EXECUTIVE SUMMARY

Trade Overview

Recent production and trade patterns in forest products suggest a number of important trends that are relevant to any assessment of the effects of trade barriers and their removal on this trade:

· The trade in forest products is highly regionalized within three important trading blocs, the Pacific Rim, North America and Western European. Within each bloc the major importers are mainly developed countries, such as Japan, the United States, Canada and the European Union. However, in recent years developing countries particularly in Asia are increasing their share of global imports, mainly logs and semi-finished wood products as raw materials for the export-oriented processing industries.

· The major global exporters of forest products still tend to be developed countries with temperate forest resources and processing industries. However, developing countries such as Indonesia and Malaysia have emerged as dominant world exporters of non-coniferous wood-based panels, logs and sawnwood and Brazil, Chile and the Asian newly industrializing countries are becoming major exporters of wood pulp and paper products. In general, the trade in forest products has shifted towards value-added processed products.

· Short and long term projections of the forest products trade confirm the increasing importance of developing countries as both exporters and importers of value-added forest products. Although there may be an increasing scarcity of tropical hardwood resources, particularly given current rates of exploitation and consumption in South East Asia, temperate resources, plantations and new sources of tropical hardwood resources in Latin America and Africa could meet any global shortfalls in supply. The extent to which the scarcity of tropical hardwood resources may become a constraint on processing activities as reflected in increased real prices for tropical logs and sawnwood may depend on the willingness of major developing country producers to pursue sustainable management of remaining old growth production forests and coordinate processing capacity with supply.

Trends in Trade Barriers

The trade in forest products has generally benefitted from successive post-war GATT agreements. Assessment of the additional progress achieved by the Uruguay Round agreement requires first identifying the main trends in forest products trade barriers leading up to the latest General Agreement on Tariffs and Trade (GATT) agreement:

· Tariff barriers to forest products trade have continued to decline in recent years, particularly in the post-Tokyo Round era. The extent of the decline in tariffs differs with the market and product. With few exceptions, developed country markets tariff rates had fallen generally to very low levels even before the Uruguay Round schedules were agreed.

· However, tariff escalation - the extent to which tariff levels rise with the level of value-added processing of a forest product - has continued in most developed countries, with specific processed products such as wood-based panels, builders' joinery, coated and corrugated paper, kraft, and furniture generally receiving relatively higher rates than unprocessed or partly processed products.

· Compared to developed country markets, tariff rates have consistently been higher - often substantially - in developing country markets. Although tariff escalation is also a feature in most of these markets, some developing countries have preferred a high uniform rate applied across all forest products.

· One important impact of the decline in tariff rates for forest products in developed country markets is that the tariff differential between Most Favoured Nation (MFN) and Generalized System of Preferences (GSP) rates has been reduced significantly. Most tariff reductions have led to a general decline in the MFN rate, while the GSP rate (often zero) has been left largely unchanged. This suggests that for certain forest products, exporters facing the full MFN rates may have gained more from falling tariff rates than developing countries that previously benefitted from the GSP and other preferential schemes.

· The most common non-tariff measures applied to the forest products trade have been quantitative restrictions and/or quality controls that have targeted specific products, wood species and even individual exporters. However, a diverse range of non-tariff measures have been employed, and their use has been both prominent and increasing for some products in the period leading up to the conclusion of the Uruguay Round.

Results of the Uruguay Round

The Uruguay Round officially concluded with the signing of the final act in Marrakesh, Morocco in April 1994. It has a number of important implications for the trade in forest products:

· Although complete elimination of tariffs on forest products was not achieved, the Uruguay Round will have a considerable effect on reducing overall tariff rates and escalation. In addition, the commitment by some of the major developed country importers to phase out tariffs on pulp and paper products was an important achievement. Equally, the establishment of bound rates - ceiling limits on tariff rates - may prove significant in terms of reducing market risk.

· The implications for the non-tariff barriers increasingly faced by forest products is less clear. However, two special agreements, the Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures and the Agreement on Technical Barriers to Trade (TBT), do provide the basis for tackling certain non-tariff measures that have been used as trade barriers against forest products. The SPS agreement could reduce the use of inspection, quarantine and treatment of imported forest products as prohibitive measures beyond what is necessary to protect domestic human, animal and plant populations from pests or diseases. The TBT agreement could limit the use of technical regulations on forest products as non-tariff restrictions rather than for legitimate purposes of protecting human health and safety, preventing environmental degradation and ensuring adequate product quality and design standards.

· Other provisions that may also help to reduce barriers to the forest products trade include limitations and clarifications on the use of anti-dumping and countervailing duties, customs valuation and licensing procedures, and market access restrictions.

· A possible indirect impact is that the Uruguay Round may have prompted other long-standing non-tariff barriers in individual markets to be lessened. For example, the European Union has recently revised its GSP plywood tariff/quota scheme.

Quantitative Effects of the Uruguay Round

A major task of this study was to estimate the likely impacts of the Uruguay Round tariff reductions on the forest products trade for selected products and markets. The impacts of the tariff changes in selected developed and developing country import markets were estimated, taking into account two effects:

· Trade creation - where the reduction in the tariff causes the product's import price to fall, thus stimulating additional demand for imports of the product.

