Market Access Negotiations
Simulation Exercise

This simulation is designed to give participants an opportunity to explore the environment in which governments manage their participation in WTO. The political economy of the agreements that we have reviewed is complex; too complex to ever reflect accurately or completely in a small simulation. The purpose of the simulation exercise, however, is to help you to develop an understanding of how WTO membership constrains and directs the choices that governments make on national policy issues and how these constraints contribute to the maintenance of global welfare.

Part I provides background information on four hypothetical countries, and a number of public and private stake-holders who are assumed to have a legitimate role in the development of each country's negotiating position. Part II lays out the three phases of the simulated negotiations, and three activities under each phase. Part III contains a set of confidential negotiating instructions.

Part I - Background on Countries Participating in the Negotiations

South Land - Developing Country
A very large population, 65% of which now lives in urban areas where employment rates for adults (75%) are three times as high as in rural areas. Economic growth rates are high (6% on average through the last decade) but population growth is almost 2% and infrastructure (transport, power, communications) is over stretched in urban and surrounding areas. Economic policy is in a state of transition from centralized, state-controlled management of production to a typical capitalist economy based on private sector ownership and control.

Wages remain low relative to other regional developing countries in most of in the small-scale and under-capitalized manufacturing industries that account for 45% of national output and 55% of national employment (balance is services, agriculture and public enterprises). The majority of firms in the private sector lack the knowledge or capacity to produce for export but many are aware that import competition in light-manufactures is growing: particularly imports from regional developing countries who now enjoy some preferential access to SouthLand markets under a regional 'free trade' agreement.

Some manufacturing industries such as sports footwear and clothing, consumer electronics, motor-vehicle parts, aircraft and railway sub-assemblies, toys and packaging, have wages levels at or above regional averages reflecting a strong export outlook, access to foreign exchange and higher levels of foreign and domestic investment. Several of the most rapidly growing firms in these industries are now located in export-processing zones along the coast of South Land where they enjoy low or zero import duties ('duty drawback') and escape many of the duties and administrative inefficiencies of the South Land ports administration. Their access to the huge domestic market is, however, limited and they have difficulties in taking full advantage of the generally low wages and high levels of supply in the domestic labor market. These industries presently account for 8% of national income but only 5% of national employment.

The two or three large state-controlled, but 'privatizing' enterprises (shipbuilding, motor-vehicles, machine-tools, cement) are also under-capitalized and probably not profitable despite many years of state-controlled borrowing from official and commercial sources. All four industries have had poor export records and have been penalized by anti-dumping duties in industrialized country markets ('non-market economy' dumping assessments). These industries have been shedding labor for several years but still account for 20% of all employment. The government of South Land would like to find a way to reduce the dependency of these industries on officially supported financing and on special labor laws, land regulations and tax-concessions related to their large, slowly moving inventories. They are concerned about the potential employment effects of rapid withdrawal of existing support measures and the impact of any collapse of these enterprises on the state banks that hold most of their debts.

Applied protection levels vary between 5% (some electronics, sporting equipment, some clothing and most building materials except cement) and the average 18%. Bound rates on these products are up to twice as high as applied rates. Applied tariffs on the goods produced by the State enterprises (boilers, rolled steel, motor-vehicles and parts, machine-tools, cement and electric motors) are 20 - 50% with bound rates averaging 100%. Post-Uruguay round average bound rates are 65%; but only 60% of the tariff schedule is bound.

SouthLand derives up to 15% of government revenues from import duties and port charges.

Government Ministries
Trade Ministry
Industry Ministry
Finance Ministry

Private stake-holders and Publicly Owned Enterprises
National Chamber of Commerce (larger private industries, including joint-ventures in the EP Zones. Investment-hungry, growing relatively quickly, looking for expansion opportunities outside the EPZs)
Association of Manufacturers (smaller firms, many suppliers to the highly-protected 'state' sector; others feeling the impact of imports from regional developing countries)
Confederation of State Enterprises (has recently asked the government to implement a more vigorous anti-dumping policy)
Union Federation (officially-sanctioned unions and workers insurance cooperatives)

Southeast Land - Developing Country

A 'newly industrializing' country in the 1990's, Southeast Land has a population 1/10 the size of South Land but an economy that is almost 1/3 as big. Southeast Land has experienced periods of rapid export-led growth in the past two or three decades based on (mostly) low manufacturing tariff rates, relatively open services markets and good port facilities (which it leases, in part, to Southwest land). The food processing, IT, telecommunications equipment, and garment industries have low levels of protection (around 5%, bound) and high growth rates based on a strong export orientation. Wage rates in this part of the manufacturing sector are now approaching those of industrialized countries, but productivity of workers is still high thanks to improvements in education and skills and the open investment climate which has seen continued capital growth.

