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Proposal for negotiating disciplines on export credits

by Chakravarthi Raghavan

Geneva, 23 Mar 2001 -- A group of ten developing countries have tabled a proposal at the WTO Special Sessions of the Committee on Agriculture, as also in the regular session of the Committee -  for negotiations at the WTO to institute disciplines on the use of export credits in agricultural trade.

The proposal has been put forward by the Mercosur (Argentina, Brazil, Paraguay and Uruguay), Bolivia, Chile, Costa Rica, Guatemala, India and Malaysia, and calls for negotiations within the WTO on a specific set of disciplines to govern the provision of export credit guarantees and export insurance programmes.

According to a study by the Paris-based Organization for Economic Cooperation and Development (OECD), ‘An Analysis of Officially Supported Export Credits in Agriculture’, published in December 2000, the use of agricultural export credits by the members of the OECD increased markedly from $5.5 billion in 1995 to $7.9 billion in 1998.

The United States is the largest user of the export credits, providing in 1998, export credits of $3.929 billion, followed by Australia with $1.553 billion, the EU with 1.254 billion and Canada with $1.108 billion.

The OECD data is based on information available till 1998. Since then, though, statements by the US administration and Congressional budgeting processes suggest that the US programmes have expanded.

The largest increase in absolute terms are those of the USA, Canada, Australia and France, with substantial increases in relative terms by Korea, Greece, Canada, Finland and Belgium. Over the period 1995-1998, total export credits provided for agricultural exports by the OECD members was $27.796 billion.

According to the OECD, while the estimated ‘subsidy element’ in these export credits are relatively low, they do offer benefits to the importers, and provide a competitive edge to the exports.

The US export credits, the OECD study says,  are “almost twice as distorting” on a per unit basis as any other countries’ and, given the USA’s relatively large programme, these “account for the majority of the distortions in world markets caused by officially supported export credits.”

In fact, in the entire debate on agricultural trade and reforms, and the charges and counter-charges between the US and EC, the latter has been insisting that the US has been distorting world trade in agriculture and benefiting through the use of export credits, which are subject to neither WTO disciplines nor the OECD.

The OECD analysis challenges the frequently used justification for the export credit programmes, namely, that they may help developing countries overcome liquidity constraints to purchase food, which, otherwise they would be unable to import.

However, points out the OECD, the bulk of officially supported export credits are provided for trade between OECD countries, where binding liquidity constraints are unlikely.

“The very small share of officially supported export credits given to developing countries is one of two facts that calls into question the very purpose of these programmes,” says the OECD study.

The second fact, undermining the claim that it is intended to help developing countries, the OECD points out, is that the benefits to the importers are very small, “perhaps only sufficient to gain a competitive advantage for the exporter - and unlikely to be of much help to countries which are truly in need of financial assistance and food.”

The issue of export credits and credit guaranteed insurance was an issue in the agriculture negotiations under the Uruguay Round, but did not result in any disciplines as in respect of export subsidies.  Article 10.1 of  the AoA merely requires that export subsidies not listed in Art.9:1 of the AoA, shall not be used in a manner that results in or threatens to lead to circumvention of the export subsidy commitments nor shall non-commercial transactions be used to circumvent such commitments.

And under Art.10.2, the WTO members undertook “to work towards development of international disciplines to govern the provision of export credits, export credit guarantees or insurance programmes,” and also undertook that after agreement on such disciplines, export credits, credit guarantees and insurance programmes would be provided only in conformity therewith.

However, the AoA has been unable to take up this work, with the US dragging its feet, and in effect blocking such work pending the negotiations and conclusion of an Understanding in the OECD (which they could then hope to thrust on the WTO). But within the OECD too, the US has been able to hold up the negotiations.

The OECD has ‘An Arrangement on Guidelines for Officially Supported Export Credits’ for the last 20 years, and is claimed to have been successful in eliminating subsidies and trade distortions on exports.  But it is just a ‘Gentlemen’s agreement’, enabling any member aggrieved by a breach by another to match the export credit terms for its own exports.

The recent Brazil-Canada export subsidy disputes on aircrafts have however brought out that while the OECD arrangements may have eliminated trade distortions in exports among OECD members, the arrangement puts the OECD countries at an advantage over the non-OECD members. But in any event, agricultural products are specifically excluded from the OECD export credit arrangements.

In July 1994 (after the conclusion of the Marrakesh Agreement for the WTO), the OECD members agreed to begin considering a sector Understanding on agricultural products. These negotiations are still continuing, and as the OECD study puts it, “there remain differences between negotiating parties.”

