three agricultural products excluded from immediate liberalization
under the EBA Agreement. EBA countries will not benefit from unlimited
zero duty access to EU markets until 2009. In the interim, since
2001/02, there is a zero duty TRQ for 2,517 MT, rising by 15% per year.
This accounts for roughly 0.6% of EU rice imports by volume.

The following table presents a picture of the bound tariff escalation
scheme for rice as it moves through the processing stages. All tariffs
are *ad valorem* and subject to tariff rate quotas (TRQs), which become
much more complex. This is a simple breakdown of the base tariff rate,
escalation, and value.

  --------------------------- ----------- ---------- ---------- ----------
  **[Table 1. Tariff                                            
  Escalation in Rice Imports                                    
  to the EU, Euros per                                          
  1000kg, 2002]{.underline}**                                   

                                                                

  Description                 World       ACP        GSP        EBA

  In the husk (paddy or       211.00      69.51      211.00     0.00
  rough)                                                        

  Husked (brown)              264.00      88.06      264.00     0.00

  Semi-milled or Milled       416.00      133.21     416.00     0.00

  Broken                      128.00      41.18      128.00     0.00
  --------------------------- ----------- ---------- ---------- ----------

Source: EU Common Customs Tariff, EU Common Customs Tariff, Official
Journal C 104 A, vol 45, 30 April 2002

Tariff escalation in the EU rice imports scheme is clearly expressed in
Table 2. There is a 21 percent increase in tariffs for husked rice
versus paddy or rough rice; the EU primarily imports husked brown rice,
consisting of two-thirds of total rice imports. The tariff on rice that
has moved to the next stage of processing more than doubles; a 57
percent tariff increase is imposed on rice that is semi-milled or
milled. This rise in tariff effectively limits semi-milled and milled
rice imports to fewer than 20 percent of total imports. The total tariff
escalation is over 97 percent from rice in the husk to semi-milled or
milled for all countries excepting those in the ACP agreement, for which
there is a 91 percent increase. The only countries exempt are those in
the EBA agreement, which accounted for only 2.5 percent of semi-milled
and milled rice imports and is limited to .6 percent of total EU rice
imports through TRQs.

  --------------------------- ---------- ---------- ---------- ----------
  **[Table 2. Tariff                                           
  Escalation by Percentage                                     
  Change, 2002]{.underline}**                                  

                                                               

  Description                 World      ACP        GSP        EBA

  In the Husk to Brown        21.11%     26.68%     21.11%     0.00%

  Brown to semi/milled        57.57%     51.27%     57.57%     0.00%

  In the Husk to semi/milled  97.16%     91.64%     97.16%     0.00%
  --------------------------- ---------- ---------- ---------- ----------

Calculated from EU Common Customs Tariff, Official Journal C 104 A, vol
45, 30 April 2002

The EU imported over one million metric tons, valued at over €390
million of rice in 2002, €284 million of which came from all developing
countries, €40 million from the Africa Pacific and Caribbean (ACP)
countries. Of the €390 million of rice imports, €273 million, or 70
percent, were either in the husk or husked but not milled. Only 19
percent of rice imports were either semi-milled or milled; the remaining
is broken rice. Developing countries account for €198 million of the
brown rice imports, or 72.5 percent of brown rice, and 65 percent of
semi-milled/milled rice imports into the EU. The import data corresponds
with the tariff scheme, as most imports are in the form of brown rice
where tariffs are 57 percent lower than semi-milled and milled rice. The
increasing tariff effectively limits imports of semi-milled and milled
rice from both developing and developed countries.

  --------------------------- -------------- -------------- --------------
  **[Table 3. Quantity of                                   
  Rice Imports to the EU,                                   
  Metric tons,                                              
  2002]{.underline}**                                       

                                                            

  Description                 ACP            GSP            EBA

  In the husk (paddy or       1              211            3
  rough)                                                    

  Husked (brown)              112,285        248,602        177

  Semi-milled or Milled       3,071          93,511         3,305

  Broken                      19,552         120,246        2,700

  Total                       134,909.00     462,570.00     6,185.00
  --------------------------- -------------- -------------- --------------

Source: Eurostat, 2003

Through this tariff escalation scheme, the EU is extracting over €127
million a year tariff rent from developing countries in the ACP and
general GSP arrangements in rice imports alone. Although ACP countries
receive preferential treatment, exporters of ACP rice still pay over €10
million a year in tariffs. More importantly, the tariff inhibits imports
of processed rice from developing countries. Discriminating against
these imports also prevents developing countries from investing in a
processing sector in order to increase export diversification. Since the
bulk of exports are not ready for consumption, the final processing
stages occur in the EU, allowing European firms to capture the marketing
margin from processing. The EU exports the semi-milled and milled rice
on the world market with export subsidies; 96 percent of EU rice exports
are semi-milled or milled and 45 percent of rice exports go to
developing countries.

#### Cocoa

Tariffs in the EU cocoa import regime classify more as peaks within the
processing sector more than basic tariff escalation. Cocoa beans, whole
or broken, raw or roasted, are imported duty-free as well as cocoa
shells, husks, skins, and other waste. However, cocoa paste (liquor) is
imported at a high tariff relative to other cocoa products aside from
chocolate. This is the case for the MFN tariff as well as the GSP
tariff. Cocoa paste is the first step of processing beans into
chocolate. The paste can be used to make cocoa butter, of which the
remnants of processing are pulverized into powder; paste is also
directly added along with the butter to make the finished chocolate.

