Dear Friend,

Welcome to Hong Kong! If ever there was a city which was testimony to the powerful impact of trade on growth and development, this is it.

Over the next several days you will witness a dizzying array of activities as the 6,000 delegates, 2,000 NGO representatives and nearly 4,000 journalists interact and struggle to stay abreast of what is going-on. With so many briefings underway and so much information to absorb, sometimes we lose sight of the bigger picture.

We must remember that this meeting was never intended as the finale of the Doha Development Agenda of global trade negotiations. It was intended to be an important stop along the road to completing the Round at end of 2006, and so it remains. We must remember as well that though much remains to be done, what has already been achieved is significant. The Doha Round is the most complex and ambitious set of commercial negotiations ever launched and the WTO takes its decisions on the basis of consensus among its 149 Members.

WTO Members reached agreement in July 2004 on a framework agreement which brings us roughly half way to a final accord. We had sought to use this meeting as a means of moving two-thirds of the way to a final accord and while we may not achieve that at this Conference, we will use this occasion to build a platform for the negotiations next year.

We have very little time and a great deal of work to accomplish. Early next year we need to complete the template agreements, known as modalities, for trade in agriculture and industrial products. We will need to accelerate our services negotiations so that we can conclude the Round with a critical mass of high quality offers on the table in more than 100 sectors including tourism, telecommunications, financial services and express delivery.

We also need to move on negotiations to ensure greater compatibility between WTO trade rules and multilateral environmental agreements, reforming the organization's dispute settlement system, improving and clarifying rules on anti-dumping and subsidies ?including those fishing subsidies which threaten to deplete global fish stocks ?and drafting rules to reduce the red tape that hinders the movement of goods across borders (trade facilitation).

And in all these issues there is the development dimension. This is the Doha Development Agenda and it is worth repeating that we will not have a successful conclusion to this Round without each one of the topics delivering results for developing countries. I believe that 70% of the gains to developing countries will flow from greater market access opportunities and a reduction of trade distortions to be agreed in the agriculture, industrial goods and services negotiations. One clear example of this is cotton ?which is part of the negotiations on agriculture ?where Members have agreed to address trade distortions ambitiously, expeditiously and specifically. Additional gains will come from specific provisions which would adjust WTO agreements to allow special and differential treatment for developing countries.

If we are to translate the results of the Round into reality, many of our developing Members will need aid for technical assistance and capacity building, for enhancing supply side capacity, infrastructure improvement, improving production efficiency and training. This is why we need a substantial Aid for Trade package as an essential complement to the results of the Round.

Governments ?all governments ?are extremely keen to have a deal. This is not just because of what they wish to achieve at the end, but because they are very much aware of what they have already done.

I hope that all Members will keep this is mind when they arrive in Hong Kong so that we can negotiate to advance the Doha Round closer to a conclusion by the end of 2006.

Finally, let me tell you that we will try to make your life easier by keeping you regularly posted on events as the Conference unfolds.

Let's keep our fingers crossed!

PASCAL LAMY
Director-General
World Trade Organization

Agriculture and industrial products: where we are and what was done in the last round of trade talks ?the Uruguay Round (1994)

To illustrate the progress made since the Round was launched in November 2001 one need only look at what is on the table in key segments of the negotiations to see the outlines of a deal which would well exceed the level of ambition in the last round of negotiations, known as the Uruguay Round, which concluded in 1994.

AGRICULTURE ?Until the Uruguay Round, international trade rules dealt with agriculture only in the most marginal way. But as part of that agreement in that Round, trading partners accepted to reduce export subsidies (by a 36% cut in the quantity exported and a 21% cut in expenditure for developed countries while developing countries agreed to reduce the quantity by 24% and expenditure by 14%). They also agreed to cut trade distorting domestic support by 20% for developed countries and by 13.3% for developing countries. Finally, governments agreed to reduce tariffs by an average of 36% for developed countries (with a minimum cut of 15% for each tariff line) while developing countries accepted average tariff cuts of 24% with a minimum tariff cut of 10% for each line.

