TWN Info Service on WTO and Trade Issues (Apr16/03)
7 April 2016
Third World Network

Time for Developing Countries to sue US, EU over AoA violations
Published in SUNS #8211 dated 31 March 2016

Toulouse, 30 Mar (Jacques Berthelot*) - Given the inflexible stand of developed countries, especially the US and EU, to bury the Doha Development Round (DDR) and their refusal to rebuild the Agreement on Agriculture (AoA) on more equitable rules, particularly for domestic subsidies, it is time for Developing Countries to take the offensive and sue the US and EU for their recurrent violation of the AoA rules, and where warranted, for dumping.

[While generally referred to and described on WTO sites etc as the 'Doha Development Round', legally and formally it is the Doha Work Programme (DWP) as a Single Undertaking (SU), launched and mandated by the WTO Doha Ministerial Conference of 2001, as modified by the General Council Decision of July 2004. As ongoing research work at the South Centre shows, until formally concluded as per the provisions of paras 45 and 48 of the Doha Ministerial Declaration, the DWP-SU remains valid and operational, notwithstanding the differing narrations of the US, EU etc or WTO trade officials including its DG. - SUNS]

At the Committee on Agriculture in Special Session (CoASS) meeting of 8 March 2016, the Chair, Ambassador Vangelis Vitalis of New Zealand stated that "negotiations on domestic support have emerged as the clear priority for the overwhelming bulk of those I have consulted with. In fact, domestic support has been identified by many of you quite explicitly as a key potential outcome for MC11. In this regard, Members have reminded me of the WTO's comparative advantage in this area as compared with Preferential Trade Agreements".

The present detailed paper** seeks to provide food for thought for this debate in analyzing the main controversies around ten methodological issues of opposite concepts: agricultural supports vs agricultural subsidies; administered prices vs market prices; coupled subsidies vs decoupled subsidies; domestic subsidies vs export subsidies; subsidies to agricultural products vs subsidies to agricultural inputs; export subsidies to raw products vs to processed products; green box subsidies vs 'gold box' subsidies; domestic agricultural subsidies vs import protection; commercial dumping vs monetary, fiscal, social and environmental dumping; subsidies to developed countries vs subsidies to emerging countries - and analyzing some contradictions in the REV4 draft modalities of 6 December 2008, and draw some conclusions.

The concept of agricultural "support" is broader than that of agricultural "subsidy" as it encompasses "market price support" (MPS) through import protection and export subsidies, albeit in different ways for the OECD (Organization for Economic Cooperation and Development) and the AoA.

For the OECD, the MPS represents the gap between domestic farm prices and current world prices (the border price of each country) rendered at farm gate, encompassing import protection as well as export subsidies.

The MPS is "financed" essentially by consumers, considering that they are entitled to buy their food and other agricultural products at world prices and that import duties prevent them from doing it.

However, in the OECD approach, a part of the MPS may be financed by taxpayers when there are explicit export subsidies, but this has always been the minor part of the MPS, particularly in Developing Countries (DCs) where they have hardly existed.

However, the AoA definition of MPS is totally absurd for three reasons: it is calculated as the gap between the present administered price and the border price of the 1986-88 period, multiplied by the eligible production; it does not imply any actual subsidy because it does not bring any additional support to that of other policy measures; these last are import duties, export subsidies and restrictions, land set aside, production quotas, and foreign and domestic food aid.

It is why Solidarite has proposed to make minor changes in the AoA rules to put an end to this absurd definition of MPS.

These modifications would find a permanent solution to the crucial issue of public stockholding for food security purposes and the developed countries would benefit even more by the changes in Annex 3, as this would almost eliminate their notifications of the MPS which is for many of them the bulk of their applied AMS (aggregate measurement of support).

The concept of administered price is not defined in the WTO agreements, although it is working in opposite ways in developed countries and DCs.

In DCs, administered prices - the MSP (minimum support price) in India, for example - are set above domestic prices to ensure remunerative prices to small farmers. In developed countries, these are minimum prices below the prevailing market prices in order to reduce their level.

The US Farm Bills and EU CAP (Common Agricultural Policy) reforms since the 1990s have lowered by steps their administered prices, and correlatively their current farm prices, so as to increase their domestic and external competitiveness - importing less and exporting more - through massive compensatory alleged non-trade-distorting subsidies of the blue and green boxes.

However, the WTO Appellate Body ruled on 3 March 2005 in the cotton case that the US alleged decoupled payments were not decoupled and therefore not in the WTO green box since farmers did not enjoy a total production flexibility.

The reasons to prove that the EU's allegedly decoupled "single payment scheme", now the "base payment scheme" since the CAP reform of 2014, are not actually decoupled, are even stronger.