· Trade diversion - where diversion, or substitution, between import sources occurs if tariff changes are not uniform across all imports, as well as where there are changing relationships in the domestic markets.

A partial equilibrium approach was used to estimate these effects using the basic methodology outlined in the Annex and the results for selected forest products in key developed and developing country markets under two scenarios are summarised in the table below. Several conclusions emerge from the analysis:

· The total trade effects of the Uruguay Round tariff changes on selected forest products when the proposed reductions have all been completed (ie around 2000-2004) are estimated in this paper to range from US$ 340 to 472 million in key developed and developing country markets. However, these impacts amount to only 0.4% of total 1991 forest products imports in the markets analyzed, which had an aggregate value of US$ 85.6 billion. This suggests that, although the real trade gains from the tariff changes are positive and significant, they may not have a substantial impact on the global forest products trade. One factor limiting the gains from the Uruguay Round for forest products is that the pre-Uruguay tariff rates for most of these forest products in major importing markets were already very low.

· Nevertheless the Uruguay Round will have succeeded in reducing forest product tariff rates in major markets to even lower levels than before, and for some forest products and markets tariffs will be phased out completely. In addition, the new and often lower rates in developed country markets will be bound, as will an increasing proportion of tariffs in developing country markets.

· Although the total forest products trade impacts estimated in this paper appear to be low compared to the overall trade flow, the different scenarios used as the basis for these estimates do suggest that the results are sensitive to key assumptions. A lower elasticity of demand in importing markets reduces the trade creation effect for both developed and developing countries. In addition, the extent to which forest products from developing countries have benefitted prior to the Uruguay Round from GSP rates in developed country markets will affect the extent of trade diversion occurring in these markets as a result of the Uruguay Round tariff changes.

· A final implication of the analysis is that any further reductions in forest products tariff rates that may be agreed in subsequent GATT Rounds or under the auspices of the World Trade Organisation (WTO) should no longer have a trade diversion effect, as both developing and developed countries should be facing a single tariff rate in most importing markets. Given that tariff rates on forest products in major markets are on average only 1.1%, the trade creation gains from additional tariff reductions may be significant but not substantial.

Estimated Trade Effects on Selected Forest Products of Uruguay Round Tariff Changes in Key Developed and Developing Country Markets

(1991 trade levels, US$ 1000)

Notes: Scenario A - medium elasticity of demand; pre-Uruguay Round tariffs in developing countries at MFN rates; pre-Uruguay Round tariffs in developed country markets at GSP rates for developing country imports and MFN rates for developed country imports.

Scenario B - medium elasticity of demand for imports, pre-Uruguay Round tariffs in all markets at MFN rates.

Other Barriers

In recent years there has been a proliferation of additional policies and regulations that have the potential of becoming "new" barriers to the forest products trade, many of which were unaffected by the Uruguay Round results. These include:

· export restrictions by developing countries to encourage domestic processing of tropical timber for export;

· environmental and trade restrictions on production and exports in developed countries that affect international trade patterns;

· quantitative restrictions on imports of "unsustainably produced" timber products; and

· the use of "eco-labelling" and "green" certification as import barriers.

Although only the last two trade measures could be strictly defined as "new", all have been increasingly employed in recent years and have the potential to affect forest product trade flows significantly:

· Developing countries are continuing to use export restrictions on wood in rough and semi-processed products to support domestic processing industries and improve export prospects for higher valued forest products. Despite the losses due to economic inefficiencies and the implications for the management of their forest resource base, developing countries are unlikely to end such policies but may instead employ them more extensively.

· Developed countries are also beginning to employ a variety of environmental regulations in their forest industries - both alone and in conjunction with export restrictions - that may have significant trade implications. Whether used intentionally for this purpose, such regulations may lead to trade distortions and discrimination.

· Many developed countries are also under pressure to adopt quantitative restrictions to limit the import of "unsustainably" produced forest products or to impose countervailing duties on imported products that benefit from an "environmental" export subsidy - i.e. "unsustainable" forest management that leads to lower harvesting costs and thus lower export product prices. This may result in an attempt to amend GATT/WTO rules to allow exceptions for quantitative restrictions and countervailing duties on these environmental grounds.

· Finally, the number of "eco-labelling" and certification initiatives applied to the forest products trade has increased rapidly in recent years. Generally, the aim of these initiatives is to distinguish "sustainably" produced forest products or to ensure that forest product imports conform to domestic environmental standards and regulations. Provided that such regulations and schemes are non-discriminatory, transparent and justified, are agreed mutually between trading partners or through multi-lateral negotiations, comply with GATT rules and conform with internationally recognized guidelines, then their potential use as trade barriers will be drastically reduced.

Although there are legitimate uses of all these policy measures, the rate at which they are being implemented and the frequency with which they have lead to trade distortion and discrimination suggests that their use must be examined carefully. International agreements and rules governing their use should also be negotiated. Indiscriminate and widespread application of these trade measures as "new" barriers to the forest products trade could easily over-ride the gains resulting from the recently concluded Uruguay Round.