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Limited impact of agricultural ‘reforms’ on OECD countries

by Chakravarthi Raghavan

Geneva, 10 Apr 2001 - - The Uruguay Round Agreement on Agriculture (AoA) has had only limited impact on agricultural trade and protection in the thirty OECD countries, the secretariat of the Paris- based Organization for Economic Cooperation and Development has reported in the executive summary of a forthcoming publication released here Tuesday.

The OECD officials said at a media briefing that in overall terms the level of domestic support in the OECD member countries remains very high, and the support currently runs at an annual $360 billion a year.

Ninety percent of the total domestic support in agriculture is concentrated in the European Union, Japan and the United States, the OECD said in the executive summary of its report, “The Uruguay Round Agreement on Agriculture: An Evaluation of its implementation in OECD countries.”

While the Aggregate Measure of Support (AMS), the main element of domestic support during the base period 1986-88 (of the UR’s AoA), has been declining, the exempt measures - blue box, green box, de minimis, and the special and differential treatment for the OECD area as a whole - has been increasing.

The largest increases in the ‘green box’ measure have been recorded by the EU, Japan and the USA.

By 1996, the green box expenditures were greater than the AMS. Domestic food aid has been the most important category of green box measures, and most of this has been accorded by the USA.

The agricultural subsidies account for 40% of the gross farm income in 1999 in the OECD countries, the same level as in the mid-1980s. In the case of Japan, Korea, Norway and Switzerland, the subsidies accounted for nearly two-thirds of the gross agricultural incomes.

Over 60% of the domestic support in the OECD countries are excluded from any reduction commitments.

Despite the reduction in the current AMS levels, the level of support measured in terms of the Producer Subsidy Equivalent (PSE) remains quite high, and the gap between PSE and the AMS is increasing over time, the OECD finds.

Many policies that may cause significant trade distortions are exempt from domestic reduction commitments. The non-product specific nature of the AMS reduction commitments, the method of calculating market price support and the use of negative figures when calculating current AMS, weaken the domestic support discipline. As a result, the domestic support reduction commitments will not necessarily result in reduced support overall, as required by the OECD Ministerial principles for agricultural policy reform, the study finds.

The green box measures do not always ensure that there are no or only minimal distortions in production and trade as a result of these measures, the OECD secretariat says, adding that more detailed studies are needed.

Looking to the future, in the context of negotiations for further reforms, another OECD report on the policy concerns of emerging and transition economies (ETEs) notes that the UR agreement was negotiated primarily by the developed countries, though accepted by consensus by all countries. As a result, there have been a number of asymmetries in the way the agreements have affected individual countries and these are looking to increased participation in the multilateral process to reduce the asymmetries. And a number of countries have also stressed the need for an agreement seen to be fair to all.

The OECD studies argue that everyone has a common interest in a liberal trading regime, and even small farmers and producers in the developing countries, albeit their non-involvement in exports, will stand to gain by freer agricultural trade and less distortions to the market.

However, representing as it does the interests of its 30-member countries, most of them very rich, and its studies and analyses based on these countries, the OECD officials don’t have any clear data, leave aside answers, to the problems of agriculture and its development in the developing world, particularly the large-sized economies with very large subsistence farming, and who face a daunting outlook (given the nature of the UR agreements) in creating employment through industrialization.

Their situations cannot be resolved exclusively by trade policies, the officials say.

The overall effects of the AoA on the OECD countries, the secretarial says, has been only moderate. This is due to the weaknesses of the AoA, and the historically high support levels during the 1986-88 base period (which became the starting point for the reduction commitments that kicked in from 1 January 1995). In some of the OECD countries, the reforms already undertaken in anticipation of the AoA had been sufficient to fulfill or partially fulfill the AoA commitments.

Also, the implementation and methodological elements of the AoA have weakened the effectiveness of reducing trade protection, the OECD said.

Despite the reforms, in terms of market access, the agricultural tariffs are very high in most OECD countries, with average agricultural tariffs higher than for non-agricultural, and with tariff rates on some agricultural products exceeding 500 percent.

The structure of the tariff schedules of the OECD countries has also become extremely complicated, “with several different rates applying to the same product, sometimes depending on the country of origin.” The number of tariff lines to accommodate in-quota and over-quota tariffs have increased.

The process of tariffication, and the considerable discretion allowed by the AoA resulted in tariff bindings much above actual protection rates, reducing the significance of subsequent tariff reductions. Some of the tariffs are not very transparent - with many specific rates or combination of ad valorem and specific components. The tariff dispersion in agriculture has increased, as also specific trade policy measures such as tariff spikes.

The special safeguards (SSG) mechanism to deal with surges in imports under the AoA (available to the OECD countries that converted all their non-tariff barriers into tariffs) has only been used modestly so far, but the potential for using the special safeguards remain, and could be used even when the imports are very low - as has occurred in some instances.

The OECD report is also critical about the tariff rate quotas (TRQs) and their administration.

The use of TRQs has allowed some access to markets previously closed, and some additional access where the imports had been restricted. The in-quota tariffs have been set at low levels, though not always. But in most OECD countries, imports of the full in-quota quantities have not occurred.

On average, only two-thirds of the TRQs have been filled, and this has steadily decreased, the OECD finds.

While this could be due to several reasons beyond the control of the importers, small in-tariff quotas, combined with high tariffs for over-tariff imports, and the restrictive methods of administration, are held responsible. The importing countries also have considerable flexibility in allocating the TRQs, and they have been allocated to specific supplier countries, through preferential tariffs under bilateral or regional agreements or preferential quota provisions.

The way the TRQs are administered not only determine who captures the economic rent, but also institutionalise the mechanisms to create the rent.

On the so-called ‘multi-functionality’ of agriculture - an economic activity with multiple outputs, contributing to several societal objectives, the OECD notes that the concept itself is not well-defined and is prone to different interpretations. The OECD is just beginning work on these, and is yet to arrive at a methodological basis for the definition and further research, starting with a ‘working definition’.

While the OECD is raising questions whether the laudable societal objectives can only be achieved through support to agriculture and not treating the agriculture sector and economy in the same way as others, there is a danger that even the concepts of rural employment, food security etc used as a part of the ‘multi-functional’ nature of agriculture, will be viewed from the optics of the industrialized world, and will be injected into the multilateral talks.

The analysis of the non-commodity output - including environmental impact and rural employment - is often used to talk about ‘multi-functionality’ in the agriculture talks, and injected and invoked in the agricultural talks mainly by Europe, Korea and Japan.

In the WTO talks, the proponents of ‘multi-functionality’ - a term not used in Art.20 of the AoA - also present it as a ‘non-trade’ concern, adding to the confusion in the talks and the references to ‘non-trade’ concerns of the developing world - whether of food security, rural employment and other elements.

Food security, from the point of the developed or OECD countries, is completely different from that of the developing countries, the OECD officials underline, and point out that in the OECD countries, food security can be assured by imports, stock-holding and perhaps some small production capacity. “We do not equate food production and food security” in the OECD countries, the officials add.

This issue of food security has not been studied at the OECD from the point of view of the developing countries, but was being looked at in terms of the impact of OECD agricultural policies on the food security of the developing countries.

Nevertheless, the OECD talks of the high tariffs in several of the developing countries, and the need for tariff reductions and the gains that will come from ‘trade reforms’. But the clarifications provided of the work being undertaken does not indicate that the OECD studies can really focus on the problems of subsistence farming in the developing world or of the role of agriculture for employment. – SUNS4875

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

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