Liberal economists themselves admit that decoupled subsidies have necessarily trade-distorting effects through several channels: wealth effects inducing production increases by reducing risk aversion and facilitating access to credit and investment; their capitalization into land rents reducing the possibilities of setting up of young farmers; "infra-marginal" cross-subsidization and deterrence effect to leave farming, etc.

Furthermore, the cumulation effect of different types of subsidies, coupled and decoupled, for the same product render coupled all subsidies.

The counter-argument that the decoupling works because farmers are not producing all they could on their allowed base areas does not hold because most farms are growing many crops receiving decoupled payments and simply choose to grow those crops with the most attractive prices and other aids depending on the year, climate and market conditions, so that any of their products receives decoupled payments from the base area of other crops.

Even the US domestic food aid entirely notified in the green box contained $1.856 bn of trade-distorting domestic subsidies in 2014.

Agricultural subsidies are mostly understood as granted to agricultural products but input and investment subsidies are also considered trade-distorting, except those benefiting low-income or resource-poor producers in DCs.

But the EU and US notify all their investment subsidies in the green box, ignoring the condition that they should benefit only farmers in "structural disadvantages".

As for input subsidies proper, they have been hugely under-notified by the US and EU. While this is already verified for non-agricultural inputs, it is even more so for inputs coming from other agricultural products.

By far the most important under-notifications of the US and EU concern their feed subsidies. The fact that the US and the EU notify in their amber box (AMS) some secondary feed subsidies attest that they are perfectly aware that feed subsidies are coupled input subsidies but they have refused to notify their huge subsidies to feed cereals, oilseeds and pulses (COPs).

Yet, on average from 1995 to 2014, the US feed subsidies have reached $5.313 bn, incorporated in dairy products ($587 million), beef ($1.479 bn), hogs ($1.242 bn), poultry and eggs ($1.957 bn). These feed subsidies have accounted on average for 14.4% of the feed costs.

The EU feed subsidies, essentially hidden in the decoupled Single Payment Scheme, are presently much higher, at 14.740 bn euros, of which 3.260 bn euros is to beef, 5.360 bn euros to pig meat, 3.680 bn euros to poultry and eggs, and 2.441 euros to cow milk.

The huge US and EU cheating in that area has been largely promoted by the OECD's tortuous concept of "excess feed cost" used to assess its other ambiguous concept of PSE (producer's support estimate).

The OECD considers that the livestock producers are penalized as they have to pay for their feedstuffs at the domestic prices, higher than the world prices, received by the growers of cereals, oilseeds and pulses (COPs).

Catherine Moreddu of the OECD wrote: "The excess feed cost due to the price support of cereals is deducted from the price support of animal products. Therefore, it is not possible to take it into account a second time in input subsidies".

This statement could have been at best debatable when the world prices of COPs were low so that this alleged "excess feed cost" - represented by the gap between domestic prices and world prices - was large. However, since the world prices of COPs have skyrocketed from 2008 to 2014, the "excess feed cost" has disappeared.

Yet the feed subsidies are still there, hidden for the EU in its alleged fully decoupled SPS (single payment scheme) and SAPS (single area payment scheme).

If the direct payments to COPs are fully received by the COPs' producers, the producers of animal products get the implicit but real subsidies corresponding to the lower prices they pay for the COPs of US or EU origin, prices that would be much higher in the absence of the subsidies granted to COPs' producers in compensation for the reduction in their administered prices.

We can invoke here the concept of "cross-subsidization" which has been central in the panels and Appellate Body's rulings in the cases of dairy products of Canada in December 2001 and December 2002 and in the EU sugar case in April 2005. So that the part of the COPs devoted to animal feed has conferred product-specific AMSs to the animal products having consumed this subsidized feed.

Though the EU and US are no longer using export subsidies, WTO Director-General Roberto Azevedo's speech at the closing ceremony of the WTO Ministerial Conference in Nairobi in December 2015 was deceptive, when he said: "The elimination of agricultural export subsidies is particularly significant... due to the enormous distorting potential of these subsidies for domestic production and trade. Today's decision tackles the issue once and for all".

Unfortunately, this is not true. The WTO Appellate Body has ruled four times - in the US Cotton case, the EU Sugar case and twice in the Dairy products of Canada case - that domestic subsidies, including the alleged "decoupled" ones, should be considered as export subsidies in assessing dumping.

The problem is that the WTO Members do not recognize the legal value of precedent to the panels' and Appellate Body's rulings when they adjudicate on similar cases.

The AoA article 11 takes into account the export subsidies to agricultural raw products incorporated into the exported processed products. Unfortunately, the EU and US have notified to the WTO very few subsidies to raw products incorporated into exported processed products.

From the latest published Eurostat trade data, Solidarite has calculated that, taking into account all the EU cereals incorporated in the exported cereal products in 2015, except in feedstuffs, the EU has exported and therefore subsidized 13.7 million tonnes (Mt) more than the 46.2 Mt of exported raw cereals, the subsidies having risen from 3,510 bn euros in 2014 to 4,002 bn euros in 2015.