The most obvious peak is in the finished product, chocolate. The actual
ad valorem percentage on the good is not a large increase. The peak is
in the additional specific tariff per 100kg that is placed on MFN, ACP,
and GSP countries. In addition, in the chocolate manufacturing process,
sugar is a main ingredient, on which an additional duty is added. The
actual tariff on chocolate will be higher than what is stated in Figure
6 due to this additional tariff on sugar.

+----------------------------------+--------+-------+-------+--------+
| **[Table 6. Tariff Escalation    |        |       |       |        |
| and Peaks in Cocoa Imports to    |        |       |       |        |
| the EU, ad valorem,              |        |       |       |        |
| 2002]{.underline}**              |        |       |       |        |
+----------------------------------+--------+-------+-------+--------+
|                                  |        |       |       |        |
+----------------------------------+--------+-------+-------+--------+
| Description                      | World  | ACP   | GSP   | EBA    |
+----------------------------------+--------+-------+-------+--------+
| Cocoa Beans, Raw or Roasted      | 0.0    | 0.0   | 0.0   | 0.0    |
+----------------------------------+--------+-------+-------+--------+
| Cocoa Shells and other Waste     | 0.0    | 0.0   | 0.0   | 0.0    |
+----------------------------------+--------+-------+-------+--------+
| Cocoa Paste                      | 9.6    | 0.0   | 6.1   | 0.0    |
+----------------------------------+--------+-------+-------+--------+
| Cocoa Fat, Butter, Oil           | 7.7    | 0.0   | 4.2   | 0.0    |
+----------------------------------+--------+-------+-------+--------+
| Cocoa Powder, No Sugar or        | 8.0    | 0.0   | 2.8   | 0.0    |
| Sweetener                        |        |       |       |        |
+----------------------------------+--------+-------+-------+--------+
| Chocolate and other Food w/      | 8.2    | 0.0   | 4.3   | 0.0    |
| Cocoa                            |        |       |       |        |
+----------------------------------+--------+-------+-------+--------+
| Additional tariff on             | 22.2   | 12.9  | 22.2  | 0.0    |
| chocolate(1)                     |        |       |       |        |
+----------------------------------+--------+-------+-------+--------+
| > \(1\) Additional specific      |        |       |       |        |
| > tariff per 100 kg additional   |        |       |       |        |
| > to ad valorem tariff, also     |        |       |       |        |
| > additional duty on sugar       |        |       |       |        |
+----------------------------------+--------+-------+-------+--------+

Source: EU Common Customs Tariff, Official Journal C 104 A, vol 45, 30
April 2002

  ---------------------------------- ------------ ----------- ----------- --
  **[Table 7. Quantity of Cocoa                                           
  Imports to the EU, Metric Tons,                                         
  2002]{.underline}**                                                     

                                                                          

  Description                        ACP          GSP         EBA         

  Cocoa Beans, Raw or Roasted        1,035,240    22,514      31,939      

  Cocoa Shells and other Waste       14,981       470         105         

  Cocoa Paste                        133,152      16,020      0           

  Cocoa Fat, Butter, Oil             63,509       41,971      400         

  Cocoa Powder, No Sugar or          14,230       3,934       0           
  Sweetener                                                               

  Chocolate and other Food w/ Cocoa  8,835        14,468      3           
  ---------------------------------- ------------ ----------- ----------- --

Source: Eurostat, 2003

The actual tariff escalation does not seem relatively high, especially
not enough to distort trade. However, it is evident in the data that ACP
exporters of cocoa products, benefiting from duty-free market access on
paste, export more paste than butter, fat, and oil. This is not the case
for MFN and GSP countries that face higher relative tariffs on paste
than butter, fat, and oil. A reasonable conclusion from this is the
relative tariff is high enough to hinder imports.

#### Conclusion

The two cases highlighted here represent the basic concept of tariff
escalation and tariff peaks. The trade flow data combined with the
tariff scheme supports economic theory that tariff escalation inhibits
imports of value added goods. Rice and cocoa are good examples, however,
tariff escalation is apparent in many other industries and overlapping
sectors in the EU import regime. For example, the tariff on soybean
imports, which is primarily used for animal feed, is zero. The finished
product of beef, pork, and poultry are protected by extremely high
tariffs and tariff escalation within meat processing. This form of
tariff escalation is more discreet, but is the same concept with the
same market affects.

The most important facet of tariff escalation in the EU is that the
value is added in the EU and then exported, often back to developing
countries with export subsidies (see Gain Report E23156). As previously
discussed, adding value in the EU allows European firms to capture the
marketing margin on adding value to the good as it moves through the
supply chain. Additionally, the tariff escalation discourages developing
countries from investing in processing sectors, which provide employment
and increased economic activity within the country. Developing countries
do not have incentives to promote export diversification and become
dependent on several primary product exports for their main source of
export revenues.

**Visit our website:** our website
**[www.useu.be/agri/usda.html]{.underline}** provides a broad range of
useful information on EU import rules and food laws and allows easy
access to USEU reports, trade information and other practical
information. More information on tariff escalation and export subsidies
can be found at [http://www.ers.usda.gov](http://www.ers.usda.gov/)

E-mail: <AgUSEUBrussels@usda.gov>

**Related reports from USEU Brussels:**

  ---------------- ------------------------------------- ----------------
  **Report         **Title**                             **Date
  Number**                                               Released**

  E23156           Export Subsidies                      08/18/2003

  E23149           Everything but arms: declining        08/06/2003
                   agricultural exports from least       
                   developed countries                   

  E23117           EU restricts cumulation rules for     06/20/2003
                   rice and sugar imports from LDCs      

  E23030           Overview of the EU Rice Import Regime 03/05/2003

  E23056           EU Sugar Annual                       04/10/2003
  ---------------- ------------------------------------- ----------------