The technology and politics of duty-free market access to the us
Tuesday, 14 December 2010
When Bangladesh began to increase its exports of ready-made garments (RMG), in the early-1980s, it was hit by quotas (government restriction on the maximum amount of imports of a particular product in a particular year). This quota, particularly by the US, was initially deeply resented. It was a restriction at the very moment when the export of those products was picking up. In time, however, it was observed that it was a blessing in disguise. On the one hand, this quota practically guaranteed the market, however limited; and, there were quota rents (excess profits) which were enjoyed by those holding the quotas.
The imposition of quotas, allowed under the multi-fiber arrangement of 1974, continued till end-2004. From January 01, 2005, the quotas on the import of ready-made garments from Bangladesh (and, the rest of the world) were abolished. Although quotas are no longer relevant, tariffs on the imports of readymade garments are an important issue. The tariff applicable varies from product to product (by tariff line, to be exact), and, over a period, the tariff could change. The average US tariff currently applicable to imports of RMG from Bangladesh is just over 15% at a time when the general US tariff is below 4.0%.
If the Bangladeshi exporters are permitted to export their products to the US free of any duty, they would get a significant price advantage and would be able to increase their exports substantially. This is the basic objective of duty-free access to the US market.
The commitment to provide duty-free market access: The US, and the rest of the developed world, is committed to providing duty-free, quota-free (DFQF) market access to all products from the least developed countries (LDCs). At a time when these commitments were made, the quotas were still in place; hence, the term DFQF gained currency. Although quotas on readymade garments are no longer applied, the term DFQF has remained, primarily because some agricultural products remain under quota restrictions in selected markets.
The DFQF initiative, at the multilateral level, was first introduced at the 1996 WTO Singapore Declaration (para 14) which agreed to a "…..Plan of Action, including provision for taking positive measures, for example duty-free access, on an autonomous basis, aimed at improving their overall capacity to respond to the opportunities offered by the trading system".
In the 2000 United Nations Millennium Summit, this was made into a commitment, when the leaders "call[ed] on the industrialized countries … to adopt, preferably by the time of [the Third United Nations Conference on the Least Developed Countries to be held in May 2001], a policy of duty- and quota-free access for essentially all exports from the least developed countries." At UN LDC III, the EU was able to declare their Everything But Arms (EBA) initiative which essentially provided DFQF access to almost all products from the LDCs, save for four agricultural products and arms.
When the Doha Round was launched in 2001, in paragraph 42 of the Declaration the Ministers stated that "We commit ourselves to the objective of duty-free, quota-free market access for products originating from LDCs."
Several developed countries, including Canada, Australia, New Zealand, and Norway provided DFQF market access to the LDCs. The Canadian offer to the LDCs was utilized effectively by Bangladesh, mainly on account of the most liberal rules of origin requirement; our exports to Canada jumped up by almost one hundred and fifty per cent within two years of the offer.
The next important milestone was at the fifth WTO Ministerial at Hong Kong (2005). The Ministers agreed that "developed-country Members shall … provide duty-free and quota-free market access on a lasting basis, for all products originating from all LDCs by 2008 or no later than the start of the implementation period in a manner that ensures stability, security and predictability". By then, almost all developed countries, except the US and Japan, had provided DFQF to the LDCs. After frantic lobbying from the US, the commitment was watered down to allow countries to limit provision of DFQF to "at least 97 per cent of products originating from LDCs, defined at the tariff line level." These measures are to be made effective by 2008 or the start of the Doha Round implementation period; furthermore, the coverage of DFQF is to be progressively increased. Pakistan was one of those countries that vehemently opposed the granting of DFQF to the LDCs; the then Pakistan Commerce Minister said in a WTO meeting that if the LDCs get such access, Pakistan will become an LDC! As a result of Pakistan's objections, a provision was incorporated to take into account the impact on developing countries at similar levels of development.
The "..at least 97 per cent… defined at the tariff-line level" was the subject of heated debate; in the end, at Hong Kong the Chair of the meeting has to add a rider to the Ministerial Declaration to the effect the procedure would be decided in Geneva. The US (probably) required this flexibility to satisfy their domestic constituencies. The Bangladesh delegation held the view that (in 2005) of about 10,464 tariff lines in the US customs classification, the US could restrict 314 items (3% of the tariff lines). Although attempts to make it trade-weighted did not succeed, it was clear that the US would have to protect a large number of agricultural and other commodities, and would be obliged to allow a significant number of readymade garments into the duty-free category.
