BACK TO MAIN  |  ONLINE BOOKSTORE  |  HOW TO ORDER

TWN Info Service on WTO and Trade Issues (Aug08/13)
15 August 2008
Third World Network

SUNS #6535 - 11 August 2008          

Agriculture:  Doha talks, market price support and Enron accounting

Toulouse, France, 8 Aug 2008
By Jacques Berthelot* 

Now that the Doha negotiations have been more or less put in deep freeze, it is perhaps time to rebuild the multilateral trade rules on a sounder basis. For this to happen, we have to understand not only the profound weaknesses of the present rules, particularly on agricultural trade, but also the huge lies of many WTO members, or even the simple lack of knowledge of many well-meaning NGOs.

Agriculture has been the Achilles heel of these negotiations, and the major focus of this has been around the two core issues of the levels of subsidies cuts in the OTDS (overall trade distorting domestic support) and tariffs. All other issues -- export competition, sensitive products, special products, special safeguard mechanisms, cotton, preferences, bananas, tropical products etc -- are subsets of these two core issues.

Nothing has been more obfuscating than the figures and statistics cited and used by negotiators (at least in public) and headlined in the media about the agricultural support/subsidies and protection to farmers that are sought to be reduced and bound in new ceiling figures, and the talk of "water" in these figures.

Much of the confusion, as several studies cited and quoted below show, arise from some of the components and terms used to quantify the various levels of trade distorting supports, and grouped together under the acronym OTDS (overall trade distorting support, a concept introduced by the July 2004 Framework Agreement, which does not change the Agreement on Agriculture /AoA). In much of the discussions, the allowed OTDS figures are used from the simulations by Canada (on the basis of data supplied by the US, EC, and Japan), and since then widely available for the agricultural talks.

Under the Framework Agreement (WT/L/579), this OTDS is the sum of the Final Bound Total Aggregate Measurement of Support (AMS) or in short FBTA (or "amber box") at the end of the base period (1995-2000, used in the Canadian simulations) + allowed product-specific de minimis (PSdm) + allowed non-product specific de minimis (NPSdm) + allowed Blue Box. PSdm and NPSdm are also "amber box" supports, but are not included in AMS so long as they remain below a ceiling.

One of the most confusing terms that has helped to artificially increase the size of notional support in the major component of PS AMS limits -- is the so-called "market price support" (MPS) set in monetary terms. This MPS is an accounting concept and is becoming for the agriculture negotiations perhaps the equivalent of Enron accounting. It needs to be called the "fake market price support", since it is notional and means nothing, and should be eliminated from the AoA rules.

This MPS is the support through administered prices ("intervention prices" in the EU). The MPS linked to administered prices accounts for the largest share of reductions since 1995 in the applied PS AMSs of the EU and Japan, and to a lesser extent of the US.

A number of scholars and academics have dealt with this.

Thus, William R. Cline writes: "The bound AMS contained about $6 billion of pure fiction, a remarkable concept called 'Market Price Support' (MPS). This accounting concept equals the difference between the domestic administered price and the 1986-88 world price. Yes, 1986-88, not today -- already a clue that this concept is a fiction. There is no actual taxpayer money paid out for the MPS, it is pure accounting. Japan suddenly cut its reported AMS subsidies by billions of dollars in the late 1990s by eliminating its administered prices, with no change in agricultural protection whatsoever. So, the first thing that should be done in Geneva is to redefine the Amber Box AMS to exclude the Market Price Support as part of the calculated bound level. Getting rid of the phony subsidy will make it easier to get rid of phony subsidy cuts" (William R. Cline, The Doha Round, Agriculture, and the Developing Countries, USDA, 2007 Agriculture Outlook Forum, USDA 1st March 2007, http://ageconsearch.umn.edu/bitstream/8028/1/fo07cl01.pdf).

According to Harry de Gorter and J. Daniel Cook: "Another source of water in domestic support ceilings is the peculiar manner in which the AMS is calculated. The AMS includes 'market price support' -- defined as eligible production multiplied by the difference between the administered price and a fixed world reference price. The product of that operation does not depict 'domestic support' per se. Instead, it is a faulty measure of support provided at the border through tariffs, import quotas or export subsidies (box 1) since an administered price cannot be sustained without supporting border measures. Reducing or even eliminating an official support price without altering border protection need not have any market impact. Japan is a case in point. There, the official support price for rice was eliminated in 1997, and Japan's total AMS, as notified to the WTO, dropped by $20 billion. However, because the country made no changes in import controls, effective support remained the same. So, a substantial portion of the water in Japan's total AMS, of approximately $34 billion (table 2) can be attributed to an adjustment made to an administered price in order to 'achieve' reduction commitments without actually reducing support. The redundancy of this 'price-gap' component of the AMS must be recognized when assessing the impact of any given cuts". (Domestic Support in Agriculture: The Struggle for Meaningful Disciplines, 2005, http://siteresources.worldbank.org/INTRANETTRADE/Resources/239054- 1126812419270/7.DomesticSupport_updated_on12Dec05.pdf ).

