TWN Info Service on WTO and Trade Issues (Nov05/16)

25 Nov 2005

Some critical points on WTO agriculture negotiations: Paper by Bhagirath Lal Das

Below please find a paper by Bhagirath Lal Das commenting on the current WTO negotiations on agriculture.

We believe the paper is a very useful reference to interpret the agriculture talks. It was published in the SUNS, 19 Nov 2005.

B. L. Das is a former Ambassador of India to the GATT and a former Director of the UNCTAD's Trade Division.

With best regards
Martin Khor


Some critical points on WTO agriculture negotiations

By Bhagirath Lal Das*
Geneva 18 November 2005

Agriculture is once again proving to be the determinant of results in the GATT/WTO negotiations. In December 1987, it caused the collapse of the Montreal Mid-term Review of the Uruguay Round negotiations. Then at the end of that round, the results could be consolidated only after the two major developed countries had an agreement in this area in what was called the Blair House accord.

Somewhat later, though the failure of the Seattle Ministerial Conference in 1999 was for various reasons, an important factor was lack of harmony in the positions of the major developed countries in the area of agriculture. Again, the Cancun conference collapsed in 2003 ostensibly because of the Singapore issues, but a more basic reason was the disappointment caused in the preparatory process by the reluctance of major developed countries to move ahead with substantial liberalisation of their agriculture production and trade.

Hectic activities during the last few weeks at various levels, including the level of Ministers, in groups of various sizes, have not succeeded in patching up the differences in this area. The media reports often point to the role of the European Union (EU) countries in the slow pace of the negotiation. This takes us to the high level of domestic subsidy in agriculture in the EU and the hesitation to cut it down. But the situation with the US is similar, though the figures are comparatively lower.

Both the EU and the US are major exporters and importers of agriculture in the world, accounting for 11-13 percent of the share in world export and world import; thus having enormous effect on world production and trade. Both have high domestic subsidies. Their permissible levels of total trade-distorting support in agriculture (TDS, comprising amber box + de minimis + blue box) were US$ 92 billion and US$ 48 billion respectively in 2000, coming to 43 percent and 25 percent of agricultural production respectively. (Actually, applied levels were lower.)

Both used the technique of fulfilling the obligation of reducing the amber box subsidy while actually increasing the total subsidy. Both adopted large-scale box shifting by questionable classification and avoided reduction. Both got the facility of the green box in the WTO Agreement on Agriculture which was immune from reduction obligations and put big amounts in it. They had 22 billion Euro and US$ 50 billion (of which about US$ 5 billion as direct payment to farmers) respectively in the green box in 2000.

Both have been pushing the export of their agricultural products to the world, putting the farmers of other countries, particularly those of the developing countries, to grave risks of losing employment and means of livelihood. And both have been shielding their own farmers from competition with imports.

Japan, Switzerland and Norway also have high permissible trade-distorting support (TDS) in comparison to their agricultural production (58 percent, 71 percent and 81 percent respectively in 2000) and in this way they also protect their farmers against imports; but they do not at least export their farm products to other countries and thus do not threaten the farmers of other countries.

Will the recent proposals of the EU and US for cutting their subsidies help the situation? There is grave doubt. Of course, there will be reduction from the permissible levels of subsidy. But there will be no reduction from the applied levels of subsidy; in fact there will be scope for further increase.

Calculations by some experts show that the proposals of the US and EU will result in their reduced TDS being respectively US$ 23 billion and 33 billion Euro. The applied TDS (for 2000) for the US is US$ 21 billion, thus leaving a scope for increase by US$ 2 billion. In the case of the EU, the applied level in 2008 will be 26 billion Euro according to their new common agriculture policy (CAP), which can be increased by 7 billion Euro and still be within the reduced limit.

It is of course true that with the commitment in the WTO, they will not be able to raise the amounts of their total TDS beyond the committed limit and the "water" in their subsidy levels will dry down to some extent. But that is no comfort as the reduced levels and even the lower applied levels are still very high levels of subsidy, accounting for more than 10 percent of their agriculture production levels. Such high overall subsidies concentrated on selected number of products will be dangerous for the products of other countries that are competing with them either in their domestic market or in third-country markets.

And the green box is likely to remain untouched. As mentioned above, both the US and the EU have been transferring various types of subsidies to the green box and the trend may continue, as the scope of increase here is limitless, since there is no cap on this box.

Thus the prospect for the agriculture sector of the developing countries is bleak. Group 20 and Group 33 have given their proposals that indeed are quite modest but yet these have not found favour with the major developed countries. Group 20's proposed TDS cut (70-80 percent) will reduce the US's applied level significantly, but in the case of the EU, it will barely trim the margin of the 2008 level. With all this reduction, the applied levels will still remain high enough to threaten the domestic production of agriculture in the developing countries and stifle their export efforts in this sector.