In the post-Hong Kong period, there has been movement on this issue in Geneva and in Washington. On April 01, 2007, Japan announced that they have opened up 98% of their tariff lines to duty-free imports from the LDCs. In 2006, this reflected some 99% of imports from the LDCs. This is an excellent move, and will put more pressure on the only remaining industrialized country, the U.S., to grant DFQF to us.
The multilateral negotiations have also had a major impact on the US Administration. In end-2006, as an outcome of the commitment undertaken at Hong Kong in 2005, the USTR called for a hearing on this subject. There were at least 17 identifiable groups submitting different petitions for, and 10 groups against, granting DFQF to the LDCs. This led to a study by the US ITC, and follow-up action is being taken. These are clearly in preparation for the implementation of decisions that may be taken at the multilateral levels.
U.S. Preference Programmes & LDCs: Following the introduction of the GSP scheme in 1976, the US has extended preferential access to developing countries. The current programmes that affect the LDCs directly are: Caribbean Basin Trade Partnership Act (CBTPA); the African Growth and Opportunity Act (AGOA), which came into effect in 2001; and the Haitian Hemispheric Opportunity through Partnership Encouragement Act (HOPE), which came into effect in 2007. Under these programmes the United States does extend effective DFQF treatment to several LDCs.
As can be seen in Table 1, nineteen of the 49 LDCs receive comprehensive preferences under either the CBTPA or AGOA. As the US Congress grants preferences by country, and not by the category of the LDCs, we find interesting outcomes. For instance, Laos has been left out of all preferences; and, several Sub-Sahara non-LDCs get the same preferences as the LDCs on the same programme.
The implementation of the Uruguay Round (WTO) agreements, and of these programmes, increased duty-free imports from the African LDCs. By 2000, about half of the goods imported from the LDCs entered the United States on a duty-free basis; that share increased steadily as a result of new, preferential programmes. The US has largely delivered on its commitment to duty-free imports from most LDCs located in Africa or the Americas; only the Asian-Pacific LDCs remain to be covered.
As can be seen from the data in Table 2, however, there is a sharp divide between the treatment that is extended to imports from four Asian LDCs that depend heavily on apparel exports and that which is granted to most other LDCs. In 2008, about 95.68% of U.S. imports from Bangladesh, Cambodia, Laos, and Nepal were dutiable on a normal trade relations basis (Regular Duty).
The only preferences that these countries receive come under either the normal duty-free or the Generalised System of Preferences or GSP (to which Laos is not yet designated); the GSP programme accounted for only one-half of one percent of U.S. imports from these countries. By contrast, for all other LDCs (excluding the four Asian countries named), duty was paid on only $ 883 million ($ 6,893 - $ 6,010), which represented just over 3.0% of imports from them - most were beneficiaries of the AGOA or the GSP programmes.
Significant differences in the import duties produce unusual outcomes. The average import from Bangladesh in 2008 faced a 15.32% tariff rate, and the rate for Cambodia was even higher (16.91%). In fact, the US duty structure is such that, effectively, imports from the richest countries face the lowest average tariffs (0.83% in 2008), followed by the middle-income developing countries (1.51%), with the average tariff on all imports from the LDCs being the highest (2.90%).
From time to time, the US has offered duty-free access to countries based on the "political" considerations. The latest effort is the passage in the US House of Representatives of a bill covering exports from mountainous areas of Pakistan, where security conditions are inhospitable and transportation costs to the port are prohibitive. Furthermore, it reduces tariff on textile products only and does not include apparel(RMG). The Senate failed to pass any bill on account of differences between the Republicans and Democrats over child labour issues; so, the House bill could not be implemented. It is not clear if the US Congress will take up this matter again.