How many WTO Members know that the actual subsidies have represented only euro 5.894 billion or 12.3% of the euro 47.825 billion of the EU average applied PS AMS (and total AMS) from 1995 to 2000? And that the US proportion of the MPS in the applied total AMS has been 56.9% of its notified PS AMS during the 1995-00 base period ($5.914 billion over $10.401 billion) and 55.9% for the whole 1995-04 period ($5.870 billion over $10.504 billion)?

The best EU example is given by the elimination on 1st July 2002 of the intervention price of bovine meat which has allowed the EU to reduce its total AMS by 24.5% or euro 9.7 billion from one day to the other, without any impact on the market price -- the producer price has increased by 7.4% in 2002, 0.9% in 2003, 5.2% in 2004 and 8% in 2005 -- or on farmers' income. Indeed, the elimination of the intervention price was more than offset by the increased blue direct payments, from euro 2.9 billion in 1999 to euro 6.0 billion in 2002 decided by the 1999 CAP reform. And this despite the collapse of intervention stocks from 222,500 tonnes at the end of 2001 to just 213 metric tonnes at the end of 2003, because other factors have played to increase the price: lower production linked to milk quotas and maintenance of high tariffs (66% on boneless fresh or chilled meat, 100% on boneless frozen meat and 16.6% on canned meat).

Notifying these fake MPS has only blurred the negotiations and misled most WTO Members and NGOs. What is the more surprising is that these amber domestic supports continue to be presented as the most trade-distorting ones!

What they are distorting above all is the understanding of negotiators of most WTO Members.

Therefore, basing the PS AMS limits without eliminating first this fake component would simply perpetuate the developed countries' tricky domination over a new AoA. Indeed, the EU and US offers to cut their FBTA by respectively 70% and 60% at the end of the Doha Round implementation period rests mainly on the elimination of their remaining MPS (on dairy and sugar for the US and mainly on wine and fruits and vegetables for the EU), elimination which would be replaced by allegedly green subsidies.

In another paper of February 2007 (Review of the EU agricultural distorting supports to rebuild fair and sustainable agricultural trade rules after the Doha Round hibernation, 29 December 2006), Merlinda Ingco (World Bank) and Harry de Gorter (Cornell University) say: "The AMS is, therefore, a misleading indicator of domestic support... Trade negotiations need to single out amber box policies that are truly domestic support policies and therefore are not conflated with market access or export subsidy policies. The purpose of the URAA was to define, quantify, and reduce trade-distorting policies, but we argue here that the URAA has not properly defined and quantified (and hence reduced) trade-distorting domestic support measures in many instances. Hence, a major challenge is to address the imbalances in the definition and quantification of agricultural support so that a level playing field is established and effective reductions in trade distortions are ensured." (Harry de Gorter, Merlinda D. Ingco, and Laura Ignacio, Domestic support economics and policy instruments, in Merlinda D. Ingco and John D. Nash, ed. "Agriculture and the WTO: Creating a trading system for development", The World Bank and Oxford University Press, 2004).

The Rome-based FAO (in Domestic support: trade related issues and the empirical evidence, FAO Trade policy technical notes No.5, 2005, ftp://ftp.fao.org/docrep/fao/007/j5012e/j5012e00.pdf), says: "However, it has been recently argued by a number of commentators (de Gorter (2004), Berthelot (2004)) that at current levels, Amber Box support measures are unlikely to be affected even if Aggregate Measure of Support (AMS) ceilings are cut significantly. The way in which support is measured in the context of the WTO agreement is a key reason for this. There are a number of limitations to the use of AMS, namely the way in which support is measured and the coverage of the measure, which raise questions as to whether the AMS is a more appropriate measure of domestic support than other measures of support, as explained in detail in Box 6.

"In the EU, for example, the intervention price is purely an administrative accounting price. If the market price is greater than the intervention price and this in turn is greater than the world reference price, then the difference between the intervention price and the world reference price is the AMS. It is therefore possible to cut the intervention price and reduce the AMS without any effect on the level of support to producers. For example, if the administered price is $100 per tonne, the world reference price is $60 per tonne, but the domestic price is $120 per tonne as a result of border protection, the gap between $100 per tonne and $60 per tonne, i.e. $40 per tonne is used to calculate the AMS. The actual domestic price, supported by border protection, plays no part in this calculation (de Gorter, H. 2004: Domestic support disciplines on agriculture in the WTO: Where to go from here? Presentation by de Gorter at an Informal Expert Consultation on Domestic Support. FAO, Rome. 30-31 August 2004.)