Some other industries (other textiles, motor-vehicles, cement, petrochemicals) are more highly protected, although at rates that are only average by developing country standards (bound rates of 16 - 30%). These industries are more dependent on domestic markets than on exports although it is clear that the motor-vehicle industry cannot survive without improved export performance. They are located in the north and central regions of SoutEast Land which is a politically sensitive area for the government.

Overall, Southeast Land has a low-tariff profile: applied rates average 8% across the manufacturing sector with bound rates averaging 18%.

The rate of economic growth in Southeast Land has slowed following a shake-out in the financial sector and a slowing of foreign investment due partly to cyclical factors including a sharp economic slowdown in its main industrialized country export markets. Southeast Land's economic growth outlook has also been affected by the difficulty of gaining new access in the most rapidly growing regional developing country markets (particularly SouthLand) for products such as motor-vehicles, consumer electronics, mobile phones and telecom/IT equipment. Exports of manufactures from Southeast Land to South Land have been growing rapidly and now account for almost 30% of all Southeast Land exports. But progress on a regional 'free trade' agreement has stalled.

The slower rate of trade and economic growth after decades of rapid expansion has resulted in unexpected unemployment particularly in the north and central regions of Southeast Land. An attempt by the Finance Ministry to reintroduce exchange controls and a new exchange rate 'peg' to protect some influential domestic investors in the construction (cement) and petrochemical industries from financial trouble has resulted in a foreign investment 'strike'. The government is under strong pressure from manufacturing industries and investors to come up with new ideas that will restore growth and stability.

Government stake-holders
Trade Ministry
Finance Ministry
Ministry of Regional Development (responsible for economic development in the Northern and Central regions)

Private stake-holders
Industry Federation (mostly the 'older' industries of the North and Center regions)
Chamber of Manufacturers (mostly the 'new' export oriented industries)

Southwest Land - Least Developed Country
Two thirds desert; landlocked with 60% of the population dependent on substance agriculture including herding livestock (sheep, goats). Poor transport infrastructure overall with one highway serving the relatively fertile central valley and leading to the main river port in the south (the river flows to the main port in Southeast Land). Good telecommunications in the central area thanks to satellite and mobile phone networks, but access is priced out of the reach of most of the population due to high protection for a single state telecomm manufacturer/importer. Two manufactured exports: cement, based on hydro-power and textiles based on a huge woolen textile factory, purpose-built by North and Southeast Land investors to take advantage of near-zero preferential duties in North Land for textiles from LDCs. The factory imports 55% of its wool inputs from North Land in order to meet the preferential rule of origin requirement in North Land. The factory is a sophisticated, capital-intensive operation with modest direct employment requirements. It sources only 10% of its woolen fiber needs locally and would buy more from Southwest Land producers if the quality and supply to the main domestic market in the capital city were more reliable.

Southwest Land applied tariffs on manufactures are high: 20 - 50%. Only 20% of duties are bound. Pre-shipment inspection procedures required by Southwest Land Customs are managed through a North Land company. PSI verification is priced at approximately 3% of the value of the goods. Southwest Land customs officials may also require physical inspections against a manifest at three points (ex-factory, at the leased port facilities in Southeast Land and at the bonded areas in the river port in Southwest land).

Government stake-holders
Trade Ministry
Finance Ministry

Private stake-holders
The Chamber of Industry and Investment (mostly funded by the foreign textile investors)
The Royal NorthWest Land Cement Company
The Rural Women's Development Cooperative (wants to improve opportunities for employment in rural areas)
  
North Land - Developed Economy
Highly developed industry economy, with world competitive manufacturing, telecom, bio-technology and services industries. Low average duties on manufactures (3%) but aggressive anti-dumping measures against State Controlled enterprises in South Land which add up to 100% to the landed cost of those imports. Although its duties are low on average, tariffs on footwear, clothing, sporting goods, toys and motor-vehicles -- exports of the South and South East -- are twice the average rate or higher. Very high barriers on some agriculture and food imports including processed foods. Extensive foreign investment in all industries. High wages in all industries. Restrictions on foreign investment in electronics industries.

