WORLD TRADE
ORGANIZATIONWT/GC/W/132
21 January 1999
(99-0211)
General Council Original:  English
PREPARATIONS FOR THE 1999 MINISTERIAL CONFERENCE
Negotiations in Industrial Products
Communication from Australia
The following communication, dated 20 January 1999, has been received from the Permanent
Mission of Australia.
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I. A TARIFF NEGOTIATING AGENDA
As a result of eight multilateral rounds of trade negotiations, tariffs on manufactured products
have been progressively reduced.  Nevertheless, areas of concern remain.  Tariff reductions are not
evenly spread across products or sectors, reflecting political imperatives.   More generally, the trading
system is still characterised by tariff peaks, tariff escalation, the widespread use of specific and
compound tariffs and nuisance tariffs.  Industrial tariffs are a key issue in relation to market access
and must therefore form an integral part of a balanced package of future negotiations.
A. PEAKS AND SPREAD
In the Uruguay Round, tariff peaks were defined as above 15%.  While the Uruguay Round
significantly reduced tariff peaks, when commitments are fully implemented, developing countries
will still maintain tariff bindings above 15% on three-quarters of their tariff lines.  Significantly, fordeveloped countries, which are still the largest market, such peaks will aply to one in every seven
lines in their tariff schedules.  In transition economies, such peaks will apply to 4% of their tariff
schedules.
Low average tariff rates can of course hide significant peaks.  In developed countries, tariff
peaks are invariably found in the textiles, clothing and footwear sectors.  For example, in the Quad
(i.e. the US, EU, Japan and Canada) where industrial tariffs are generally low, peaks of over 20% are
common in this sector.  Moreover, a tariff of 10% could reasonably be labelled a peak in a tariff
regime predominantly characterised by zero tariffs.  Another approach is to define peaks say, as those
tariffs in excess of three times the average tariff.  The higher the dispersion, i.e. the spread of tariffrates around the level of average tariff, the larger the distortionary effects of tariffs on domestic
production and consumption.WT/GC/W/132
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B. ESCALATION
Tariff escalation produces an import bias against processed (higher value-added) production.
When Uruguay Round commitments are fully implemented, average finished product tariffs will be
eight times higher than those of raw materials, co mpared with about four times higher before the
Uruguay Round.  Tariff escalation increases protection of value-added production which in turndistorts trade in products all along the supply chain.  Tariff escalation in export markets is a major
obstacle to local processing of domestically-produced raw materials.
Changes in Tariff Escalation on Industrial Pr oducts Imported by Developed Countries from
Developing Countries (Trade Weighted Averages)
Stages Share of each
processing stagePre-U.R.
tariffPost- U.R.
tariff
All Industrial Products
Raw Materials 22 2.1 0.8
Semi-manufactures 21 5.4 2.8
Finished Products 57 9.1 6.2
All Tropical Industrial Products
Raw Materials 35 0.1 0.0
Semi-manufactures 30 6.3 3.4
Finished Products 34 6.6 2.4
Natural Resource-based Products
Raw Materials 44 3.1 2.0
Semi-manufactures 40 3.5 2.0
Finished Products 17 7.9 5.9
Source:  WTO, November 1994
C. AD VALOREM VS SPECIFIC  TARIFFS
Ad valorem tariffs have the important advantage of  transparency.  The use of non-ad valorem
tariffs can hide the real rate of protection afforded industries - often rates much higher than ad
valorem tariffs for similar products.  Non-ad valorem tariffs affect agricultural products and are used
in some sections of the non-agricultural sector, such as footwear and headgear.  The products ofefficient producers can be disadvantaged to a greater degree than less efficient producers.  Goods
from developing countries, which usually have  the advantage of lower cost production, are
particularly disadvantaged. For example, a specific tariff of $40 on shoes means that a $25 pair will
cost the consumer $65, an increase of 160 per cent.  For shoes costing $250 the specific duty adds
only 16 per cent to the price to the consumer.
D. N
UISANCE TARIFFS
Most WTO Members continue to maintain uneconomic, or nuisance tariffs.  These are
generally around  two per cent or lower, where the co st of collecting the duties outweighs the actual
duties collected.  These duties are a nuisance for the collecting authorities and the importer.Agreement to eliminate these nuisance duties will improve trade flows and resource allocation as it
would  reduce transaction costs.WT/GC/W/132
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E. BINDINGS
In many instances, WTO members' schedules establish bound rates significantly above
applied rates.  In the Uruguay Round, some participants made commitments of tariff bindings at
ceiling levels, i.e. significantly above the level of the applied tariff.
For example, tariffs have been bound at ceiling bindings of 35% to 40% when current applied tariffswere significantly below these levels.  Lowering bound rates to current applied levels will increase
certainty for exporters.  This could be done, for example, by agreeing that  a binding would come into
effect at current applied rates if there was no change to a tariff for three years. Additional objectives
within the scope of negotiations on bindings could include binding 100 per cent of tariff  lines in
schedules and limitations on the  use of ceiling bindings in schedules of commitments.
