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TWN Info Service on WTO and Trade Issues (May07/01)

2 May 2007


WTO Agriculture Chair's paper gives ranges for subsidy, tariff cuts

Ranges of figures on how much agricultural domestic subsidies and tariffs should be cut have been provided in a paper meant to "challenge" WTO members by the Chair of the WTO's Doha agriculture negotiations, Ambassador Crawford Falconer of New Zealand.

Falconer's 30 April paper is likely to meet with griping and opposition from various WTO members and groupings, because the positions are so polarised on several key issues.

Falconer said that in some areas he has stated where he thinks the parameters of the "basic centre of gravity" are.

In an interesting and central description of his role, Falconer admits to a very pragmatic approach, of putting forward what is possible, rather than what is fair or right, even to the majority.

"It is not a matter of what I think is fair or right or even where the majority is. It is a more hard-nosed view of what I think is within the realm of the possible." This statement may come back to haunt the author.

Below is a report of the Falconer paper.  It was published in SUNS on 1 May.  A second article also published in the same day will be sent separately.

With best wishes
Martin Khor
TWN

Agriculture Chair's "Challenge Paper" gives ranges for subsidy, tariff cuts

By Martin Khor (TWN) Geneva, 30 April 2007

Ranges of figures on how much agricultural domestic subsidies and tariffs should be cut have been provided in a paper meant to "challenge" WTO members by the Chair of the WTO's Doha agriculture negotiations, Ambassador Crawford Falconer of New Zealand.

Falconer's much-anticipated paper was distributed at lunch-time by the WTO secretariat. It is the first of two papers. The second will be issued in a week or so. After responses to the two papers, Falconer intends to come up with a new draft of modalities in the form of more formal text. This will be an updated version of his first draft modalities, issued in June 2006.

As he had promised, Falconer has come out with a paper that is likely to meet with griping and opposition from various WTO members and groupings, because the positions are so polarised on several key issues.

"What I have tried to do in the attached is to challenge you," he says in a forward to the 26-page paper. "Now is the time for honest talk...If we do not get serious momentum over the next few weeks (I hesitate to say months) we will either fail or we will put this whole exercise in the freezer for some considerable time until a better generation than us can thaw it out."

Falconer said that in some areas he has stated where he thinks the parameters of the "basic centre of gravity" are.

In an interesting and central description of his role, Falconer admits to a very pragmatic approach, of putting forward what is possible, rather than what is fair or right, even to the majority.

"I am trying to be impartial," he says. "It is not a matter of what I think is fair or right or even where the majority is. It is a more hard-nosed view of what I think is within the realm of the possible." This statement may come back to haunt the author as those who disagree with his suggestions can use it to show that he did not aim to be fair, but only to be within the "realm of the possible."

Falconer also throws the ball back to the WTO membership. "It is for me to propose but for you to dispose. That is at once your ultimate safeguard and your ultimate responsibility. My responsibility is much less, but no less serious. It is to be honest, to be frank and to give you the best advice I can without fear or favour."

The paper deals with two major aspects, Subsidies (domestic and export) and Market Access.

On Domestic Support, Falconer discusses the ranges of cuts that are either necessary or possible in overall trade-distorting domestic support and its components - de minimis support, aggregate measure of support (AMS) or the amber box; and the blue box. He also covers export subsidies and related issues (export credit, food aid, state trading enterprises, etc).

In Market Access, the paper covers the "tiered formula" for tariff reduction, as well as the numbers and treatment of sensitive products and special products.

On Domestic Support, the paper first discusses the cuts in Overall Trade-Distorting Support (OTDS). He uses as a starting position the same bands, thresholds and ranges of cuts as put forward in his June 2006 draft modalities paper.

There are to be three bands, each with its range of cuts. Band 1 (for countries that presently have least domestic support) applies to all developing countries and to all others with a threshold of $0-10 billion annual support; the cuts would be 31-70% ( a wide range to be negotiated down presumably to a single figure).

Band 2 would apply to countries presently having $10-60 billion in annual domestic support, and the proposed cut would be 53-75%. Band 3 (comprising the biggest subsidisers) would apply to those with over $60 billion support, which would have to cut by 70-80%.

