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TWN Info Service on WTO and Trade Issues  (June 07/01)

3 June 2007


Agriculture Chair's second paper conflicts with G33 position on SSM

The Chair of the WTO's agriculture negotiations, Crawford Falconer, issued the second instalment of his "Challenge Paper" on 25 May.

The paper, meant to "challenge" the WTO members to make choices and decisions on outstanding  issues in the agriculture negotiations, contains sections on Special Safeguard Mechanism (SSM), tropical and diversification products, small and vulnerable economies (SVEs), the Green Box domestic support, tariff escalation, tariff simplification, least developed countries (LDCs), preference erosion, recently acceded members (RAMs), cotton, and commodities.

Below is a commentary on this paper, focusing especially on the section on SSM.  A second commentary -- on Green Box -- will be sent out separately.

This report was published in the SUNS of 30 May.

With best wishes
Martin Khor
TWN

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Falconer's second paper conflicts with G33 position on SSM

By Martin Khor (TWN), 27 May 2007

The second instalment of his "Challenge Paper" was issued by the chair of the WTO's Doha agriculture negotiations, Ambassador Crawford Falconer of New Zealand, late afternoon on Friday 25 May.

The paper is meant to "challenge" the WTO members to make choices and decisions on outstanding issues in the agriculture negotiations on modalities. This second instalment contains sections on Special Safeguard Mechanism (SSM), tropical and diversification products, small and vulnerable economies (SVEs), the Green Box domestic support, tariff escalation, tariff simplification, least developed countries (LDCs), preference erosion, recently acceded members (RAMs), cotton, and commodities.

From the viewpoint of many developing countries, the most important (and perhaps the most disappointing) section of Falconer's paper is the one on SSM.

He admits that there is little convergence among WTO members on this issue, then offers some of his own views. However, his views seem to be not friendly to the concerns of the proponents of the SSM, led by the G33 developing countries, and supported by other groupings including the African Group, the LDC Group and the ACP Group.

Another disappointment, from the perspective of developing countries, is his treatment of the Green Box. On this issue, Falconer accepts that the box should be expanded to include some subsidies that developing countries would like to use under this category of domestic support. But he throws cold water on proposals that had been made, in particular by the G20, to place stricter disciplines on this supposedly "non trade distorting" support.

The Falconer paper by not taking on board proposals for stricter disciplines on Green Box (which the industrialized countries can fully use to subsidise their farmers), coupled with his proposals to restrict and make difficult use of SSM by the developing world seems to underline that in the WTO trade order, the farmers of the rich countries with their infinite budget resources can enjoy all the protection while those in the developing world whose governments have many budget constraints can be driven to the wall!

The sections on cotton, preference erosion, commodities, SVEs and RAMs also do not offer any comfort, nor new proposals, for the developing countries concerned with these issues.

On the whole, Falconer's paper seems to take the attitude that what developing countries are demanding in the negotiations (either as benefits to themselves, or as demands on the behaviour of developed countries) are not realistic, presumably because they are not acceptable to the major powers like the United States. In other words, Falconer seems to be bending backwards to make his views within the realm of acceptability of the big developed members.

However, in doing so, it is likely to attract the disappointment and dissatisfaction, if not anger, of a large number of developing countries. The second instalment could then add on to the frustrations that the developing countries have already voiced about the first instalment, issued last month.

On the SSM issue, Falconer says that "there are, frankly, too many variables on this issue with positions that are too wide apart for me to be in a position to even begin to define a centre of gravity on this issue." He complains that "here we are effectively still facing ambit claims" (presumably those made by the G33) and says he can at most only offer a few observations or suggestions.

The paper confirms what was agreed to in Hong Kong, that there will be two triggers -- import volume and price -- for the SSM to take effect.

He then controversially defines what is "special" about the proposed "Special" Safeguard Mechanism. He implies it is "special" because it cannot be used often. "If this is a mechanism which would, when applied, be capable of being triggered literally hundreds of times in any given year, how is this to be reconciled with something that is 'special'"?, says the paper.

He then concludes that members will not agree to "an unconstrained entitlement" to use a measure that could impose tariff increases applicable to hundreds of tariff lines in any given year by each developing country. He wants the focus to be on how to reasonably ensure that "normal" trade is not disrupted while genuinely "special" situations are able to be responded to flexibly.

In staking out its position on why there should be limitations on using the SSM because it is meant for "special" events, the Falconer paper has misconstrued the origin of the SSM concept.

