TWN Info Service on WTO and Trade Issues (May 07/08)

27 May 2007

Agriculture: Falconer's 'Challenge Paper' sharply criticized at WTO

Below is a detailed report on the 7 May meeting on agriculture at the WTO, in which many groupings of developing countries (as well as other groupings) presented their critical views of the first "Challenge Paper" of the chair of the agriculture negotiations, Crawford Falconer. 

The report covers the positions of the G33, the G20, the G10, the African Group, the ACP Group, the  Cairns Group, and the Small and Vulnerable Economies (SVEs), as well as individual countries such as India.

The informal meeting was held for members to comment on Falconer's 'Challenge Paper', which he had issued on 30 April. This first paper of Falconer had dealt with the two major aspects of subsidies (domestic and export) and market access.

This report was published in the SUNS on 9 May.

With best wishes
Martin Khor

Agriculture: Falconer's 'Challenge Paper' sharply criticized at WTO

By Kanaga Raja (SUNS), Geneva, 8 May 2007

A 'Challenge Paper' issued by the Chair of the agriculture negotiations, Ambassador Crawford Falconer of New Zealand, drew some sharp criticisms and voicing of concerns from a broad range of countries, both developed and developing, at the WTO Monday.

Several country groupings including the G33, the G20, the G10, the African Group, the ACP Group, the Cairns Group, and the Small and Vulnerable Economies (SVEs), as well as many individual countries - altogether comprising nearly half the WTO membership - spoke at an informal meeting of the Special Session of the Committee on Agriculture.

The informal meeting was held for members to comment on Falconer's 'Challenge Paper', which he had issued on 30 April. This first paper of Falconer had dealt with the two major aspects of subsidies (domestic and export) and market access.

Falconer is expected to issue his second installment on 14 May, to deal with the issues that were not addressed in his first paper. The week starting on 21 May is to be devoted to intensive consultations and other meetings in various forms.

At the informal meeting Monday, the G33 was sharply critical of the paper for being severely imbalanced in its treatment of issues of concern to developing countries, as opposed to its treatment of issues of concern to the developed countries.

The G33 said that the Falconer paper only took on board the concerns of the developed countries and left un-addressed, the sensitivities of the developing countries (see SUNS #6247 dated 8 May 2007).

The G20 also addressed this question of balance, and said: ''Balance should be ascertained based on our commitment to make this Round a development Round. As a development Round, its results should be development-oriented and should correct the imbalances present in the multilateral trading system.''

This is specially important, where the objective is abolition or at least substantial reduction in trade-distorting policies that are largely employed by developed countries, said the G20, pointing out that unbalanced results in the central area of agriculture would undermine the prospects for a successful negotiation in other areas.

India said that the major overall reservation that it had about Falconer's paper was that it lacked balance between the sacrifices required from various interests. ''If the challenges are weighted against developing countries, we stand the risk of challenging the mandate itself.''

According to trade officials, at the informal meeting, members commented on what they considered to be imbalances between different parts of the paper - too much or too little ambition or flexibility in specific areas. A number of other issues in the paper was also commented upon by the members.

Broadly summarizing the six-hour discussion at the informal meeting, trade officials said that some delegations considered the 30 April text by Falconer to be unbalanced in several ways.

A number of developing countries (mainly the G33 and those supporting it), described the paper as giving too much flexibility to developed countries or reflecting too wide a range of options for them in market access and domestic support. In contrast, the paper is more demanding for developing countries. Some developed countries (particularly those in the G10) argued that the paper was too inflexible for them.

Another area of concern was the question of balance in the amount of ambition that the paper suggests for developed and developing countries. According to trade officials, a number of developing countries objected to Falconer's suggestion that the "centre of gravity" for the overall trade-distorting domestic support of the US might be in the range from below $19 billion to the "low teens". They said that this was too moderate, since getting rid of distortions is the priority, and was not balanced by the cuts in tariffs that he was suggesting for developing countries.