Reminding members that "we are to achieve effective cuts in trade-distorting support", Falconer says that it is difficult to conceive how any number that leads to an actual increase in overall support could be sensibly described as being an "effective cut". Thus, the eventual figures would have to be higher than 53 in the second band and 70 in the third band.

Falconer's most important comments in this section is on the United States. The main cause of the Doha impasse is widely taken to be the refusal so far of the US to budge from its October 2005 offer of placing the maximum level of allowed overall trade-distorting domestic support at $22.7 billion, when its actual spending level was $19.7 billion in 2005.

Indirectly referring to this situation, Falconer says that "it is frankly inconceivable that the US will come out of this negotiation with an entitlement to spend more on overall trade distorting domestic support than it had when it came in."

He says that the number for the US will have to be "less than 22 billion" and "will be in the teens."

Though some members argue for the "very low teens" (and here he is implicitly referring to the G20 demand on the US for $12 billion), Falconer says that this would be "a real stretch" in negotiating terms.

"I cannot rule it out, but I have to say that I have the clear sense that...it would require a political commitment on market access for both developed and developing countries that would be difficult to conceive based on what I am hearing right now."

It would also be a "real stretch" for the overall number to end up as $19 billion. Thus, for Falconer, the centre of gravity of OTDS for the US is "certainly below 19 and somewhere above the very low teens."

On the EU, Falconer says that it has signalled that it could go to a 75% cut which would take its OTDS down to around 27.5 billion Euros. But this is conditional on the EU maintaining a 10% margin only with the US.

"I have seen analysis which opines that the EU is at least 'technically' capable of going as high as over 80%, given that its domestic reforms would seem to leave it sufficient headroom to meet even these kinds of levels," says Falconer. But he consider this  an "unlikely stretch" not for technical reasons, but as reflecting a political judgement on what the "balance" of an outcome would be.

He thinks it is possible to end up, at a minimum, with an EU cut above 70% and that a cut of 75-80% is still in play.

In the case of Japan, which is in the second band, wherever the outcome for the cuts in the second and third band comes out, reflecting the US and EU ultimate limits, Japan will be able to at least match such an outcome comfortably, says Falconer.

For developing countries, the Hong Kong Ministerial clarified that developing countries with no AMS commitments are to be exempt from the overall cut in TDS. Falconer suggests that for developing countries that have AMS commitments be subjected to an overall cut that are two-thirds the rates for developed countries.

On the developed countries' de minimis support (a component of the OTDS), Falconer suggests that there should be a cut of at least 50% with an additional amount sufficient to ensure that the OTDS commitment arrived at is met net of Blue and AMS commitments.

Falconer confirms the July 2004 Framework outcome that developing countries which allocate almost all de minimis support for subsistence and resource-poor farmers will be exempt from reductions. The Hong Kong Ministerial went further, by specifying generally that developing countries with no AMS commitments are to be exempt from reductions in de minimis.

For those developing countries that fit neither criterion, Falconer suggests a commitment two-thirds the reduction rate of developed countries, i.e. 30% with an additional amount (if necessary) to ensure the overall OTDS commitment arrived at is met.

On the Aggregate Measurement of Support or AMS (another component of the OTDS), Falconer assumes that the EC is in the top tier, the US and Japan are in the second tier and all other Members are in the bottom tier. He suggests that the top tier has to apply a 70% cut, the second tier 60% and the bottom tier 37-60%.

With "additional effort", the second tier would go very close to an outcome equivalent to a third tier cut. For developing countries, it will be around two-thirds of the cuts for developed countries.

On commodity-specific AMS cuts, Falconer says that there is very strong support that AMS for developed countries should be capped at the product specific levels for 1995-2000. The US has rejected this, opting for 1999-2001. The extent of the difference this gives to expenditure entitlements is very considerable in the case of certain products.

There is no agreement yet and this is fundamental, says Falconer, who then provides three options. The first is that the US accepts what everyone else can, the 1995-2000 base period. A second option is to make a compromise, for instance, to use the relative shares of commodities that existed in the (relatively high spending) 1999-2001 period, but to apply those shares to the overall 1995-2000 expenditure period. A third option is to go with the 1995-2000 period but modify it with some kind of constrained ad hoc adjustment to give a modest degree of flexibility.