[See, The EU dumping cereals, dairy and meats in 2012, total and to ACP countries, 5 March 2014, http://www.solidarite.asso.fr/Papers-2014?debut_documents_joints=3D30#pag ination_documents_joints; Reappraisal of the UE dumping on cereals to West Africa from 2006 to 2013, 28 May 2015, http://www.solidarite.asso.fr/Papers-2015?debut_documents_joints=3D10#pag ination_documents_joints]

The WTO rules take into account only the current "specific" subsidies, here, agricultural subsidies.

Solidarite has proposed to put in a "gold box" all types of past and present non-agricultural supports, and the past agricultural supports, which have reduced largely the unit production cost of agri-food products in rich countries vis-a-vis those in DCs, particularly on the following items: efficient transport and information infrastructures; general education and research; wealthy consumers with an increasing purchasing power, able to pay fair prices to farmers; democratic States able to enforce commercial contracts and to fight corruption; the plundering of DCs' resources during the slave and colonial periods; neo-colonial exploitation ever since through the DCs' indebtedness vis-a-vis the developed countries and the international institutions, and through unfair free-trade agreements; high import protection on agricultural products and infant industries for decades; health and pensions of farmers financed by society at large; low interest rates, particularly on agriculture, low inflation rates and manipulation of their currencies.

All in all, the present higher competitiveness of Western agri-food products relative to that of DCs results much less from the difference in the present agricultural supports - the only ones considered by the WTO - than from the present and past non-agricultural supports and past agricultural supports, for decades and even centuries, particularly through huge import protection.

It is why, even if the WTO would decide stricter criteria for the green box, the developed countries would still be able to increase their gold box subsidies to maintain their farmers' competitiveness.

One of the powerful means used by developed countries to consolidate their agricultural competitiveness was to impose on all countries, especially DCs, a reduction of import protection in the AoA as in bilateral trade agreements, as they were the only ones able to maintain, and if necessary, increase, the level of their domestic subsidies, which have clearly an import-substitution effect.

Therefore, DCs should be allowed to raise their applied import duty per tonne by adding to it the subsidy per tonne of the exporting country even if the result exceeds their bound duty. WTO Members should be obliged to notify to the WTO their subsidy per tonne per tariff line.

The WTO deals only with commercial dumping and ignores monetary, fiscal, social and environmental dumping practices, which are often the basis of commercial dumping. The basic idea is to justify anti-dumping duties on imports from countries practicing these kinds of dumping.

As all other WTO agreements, the AoA has several specific provisions for DCs in the three pillars of market access, domestic support and export competition, to take into account the special and differential treatment they are entitled to.

Although the AoA rules have been essentially negotiated between the US and EU during the Uruguay Round, and although they offered in October 2005 - offers endorsed in the Chair's draft agricultural modalities of 6 December 2008, called REV4 - to reduce drastically their allowed agricultural trade-distorting subsidies at the end of the Doha Round implementation period, if the DCs would open more their border to the US and EU exports of non-agricultural products and services, they have changed their minds in the last years.

The US has done so since 2011 with the explosion of its crop insurance subsidies and above all since the 2014 Farm Bill having eliminated the decoupled fixed direct payments so that all domestic subsidies will have to be notified in the AMS, which is expected to rise in the context of decreasing farm prices.

In that context US agri-food associations have taken an offensive stance, through reports and hearings in Congress, to claim that emerging countries are now granting higher and more trade-distorting subsidies than the US and EU.

Unfortunately, these reports of the associations are full of errors, particularly on the following issues: the currency to use in agricultural notifications; the eligible production; the reasons why emerging countries' support prices are higher than those of the US (huge disparity in the arable land per active agricultural worker and in average yields per ha in a context where these prices cannot keep pace with fast increasing production costs).

The report of two researchers of Iowa State University on behalf of US Wheat Associates is particularly outrageous and full of illogical calculations.

It is outrageous because it states the fact that for emerging countries to subsidize their wheat and to support it at the border is a trade-distortion that suppresses the world price and reduces the potential US wheat exports.

The comparison of the OECD indicators of agricultural supports of 10 high income developed countries and 12 emerging countries in 2014 is full of lessons.

We see that the ratio of individual agricultural subsidies on total agricultural production value was 7.2% in the US against 4.1% in China and the ratio of total agricultural subsidies (including those allocated collectively and in kind to farmers) per agricultural working unit (full-time worker equivalent) was 118 times larger in the US ($17,828) than in China ($151).

The report ends with a preliminary analysis of what should be changed in the REV4 modalities of 6 December 2008. If REV4 would generally put more constraints on developed countries, it is far from being totally beneficial to DCs.

