Agreement On Agriculture Made Up Of Three Pillars

In 1995, the year that the WTO was established, the first effective rules governing international trade in agriculture and food were introduced. Following the Uruguay Round negotiations, all agricultural products were brought under multilateral trade rules by the WTO’s Agreement on Agriculture.

The Agreement is made up of three ‘pillars’: market access, export competition and domestic support. All WTO members, except least developed countries (LDCs), were required to make commitments in all these areas in order to liberalize agricultural trade. Developing countries were given a limited element of special and differential treatment (S&DT).

Provisions of the agreement

1.2.1 Introduction

Increase market orientation in agricultural trade

Long-term objective: to establish a fair and market-oriented agricultural trading system. By providing for substantial progressive reductions in agricultural support and protection sustained over an agreed period of time, resulting in correcting and preventing restrictions and distortions in world agricultural markets.

Strengthen rules to improve predictability and stability for importing and exporting countries

Initiate a reform process through negotiations on support and protection

Make specific commitments on market access, domestic support, export competition, and sanitary and phytosanitary issues

On market access: take fully into account the particular needs and conditions of developing-country members by providing for a greater improvement of opportunities and terms of access for agricultural products of particular interest to these members, including the fullest liberalization of trade in tropical agricultural products.

Consider non trade concerns such as food security, environmental protection, special and differential treatment for developing countries, possible negative effects on least-developed and net food-importing developing countries.

1.2.2 Concessions and commitments members are to undertake on market access, domestic support, and export subsidies

Market access

The most important commitments are:

Developed and developing countries to convert all non-tariff barriers into simple tariffs (a process known as tariffication).

All tariffs to be bound (i.e. cannot be increased above a certain limit).

Developed countries to reduce import tariffs by 36% (across the board) over a six year period with a minimum 15% tariff reduction for any one product.

Developing countries to reduce import tariffs by 24% (across the board) over a ten year period with a minimum 10% tariff reduction for any one product.

Export competition

The commitments are:

For developed countries, the value and volume of export subsidies to be reduced by 36% and 24% respectively from the base period 1986- 1990 over a six year period.

For developing countries, the value and volume of export subsidies to be reduced by 24% and 10% respectively from the base period 1986-a990 over a ten year period.

Domestic Support

All forms of domestic support are subject to rules. The WTO classifies domestic subsidies into three categories known as the Amber, Blue and Green Boxes. Only the Amber Box is subject to reduction commitments as follows:

For developed countries, a 20% reduction in Total AMS (Amber Box) over six years commencing 1995 from a base period 1986-1988.

For developing countries, a 13% reduction in Total AMS (Amber Box) over ten years commencing 1995 from a base period 1986-1988.

The WTO classifies subsidies into three categories:

Amber Box: all domestic subsidies – such as

Amber Box: all domestic subsidies – such as market price support – that are considered to distort production and trade. Subsidies in this category are expressed in terms of a “Total Aggregate Measurement of Support” (Total AMS) which includes all supports in one single figure. Amber Box subsidies are subject to WTO reduction commitments.

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Blue Box: subsidy payments that are straightforwardly linked to acreage or animal numbers, but under schemes which also limit production by impressive production quotas or requiring farmers to set-aside part of their land. These are deemed by WTO rules to be ‘partially decoupled’ from production and are not subject to WTO reduction commitments. In the EU, they are universally known as direct payments.

Green Box: subsidies that are deemed not to distort trade, or at most cause minimal distortion and are not subject to WTO reduction commitments. For the EU and US one of the most important permissible subsidies in this category is decoupled support paid directly to producers. Such support should not relate to current production levels or prices. It can also be given on provision that no production shall be required in order to receive such payments.

Part Two: An Unequal Agreement

2.1 An Unequal Agreement

From the time when it came into force, the AoA has established several weaknesses. These can be categorized under two headings:

Design related issues

Implementation related issues.

2.2 Design related issues

No recognition of differences in agricultural systems

The Agreement fails to recognize the fundamental differences between agricultural systems in developed and developing countries and uses a one-size-fits-all approach. It ignores, for example, the fact that agriculture is the main source of livelihood for the majority of the population in developing countries and that the sector is a major contributor to national income.

While LDCs are exempt from reduction commitments, the AoA affords very limited special and differential treatment (S&DT) to developing countries. Rather than ensuring the flexibility to implement trade policies that are consistent with their development objectives, these provisions amount to little more than providing additional time to implement agreements.

The AoA fails to discriminate between the different needs of diverse developing countries and provides no guarantee of food security. In contrast, the way subsidies are classified, the provision of special safeguards (SSG) and the Peace Clause, all work in favor of producers in developed countries.