On the Blue Box support (another component of the OTDS), Falconer assumes that the currently permissible overall ceiling for developed countries will be shrunk from 5% to 2.5% (of total production value). It remains to be determined whether this is to apply from day one or only at the end of the implementation period.

For one member (presumably the EU) which had placed a disproportionately large percentage of its trade-distorting domestic support in the old Blue Box, Falconer suggests that the member  not be bound by that 2.5% percent ceiling.

By way of "compensatory" commitment, however, it would either accept a cut in their Blue Box commitment equivalent to the overall cut in trade distorting support for developed countries or they would accept a cut in blue that was the same as the cut for AMS.

Falconer also raises a key issue of whether to effectively also constrain the Blue Box subsidies at a commodity specific level. Members are split between those who want to avoid "too much" subsidy expenditure on a particular commodity or commodities, and those who think this too "intrusive" i.e. too constraining at a commodity specific level.

One option is to have parallel caps at a commodity specific level along the same lines as is envisaged for the Amber (AMS) box.

But if product specificity of this kind is, indeed, a "no-go area", what is possible then is only one other category of pure Blue Box discipline: some version of "anti-concentration", for example, to have a maximum percentage of the overall Blue Box ceiling that cannot be exceeded for any given product.

What this is all about is still how much money can or should be spent on particular commodities, says Falconer. It is about trying to stop the overall amount being shifted into one or two products. But, if product specific amounts are a non-starter then all so-called "anti-concentration" variants that are in actual fact only devices to extract a product specific cap by another name are also non-starters. He asks: "Is there a genuine willingness to take a ceiling limit one way or another or not?"

Falconer then discusses the "combined amber and blue commodity specific caps", which is a recent suggestion.  If this was to be done, it would need safeguards to ensure that it could not be a device to simply circumvent what would otherwise be the required AMS commodity-specific caps.

"Although it would be a 'combined' cap, it would still have to be made up of the AMS and blue elements. So you would still (at least analytically) have to arrive at the component elements to make up the combined cap. So the purely analytical elements will still have to reflect the judgements for your AMS and Blue elements outlined above," says Falconer.

In addition, this should not over-ride the AMS commodity-specific commitment. Thus, that would always function as a ratchet within any "overall" commitment. In other words, a Member could spend up to its full AMS entitlement, but it would never be entitled to exceed that entitlement by utilising its implicit blue entitlement for AMS purposes.

But it could (indeed is precisely designed to) work the other way around. In other words, it could "spend" its AMS entitlement in Blue. On this model, the only real question would be how far that entitlement to spend would go. What limits would apply to the transferability of that AMS entitlement would still have to be answered.

On cotton subsidy, Hong Kong decided that it be reduced "more ambitiously" than under "whatever general formula" is agreed, and it should be implemented over a shorter period.

Falconer says that the proposal by the proponents remains in play, as it is clearly capable of delivering the requisite standard from Hong Kong. He suggests that a rough zone exists: where the proponents are suggesting concretely, and where, above the general (which for AMS  looks to be at least 60% and for overall will be somewhere above 53% for a tier two country), an increment could sensibly be said still to be "ambitious".

The paper has a section on Export Competition and within it a sub-section on Export Subsidies.

Falconer says that entry into force of the Doha agreement could not now occur before 1 January 2009. That aspect of the draft text should therefore be modified, including the mid-point (of the period to eliminate export subsidies) which now shifts to the middle of 2011.

This means that there is a five-year implementation period if the 2013 deadline (to eliminate export subsidies) is maintained. A "substantial part" is to be realized by the end of the first half of the implementation period. Falconer thinks that this will end up being between half and two-thirds being achieved by the mid-point. He suggests that 50% bis eliminated by the end of the second year (i.e. end 2010), leaving 50% for the last three years in relation to value of the subsidies.

As regards volume, this is still to be resolved, with flatly opposed views.

With regard to agricultural subsidies, the paper also deals with other export competition issues, including food aid, exporting state trading enterprises; Export Credits, Export Credit Guarantees or Insurance Programmes.

 


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