Group 33's proposal on SSM (October 2005) specifies the criteria of application of the safeguard, but it limits the safeguard recourse to additional tariffs. It leaves out quantitative import control that is a direct and more effective protection.

Further, in its proposal for SP (October 2005) it has given detailed criteria for indicators for food security, livelihood security and rural development which can be a good base for negotiation, but one should guard against the details getting bogged down in technical fineries.

Its proposal for treatment of SP (December 2004) stipulates eligibility for SSM and exemption from tariff cut. The very objective of having the category of SP is such that really there should not be any doubt about its eligibility for SSM; in fact the eligibility criteria for SP should be lighter, application should be simpler and relief should be stronger compared to the SSM applied to other products.

The major developed countries, particularly the EU, are letting it appear that they have some form of right on their current subsidies and are making huge concessions by reducing them. It is on the basis of this presumption that they are seeking counter-concessions from the developing countries in the areas of industrial tariff and services. This line of thinking and reasoning has to be challenged straightway.

Subsidy is different from tariff which is a well recognised form of protection in the GATT/WTO system. Countries enter into negotiations for mutual give-and-take in rights and obligations through reduction of tariff. But subsidy has never been put on a similar pedestal of rights as tariff. It is in fact seen more as an instrument to curtail/infringe the benefit arising out of the reduction of tariffs; and therein lies the justification for relief against subsidy in the GATT/WTO system.

Moreover, there is also the aspect of equity and fair play in this system where the members are at vastly diverse levels of capacity and resources. The developing countries, even if permitted, can never match the quantum of subsidies that is possible for the major developed countries; and thus they will always have a severe structural handicap if the subsidy is recognised as a norm and right in the GATT/WTO system.

Subsidies should be considered permissible only for the limited purpose of compensating for the structural weakness of the members in deriving commensurate benefit from the system that is based on the concept of mutual benefit sharing. Certainly, the major developed countries do not fall in this category. Any professed or implied claim from their side that they have to be compensated for reducing/eliminating their agriculture subsidy should be rejected outright.

It is foreseen that the negotiation will be getting more intense now on up to Hong Kong and even beyond, until the detailed modalities are finalised. We should consider the following points critical and basic:

1. The objective should be to eliminate the domestic subsidy of the major developed countries within a time frame. Towards that end, there should be effective reduction progressively and speedily.

2. The target for reduction should be the applied levels of subsidy of the major developed countries, and not merely their permissible levels.

3. Further, the target for reduction should be the total trade distorting subsidy (TDS), whatever the formula may be for cutting their different components, i. e., amber box, de minimis and blue box subsidies.

4. The TDS should be eliminated at the end of the implementation period of the agreement that will emerge out of the Doha Work Programme negotiations.

5. The currently applied TDS (irrespective of the permissible level) should be reduced at least by 50 percent in the first year of the implementation period.

6. Payment of TDS should be exclusively limited to the individual farmers; the corporate bodies should be excluded from it right from the beginning of the implementation period of the new agreement.

7. There should be a ceiling on the TDS on a product, i. e. there should be product-specific caps. This ceiling should not be based on past historical subsidies given on the product, but on the percentage of production or price.

8. In the green box subsidy, for the de-coupled direct payment (paragraph 6 of Annex 2 to the WTO Agreement on Agriculture), there should be eligibility criterion based on income; for example, only those individual farmers that have average income from all sources less than 10 percent of the average annual income in the country should be eligible. The corporate farms should be excluded from eligibility altogether.

9. There should be an annual ceiling on payment of total subsidy, i. e., TDS plus green box decoupled direct payment, to an individual farmer.

10. The export subsidy should be eliminated right from the start of the implementation period of the new agreement.

11. Sensitive products should be limited in terms of number and also in terms of percentage of domestic production.

12. Recognising that the selection of sensitive products and softer treatment to them is for defensive purposes, they should be ineligible for any special treatment if they are exported beyond a de minimis limit.

13. There should be Special Safeguard Mechanism (SSM) for the developing countries which should be applicable to all products. The trigger should be based on increase in import over the previous year or decrease in price below the previous year level.

14. Both additional tariff and quantitative import restriction should be admissible as SSM.

15. So long as the developed countries continue with their export subsidy and domestic subsidy, (i. e., TDS and de-coupled direct payment in the green box), the developing countries should be allowed to apply quantitative import restriction on such subsidised import from such subsidising sources. This protection will be different from that through the SSM; as it will be applied as a recourse against only subsidised imports.

16. The peace clause should not be renewed in any form.

(* Mr Bhagirath Lal Das is a former ambassador of India to the GATT, and later was the Director of International Trade Programmes at UNCTAD.)