In the Uruguay Round, the need for a "special Safeguard" was advocated on the ground that the normal safeguard mechanism in the GATT, which applies to industrial products, was unsuitable for agriculture because in agriculture, unlike the industrial sector, it is difficult or even impossible to meet conditions such as to prove to whom the damage is done (as there are many thousands of agricultural producers) and also to locate and isolate the source of the problem.

The term "special" in the special safeguard (SSG) in the agreement on agriculture thus signifies the special circumstances in agriculture, and this is the same context in which the SSM proposal has been made. The meaning of "special" is not that the mechanism is to be limited in use to rare events.

Falconer's paper then argues that there should be criteria beyond price and volume movements to enable the use of the SSM. "While I have not heard any compelling argument for arbitrarily restricting the coverage of the SSM (i. e. a priori numerical constraint), I have not heard any compelling argument why the Measure should be an entitlement simply to raise tariffs based on price and volume movements per se (i. e. a pure measure of protection unrelated to the criteria for special and differential treatment in paragraph 39 of the framework referred to above)," he says.

He then suggests that the SSM be "applicable anywhere there is domestic or substitutable production. Absent that, the rationale for having an SSM seems less clear."

He also remains to be persuaded of the view that non-preferential MFN suppliers should be obliged to bear the "cost" of any import surges or price declines attributable to preferential sources. He is not convinced why increased imports from a preference receiver can get counted "in" when calculating whether you have a global surge or not but then the measure is not applied to those sources but only to MFN sources.

"If preferential suppliers get counted in for one, they should be counted in for the other. If they get counted out for the purposes of the initial calculation, fine; then they can be counted out for application of the measure also," he says.

As regards the quantity trigger, one basic choice delegations face is whether to have a simple single trigger and single remedy or a number of triggers and an escalating series of remedies, says the paper.

If the aim is to have something simple, then a single trigger/single remedy approach would seem more appropriate, says the paper. It notes that the current Article 5 (in the SSG) has a default trigger of 125 per cent of imports compared to the most recent 3 year period for which data are available.

The paper also notes approvingly that duration for the remedy under the present SSG is for the rest of the year in question, adding that there is a certain logic to this that is of more general application.

As regards the price-based SSM, the idea that it should depend on the CIF import price compared to some average price appears to be generally accepted, says the paper. "It also appears to be generally accepted that the remedy would be based on the difference between the import price and the trigger price, that is the lower the import price relative to the trigger the greater the additional duty that could be imposed."

The paper adds that the two main ideas that have been put forward are for an annual average or a monthly average both based on import prices for the previous three years for which data are available. It says an annual average would be more representative.

According to Falconer, it is generally accepted that the remedy would be based on the difference between the import price and the trigger price, i. e. the lower the import price relative to the trigger the greater the additional duty that could be imposed.

The paper then remarks that this leads to two further questions: ( I) should the price be allowed to fall by x per cent below the trigger before any remedy could be applied; and (ii) should the remedy fully or partially offset the decline in price.

It notes that the current SSG does require that the import price be more than 10 per cent below the trigger price and the remedy does not fully offset the difference between trigger minus 10 per cent and the actual import price.

The implication of the paper's last comment is that the SSM should not offset the decline in price, in the event of a price-based trigger of the SSM.

Falconer's paper does not seem to be sympathetic to many points in the G33 position on SSM, as given in the G33 paper of October 2005 (See SUNS #5904, dated 28 October 2005).

The developing countries, led by the G33, have argued that they require an SSM to defend the interests of their farmers during periods or situations when there is a surge of agriculture imports or when import prices fall significantly and thus could adversely affect the products of local farmers.

The G33 proposal covered such issues as the remedy to be applied by developing country members, the conditions under which they can resort to these remedies, and the duration and scope of the remedy.

In relation to the remedy, the G33 position has been that it is available to all developing countries and applies to all agricultural products. By contrast, the Falconer paper seems to indicate that there is need to limit the number of times or the types of products that the SSM should cover.

The G33 paper defines the volume trigger as a situation where "the volume of imports of that product entering the customs territory of that developing country Member during any year exceeds a trigger level equal to the average annual volume of imports for the most recent three-year period preceding the year of importation for which data are available."

The price trigger relates to a situation where the import price at which a shipment of imports of a product enters a developing country during any year falls below a trigger price equal to the average monthly price for that product for the most recent three-year period preceding the year of importation for which data are available.

The G33 proposal also spelt out the quantum and duration of the additional duties, with different provisions for duties imposed for the volume and price triggers.

