Examining the controversy surrounding the WTO Agricultural Agreement

The World Trade Organization (WTO) is an international organization designed by its founders to supervise and liberalize international trade replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1947. The World Trade Organization deals with regulation of trade between participating countries; it provides a framework for negotiating and formalizing trade agreements, and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements.

The WTO’s Agriculture Agreement was negotiated in the 1986-94 Uruguay Round and is a significant first step towards fairer competition and a less distorted sector. It includes specific commitments by WTO member governments to improve market access and reduce trade-distorting subsidies in agriculture. In general, these commitments were phased in over a six year period (10 years for developing countries) that began in 1995.

The objective of the Agriculture Agreement is to reform trade in the sector and to make policies more market-oriented. This would improve predictability and security for importing and exporting countries alike. The AoA wanted to bring about discipline in one of the most distorted sectors of trade, by, inter alia, disciplining the unrestricted use of production and export subsidies, as well as by reducing import barriers, including non-tariff barriers. Thus, the AoA sought to limit the extent of support granted by individual countries and attempted to ensure that countries adopt a more liberal policy as far as agricultural trade was concerned.

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However, the Agreement on Agriculture (AoA) has been subject to much controversy over the years after its implementation. Does it really promote fairer global competition? Does it reduce trade distorting subsidies in agriculture? Does it improve global market access? All these issues are subject to much debate on the WTO agenda.

SECTION 2: REFORMS

Under the Agricultural Agreement, the new rules and commitments apply to:

• Market access – open markets by prohibiting non-tariff barriers (including quantitative import restrictions, variable import levies, discretionary import licensing, and voluntary export restraints), converting existing non-tariff barriers to tariffs, and reducing tariffs. Least developed countries (LDCs) do not have to reduce their tariffs, but also commit not to raise their bound rates.

• Domestic support – subsidies and other programmes, including those that raise or guarantee farmgate prices and farmers’ incomes. LDCs are exempted from these reduction commitments; however they have also committed not to raise the level of support beyond the de minimis level.

• Export subsidies and other methods used to make exports artificially competitive – to reduce expenditures on export subsidies and the quantity of agricultural products exported with subsidies, and prohibits the introduction of new export subsidies for agricultural products.

Developing countries are subjected to the same disciplines to liberalise their agriculture sector as the developed countries, the only concession being slightly lower reduction rates and slightly longer time schedules.

Numerical targets for cutting subsidies and protection

SECTION 3: IMPORTANCE AND EXPECTED BENEFITS OF THE AGREEMENT

There were many expected benefits from the Agricultural Agreement and these are as follows:

It deals with a significant sector of world economic activity – In many countries, including many least-developed and developing countries, agricultural trade remains an important part of overall economic activity and continues to play a major role in domestic agricultural production and employment.

It would correct serious economic and trade distortions caused by non-market- oriented mechanisms that result in grossly inefficient use of resources.

It could substantially reduce world poverty – The World Bank estimates that an end to trade-distorting farm subsidies and tariffs could expand global wealth by as much as 0.5 trillion dollars and lift 150 million people out of poverty by 2015.

It would address food security issues – The trading system also plays a fundamentally important role in global food security. For example, it ensures that temporary or protracted food deficits arising from adverse climatic and other conditions can be met from world markets.

It is long overdue – The products of greatest interest to the least-developed countries – many agricultural products, together with clothing and other labor-intensive manufactures are among the most heavily protected in the markets of their current and potential trading partners, both developed and developing. For the first time, member governments are committed to reducing agricultural export subsidies and trade-distorting domestic support. They have agreed to prohibit subsidies that exceed negotiated limits for specific products.

For some countries, including the poorest, the negotiations offer the possibility of improved growth through trade in products where they might have a competitive advantage if trading conditions were less distorted. This, in turn, will make it less attractive to grow illegal crops.

SECTION 4: CONCESSIONS FOR DEVELOPING COUNTRIES

Given the differences in competitiveness and economic capacity between developing and developed economies, the AoA encloses some concession clauses to help integration of developing countries under the AoA.

Special and Differential Treatment has been embedded in the agreement so as to be operationally effective and to enable developing countries to effectively take account of their development needs, including food security and rural development.

Tariff reductions – Developing countries will be able to designate a certain number of products as sensitive products, with the possibility of implementing lower tariff reductions on these products than the tiered formula would require.

Special products – In addition, developing countries will be able to designate an appropriate number of products as Special Products, based on criteria of food security, livelihood security and rural development needs. These products will be eligible for more flexible treatment, with their criteria for selection and treatment to be specified in the further negotiations.