Trade officials said that the US took the opposite view on domestic support, arguing that the major gains for development would be from improved market access and not so much from cutting domestic support. The US called for more on market access and said that proposals on domestic support have to be "realistic". The US also did not agree with the stand-alone average cut for developing countries. The Uruguay Round approach is interesting but ''is not needed right now,'' said the US.

The EU and Japan said that they were looking for $15 billion from the US on domestic support.

Falconer told the meeting that those complaining that he did not go far enough on domestic support were not looking closely enough at what he said. The top of the range "under $19 billion" means $18 billion, he said, and for him "low teens" means double digits. He cautioned that calling for the US to cut to below $10 billion would not be accepted.

Yet another area of concern was the balance across the pillars and parallelism. According to trade officials, the EU reiterated its emphasis on striking an equal balance between the three pillars (market access, domestic support, and export competition), and within the pillars, particularly parallel treatment for the components of export competition (export subsidies, subsidized export credit, food aid and state trading enterprises).

With respect to Special Products, trade officials said that the arguments remain unchanged. The G33 and those supporting it objected to the text's handling of Special Products. Their complaints included the use of numbers to filter the number of Special Products, and the Chair's analysis of the mandate. Taking the opposite view to the G33 were Thailand, Malaysia, Costa Rica, Paraguay, and indirectly, the US.

Falconer said that this had been a difficult subject for him to deal with because positions remain unchanged and far apart. He urged members to consider seriously whether it would really be possible to write the "modalities" in a way that left completely open the question of how many Special Products each country might have and what they would be.

He reiterated his assertion that the G33's current proposal for "at least 20%" of products to be eligible to be the one that will not achieve consensus because it could lead to almost all of many countries' imports being shielded from tariff reductions. At the same time, the idea is not to impose disproportionate burdens on developing countries, he said, and therefore, a solution ought to be found that would deal with all concerns.

According to trade officials, several countries objected to his linking sensitive products (available to all countries) with Special Products, which they said were completely separate issues. Trade officials said that this arose from the Chair's assertion that the outcome would likely to be more Special Products than sensitive products.

Falconer said that this did not mean a link between the two. Rather, it was a prediction, and to object to it would be to seek fewer special products than sensitive products, he said.

Among a list of other topics discussed at the meeting were: the tariff-reduction formula (whether too much or too little flexibility is given for products in the top tier, which would have the steepest cuts; whether the target average reduction of "more than 50%" for developed countries would be enough); sensitive products (whether the proposed 1-5% of products is too much or too little; how quotas would be treated); measures to prevent "box shifting" and "concentration" of domestic support on some commodities; and various technical issues in export competition.

In its statement at the informal meeting, Indonesia, on behalf of the G33, was of the view that while Falconer's paper may help members to better focus the discussions, it did not, however, provide a good starting point because of severe imbalance in the treatment of issues of developed countries and developing countries.

The G33 expressed concern at the imbalance in the Challenge Paper, saying that it only takes on board the concerns of the developed countries and leaves effectively un-addressed, the sensitivities of developing countries.

''This would only lead to perpetuate the existing structural flaws and distortions in agriculture trade and, in the process, would negate the Doha Mandate, which is essentially a Development mandate,'' said the G33.

The imbalance is not only among different pillars of agriculture negotiations, but also, within the market access pillar, where there is a clear imbalance between market access for developed countries and that for the developing countries, said Indonesia.

The G33 said that the Falconer paper proposes that the overall trade-distorting domestic support (OTDS) of one of the major agricultural subsidizers could remain much higher than the current levels of subsidies. The paper goes on to suggest that the market access commitments of major developed countries could remain at the same levels that were proposed by them in July 2006 at the time of the breakdown of negotiations. On the other hand, the paper suggests rather stringent norms and low numbers for the Special Products for developing countries and LDCs, which are required to protect their food security, livelihood security and rural development needs. This only adds to the imbalance referred above, said the G33.

Indonesia said that in arriving at the appropriate number of SPs, Falconer seems to suggest that at this stage, focussing on the number would constitute the most pragmatic and simplest approach. However, said Indonesia, the G33 is of the view that a combination of number- and indicator-based approach in discussing the designation of SPs would be the most appropriate way.