In relation to additional duty imposed for the volume trigger, such duty "shall be maintained for no more than 12 months after it has been imposed". By contrast, Falconer's paper seems to suggest that the duration of applicability of the SSM is "for the rest of the year", rather than 12 months.

In the G33 proposal, the maximum levels of additional duty that can be imposed will also differ according to the different situations.

On 24 April 2006, the United States submitted a paper on SSM that would provide only a very limited use of the SSM mechanism (See SUNS #6015, dated 27 April 2006).

At that time, Falconer issued a Reference Paper on SSM which suggested that the basis for negotiations be the proposals of the G33.

The US paper contradicted in many areas the G33 proposal and the US paper was strongly opposed by developing countries for making it very difficult if not impossible for developing countries to use the SSM.

The US wanted the SSM to be only available to a limited number of products, and only to some categories of products: ( i) a percentage of tariff lines that take the full tariff cut as specified by the general tariff reduction formula for developing countries which result in new bound tariffs below current applied tariffs" and (ii) products that are produced domestically or are close substitutes of products produced domestically.

These US proposals seem to be the basis of Falconer's comments (in his second instalment paper) that there cannot be unlimited use of SSM and his implication that there should be some criteria for its use, such as that the SSM should be applied "where there is domestic or substitutable production."

The US proposals imposed extreme limitations. Only products that are affected by the full formula cut, and only in instances where the cuts affect the present applied tariffs, are eligible; and even then only a percentage of these can enjoy the SSM.

This went against the G33 position that the SSM mechanism is available for all agricultural products, and that there should not be any limitations like the ones suggested by the US.

The other condition, that only products produced locally are eligible, is also restrictive as agricultural products can be easily displaced by other products; for example, a significant price decline in an imported cereal could displace the demand for another, locally-produced, cereal or even non-cereal food product.

The US proposal also severely restricted the conditions under which the SSM can be used, i. e. the "triggers" which indicate that a country can take action to raise duties.

The US proposal said "If the price-based trigger is met, a market test will be used to ensure that imports are rising, before the SSM remedy is applied. If the volume-based trigger is met, a market test will be used to ensure that domestic prices are falling, before the SSM remedy is applied."

This very significantly restricts the conditions under which a developing country can use the SSM.

Moreover, the parameters of the US-suggested triggers were also very stringent. On the price-based trigger, the US implies that only if there is a price fall of 30% or more can action be taken. On the volume-based trigger, the US proposal is also stringent, as the reference level shall be the larger of 130 percent of yearly average MFN imports over the most recent 36 month period, or 130 percent of the yearly average 2002-2004 MFN imports.

The extent of additional duty will thus be low; for example, if the Uruguay Round bound rate is 50% and the rate falls to 30% because of the Doha commitments, then the additional duty can be only 10%, and the new rate after using the SSM will be 40%. Such a low extent of additional duty will hardly be adequate to deal with the problem of import surge.

In contrast, the G33 had proposed that the trigger price would be the average monthly price of that product for the most recent three-year period, and the trigger volume would be equal to the average annual volume of imports for the most recent three-year period. Additional duty can be imposed if the import volume trigger level is exceeded, or if the import price falls below the trigger price.

The G33 had proposed much more significant additional duties that can be imposed as follows: Where imports during a year do not exceed 105% of the average import volume, no additional duty is imposed; where imports in a year exceeds by 105-110% of the average import volume, the additional duty can be up to 50% of the bound tariff or 40 percentage points (whichever is higher); and where imports exceeds by 110-130% of average import volume, the additional duty can be up to 75% of bound tariffs or 50 percentage points (whichever is higher); and where imports exceed 130% of average import volume, the additional duty can be up to 100% of the bound tariff or 60 percentage points (whichever is higher).

In May last year, reacting to the US attempts to restrict the use of the SSM and special products (SP) instruments, the G33, the African Group, the ACP Group and the LDC Group issued a joint statement warning that they cannot agree to any WTO deal in agriculture which does not accommodate their needs of food and livelihood security and rural development, and especially in the areas of tariff reduction, SPs and SSM.

A press release accompanying the joint statement says that the attempts to restrict the use of SPs and SSM threaten the Doha deal, and that there will be "no deal" without adequate treatment of SPs and SSM.

The negotiations on SSM, when they resume, can be expected to continue to be heated. The second instalment of the "Challenge Paper" would be unlikely to have a cooling effect.

 


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