Special safeguard mechanisms – Producers in developing countries are vulnerable to import surges and imported price volatility, in the absence of alternative risk management and safety net instruments. It is accepted that a special safeguard mechanism will be established for use by WTO developing country members, but key criteria such as the country coverage, product coverage, trigger levels and preconditions, type of remedy and duration remain to be decided.

Domestic subsidy commitment – Developing countries have proposed some broadening of exempt Amber Box policies as well as other rule changes to increase their flexilibility to be able to provide budgetary support to their producers.

SECTION 5: CONTROVERSIAL ISSUES

Developing countries represent a large percentage of the World Trade Organization (WTO) membership, and agriculture is critical for their economic growth, poverty alleviation, food security, and environmental sustainability. However, the Agreement on Agriculture encloses some controversial issues which seem to favor developed countries at the expense of developing countries. In addition some of the expected benefits to be derived under the agreement as mentioned under section 2 were not actually reaped.

The main areas of controversy in the AoA pertain to:

• Market access

• Food security

• Domestic Support Requirement

• Export subsidies

The WTO Agreement on Agriculture has permitted developed countries to increase their domestic subsidies (instead of reducing them), substantially continue with their export subsidies and provide special protection to their farmers in terms of increased imports and diminished domestic prices. The developing countries, on the other hand, cannot use domestic subsidies beyond a de minimis level (except for very limited purposes), export subsidies and the special protection measures for their farmers. In essence, developed countries are allowed to continue with the distortion of agriculture trade to a substantial extent and even to enhance the distortion; whereas developing countries that had not been engaging in such distortion are not allowed the use of subsidies and special protection”

Section 5.1: Market Access

Many developing countries complain that their exports still face high tariffs and other barriers in developed countries’ markets and that their attempts to develop processing industries are hampered by tariff escalation (higher import duties on processed products compared to raw materials).

Import dumping and import surges by developed economies continue to threaten many developing and least developed countries which at the same time were compelled to lower tariffs and to dismantle their protective trade walls in compliance with WTO rules and IFIs’ loan conditionalities. Between 1990 and 2000, developing countries cut their average applied tariffs on agricultural imports from 30 percent down to 18 percent. Eventually the local agricultural sectors of these developing economies are likely to suffer from a lack of competitiveness.

And while developing countries complied with liberalization measures, developed countries managed to retain their protectionist walls by using tariff peaks or setting tariffs at a very high level from the base year of implementation, resulting in negligible tariff reduction and insignificant market access for the exports of developing and least developed countries.

For e.g., in the first year of the agreement, there were tariff peaks at very high rates in the United States (e.g., sugar 244 per cent, peanuts 174 per cent); the EEC (beef 213 per cent, wheat 168 per cent); Japan (wheat 353 per cent) and Canada (butter 360 per cent, eggs 236 per cent. According to the agreement, developed countries needed to reduce their tariffs by only 36 per cent on average to the end of 2000, and thus the rates for some products remain prohibitively high.

Developed countries have also invoked the Special Safeguards (SSG) provision of the GATT-UR to discriminate against developing country exports. The special safeguard provisions allow the imposition of an additional tariff where certain criteria are met whether volume, shipment basis or import price below specified reference price.

Section 5.2: Food Security

Ensuring food security, which is the access of the population to sufficient food to meet its nutritional requirements, is a basic objective of governmental policies in agrarian developing countries. Food security was defined in the 1974 World Food Summit as: “availability at all times of adequate world food supplies of basic foodstuffs to sustain a steady expansion of food consumption and to offset fluctuations in production and prices”.

Developed countries adopt practices to circumvent AoA rules thus undermining the food security and rural livelihoods of developing and least developed countries. Food imports by developing countries grew by 115 per cent between 1970 and 2001, transforming their combined food trade surplus of $1bn into a deficit of more than $11bn. Tariff cuts on rice imports were forced upon rice-producing developing countries, transforming many of these countries from self-reliant rice producers to net food importers.

It can be argued that under the AoA, developing countries have had to remove non-tariff controls on agricultural products and convert these to tariffs. Developing countries are then required to progressively reduce these tariffs, while LDCs are exempt from this requirement. In many developing countries this has threatened the viability of small farms that are unable to compete with cheaper imports. Many millions of small Third World farmers could be affected. The process has also increased fears of greater food insecurity, in that the developing countries will become less self-sufficient in food.