As the revised indicators (approved by G33 Ministers in Jakarta) have also been supported by the African Group, ACP and Small and Vulnerable Economies, and so, almost the entire developing world, the G33 suggested that they be recognised as the basis of any further discussion on designation of SPs.

On the number of Special Products, the G33 said that Falconer had explicitly made a direct link between the number of sensitive products for developed countries and the number of SPs. ''This proposal seems to be inconsistent with the fact that according to negotiating mandate, no conceptual relationship exists between sensitive products and special products, because their very rationale is different.''

In this connection, the G33 said that it would like to seek the Chair's clarification on the number of sensitive products for developing countries.

With regard to the treatment of SPs, the G33 said that Falconer proposed that all SPs have to be subject to tariff reduction, and he went on to suggest that the minimum for SPs are between 10-20%.

''We view that this proposal is very restrictive compared to various flexibilities that you (Falconer) have offered on sensitive products as well as domestic support. We believe that the graded approach which the G33 proposed is the most appropriate way, as it would accommodate the concern of most of developing country members, including the members of the Small and Vulnerable Economies,'' said the G33.

The G33 also mentioned a paragraph in Falconer's paper (paragraph 139) where the G33 said, Falconer seemed to refer to the Special Safeguard and not Special Safeguard Mechanism (SSM). In this connection, the G33 urged the Chair that SSM be covered in the second installment.

Brazil, on behalf of the G20, also addressed the question of balance. ''Balance should be ascertained based on our commitment to make this Round a development Round. As a development Round, its results should be development-oriented and should correct the imbalances present in the multilateral trading system.''

A second element, according to the G20, is that any outcome must be based on agreements reached so far. Those agreements incorporate the balances achieved so far in the negotiations. Those balances will have to be reflected in the final text. They are the best possible guarantee of a successful outcome.

''The mandates contained in the Doha Declaration, the July 2004 Framework and the Hong Kong Declaration are the basis of our deliberations,'' the G20 said, pointing out that unbalanced results in the central area of agriculture would undermine the prospects for a successful negotiation in other areas.

As to the Chair's perception of the centres of gravity on various issues, the G20 said that the notion of centres of gravity reflect also a negotiating environment. But the centre of gravity does not necessarily correspond to balance. ''Balance will not be found by averaging negotiating positions; balance can only be found by reference to the mandate and to the outcome in other areas of the negotiation.''

The G20 said that the centre of gravity in domestic support should reflect the commitment to effective cuts. This is especially so in relation to the OTDS, a number that, beyond its technical significance, also has a political dimension.

''We believe, in this respect, that what should be discarded are the 'high teens' and that the 'lower teens' actually reflect the only possible centre of gravity. In addition to that, there are certain tiers and cuts that would not even achieve consolidation of current applied levels and therefore could not constitute a centre of gravity.''

A centre of gravity in domestic support must also incorporate a combination of cuts and disciplines, said the G20. Both are important, but at lower levels of cuts, disciplines become even more essential. Disciplines must be credible in avoiding product-shifting or box-shifting. This is especially so in the case of the blue box where, for instance, a mere anti-concentration discipline will not be effective to avoid increasing volumes of support in most commodities.

''The centre of gravity in market access is of particular sensitivity due to the completely different characteristics of agriculture in developed and developing countries. In defining a centre of gravity, proportionality is essential, as mandated by the July Framework,'' the G20 said, recalling that a centre of gravity in market access requires an appropriate combination of tariff cuts and flexibilities.

In the case of developed countries, said the G20, a combination that would include less than 50% cut in the higher band with a large number of sensitive products, subject to a large deviation and a reduced TRQ expansion in terms of domestic consumption does not seem to provide a good centre of gravity for a Round that should deliver substantial improvements in market access.

The G20 stressed that its proposal remains the centre of gravity in this pillar. It is the middle ground that is achieved by the combination of the tariff cut formula structure and the benchmarks for average cuts in developed and developing countries, respectively, at least 54% for the former and at the maximum 36% for the latter.

