While analyses in the media suggest that many countries are rethinking free trade, a group of developing countries recently took unprecedented steps to liberalize trade with each other.  It will be worth watching how these countries build on the framework worked out on December 2, 2009, in São Paulo, Brazil.

During the so-called São Paulo Round, trade ministers from a group of developing countries adopted a decision on modalities that would require them to cut tariffs by at least 20% on most of their dutiable tariff lines.  The trade negotiations are being conducted pursuant to the 1989 Global System of Trade Preferences Among Developing Countries (“GSTP”).  The GSTP Agreement is administered with the assistance of the United Nations Conference on Trade and Development (“UNCTAD”) and serves as a framework for the negotiation of progressive tariff reductions to stimulate trade among developing country members (often referred to as “South-South” trade) and world trade as a whole.  Launched in 2004, the São Paulo Round of GSTP negotiations is now scheduled to conclude by the end of September 2010. 

The Modalities

There is a lot that developing countries could accomplish in the São Paulo Round.  Simple average tariffs applied by participating developing countries range from 6 to 26.2% compared to an average tariff rate of 3.8% for developed WTO Members.  Participants in the São Paulo Round have committed to the following negotiating modalities for tariff cuts to their MFN applied tariff rates:

Depth of Cut:  an across-the-board, line-by-line, linear cut of at least 20% on dutiable tariff lines, to be combined with request-and-offer and/or sectoral negotiations on a voluntary basis.

Breadth of Cut:  commitments on at least 70% of dutiable tariff lines, except that participants with duty-free tariff lines accounting for more than 50% of total national tariff lines may apply the linear cut for product coverage equivalent to at least 60% of their dutiable tariff lines.

UNCTAD estimates that tariff cuts by GSTP members (including applicants) of 20% could generate intra-GSTP export gains of $7.7 billion, with 75% of that total accruing to Asian over African or Latin American signatories.  Those estimates, however, include GSTP members not currently participating in the São Paulo Round.  At the launch of the São Paulo Round, GSTP members tried to broaden participation in the GSTP by extending an invitation to all the members of the “Group of 77” developing countries and China to accede to the agreement.  To date, however, only the following twenty-two developing countries accounting for 15-18% of global trade have been participating in the São Paulo Round:  Algeria, Argentina, Brazil, Chile, Cuba, Egypt, India, Indonesia, Iran, Malaysia, Mexico, Morocco, Nigeria, North Korea, Pakistan, Paraguay, South Korea, Sri Lanka, Thailand, Uruguay, Viet Nam, and Zimbabwe. 

The Final Agreement in the Context of Doha and Existing WTO Practices

Any final agreement among developing countries in the São Paulo Round will secure preferential tariff rates for a select group of developing countries that will not be available to all WTO Members on a most-favored-nation (“MFN”) basis.  The WTO encourages developing countries to participate in regional trade agreements like the GSTP.  In 1979, GATT Contracting Parties adopted a decision known as the “Enabling Clause,” which exempts developing countries from the MFN obligation if they enter into regional or global arrangements for the mutual reduction or elimination of tariffs.    Today, the Enabling Clause continues to provide a legal WTO framework to encourage preferential trade agreements for developing countries, provided that any such “differential and more favorable treatment” be, among other things, (1) designed to facilitate and promote the trade of developing countries and not to raise barriers to or create undue difficulties for the trade of any other contracting parties, and (2) not constitute an impediment to the reduction or elimination of tariffs and other restrictions to trade on an MFN basis.  The GSTP Agreement is one of a dozen preferential trade agreements notified to the WTO pursuant to the Enabling Clause.

Tariff cuts achieved through regional trade agreements, such as the GSTP Agreement, can progressively reduce developing countries’ dependence on high tariffs.  Another advantage to developing countries participating in the São Paulo Round, in particular, is that the negotiating modalities propose to cut tariffs on the basis of lower applied, rather than bound, tariff rates.  In contrast, the Doha Round’s draft modalities envision tariff cuts from bound, not applied, tariff rates.  The gap between bound and MFN-applied 2007 tariff rates for WTO Members participating in the São Paulo Round averaged 27.2 percentage points for all products, 16.7 percentage points for non-agricultural products, and 40.3 percentage points for agricultural products. 

The ability of São Paulo Round participants to exempt 30% of their tariff lines from a linear cut, however, can be expected to reduce the potential trade expansion flowing from a final agreement to some extent.  The effect of a final agreement will also depend on concessions made on an MFN basis in the Doha Round.  A few participating countries (Algeria, Iran, and North Korea) are not WTO Members, and one participating country recently acceded to the WTO Agreement will not be required to undertake additional tariff reductions (Viet Nam).  For the rest, draft modalities for tariff cuts in non-agricultural products in the Doha Round are expected to result in the majority of tariff lines for developing countries being less than 12 to 14% (depending on the coefficient and flexibilities used).  Because most of the countries participating in the São Paulo Round already maintain simple average applied tariff rates on non-agricultural products lower than 14%, the Doha Round will lower tariff barriers to non-GSTP WTO Members even though applied rates to GSTP participants will be significantly lower:

Simple Average Tariffs for São Paulo Round Participants

(Except North Korea)

Source:  World Tariff Profiles 2008 – Summary Tables at 2-18.

Likewise, the Doha Round is likely to reduce bound rates for all WTO Members but will not eliminate advantages to GSTP participating members from the São Paulo Round tariff concessions on agricultural products.  Doha’s draft modalities call for a “tiered” formula for reducing tariffs, generally proposing cuts of 50% in tariffs greater than 0 to 20%, 57% in tariffs greater than 20 to 50%, 64% in tariffs greater than 50 to 75%, and 70% in tariffs above 75% for developed countries with developing countries required to make two-thirds of those cuts.   Participating countries, however, have especially large gaps between their bound and applied tariff rates on agricultural products.  As a result, a 20% cut to applied tariff rates in the São Paulo Round is unlikely to be equaled by the Doha Round’s cuts that are limited to bound tariff rates on agricultural products.

Next Steps

São Paulo Round participants have agreed to submit draft schedules of tariff concessions by the end of May 2010 at the latest.  The schedule also includes a four-month period to verify draft schedules and engage in consultations and request-and-offer negotiations.  Participants will then notify the GSTP Secretariat no later than September 30, 2010, of their finalized schedules, which will become an integral part of the Final Agreement of the São Paulo Round.  While preceding rounds of GSTP negotiations have not produced large-scale tariff reductions on a wide variety of products, there appears to be significant political momentum for achieving an agreement in the São Paulo Round in 2010.

Amy S. Dwyer is an international trade attorney and of counsel to the Washington, D.C. law firm of Stewart and Stewart