Before leaving this topic, it may be useful to refer to the severe structural handicaps the LDCs face in trade; for instance, the high shipping costs to the US market. On average, it costs $3.93 to ship $100 worth of goods from an LDC to the United States. When this is added to the average tariff of $2.90, the total cost becomes $6.83. In contrast, to import from an industrialized country, the comparable rate is $2.64. Put another way, even if all the tariffs on the LDCs were to be removed, and all of the tariffs on industrialized countries were to remain in place, it would still cost substantially more to import goods from an LDC than it does to import goods from an industrialized country. This is another challenge that the LDCs face.
Bangladesh Efforts in the US: Bangladesh has been making strenuous efforts at the bilateral level. At every opportunity, the political and governmental leaders take up this issue with their US counterparts. The Bangladesh Garments Manufacturers & Exporters Association (BGMEA), representing the direct interests of the manufacturers and exporters of RMG, have been active at their own end. It would appear that these efforts are not only not coordinated, they also reveal a lack of deeper understanding of the dynamics of the political and administrative processes in the US.
Unlike most countries, tariffs are set by the US Congress and not the US Administration. Given that our tariffs are set by the Government, it was very difficult to grasp that the US Administration has very little decision-making powers in this regard. Furthermore, unlike some other countries, any decision in the US requires a process to be followed, involving several stakeholders and agencies.
The BGMEA lobbyists, knowing the procedures in the US, have been submitting bills in the US Congress for granting duty-free. They have been able to get a few Congressmen to co-sponsor these bills. The life of the bill is co-terminus with that of the elected members, which is two years; if not passed within this period, the bill automatically lapses. So, a new bill has been introduced every two years; incidentally, we observe that the co-sponsors have been dwindling each time, a new bill is introduced. The latest bill (HR 4101) - also known as the "New Partnership for Trade Development Act of 2009" (NEPAD) has been introduced by Congressman McDermott, but at the end of 2010 this too will join the list of failed efforts.
Our efforts at the Congressional level were given a boost by the participation of Prof. Yunus in a Congressional hearing on this subject, in May 2007. Despite the improved understanding of our problems, there was no forward movement in the Congress on granting duty-free access.
At the US administration level, each and every Bangladeshi leader has taken up this issue; we do not see any positive outcome or forward movement based on these efforts. A detailed narration of such efforts would not improve our understanding of the subject.
Recommendation: A detailed examination of this subject indicates that a multi-pronged, coordinated approach to this subject is needed.
On the bilateral front, the interest groups in the US are clearly identifiable, and lobbying with them is vital. Some of the groups are:
a. The US Congress
b. The US Trade Representative, who ask the US ITC to conduct studies, coordinates the Trade Policy Staff Committee (TPSC), and holds hearings on GSP (DFQF is within the category of GSP). The role of the State Department is not clear, unless there are over-riding political or strategic considerations
c. Lobbyist - the TRADE bill was a non-starter, as is the McDermott bill (NPDA) - However, they could perform a useful function, as a part of a broader lobbying strategy.
d. Non-Governmental Organizations in the US could play an important role, provided their concerns on issues such as the environment and labour, are taken on board.
a. Textile and apparel groups, including the National Council of Textile Associations, American Manufacturing Trade Action Coalition & National Cotton Council could play a supportive role. They had made an overture to us in 2006-7, but this was rejected by the BGMEA; if we had accepted their proposal, at least 30% of our RMG exports to the US would have been included in the duty-free list.
The key ingredient we sometimes ignore is the multilateral front. The Doha Round presents a wonderful opportunity. It was only on account of the commitments undertaken by the US in the WTO Ministerial in Hong Kong in 2005, that the US Representative (USTR) decided to hold the hearing and also ask the US ITC to undertake studies. Negotiations in Geneva must be pursued vigorously. There are expectations that the Doha Round will reach closure soon; we must not miss the bus.
Perhaps it should also be pointed out to the reader that the Doha Round will bring down US tariffs. Although the negotiations are still continuing, it can be safely predicted that the within five years of the conclusion of the Doha Round, the effective tariff on imports from Bangladesh will be reduced by more than half their current levels. This will erode the attractiveness of DFQF, and also make it easier for the US to grant DFQF.
In essence, the thrust of our efforts, to get DFQF into the US market, should be through the WTO. To supplement these efforts, approaches to many groups in the US should be made. Alone, Bangladesh would not be able to get a bill for DFQF passed in the US Congress; however, if this is a component of the Doha Round, it would pass automatically as a part of the Doha package.