Uganda, speaking on behalf of the African Group, emphasized that the Doha Round must remain a Development Round. This means that the outcome of the Doha negotiations must fully reflect the development aspirations of the developing and least developed countries, particularly the African countries.

In some specific comments on the paper, the African Group said that on domestic support, the Chair had endeavoured to locate the centre of gravity for the extent of the likely reductions of domestic support by the major players. The Group however was of the view that the reductions should be done on their own merit as required by the mandate, and should not be conditional on increased market access from developing countries.

On cotton, the Group strongly supported the Chair's statement that addressing cotton issues more ambitiously, as provided for in the mandate, means more than modest cuts on various categories of support affecting cotton. ''The level of ambition in domestic support, judging from your honest assessment of the situation, has clearly moved downwards''.

The African Group was also of the view that the proposal submitted by the Cotton-4 countries (Benin, Burkina Faso, Chad and Mali) should be the basis for the treatment of the trade and development aspects of cotton. The Group shared the G20 proposals regarding the disciplines on the level of cuts in domestic support.

On export competition, the African Group agreed with the suggestion that the front-loading of export subsidies commitments is a good basis for moving forward. It was also of the view that commitments should be made on volume and values in order to avoid creating loopholes in the disciplines.

On Special Products, the African Group said that ''we should not lose sight of the mandate which clearly spells out the right of the developing countries to self-designate an appropriate number of tariff lines as special products. This is to be guided by indicators based on criteria of food security, livelihood concerns and rural development.''

The Group also said that the designation of special products should remain an empirically guided issue which should at all times have the development concerns of the developing countries as its ultimate objective. ''At the moment therefore, we are having some difficulty with your (Falconer's) interpretation of the treatment of special products.''

The Group expressed appreciation for Falconer's proposal for applying the Uruguay Round formula for developing countries. ''However, coming at this late and critical stage in the negotiations, it is a challenge to all of us to reflect profoundly on this interesting suggestion, before we can make any concrete comments.''

The Dominican Republic, on behalf of the Small and Vulnerable Economies (SVEs), said that in general, it considered that the Falconer paper presents an evident imbalance in the treatment of the pillar of domestic support and the pillar of market access.

In relation to the tariff reduction formula, the SVEs took note that the paper considered that the reduction that will have to be made by the developing countries will have to be 2/3 of the reduction made by the developed countries, and the reduction of these latest should be at a level between the proposition made by the US and that of the EU. This opens the possibility that the developing countries must apply reductions more aggressive than those in proposals made by the G20, which the SVEs said is very difficult to accept for its delegations. In this respect, it reiterated that small and vulnerable economies will have to make smaller reductions than other developing countries.

With respect to special products and the special safeguard mechanism for the developing countries, the SVEs supported the intervention of Indonesia on behalf of the G33.

In relation to the number of special products, the SVEs expressed worry over the link that Falconer had made between sensitive products for the developed countries and special products. The Dominican Republic ''cannot justify the political judgment that you (Falconer) do, in proposing tariff lines between 5% and 8% for special products, when the mandate says that the selection of an appropriate number of such products will be made on the basis of the three defined criteria of food security, rural development, and security of subsistence means.''

The Cairns Group of agricultural exporters said that the paper's assessment of the 'centre of gravity' points to an unsustainably low level of ambition in a number of key areas, notably in domestic support and market access. It believed that the real centre is within a narrower and higher range of reductions.

On domestic support, the Group considered that the magnitudes under discussion for the US' overall trade-distorting support 'centre of gravity' were at the lower end of the range described by the Chair. Meaningful disciplines, especially product-specific caps are needed to prevent large fluctuations in distorting support and concentration of distorting support on individual products.

The Group also emphasized the importance of providing predictability of the maximum amount of support that could be provided on specific products. ''This is one reason we are sceptical about the suggestion on the use of over-runs.''

Switzerland, on behalf of the G10, said that the general direction of the paper ''takes us away from 'landing zones' and leads us to areas of 'disaster', destabilizing the majority of WTO Members' governments which will certainly not create new trade flow opportunities.''