Furthermore, it is full of huge contradictions, and we will limit ourselves to show the large implications of the new rule proposed for the product-specific de minimis (PSdm) as it would change all the notifications of agricultural domestic subsidies.

Indeed, paragraph I.1/1.b states: "The base level for reductions in Overall Trade-Distorting Domestic Support (hereafter "Base OTDS") shall be the sum of: ... for developed country Members, 10 per cent of the average total value of agricultural production in the 1995-2000 base period (this being composed of 5 per cent of the average total value of production for product-specific and non-product-specific AMS respectively)", and paragraph I.A.2 adds: "For developing country Members, item (b) of paragraph 1 above shall be 20 per cent of the average total value of agricultural production in the 1995-2000 or 1995-2004 period as may be selected by the Member concerned".

Beyond the radical contradiction with the current AoA rule - that the PSdm is only 5% of the production value of each specific product - the issue is the extent to which this proposed new definition of PSdm would be more beneficial to DCs, particularly to the majority of them which did not notify an AMS in their Schedule of commitments of 1986-88, than to the developed countries.

But we are facing a huge logical contradiction: it would be impossible to calculate a PSdm product by product because you cannot assign to each product having a calculated AMS a de minimis equal to 5% of the total value of agricultural production (VOP).

Another contradiction is the provision that the PSdm should be halved for developed countries "on the first day of the implementation period" and, for DCs, "shall be reduced by at least two-thirds of the reduction rate" of the developed countries.

This provision would render ineffective the proposed doubling of the de minimis for the developed countries and DCs!

If there were a single de minimis of 10% of the VOP for the developed countries and of 20% for DCs (17% for China), the WTO notification requirements of domestic support would be changed radically. The disappearance of PSdm will imply the disappearance of PS AMS and its merging with the NPS AMS.

Finally, the notification requirements would only be composed of three tables: the DS:1 on the green box, maybe for a while the DS:3 on the blue box (it has already been considered as trade-distorting by its integration in the OTDS) and DS:2 which would regroup all the other trade-distorting domestic supports to which a single common de minimis would be applied.

This simplification of the notification requirements should be very useful and would not require to double the level of de minimis. But the criteria of the green box should be revised drastically.

CONCLUSION

Free trade has never worked in agricultural markets as they cannot self-regulate. Indeed, faced with a steady food demand in the short term, agricultural production fluctuates with the vagaries of the weather - vagaries that will intensify with climate change, particularly in DCs - hence so do agricultural prices and incomes as well as food prices.

Having reached the top of the ladder of agricultural competitiveness thanks to decades of high import protection and high export subsidies, the US and the EU created a double trap for DCs to prevent them from climbing the same ladder: in 1986, they launched the Uruguay Round of trade negotiations, where they wrote together the AoA rules while changing radically their agricultural policies, the Common Agricultural Policy (CAP) and the Farm Bill.

Those radical changes included the EU and the US reduction of their minimum guaranteed agricultural prices in the early 1990s - and the EU continued their reductions in the CAP reforms of 2003 and 2004 - while compensating their farmers for the income loss with subsidies that they defined in the AoA as not trade-distorting, so as to improve the competitiveness of their agricultural products by importing less and exporting more.

At the same time, the AoA required all countries, including DCs other than the LDCs (least developed countries), to reduce their import protections - the LDCs having been constrained already to do the same by the structural adjustment policies of the World Bank and IMF - knowing that the DCs did not have the means to significantly subsidize their large number of farmers.

Given the inflexible stance taken now by the developed countries, particularly the US and EU, to bury the Doha Development Round (DDR), to refuse to rebuild the AoA on more equitable rules, particularly for domestic subsidies, and to attack instead those of the emerging developing countries, the DCs should take an offensive stance rather than to continue to get a caning without reacting.

The present paper has shown that DCs have many robust arguments to sue the US and EU for their recurrent violation of the AoA rules.

It is only Brazil which dared in 2002 to sue the US over its subsidies in the cotton case and the EU over its subsidies in the sugar case (together with Thailand and Australia).

However, now that Brazil's cotton has been subsidized by the US, Brazil has chosen to join the developed countries' camp and not to prejudice its compatriot, the WTO Director-General Roberto Azevedo.

No Developing Country, not even China or India, seems prepared to adopt an offensive stance against the US and EU agricultural subsidies.

In saying this we do not intend to prejudice the right and need of the developed countries' farmers to be protected by efficient agricultural policies that ensure fair incomes for them.

But this should not be at the expense of impoverishing their DCs' colleagues who should have the right to use the same policy tools that Western farmers have been enjoying for decades.

[* Jacques Berthelot, a French agro-economist and retired academic of ENSAT (Ecole Nationale Superieure Agronomique de Toulouse), and civil society activist at Solidarite, France, contributed this comment. The full text of his paper with references can be found at: http://solidarite.asso.fr/Papers-2016]