The average annual value of food imports in 1995-98 exceeded the 1990-94 ranging from 30 per cent in Senegal to 168 per cent in India. The food import bill more than doubled for two countries (India and Brazil) and increased by 50-100 per cent for another five (Bangladesh, Morocco, Pakistan, Peru and Thailand).

Increases in food imports were generally significantly greater than increases in agricultural exports. . An increase in the ratio indicates a negative experience, as it shows food import bills growing faster than agricultural export earnings. The worst experiences were those of Senegal (86 per cent rise in the ratio), Bangladesh (80 per cent) and India (49 per cent).

Countries which argue and support rapid liberalisation of the agricultural sector contend that global food sufficiency would in a way ensure food security since countries could then produce what they are most competent and efficient in, while importing the rest of their food requirements. Such an argument presupposes that all countries would at all times have sufficient foreign exchange to procure their food requirements internationally. This assumption is obviously not true since not all developing countries would be in a position to import food grains, even if these were available at competitive prices, due to their limited foreign exchange reserves.

Moreover, these countries often face cross sectoral pressures on their available funds, which further limit their capacity to procure internationally. This problem is further compounded in case there are unforeseen variations in the international prices.

Section 5.3: Domestic Support Requirement.

Developed countries with high levels of domestic subsidies were allowed to continue these up to 80 per cent after the six-year period. In contrast, most developing countries have had little or no subsidies due to their lack of resources. In addition, many types of domestic subsidy have been exempted from reduction, most of which are used by the developed countries. While these countries reduced their reducible subsidies to 80 per cent, they at the same time raised the exempted subsidies substantially.

Exemptions on Subsidies – By classifying their subsidies under different forms of exemptions, Developed economies (US and the EU) have retained and even increased their annual farm subsidies to the tune of USD 70- 80 billion each. The types of exemptions allowed by the AoA are as follows:

Amber box – domestic subsidies that governments have agreed to reduce but not eliminate.

Green Box – contains fixed payments to producers for environmental programs

Blue box – subsidies which can be increased without limit

AoA has erroneously categorised several types of subsidies under the so-called Blue Box and Green Box and made them respectable and not subject to discipline, even though they give an unfair advantage to the farms receiving the subsidies. This has allowed the developed countries to maintain or even increase the level of their total domestic support, with damaging effects on the developing countries.

Agricultural Subsidies – The AoA’s domestic support system currently allows Europe and the USA to spend $380 billion every year on agricultural subsidies alone. “It is often still argued that subsidies are needed to protect small farmers but, according to the World Bank, more than half of EU support goes to 1% of producers while in the US 70% of subsidies go to 10% of producers, mainly agri-businesses.” The effect of these subsidies is to flood global markets with below-cost commodities, depressing prices and undercutting producers in poor countries.

Domestic Support in Rice Sector – While most developing countries could barely provide domestic support to their farmers even lower than the 10% de minimize ceiling provided by the AoA, the combined subsidies poured in by the U.S., Japan and EU for their rice sector in 2002 reached US$16 billion. The U.S., the third largest rice exporter, is subsidizing its rice sector to an amount equivalent to 72% of its cost of production, something that is very obscene because U.S. rice production cost is more than twice the production costs of the two other leading rice exporters, Thailand and Vietnam.

Special Safeguard Provision – Countries that had been using non-tariff measures or quantitative limits on imports were obliged to remove them and convert them into equivalent tariffs. Countries that undertook such tariffication for a product have been given the benefit of the “special safeguard” provision, which enables them to protect their farmers when imports rise above some specified limits or prices fall below some specified levels. Countries that did not undertake tariffication did not get this special facility. This has been clearly unfair to developing countries, which, with few exceptions, did not have any non-tariff measures and thus did not have to tariffy them. The result is that developed countries, which were engaging in trade-distorting methods, have been allowed to protect their farmers, whereas developing countries, which were not engaging in such practices, cannot provide special protection to their farmers.

Aggregate Measurement of Support (AMS) – The agreement obliged developed countries to reduce the Aggregate Measurement of Support. While developed countries reduced their AMS, they also increased their exempted subsidies significantly, thereby offsetting the AMS reduction and resulting in an increase in total domestic support.

The Producer Subsidy Equivalent (PSE) for all developed countries rose from US$247 billion in the base period to US$274 billion in 1998. (In the EEC it rose from US$99.6 billion to US$129.8 billion and in the United States from US$41.4 billion to US$46.9 billion.)

Some consequences of developed countries subsidies:

• UK- wheat: In 2000, the world price of wheat was £73 a ton, the production cost of UK wheat was £113 a ton, and the UK wheat price was £70 a ton. Thus the selling price in the UK was £43 below the production cost due to massive subsidy.