(Dr. Toufiq Ali is former Ambassador in Geneva (2001-7), and can be reached at toufiqali@hotmail.com)
The imposition of quotas, allowed under the multi-fiber arrangement of 1974, continued till end-2004. From January 01, 2005, the quotas on the import of ready-made garments from Bangladesh (and, the rest of the world) were abolished. Although quotas are no longer relevant, tariffs on the imports of readymade garments are an important issue. The tariff applicable varies from product to product (by tariff line, to be exact), and, over a period, the tariff could change. The average US tariff currently applicable to imports of RMG from Bangladesh is just over 15% at a time when the general US tariff is below 4.0%.
If the Bangladeshi exporters are permitted to export their products to the US free of any duty, they would get a significant price advantage and would be able to increase their exports substantially. This is the basic objective of duty-free access to the US market.
The commitment to provide duty-free market access: The US, and the rest of the developed world, is committed to providing duty-free, quota-free (DFQF) market access to all products from the least developed countries (LDCs). At a time when these commitments were made, the quotas were still in place; hence, the term DFQF gained currency. Although quotas on readymade garments are no longer applied, the term DFQF has remained, primarily because some agricultural products remain under quota restrictions in selected markets.
The DFQF initiative, at the multilateral level, was first introduced at the 1996 WTO Singapore Declaration (para 14) which agreed to a "…..Plan of Action, including provision for taking positive measures, for example duty-free access, on an autonomous basis, aimed at improving their overall capacity to respond to the opportunities offered by the trading system".
In the 2000 United Nations Millennium Summit, this was made into a commitment, when the leaders "call[ed] on the industrialized countries … to adopt, preferably by the time of [the Third United Nations Conference on the Least Developed Countries to be held in May 2001], a policy of duty- and quota-free access for essentially all exports from the least developed countries." At UN LDC III, the EU was able to declare their Everything But Arms (EBA) initiative which essentially provided DFQF access to almost all products from the LDCs, save for four agricultural products and arms.
When the Doha Round was launched in 2001, in paragraph 42 of the Declaration the Ministers stated that "We commit ourselves to the objective of duty-free, quota-free market access for products originating from LDCs."
Several developed countries, including Canada, Australia, New Zealand, and Norway provided DFQF market access to the LDCs. The Canadian offer to the LDCs was utilized effectively by Bangladesh, mainly on account of the most liberal rules of origin requirement; our exports to Canada jumped up by almost one hundred and fifty per cent within two years of the offer.
The next important milestone was at the fifth WTO Ministerial at Hong Kong (2005). The Ministers agreed that "developed-country Members shall … provide duty-free and quota-free market access on a lasting basis, for all products originating from all LDCs by 2008 or no later than the start of the implementation period in a manner that ensures stability, security and predictability". By then, almost all developed countries, except the US and Japan, had provided DFQF to the LDCs. After frantic lobbying from the US, the commitment was watered down to allow countries to limit provision of DFQF to "at least 97 per cent of products originating from LDCs, defined at the tariff line level." These measures are to be made effective by 2008 or the start of the Doha Round implementation period; furthermore, the coverage of DFQF is to be progressively increased. Pakistan was one of those countries that vehemently opposed the granting of DFQF to the LDCs; the then Pakistan Commerce Minister said in a WTO meeting that if the LDCs get such access, Pakistan will become an LDC! As a result of Pakistan's objections, a provision was incorporated to take into account the impact on developing countries at similar levels of development.
The "..at least 97 per cent… defined at the tariff-line level" was the subject of heated debate; in the end, at Hong Kong the Chair of the meeting has to add a rider to the Ministerial Declaration to the effect the procedure would be decided in Geneva. The US (probably) required this flexibility to satisfy their domestic constituencies. The Bangladesh delegation held the view that (in 2005) of about 10,464 tariff lines in the US customs classification, the US could restrict 314 items (3% of the tariff lines). Although attempts to make it trade-weighted did not succeed, it was clear that the US would have to protect a large number of agricultural and other commodities, and would be obliged to allow a significant number of readymade garments into the duty-free category.
