TWN Info Service on WTO and Trade Issues (Sept07/09)

21 September 2007

Issues in establishing and using agriculture special safeguard mechanism

A special safeguard mechanism (SSM) that developing countries can use is one of the significant issues being discussed in the current WTO negotiations.

A heated discussion on SSM was held last week and this week at the WTO, in the Room E process, as well as in the G8 process.

A majority of developing countries, which are members of the G33, the ACP Group, the African Group and the LDC Group, have championed new rules in the WTO's Agreement on Agriculture to establish a SSM for developing countries that enables them to address import surges (an increase in import volume) and price declines in agricultural imports.

But there are strong reservations from other countries (which have an export interest);  they want to restrict the use and treatment of the SSM, because otherwise it would affect their market access to the countries using it.  

Below, please see an analysis of SSM issue, especially on why SSM is "special" because agriculture has special characteristics that industrial products do not have and that is why an SSM which to some extent seeks to prevent serious adverse effects is needed in agriculture whereas the normal safeguard in the safeguard agreement provides a remedy only after serious injury is done.

In industry, you can switch on and off the production and can store excess goods but in agriculture in developing countries you cannot switch production off and on (the farmer has to wait for next planting season) and you cannot store the excess product because food is perishable and also there are no adequate storage facilities.  That is why we need to prevent the worst of damages rather than just remedy serious injury.  At the end of the paper are reasons why the SSM duty should be allowed to rise above the Uruguay Round rates.

With best wishes
Martin Khor

Agriculture: Issues in establishing and using a special safeguard mechanism

Published in SUNS #6324 dated 17 September 2007

By Martin Khor (TWN), Geneva, 14 Sept 2007

A special safeguard mechanism (SSM) that developing countries can use is one of the significant issues being discussed in the current September agriculture negotiations at the WTO.

The discussion on SSM is expected to be held on Friday in the "Room E process", in which about 36 delegations are meeting to respond to the 17 July draft modalities paper of the Chair of the agriculture negotiations, Ambassador Crawford Falconer of New Zealand.

A majority of developing countries, which are members of the G33, the ACP Group, the African Group and the LDC Group, have championed new rules in the WTO's Agreement on Agriculture to establish a SSM for developing countries that enables them to address import surges (an increase in import volume) and price declines in agricultural imports.

The proposed SSM is seen as an important tool for developing countries to safeguard their vital agriculture sector for purposes of food security, livelihood security and rural development. It is especially needed because there are continuing distortions in the global agricultural market, caused by export subsidies and domestic subsidies, mainly in developed countries, that artificially depress prices and thus facilitate cheap imports into the developing countries.

The establishment of the SSM, together with some parameters, have been accepted as part of the mandate of the Doha negotiations, in particular, through the August 2004 package and the WTO Hong Kong Ministerial Declaration.

The G33, comprising over 40 developing countries that have mainly defensive interest in agriculture, have a proposal on SSM dated March 2006 on the table. It deals comprehensively with the issue, including the conditions that enable the use of SSM (when either of the two triggers of increased import volume or depressed import price come into effect), the duration of use allowed (12 months after the triggering), the products eligible for use (all agricultural products) and the remedy (the amount of additional duty allowed).

Other proposals have been made by the United States and by a group of three countries (Argentina, Paraguay and Uruguay) which would like to have far more restrictions than the G33 proposal on the use of the SSM.

In his 17 July modalities paper, the Chair has also dealt with SSM. However, he was unable to come up with a proposed text, because of continuing wide differences of views on the issue. Instead, he provides his views on some key aspects. While the Chair's paper seems to agree with some aspects of the proponents' case, on many points its positions or views contradict the case for a strong and effective SSM.

A major point of departure seems to be the interpretation or understanding of the term "special" in SSM. The Chair's paper seems to take the position that "special" means that the SSM should and can be used only in "special circumstances", and thus should be somehow restricted in frequency (of numbers) or reserved only for rare and abnormal conditions.