After a period of sustained growth (2.8% average over more than a decade) NorthLand has experienced a sudden economic slump triggered by the bursting of an asset-market bubble (stock, real-estate) that has turned into a recession with a surprisingly big loss of employment in import competing industries, particularly those with high labor costs. The authorities had held interest rates high for several years to control asset overpricing. But this also had the effect of pumping up the exchange rate, and sucking in imports (leading to a massive trade deficit, financed by foreign investors). The authorities have now allowed interest rates to slide dramatically to try to ensure a 'soft landing' at the bottom of the slump. As a result, the currency has softened and import levels have fallen faster than overall economic growth.

Economic growth in North Land remains always been trade-led -- although trade accounts for only 26% of output -- particularly by the opportunities for its exporters in South and Southeast Land and investors in Southeast Land. Recently, it has become more concerned by the preferential trade agreements between the developing countries which it believes may be discriminating against its exports. Both exporters and importers in North Land have been advocating an agreement on Trade Facilitation that they hope will bring about a reduction in port and clearance costs, particularly in the South.

Government stake-holders
Trade Ministry
Ministry of Finance

Private stake-holders
Chamber of Commerce (exporters and importers -- firms with substantial foreign investments in manufacturing)
Industry Association (representing mostly import-competing industries)
Union Federation
 

Part II - Simulation Instructions:

Depending on the amount of time available, a simulation of a round of WTO negotiations on non-agricultural market access can encompass the following three phases in negotiations. Each of the three phases should be expected to take no more than 90 minutes, with perhaps another 90 minutes spent in initial briefings and final assessment.

To simplify this simulation, 'proposals' should be based on one or a combination of the following, with 'special and differential' treatment for developing countries as part of any approach

(a) A simple linear tariff cut of [33%] by developed countries and [16%] by all developing countries.
(b) A 'harmonizing' formula cut of the form proposed by the chairman of the NAMA negotiating group.
(c) Possible 'zero-for-zero' tariff cuts on a sector basis
(d) Changes to rules on regional trade agreements, anti-dumping, rules-of-origin and PSI
(e) A potential agreement on trade facilitation


1. Development of Proposals (1 hour)
a) In preparation for the negotiation of market access trade ministry representatives should consult with private sector representatives, and other government ministries on preparation of national request. Each country should prepare a proposal that has the approval of most, if not all, stake-holders.
 
b) Trade Ministry should hold bilateral consultations with each trading partner on its proposal (this step can be skipped if time is limited).
 
c) While government representatives are consulting or negotiating with trading partners in this and the following phases, private stake-holders should meet with their counterparts from other countries to discuss issues, interests, and to obtain additional information that can be shared with their government negotiators.

2. Advocacy of Proposals (1 hour)
a) Each country should submit its proposal to the Negotiating Group. Government representatives should speak briefly about its advantages (seeking the agreement of other countries). The advantages could be due to:

There should be a brief Q&A period following each presentation in which any member of a national delegation (including industry and union representatives) may seek further clarification of a proposal.
 
3. Final Negotiations (1.5 hours)
a) Remember, this is a negotiation. Each country should be ready to modify its proposals during the advocacy phase; after the Final presentations are made in the next phase there may be NO FURTHER changes to proposals pending the 'vote'. Government representatives lead by the Trade ministry, may meet with other government representatives as necessary during the time available to discuss proposals. Industry/Union representatives may observe these negotiations but may not participate directly in them. Government representatives must seek approval of any changes to a negotiating proposal from their stake-holders.

b) National groups should meet to discuss their final proposals. Countries may decide to form 'alliances' with other countries in the presentation of a final proposal. This means that there may be fewer final proposals than countries.

c) The Trade Ministry should develop and obtain approval of final negotiating instructions by most, if not all, stake-holders.

d) Government representatives should briefly (5 minutes) present their final proposals highlighting any changes they may have made and summarizing the advantage of their proposals.

4. Decision and assessment (1.5 hours)
Unlike WTO, this simulation does not necessarily lead to a consensus. The final decision is taken by a ballot of the industry and union representatives who must 'vote' on each of the final proposals put forward by their own and by foreign governments. In an open procedure, each industry and union representative must allocate between 0 and 10 points to each of the final proposals having regard to the long-term (5 year) prospects for his or her constituents, for their national economy and for the global economy. The points allocated should reflect each representative's estimation of the likelihood that the proposals would advance these objectives on a scale of 0 to 10. The 'winning' proposal is the one with the most 'votes', EXCEPT that if the proposal with the most votes gathers less than an 'average' share of the possible votes (e.g. if the 'winner' out of 3 proposals wins fewer than 33% of the total possible number of votes) then the negotiations are declared a 'failure' and must start again.

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Draft 29 September, 2003. (c) Peter Gallagher (www.petergallagher.com.au)