A Swiss skunk

The Swiss are famous for several things -- cheese, watches and clocks, army-knives, secret bank accounts, chocolates, expensive pens. However, today they are probably the most famous for a formula they proposed during the Tokyo Round (1973-79), but now vehemently oppose, especially any possibility of it being extended to agriculture.

By the way, there is another Swiss formula for cosmetics. If you do a Google search on Swiss formula, that's the one that will be thrown up first. Apparently, this "smells great, works well."

But regardless of what Google suggests, the topical Swiss formula is the one relevant for the Hong Kong Ministerial, the World Trade Oorganisation, and the Doha Work Programme. As applied particularly to NAMA (non-agricultural market access). By all developed country accounts, this formula also smells great and works well.

By most developing country accounts, this formula is nothing but butyl mercaptan. Isaac Asimov was a chemist, although success as a science fiction writer eventually overtook the chemist's career. Once, Asimov sent a story to his editor. It was returned, with the chemical formula for butyl mercaptan pencilled in by the editor. Butyl mercaptan is the core ingredient that gives the skunk its smell.

Although Indian newspapers are now full of the Swiss formula, no one cares to explain what it is.

The formula is simple. The final tariff will be At/(A+t), where 't' is the original tariff. 'A' is an undetermined coefficient that will be negotiated. There is a mathematical interpretation one can ascribe to 'A'.

If 't' is infinitely high, t/(A+t) approximates to 1 and the coefficient 'A' is thus the final tariff. We can choose A depending on what we want the final tariff to be.

Alternatively, there is a prior knowledge about the outcome of negotiations. Regardless of nitty gritty details, and the level of original tariff, once we know 'A', we know the maximum possible value of the final tariff, which will be 'A'.

Notice the formula is non-linear. Automatically, there will be higher proportionate reductions in higher tariffs. This is the so-called harmonisation effect and means dispersion in final tariffs will be smaller than dispersion in original tariffs.

This may seem to be desirable. But leads to the skunk effect. Because tariffs are higher in developing countries and developing countries will thus have to cut tariffs proportionately more than developed countries do. Particularly, in NAMA.

Thus leading to special and differential treatment in favour of developed countries and undermining not only one of the fundamental principles of GATT, but also the 2001 Doha decisions and the July 31, 2004 framework agreement.

To add to the skunk effect, there are bound duties and there are applied rates. Reductions apply to bound rates. What is the base for tariff reductions if there are no bound rates, as happens with some manufactured products?

One may then argue that the base for tariff reductions will be twice the applied rate in 2001. But this effectively amounts to exacting a second concession from developing countries, since unbound rates will be bound. Protectionism has overall deadweight welfare losses.

Trade economists are right in arguing for liberalisation. However, one must also appreciate that the GATT/WTO system operates on a principle of reciprocity: 'If you are stupid, I will continue to be stupid.'

Because multilateral negotiations operate on that principle and one cannot wish reciprocity away. That apart, what is being compared with what? From a welfare point of view, my unilateral liberalisation is preferable to my not liberalising.

But my liberalisation, spliced with your liberalisation, is preferable to my liberalisation without your liberalisation. To get back to the Swiss formula, this double whammy for developing countries can be handled through differing coefficients. 'A' for developed countries will be different from 'A' for developing countries. That's the outcome of negotiations and per se, the Swiss formula tells us nothing about what these coefficients are.

There is indeed a unilateral tariff reform agenda. Nor will any WTO commitments bite immediately. If Hong Kong is successful, which one doubts, they will bite after 2010. But even then, are we prepared to accept a maximum manufactured tariff of 10 per cent across the board, which is what acceptance of a coefficient of 10 (regardless of what coefficient developed countries accept), will imply?

The answer is almost certainly a function of how many tariff lines can be exempted from reduction commitments. With more exempted, acceptance of a 10 coefficient is easier. With fewer exemptions, one might want a coefficient of 15.

A coefficient of 10 for developed countries and one of 15 for developing countries of course maintains the developed countries' special and differential treatment. The simple Swiss formula is not the only option.

Modifications have been suggested, including the Argentina, Brazil and India (ABI) formula. In the ABI, each country's coefficient is a function of that country's average bound tariff. More specifically, the coefficient 'A' is an ambition coefficient ('B'), multiplied by the simple average of bound tariffs.

Developed countries suggest there is almost universal support for the simple Swiss. The commerce ministry suggests there is quite a bit of support for ABI. Modified, or simple, the Swiss part is certain.