The OECD Ministerial Meeting of 2000 regretted the failure of Participants in the Export Credit Arrangements to reach an agreement on an Understanding covering agriculture as mandated by the Uruguay Round, and called for negotiations to be resumed and successfully completed by July 2000, if possible, and by the end of 2000 at the latest.”

However, no agreement has still been reached and, as the OECD points out, “governments are currently free to provide credits to importers on any terms, no matter the degree to which they effectively subsidise the importer, as long as there is no protocol governing or limiting their use in agriculture.”

The ten developing-country group proposal for export credit negotiations at the WTO points out that though it was agreed during the Uruguay Round to work towards development of disciplines on export credits, they had not been developed so far, and Art.10.2 remains unimplemented.

This is an outstanding issue requiring priority at the WTO.

In their proposal, the ten countries have listed the issues to be addressed in the negotiations to develop disciplines on export credits, export credit guarantees and insurance programmes. These are: definition of official supported export credit, identification and listing of the variety of forms of officially supported export credit operations and identification and listing of types of institutions and programmes to be covered by such disciplines.  The proposal also calls for negotiating the terms and conditions for use of such credits, including, but not limited to: source of funds employed in the operation, maximum repayment terms, starting point of the credit, repayment of the principal, payment of interest, cash payments, sharing of risk, minimum interest rates, validity period for export credits, and minimum premiums.

There should also be notification requirements for all officially supported export credit transactions exceeding 180 days and with the notifications providing information on an aggregated basis of the products (by volume and amount of credit), countries of destination and terms and conditions of the transactions.

The proposal also calls for Special and Differential treatment and for appropriate minimum interest rates to address the interests of exporting developing countries.

And in terms of the Marrakesh decision on measures concerning possible negative effects of the agricultural reform programme on LDCs and Net Food Importing Developing Countries (NFIDCs), the disciplines to be adopted “must include appropriate provisions for differential treatment” for LDCs and NFIDCs. These should include longer repayment periods, consistent with the exemptions provided in the AoA.

On the issue of operationalising the Marrakesh decision on LDCs and NFIDCs, a discussion paper presented Wednesday at a FAO-organized round table on selected agricultural trade policy issues, said that the response mechanisms envisaged in the context of the Marrakesh decision have been ineffective.

The Food Aid Convention (FAC) envisaged under the decision, for a Committee on Food Aid to establish a level of food aid commitments, while the actual volumes of food aid have exceeded the minimum targets set (of 4.895 million tons of wheat equivalent, plus $ 130 million), the FAC has not treated all LDCs and NFIDCs equally in terms of priority and criteria for food aid allocation.

As a result, in the view of the FAO paper, the needs of some 13 NFIDCs are not fully taken into account. And the food aid allocation criteria suggested for the nine NFIDCs among lower middle income countries and four other NFIDCs, did not fully conform with the decision. Notably, the principle of compensation, implicit in the Marrakesh decision, is related strictly to the reform process and not considerations such as international financial crises or feeding vulnerable groups. The FAC thus does not fully reflect the concerns of the Marrakesh decision.

The IMF compensatory financing facility has been envisaged under the decision as a source for compensation for the LDCs and NFIDCs. But the CFF has not been used much, and its cereal component even less.

Citing an IMF staff study, the FAO discussion paper says, a key factor in the way of use of the CFF facility related to the conditionality attached to the access of the facility. The coverage of food under the CFF is limited to cereals only, whereas the Marrakesh decision refers to basic foods. And the CFF links excess cereal imports to export earnings. There were also problems of interpretation on whether the shocks are exogenous and short-lived events, requiring no policy adjustments, or otherwise (requiring such adjustments).

In the FAO view, the CFF would need considerable adjustments for it to be used as intended by the Marrakesh decision.

The FAO discussion paper has hence suggested two alternatives for operationalising the Marrakesh decision (sought by the LDCs and NFIDCs).

One idea is to strengthen the current mechanisms - the IMF’s CFF and World Food Programmes food aid, and bilateral programmes like export credits and food aid under the FAC.

The other alternative is to create a separate facility, “A WTO Food Security Facility (FSF)”, solely for implementing the Marrakesh decision. While details need to be worked out, the FAO paper suggests certain elements for such a facility.

The FSF would be a centralized machinery, with its own resources and an administrative machinery for implementation. The assistance commitments would be bound at the WTO.

According to FAO calculations, the annual level of compensation required would be roughly $600 million, and on the basis of a six-year reform programme, a total of $3.6 billion would be needed. Donor commitments for this could be provided in cash and kind.

The FAO proposal suggests, among the elements, the setting of the eligibility and level of compensation, and for the FSF in fully controlling the resources. The resources could be held elsewhere, but committed at the WTO, with these commitments bound in the WTO agriculture schedules. – SUNS4861

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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