In July 2004 Members agreed, as part of the Doha Round framework accord, to eliminate all forms of export subsidies by a date certain. Governments agreed to cut trade distorting domestic support by 20% from the first day an agreement would be implemented ?a figure equal to the total cuts for the Uruguay Round. Members have responded since July 2004 with a series of offers which would further slash trade distorting support, with various proposals offering cuts for the largest subsidizers of between 60%-83%. Developing countries would see their trade distorting support reduced by a smaller amount. Much has been made of the fact that these offers would be from the subsidy level caps which were agreed in the Uruguay Round and that many subsidizing Members currently spend well under these caps. True enough, but looked at another way bringing down the cap would greatly reduce budgetary room for manoeuvre in the future. When you consider as well that under current rules some governments could raise their spending on trade distorting support by $25 billion annually and still be within their Uruguay Round commitments, there is a significant downside risk to a failed negotiation.

Furthermore, the July framework and subsequent offers would mean that distorting subsidies for all commodities would have to be reduced. Allowable limits on other types of subsidies, for instance smaller payments that have not counted towards the cap (de minimis), would be reduced and other subsidies which had never been capped, included production limiting support, would be significantly reduced and capped.

On market access, the offers on the table indicate that there is a good chance that we will go beyond what was achieved in the Uruguay Round. For one thing, under the agreed tiered formula, the highest tariffs will be reduced by the largest amount. This compression effect would sharply reduce tariff peaks and a process called tariff escalation whereby products attract a higher import duty at every stage in the value-added chain. Moreover, the majority of offers on the table would result in markedly deeper cuts in tariffs than we saw in the Uruguay Round.

Some sceptics have noted that proposed cuts would come from bound tariff levels and not from the levels that are actually applied to imports. To some extent this is true, though in the end we will see applied rates coming down as well. This criticism misses the fundamental point that a significant reduction in bound rates would radically improve transparency and predictability in trade because governments' ability to suddenly close the market through WTO-consistent tariff hikes would be curtailed. This sort of discipline has historically served to underpin domestic reform in a great many countries.

INDUSTRIAL TARIFFS ?Since the creation in 1948 of the multilateral trading system and the WTO's predecessor the General Agreement on Tariffs and Trade average tariffs in the industrial world have fallen from roughly 40% to less than 4%. Trade in manufactured products constitutes about 70% of total world trade and these tariff reductions have driven explosive trade growth. Since 1948 trade has increased nearly 20 fold with developing countries seeing their share of world trade rising to 31%.

Different systems of tariff reduction have been used in various trade rounds. In the Tokyo Round which concluded in 1979, a “Swiss?formula was used, under which the highest tariffs were reduced by the widest margin. In the Kennedy Round, which ended in 1967, tariffs were cut through a straight linear reduction. In the Uruguay Round there were a mix of approaches utilized with the objective being an overall average cut in tariffs of one-third. This resulted in developed country tariffs being reduced from a trade weighted average of 6.3% to the current level of 3.8%. To calculate developing country average tariffs is more difficult because a large percentage of these tariffs were unbound and variable. What is significant is that the percentage of industrial product tariff lines that was bound increased from 21% to 73%. A tariff binding is a ceiling level above which a Member cannot apply a tariff. In other words, it is the maximum tariff that may be applied by a Member. However, such rates are not cast in stone. They may be increased or withdrawn subject to compensation being provided to the WTO Members affected by such action. This binding locked in reforms, enhanced transparency and predictability and thus contributed to facilitating trade.

In the July framework WTO Members have agreed to cutting tariffs in accordance with a formula. A formula approach provides transparency (every Member will know how the other will reduce its tariffs); efficiency (simpler process than request/offer approach), equity (tariff reduction depends on rules rather then “bargaining power?; predictability (easy to foresee the results of the negotiations). Although no consensus has been reached on this point yet, a large number of Members have embraced the Swiss formula with the use of two coefficients, one for developing countries which would result in smaller average cuts and one for developed countries where the cuts would be larger in percentage terms. There would also be flexibilities for developing countries in which they could exempt a percentage of tariff lines from the formula cuts. The compression effect of this formula means that tariff peaks and tariff escalation will be sharply reduced. This is significant because while developed countries have generally low tariffs, they often apply their highest peaks and use tariff escalation on products of greatest interest to developing countries such as textiles, apparel and shoes.