"In other words, the AMS is not based on current actual domestic and world prices and is therefore a misleading estimate of current levels of support. If the world price falls, and the actual level of support increases as a result, the AMS is unaffected because the administered price remains unchanged. Equally problematic, the AMS can be reduced without reducing support to producers, simply by altering the intervention price (which as demonstrated in the example, will not necessarily affect the domestic producer price). In the EU, for example, the intervention price for beef was significantly reduced in 2002, reducing the overall AMS by euro 11.9 billion. In Japan, a similar policy change in the rice intervention price resulted in a significant cut in its AMS.

"A further difficulty arises in that the price gap component results from the incidence of border protection, not from domestic support policies. This component of the AMS is financed by the consumer and as such it should not be counted as domestic support. AMS should be defined as only that support that is financed by the taxpayer, in other words, the budgetary expenditure on support. Consumer financed payments should be omitted from the calculation to avoid double counting with border support. By way of reference, levels of support, as measured by the PSE, which are greater than the value of the ceiling AMS in all selected countries, are significantly reduced when the support provided through border support is subtracted.

"Consumer financed payments are large in comparison to taxpayer financed transfers in many countries with AMS reduction commitments, as demonstrated in Table 2. With the implementation of current reforms to the CAP, intervention prices in the EU will be close to world reference prices, implying a much lower AMS for targeted commodities such as cereals, (although it will still be high for some commodities including dairy products). The EU will be well within the ceiling AMS and further cuts in AMS will be likely to have little effect on the EU's ability to use trade distorting support. Similarly, in the Republic of Korea, rice support is consumer financed and there is no production enhancement as a result of domestic support measures over and above the support provided through border protection (de Gorter, 2004).

"It is possible that even an agreement to reduce AMS significantly will not be binding on the main users of Amber Box policies, given the way that domestic support is currently measured."

According to Jean-Pierre Butault and Jean-Christophe Bureau from INRA (Institut National de la Recherche Agronomique or National Institute of Agronomic Research): "It is unclear what kind of economic support is now reflected by the AMS... The AMS per se is no longer meaningful. The methodology used to calculate the fruits and vegetable AMS does not seem to rely on sound economic analysis. The changes in EU policies, and the reliance on a world price observed some 20 years ago as a reference have led to a complete disconnection of what is measured and what is the actual support provided to EU farmers. Clearly, the objective of reducing the AMS should be seen as a useful political target, but the AMS per se has no longer any meaning." (Jean-Pierre Butault and Jean-Christophe Bureau, WTO Constraints and the CAP: Domestic Support in EU25 Agriculture, TRADEAG, Working paper 2006.06, INRA and European Commission: http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp171.pdf).

OECD has well noticed that "the AMS is not linked to the variation of domestic or world prices. If the secular decline of world prices persists, the actual support will increase but the AMS will not be affected Likewise, if world prices rise, the actual support will diminish but the AMS will not be modified." (OECD, L'Accord sur l'agriculture du cycle d'Uruguay. Une evaluation de sa mise en oeuvre dans les pays de l'OCDE, 2001, p. 69).

Thus, the high price of US dairy products is not linked to the administered prices -- much lower than market prices and therefore not activated -- but to the high level of import protection. Nevertheless, the dairy products AMS has long been the main component of the US specific AMS, with more than $4 billion a year, before being exceeded since 1999 by the marketing loan payments.

In the sugar panel dispute against the EU, the panel noted that "The intervention price (minimum guaranteed price) for sugar is approximately three times the price of world market prices. The intervention price operates as a safety net that provides for intervention agencies to purchase EC quota sugar at a guaranteed price if sugar prices on the domestic market fall below a certain level. Intervention purchasing has occurred only once in 25 years as the regulatory aspects of the EC sugar regime controlling the amount of sugar sold in domestic markets and protection from outside competition enables quota sugar to be sold at prices well above the intervention price." (Report of the panel on European Communities-Export subsidies on sugar. Complaint by Australia, WT/DS265/R, 15 October 2004, paragraph 7.245).

Conversely, the absence of administered prices, then of AMS, for poultry and eggs in Canada does not prevent their high prices as a consequence of a high import protection.

To conclude, the MPS component of the AMS should be eliminated altogether, since it is the source of such a confusion and cosmetic window-dressing by the EU and US which is mystifying the whole world, trade experts and WTO Members' representatives alike. Therefore, it is highly preferable to stick to the actual subsidies component of the AMS.

(* Jacques Berthelot is a civil society activist based in Toulouse, France. He is an agricultural economist and a former lecturer in economics at the National Superior Agronomic College of Toulouse (ENSAT) and a former Jean Monnet Chair in European economic integration at the National Polytechnical Institute of Toulouse. He contributed this article on request to SUNS.)

 


BACK TO MAIN  |  ONLINE BOOKSTORE  |  HOW TO ORDER