In the post-Hong Kong period, there has been movement on this issue in Geneva and in Washington. On April 01, 2007, Japan announced that they have opened up 98% of their tariff lines to duty-free imports from the LDCs. In 2006, this reflected some 99% of imports from the LDCs. This is an excellent move, and will put more pressure on the only remaining industrialized country, the U.S., to grant DFQF to us.
The multilateral negotiations have also had a major impact on the US Administration. In end-2006, as an outcome of the commitment undertaken at Hong Kong in 2005, the USTR called for a hearing on this subject. There were at least 17 identifiable groups submitting different petitions for, and 10 groups against, granting DFQF to the LDCs. This led to a study by the US ITC, and follow-up action is being taken. These are clearly in preparation for the implementation of decisions that may be taken at the multilateral levels.
U.S. Preference Programmes & LDCs: Following the introduction of the GSP scheme in 1976, the US has extended preferential access to developing countries. The current programmes that affect the LDCs directly are: Caribbean Basin Trade Partnership Act (CBTPA); the African Growth and Opportunity Act (AGOA), which came into effect in 2001; and the Haitian Hemispheric Opportunity through Partnership Encouragement Act (HOPE), which came into effect in 2007. Under these programmes the United States does extend effective DFQF treatment to several LDCs.
As can be seen in Table 1, nineteen of the 49 LDCs receive comprehensive preferences under either the CBTPA or AGOA. As the US Congress grants preferences by country, and not by the category of the LDCs, we find interesting outcomes. For instance, Laos has been left out of all preferences; and, several Sub-Sahara non-LDCs get the same preferences as the LDCs on the same programme.
The implementation of the Uruguay Round (WTO) agreements, and of these programmes, increased duty-free imports from the African LDCs. By 2000, about half of the goods imported from the LDCs entered the United States on a duty-free basis; that share increased steadily as a result of new, preferential programmes. The US has largely delivered on its commitment to duty-free imports from most LDCs located in Africa or the Americas; only the Asian-Pacific LDCs remain to be covered.
As can be seen from the data in Table 2, however, there is a sharp divide between the treatment that is extended to imports from four Asian LDCs that depend heavily on apparel exports and that which is granted to most other LDCs. In 2008, about 95.68% of U.S. imports from Bangladesh, Cambodia, Laos, and Nepal were dutiable on a normal trade relations basis (Regular Duty).
The only preferences that these countries receive come under either the normal duty-free or the Generalised System of Preferences or GSP (to which Laos is not yet designated); the GSP programme accounted for only one-half of one percent of U.S. imports from these countries. By contrast, for all other LDCs (excluding the four Asian countries named), duty was paid on only $ 883 million ($ 6,893 - $ 6,010), which represented just over 3.0% of imports from them - most were beneficiaries of the AGOA or the GSP programmes.
Significant differences in the import duties produce unusual outcomes. The average import from Bangladesh in 2008 faced a 15.32% tariff rate, and the rate for Cambodia was even higher (16.91%). In fact, the US duty structure is such that, effectively, imports from the richest countries face the lowest average tariffs (0.83% in 2008), followed by the middle-income developing countries (1.51%), with the average tariff on all imports from the LDCs being the highest (2.90%).
From time to time, the US has offered duty-free access to countries based on the "political" considerations. The latest effort is the passage in the US House of Representatives of a bill covering exports from mountainous areas of Pakistan, where security conditions are inhospitable and transportation costs to the port are prohibitive. Furthermore, it reduces tariff on textile products only and does not include apparel(RMG). The Senate failed to pass any bill on account of differences between the Republicans and Democrats over child labour issues; so, the House bill could not be implemented. It is not clear if the US Congress will take up this matter again.
Before leaving this topic, it may be useful to refer to the severe structural handicaps the LDCs face in trade; for instance, the high shipping costs to the US market. On average, it costs $3.93 to ship $100 worth of goods from an LDC to the United States. When this is added to the average tariff of $2.90, the total cost becomes $6.83. In contrast, to import from an industrialized country, the comparable rate is $2.64. Put another way, even if all the tariffs on the LDCs were to be removed, and all of the tariffs on industrialized countries were to remain in place, it would still cost substantially more to import goods from an LDC than it does to import goods from an industrialized country. This is another challenge that the LDCs face.