In fact, when developing countries initiated their move and called for SSM, even in the run-up to Seattle in 1999, it was on the basis that these safeguard measures in agriculture for developing countries was needed and was "special" in that normal safeguards as established in the WTO Safeguard Agreement is inadequate to take care of the special circumstances of agriculture in developing countries. A special safeguard mechanism was required in order to enable them to invoke it and use it more easily and effectively for agricultural products, given the large proportion of their population in agriculture.

The rationale for having a safeguard in the trading system is a recognition of the need to protect domestic producers from injury resulting from an increase in imports or a fall in import prices.

The use of the normal safeguard requires the fulfillment of several conditions, including that the authorities undertake investigation procedures to determine that there is injury to domestic producers.

Recognising that circumstances in agriculture are different from those for industrial products, the Uruguay Round established a clause for a special safeguard (SSG) in the Agreement on Agriculture (AoA).

The SSG makes it easier for the safeguard to be used in agriculture; for example, the normal safeguard requires evidence of injury before action can be taken, while the SSG in the AoA does not require such evidence.

However, the SSG was available for use only by those countries that undertook the exercise of "tariffication" in the Uruguay Round. This included many of the developed countries but only a small proportion of the developing countries (only 22). To redress this, the developing countries are now insisting that a new SSM be established, which can be used by developing countries.

Agriculture in developing countries requires such special safeguard because of factors such as the following:

-- It is a very important sector economically and socially in most developing countries, which thus have to address the needs of food security, livelihood security and rural development.

-- There are many thousands or millions of small producers unlike in the case of industry where there are only a few producers, and thus injury is easier to demonstrate in the case of industry than it is for agriculture.

-- It is important to prevent social damage from happening from import surges in agriculture in developing countries, rather than be allowed to act only after the serious damage happens. This is especially because:

(a) Unlike in industry, the production cycle in agriculture does not allow for sudden stopping and re-starting of production; if agricultural production is halted or reduced because of fall in sales, and demand picks up again after some time after a normal safeguard action remedy is applied, the farmers have to wait till the next planting season to expand output. Moreover, if the decreased demand persists for some time, the farmer may have to switch to another crop, and it would be difficult for him to return to the original crop even after the normal safeguard is applied because too much time has elapsed. Thus, prevention or quick action through the SSM is needed.

(b) Also, if demand is reduced (because of increased imports), the small farmer in developing countries finds it difficult to increase storage of his product due to lack of storage facilities and to the perishability of agricultural products (unlike in industry where the factory can increase its inventory which it can then run down when there is an increase in sales after the normal safeguard remedy is applied). Thus, preventive action through SSM is required as the normal safeguard would not be sufficient to address the problem.

-- There can be very strong fluctuations and swings in prices of agricultural products and imports, and these can take place more suddenly and more frequently than in the case of industrial products, and thus, the need for quicker action.

Because of these and other special circumstances in agriculture, a "special" safeguard is needed. The term "special" should therefore not be interpreted to mean that the modalities should seek to restrict the use or treatment of SSM to "special cases" or because it should only be used in special circumstances, which seems to be an underlying theme in some sections of the Chair's paper (for example, para 104 that SSM is meant to be used only in special situations, or in para 111, that some members want the treatment of SSM to be restricted to raising additional duty only to the Uruguay Round bound rate).

Another important general point is that the SSM is aimed at preventing or treating a major problem - injury to producers in developing countries caused by import surges or depressed import prices. Therefore, the design and operation of the SSM must be such that it can meet this aim, and the remedy should be such that it adequately deals with the problem. This is a key general principle, which should guide the discussions and the outcome of the SSM issue.

Interesting comments can also be made on some specific points of the Chair's modalities paper as it pertains to the SSM.

In para 104, the paper says that the SSM should not be allowed to be triggered hundreds or scores of times. This should not be a matter of serious concern because the G33 proposal is not aimed at allowing countries to use the SSM as a kind of permanent protectionist device.