• US-cotton: Brazil and African countries are affected by US subsidies. The US production cost is twice the world market price of 42 cents a pound. Yet US growers raised their share of global exports in 15 years. In 2001, US$4 billion in subsidies was paid on $3 billion worth of crops in the US.

• EU-sugar: In 2002, The EU maintains high domestic sugar price above the world market price, then provides export refunds (totaling Euro 1.5 billion) to local farmers/companies. The refunds are the difference between the local and the world prices.

Section 5.4: Export Subsidies.

Very few developing countries provide export subsidies and so the disciplining of this practice has little direct consequence for them. But it is important that they are aware of the effects felt indirectly. The effect on net food-exporters is the most obvious one – export subsidization by others hurt them in terms of market share and export earnings. For others, the degree of self-sufficiency in food is an important parameter to consider – large food importers may face an increased import bill once subsidies are withdrawn. In addition, all importers may face higher import costs in terms of coping with instabilities in world markets due to the subsidies.

Of course, the extent to which removing or reducing export subsidies will raise international prices is an empirical issue, and may not be very significant. And irrespective of the medium to long-term advantages of subsidy removals for food importers, the short-term costs of higher world prices may be substantial for many of the low-income countries.

Under the AoA, developed countries get to retain 64 per cent of their budget allocations and 79 per cent of their subsidy coverage after six years. The developing countries, on the other hand, had generally not been using export subsidies, except in a very few cases. Those that have not used them are now prohibited from using them, whilst those that have subsidies of little value have also to reduce the level.

The agreement committed developed countries to reduce the budget outlay by 36 per cent and the total quantity of exports covered by the subsidies by 21 per cent. The base level was the average annual level for 1986-90 and the reduction is to be done over the period 1995-2000. However, even in the year 2000 the level of export subsidies is allowed to be as high as 64 per cent of the base level.

SECTION 6: CONCLUSIONS

The Agreement on Agriculture has sought to reform trade in the agricultural sector and to make policies more market-oriented through greater market access and reducing trade-distorting subsidies in agriculture. Nevertheless the agreement has more or less failed in its objectives.

Market access has not been significant. Many developing countries complain that their exports still face high tariffs and other barriers in developed countries’ markets. Import dumping and import surges by developed economies continue to threaten many developing and least developed countries and developed countries have also invoked the Special Safeguards (SSG) provision of the GATT-UR to discriminate against developing country exports.

Furthermore, the continued domestic support received by producers in developed countries undermines the agricultural sectors on developing countries. Developed economies (US and the EU) have retained and even increased their annual farm subsidies to the tune of USD 70- 80 billion each. In addition, The AoA’s domestic support system currently allows Europe and the USA to spend $380 billion every year on agricultural subsidies alone.

Food security is another matter of concern where developed countries adopt practices to circumvent AoA rules thus undermining the food security and rural livelihoods of developing and least developed countries. Food imports by developing countries grew by 115 per cent between 1970 and 2001, transforming their combined food trade surplus of $1bn into a deficit of more than $11bn.

Last but not least, export subsidization by developed economies continues harm developing economies in terms of market share and export earnings. Under the AoA, developed countries get to retain 64 per cent of their budget allocations and 79 per cent of their subsidy coverage after six years.

SECTION 7: RECOMMENDATIONS

Some countries say WTO arrangements should be more flexible so that developing countries can support and protect their agricultural and rural development and ensure the livelihoods of their large agrarian populations whose farming is quite different from the scale and methods in developing countries.

They argue, for example, that subsidies and protection are needed to ensure food security, to support small scale farming, to make up for a lack of capital, or to prevent the rural poor from migrating into already over-congested cities. India’s and Nigeria’s proposals are among those that emphasize food security issues for developing countries.

Many developing countries complain that their exports still face high tariffs and other barriers in developed countries’ markets and that their attempts to develop processing industries are hampered by tariff escalation (higher import duties on processed products compared to raw materials). They want to see substantial cuts in these barriers.

On the other hand, some smaller developing countries have expressed concerns about import barriers in developed countries falling too fast. They say they depend on a few basic commodities that currently need preferential treatment (such as duty-free trade) in order to preserve the value of their access to richer countries’ markets. If normal tariffs fall too fast, their preferential treatment is eroded, they say. Some developing countries see this situation as almost permanent. Others, view it as a transition, and are calling for binding commitments on technical and financial assistance to help them adjust, including the creation of a technical assistance fund for the purpose.