''While we embrace some parts of this document, there are indications of 'landing zones' which we cannot subscribe to, and will need to be relocated if we are to find solutions that may achieve consensus,'' said the G10.

''In the market access pillar, where most of the G10 sensitivities lie, we have seen many of the essential flexibilities vanish from the new document. These flexibilities have a fundamental importance in the discussion concerning landing zones,'' the G10 said, adding that in this sense, there is a need for re-balancing the paper.

The G10 was also of the view that the 'centre of gravity' was not reflected in an equitable manner in the domestic support and market access pillars. More concretely, the proposed level of ambition for the reduction commitments goes too far for the G10, said Switzerland.

With regard to the selection of sensitive products, the G10 expressed disappointment that the history of proposals, including its own, was once again not appropriately reflected in the alluded 'centre of gravity' where specific situations are not even taken into account. The G10 said that it cannot accept the Chair's view that 1% to 5% is the centre of gravity for the number of sensitive products.

On domestic support, the G10 took the view that there should be clear disciplines on a product-specific level for AMS as well as the Blue Box. Nevertheless, more clarification is needed on how the concerns of newcomers to the Blue Box, with no records in the reference period, are taken care of. On AMS reduction rates, the G10 said that there should be an interval of more than 10 points between tier 1 and tier 2. Furthermore, given the huge gaps in absolute AMS bindings between tiers 2 and 3, the interval between these two tiers should be larger than that between tiers 1 and 2.

India said that ''the major issue which has to be addressed in these negotiations is the issue of distortions caused by huge subsidies and market access restrictions in developed countries. This is what the mandate cumulatively, from Doha to Hong Kong has required us to do.''

The mandate, therefore, requires high ambition in dealing with distortions in developed country agriculture and equally high ambition in addressing the development challenges of developing countries, India said, adding that regretfully, several of Falconer's conclusions did not measure up to these standards of ambition in the mandate.

''In the area of OTDS (overall trade-distorting support) reductions, all subsidizers would need to go below recent levels of support. That is the only way in which the mandate for effective cuts can be met. To say that the very low teens for the US 'would be a real stretch in negotiating terms' is equivalent to saying that the mandate cannot be delivered,'' said India.

''Equally importantly, lowering the ambition in OTDS cuts for the US will have the effect of doing the same for the EU which will end up doing significantly less than the 80-85% cuts most of us consider them capable of doing.''

''If in OTDS, the level of ambition is way below the locking in of current levels of support, there can surely be no case for substantial improvements (presumably by developing countries) in market access in agriculture or for new trade flows either in NAMA, in services,'' said India.

On the issue of market access, India said, ''we note that while you have adopted the G20 thresholds for developed countries as a working hypothesis, you have not done so for developing countries. The thresholds proposed by the G20 for developing countries reflect the difference in tariff structures between developed and developing countries.''

The thresholds and cuts in the G20 proposal have been designed to deliver the two-thirds overall proportionality that is required to be delivered in these negotiations, said India.

On special products, India said that ''the mandate directs us towards self-designation of an appropriate number guided by indicators, based on the three agreed criteria. There cannot be any short cuts here.''

India also said that it could not accept a linkage being now introduced between Sensitive Products and Special Products. There is nothing in the mandate to warrant such a link. On treatment of special products, India said that the G33 had proposed a structure for treatment which it believed is a good basis for negotiations.

At the end of the informal meeting, Falconer said that the comments from almost half of the WTO membership showed at least that members are serious about negotiating and that their positions are broadly within the ranges in his "challenges paper".

He noted that members chose to speak mainly about what they thought was wrong with the paper. He would have been in trouble if anyone had liked it, Falconer said in jest. He however regretted that he had not heard any new positions.

Falconer stressed that it was up to members to respond to his paper by negotiating with each other, not with him, and developing solutions that can find consensus.

According to trade officials, he cautioned that some repeated positions - particularly on developing countries' "special products" - will definitely not find consensus.