F. C
ONCLUSION
The development of a tariff-related negotiating  package should include:
. agreement on a framework of principles  for national tariff regimes, embodying
objectives such as all tariff lines be ing bound and expressed as ad valorems,
commitments to reduce tariff peaks, to eliminate nuisance tariffs and to unwind tariff
escalation; and
. parameters for tariff negotiations, such as percentage targets for comprehensive tariff
reductions.
II. MECHANISMS FOR TARIFF REDUCTIONS
An essential aspect of any agreement on the objectives for a negotiating process will be the
mechanisms set for establishing a programme of tariff reductions.  During the Uruguay Round,
negotiations for tariff reductions were conducted on the basis of request and offer; sectoralnegotiations and formula cut.  The final outcomes reflected the use of all three methods.   The
following factual description might be useful background for members.
A. R
EQUEST AND OFFER
Request and offer negotiations were initially conducted on a bilateral basis, with individual
participants submitting lists of products by tariff line.  Each participant decided to merge its bilateral
offer lists into one comprehensive list for co mparison with prevailing trade flows, to permit
adjustment of the list and thus minimise the free-rider effect.  The longer the Uruguay Round
progressed, the more complicated this approach became, particularly with differing versions of
comprehensive offer lists being produced to cater for greater or lesser concessions by trading partners.
B. SECTORAL PROPOSALS
Towards the latter stages of the Uruguay Round, a range of sectoral initiatives was proposed
(pharmaceuticals, construction equipment, medical equipment, steel, beer, furniture, farm equipment
and brown spirits) . The majority of the sectoral proposals were for zero-for-zero agreements.  Under
these initiatives tariffs for the entire sector would be  eliminated by the participants.  The other type of
sector was the tariff harmonisation model, under which specific tariff levels were set for agreedcomponents of the sector, such as for the chemicals sector.WT/GC/W/132
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A range of sectoral proposals initiated during the Uruguay Round was not concluded,
including fish, non-ferrous metals, paper, scientific equipment, textiles, musical instruments, toys and
wood. Following the conclusion of the Uruguay R ound, negotiations were conducted on a Multilateral
Steel Agreement outside the WTO, but in addition to the successful zero-for-zero agreement,
participants have been unable to reach agreement.
C. FORMULA CUT
For tariff lines not included in the zero-for-zeros or harmonisation sectors, a formula
approach was used.  This formula sought to establish commitments to tariff reductions by up to 50%
for tariffs not less than 15% at the time th e Uruguay Round commenced; and an average trade-
weighted tariff reduction of 33% for tariffs less than 15%.  In the agricultural sector, all lines had to
be bound, with a simple average tariff cut across the sector of 36% for developed countries (24% fordeveloping countries and a minimum cut of 15% for each line for developed countries (10% for DCs).
The outcome in the non-agricultural sector was markedly different.  In some cases, no offers were
made on particular tariff lines or sectors, e.g. developed countries did not make offers  on 7% of the
lines in their tariff schedules.  For developing countries, this proportion was 29%, and for economies
in transition, 11%.  On the other hand, some countries, such as Chile, Mexico and Uruguay boundtheir entire tariff schedules.
D. P
OST URUGUAY ROUND NEGOTIATIONS
Agreement by 29 participants in December 1996 at the first Ministerial Meeting of the WTO
saw the conclusion of the Ministerial Declaration on Trade in Information Technology Products(ITA).  Membership of this Agreement has since increased to 44.  The ITA has now entered a second
phase of negotiations which proposes to broaden product coverage, deepen the degree of participation
and to commence work on the ultimate removal of non-tariff measures in this sector.
APEC economies in 1997 identified fifteen sectors for Early Voluntary Sectoral
Liberalisation, nine for fast-track finalisation in 1998, and the remaining six sectors to be finalised by
mid-1999.  Each of the sectors containing tariff elimination components also included non-tariff
measures, trade facilitation and economic and technical cooperation.  In 1998, APEC decided to
transfer the tariff components of each of the nine sectors to the WTO with a view to conclusion of the
sectors in 1999.
III. A BASIS FOR A NEW ROUND OF COMPREHENSIVE INDUSTRIAL TARIFF
NEGOTIATIONS
Ministers should agree at the 1999 Ministerial on a broad mandate for comprehensive
negotiations in industrial products as part of a comprehensive round of negotiations, including the
mandated negotiations in services and agriculture.
The mandate must cover the interests of developed and developing countries in areas of
traditional trading interest and new demands of trade in high technology products.
The mandate should offer scope for agreement on a framework of principles for national tariff
regimes and parameters for tariff negotiations as described above in Section I.  It should also allow forexpanded rules to address non-tariff measures.  (A ustralia will submit a separate paper highlighting
some the issues on the non-tariff agenda.)
Negotiations should proceed on the basis of regular submissions of data from WTO members
to the Integrated Data Base.
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