The experience with SSG shows that the developing countries which were eligible to use it in fact seldom made use of it. Of the 22 developing countries that can use SSG, only 6 used it, according to a FAO study, and these 6 countries made use of the SSG only 5% of the total number of times they could have applied it under the SSG rules in the period 1995-2004.

The problem is not that developing countries will abuse the SSM system but that they may not have the capacity to make use of it and will need training and equipment such as computers and software.

In para 106, the Chair made a very important general point that the triggers and remedy are meant to be usable by developing countries and must not be complicated or burdensome for them to use. In fact, the developing countries will require SSM rules that are simple, effective and operational, as well as rules that are able to resolve or prevent the problem.

Paragraphs 108 and 109 deal with the volume and price triggers. In para 109, the Chair's paper asks if the remedy for the price factor should be the full difference between the benchmark price and the import price. The answer is yes, if the remedy must be adequate and effective in resolving the problem (which should be the general principle), and thus, it should enable the developing country experiencing a price depression to raise the import duty to the level that allows for a full offset. This is required to safeguard the producers from import surge.

The G33 proposal on price trigger and remedy for the price factor in fact puts forward such a full-offset scheme, in which the SSM additional duty would enable the depressed import price to be raised back to the reference price (or the average price of the most immediate three-year period).

In para 110, on the duration of the use of the SSM, the Chair's paper seems to suggest that when it is triggered, the SSM can be applied only to the end of the calendar or financial year. The G33 position is that when the trigger applies, the SSM can be applied for a 12-month period.

The G33 proposal is more logical, as compared to the Chair's proposal which is too restrictive and also not very logical or fair. For example, take two cases: One, where the trigger goes off on 1 January of a year, then the SSM can operate for the whole year; Two, where the trigger goes off on 1 December, then the SSM can operate only for 30 days.

In situation two, the SSM can hardly be used at all. It would then be a matter of luck as to when the trigger goes off. It is more logical and also it would more adequately satisfy the aim of having an SSM if the SSM can be applied for a period of 12 months following the triggering of the price or volume factor.

Para 111 deals with the crucial issue whether the SSM additional duty should be restricted so that the new duty cannot exceed the Uruguay Round level. The Chair's paper seems to be supporting this restriction, which is proposed by some countries that are not in favour of a strong SSM. The G33 position is that there should not and cannot be such a restriction.

The following are some reasons why there should not be such a restriction.

-- Having such a restriction would prevent the SSM from being a useful or effective instrument and thus the objective of having a special safeguard for developing countries would be lost. Being allowed to raise the duty to only the Uruguay Round rate would mean that in many cases, the developing country would be able to offset the price decline to only a very limited and very inadequate extent, and thus, the whole aim of having an SSM would be defeated.

-- The Safeguard Agreement does not have such a restriction, i. e. it does not state that members can only raise the duty up to the level of bound rates of the previous Round. Neither does the SSG clause in the AoA. There is a good reason why they did not have this restriction, for it would prevent the use of safeguard from being effective. The SSM is meant to be easier and more flexible and more effective than the normal safeguard or the SSG and thus, there should not be such a restriction on the SSM.

-- Such a restriction would in effect also penalize special products since these SPs will have their tariffs reduced little or not at all and will thus remain at (or very near) the Uruguay Round levels. By having the restriction, these SPs will hardly be able to make use of the SSM mechanism and thus the restriction in effect would exclude SPs from their use.

-- Since LDCs are exempted from tariff reduction in this Round, their bound tariffs will remain at the Uruguay Round levels. If the SSM does not allow the duty to be raised above the Uruguay Round rates, then the LDCs in effect cannot apply the SSM.

For these reasons, there should not be such a restriction. Instead, the principle should be respected, that the SSM must be designed in a way to enable the solution of the problem (i. e., the prevention or minimizing of injury to the producers).

Following this principle, the remedy should be that the decline in price should be fully offset by the use of additional tariff to the degree necessary to safeguard the farmers from injury.

Note: The paragraph numbers above refer to the modalities draft dated 1 August 2007 (TN/AG/W/4). +