Bangladesh Efforts in the US: Bangladesh has been making strenuous efforts at the bilateral level. At every opportunity, the political and governmental leaders take up this issue with their US counterparts. The Bangladesh Garments Manufacturers & Exporters Association (BGMEA), representing the direct interests of the manufacturers and exporters of RMG, have been active at their own end. It would appear that these efforts are not only not coordinated, they also reveal a lack of deeper understanding of the dynamics of the political and administrative processes in the US.
Unlike most countries, tariffs are set by the US Congress and not the US Administration. Given that our tariffs are set by the Government, it was very difficult to grasp that the US Administration has very little decision-making powers in this regard. Furthermore, unlike some other countries, any decision in the US requires a process to be followed, involving several stakeholders and agencies.
The BGMEA lobbyists, knowing the procedures in the US, have been submitting bills in the US Congress for granting duty-free. They have been able to get a few Congressmen to co-sponsor these bills. The life of the bill is co-terminus with that of the elected members, which is two years; if not passed within this period, the bill automatically lapses. So, a new bill has been introduced every two years; incidentally, we observe that the co-sponsors have been dwindling each time, a new bill is introduced. The latest bill (HR 4101) - also known as the "New Partnership for Trade Development Act of 2009" (NEPAD) has been introduced by Congressman McDermott, but at the end of 2010 this too will join the list of failed efforts.
Our efforts at the Congressional level were given a boost by the participation of Prof. Yunus in a Congressional hearing on this subject, in May 2007. Despite the improved understanding of our problems, there was no forward movement in the Congress on granting duty-free access.
At the US administration level, each and every Bangladeshi leader has taken up this issue; we do not see any positive outcome or forward movement based on these efforts. A detailed narration of such efforts would not improve our understanding of the subject.
Recommendation: A detailed examination of this subject indicates that a multi-pronged, coordinated approach to this subject is needed.
On the bilateral front, the interest groups in the US are clearly identifiable, and lobbying with them is vital. Some of the groups are:
a. The US Congress
b. The US Trade Representative, who ask the US ITC to conduct studies, coordinates the Trade Policy Staff Committee (TPSC), and holds hearings on GSP (DFQF is within the category of GSP). The role of the State Department is not clear, unless there are over-riding political or strategic considerations
c. Lobbyist - the TRADE bill was a non-starter, as is the McDermott bill (NPDA) - However, they could perform a useful function, as a part of a broader lobbying strategy.
d. Non-Governmental Organizations in the US could play an important role, provided their concerns on issues such as the environment and labour, are taken on board.
a. Textile and apparel groups, including the National Council of Textile Associations, American Manufacturing Trade Action Coalition & National Cotton Council could play a supportive role. They had made an overture to us in 2006-7, but this was rejected by the BGMEA; if we had accepted their proposal, at least 30% of our RMG exports to the US would have been included in the duty-free list.
The key ingredient we sometimes ignore is the multilateral front. The Doha Round presents a wonderful opportunity. It was only on account of the commitments undertaken by the US in the WTO Ministerial in Hong Kong in 2005, that the US Representative (USTR) decided to hold the hearing and also ask the US ITC to undertake studies. Negotiations in Geneva must be pursued vigorously. There are expectations that the Doha Round will reach closure soon; we must not miss the bus.
Perhaps it should also be pointed out to the reader that the Doha Round will bring down US tariffs. Although the negotiations are still continuing, it can be safely predicted that the within five years of the conclusion of the Doha Round, the effective tariff on imports from Bangladesh will be reduced by more than half their current levels. This will erode the attractiveness of DFQF, and also make it easier for the US to grant DFQF.
In essence, the thrust of our efforts, to get DFQF into the US market, should be through the WTO. To supplement these efforts, approaches to many groups in the US should be made. Alone, Bangladesh would not be able to get a bill for DFQF passed in the US Congress; however, if this is a component of the Doha Round, it would pass automatically as a part of the Doha package.
(Dr. Toufiq Ali is former Ambassador in Geneva (2001-7), and can be reached at toufiqali@hotmail.com)