Subsidies: boxing in the AoA

There are a number of exceptions to the domestic subsidy reduction commitments outlined above.

The first exception is contained in the Blue Box. During the Uruguay round, the EU and other developed countries argued that reductions in Amber Box subsidies would have a detrimental impact on farmers. Blue Box subsidies were introduced to offset this impact. On the grounds that supposedly they are only partially linked to production, they are exempt from reduction commitments.

The second exception is the de minimis level of support. For developed countries this exempts market price support if, in any year, the aggregate value of this support does not exceed 5% of the total value of the production of that product. It also exempts non-product specific domestic support, such as input subsidies, if their value is less than 5% of the value of total agricultural production. For developing countries, the de minimis level is 10%.

The third exception concerns subsidies for development purposes in developing countries. These are measures of assistance, whether direct or indirect, designed to encourage agricultural and rural development.

The fourth exception is contained in the Green Box. This allows subsidies that are deemed to have no, or at most minimal, trade-distorting effects.

Unfortunately, given their complex administrative requirements and the fact that few developing countries have the financial resources to provide large subsidies, it is producers in developed countries that gain most from these exceptions.

Special safeguards (SSG)

The special safeguard (SSG) provision was introduced to allow countries to impose additional duties in order to protect them from sudden import surges in terms of volumes or low prices. However, in order to qualify for SSG, countries had to have non-tariff barriers (quantitative restrictions on imports) in place at the time tariffication took place under the Uruguay Round.

Only 22 developing countries had non-tariff barriers that enabled them to qualify. In contrast, 16 developed and eastern European countries qualified. It is pertinent to note that out of the total number of SSG products (6072) that are available to all 38 countries; only 31.8% products (1930) are available to developing countries as against 68.2 % (4142) to developed countries. Of these, the EU can use SSG against 539 products, the US against 189 products, Canada against 150 products, Australia against 10 products and Switzerland against an astounding 961 products.

Peace Clause

The inequalities in the AoA are further exemplified by the inclusion of the Peace Clause. In effect, this makes developed country subsidy regimes immune from challenge by other WTO members unless they renege on their WTO commitments. The Peace Clause is due to expire at the end of 2003.

As the Clause currently stands, WTO members are urged to use ‘due restraint’ by not challenging agricultural subsidies that fully comply with the rules in the AoA. When the Clause expires, it is likely that subsidies will be challenged, particularly where they cause adverse effects to the interests to other members, for example displacing exports of another member from a third country market.

The types of subsidies that cause adverse effects are EU export subsidies to cereals, dairy products and sugar, EU direct payments to cereals, oilseeds and livestock, US export credits to wheat and US marketing loans to rice and cotton.

2.3 Implementation related issues

Design related issues have resulted in the unfair implementation of the AoA. Developed countries continue to subsidize their agriculture and food exports very heavily while simultaneously protecting their producers by manipulating tariffs and employing tariff peaks and tariff escalation.

No reduction in subsidies

Since the AoA came into effect, developed countries in the early 1990s have been juggling the way that subsidies are provided in order to avoid reduction commitments. The EU has progressively moved domestic subsidies from the Amber Box to the Blue and Green Boxes. As can be seen in Table 2, the majority of US subsidies already fall under Green Box provisions.

The net result of transferring subsidies into different Boxes is that between 1999 and 2001, developed countries’ support to agriculture was some 9% higher in nominal terms than during 1986-88.

Dumping

However they are categorized, substantial subsidy payments are still available to farmers and agribusiness in developed countries. This has two interlinked impacts: domestic and export subsidies lead to over-production (with corresponding impacts on world prices) and dumping. ‘Dumping’ is defined as the sale of products in third markets at less than the cost of production in the exporting country.

Dumping from developed countries occurs, in part, because export subsidies bridge the gap between high domestic prices and lower world prices (as in EU sugar and dairy products); and direct payments bridge the gap between higher costs of production and the lower world price (as in EU cereals).

It is generally accepted that currently “practically everything exported from [the USA and EU] involves some level of dumping”. In the US, it is calculated that over the past ten years, maize has been sold in third markets at some 5-35% less than its cost of production (COP), cotton 20-55% less than the COP, wheat 20-35%, rice 15-20% and soybeans 8-30%.

In the EU, the picture is similar. Recently, wheat was sold at 30-35% less than the COP, sugar 60-75% and skimmed milk powder some 50% below COP. Dumping has three main effects. It depresses world prices, displaces developing country exports in third markets, and undermines domestic production in developing countries as local producers are unable to compete with the cheap imports.

Dumping can have a devastating impact on developing country farmers, depriving them of their livelihoods and forcing them to leave their lands. In the process it seriously undermines food sovereignty and food security.

High Tariffs

Not only do developed countries continue to provide their agricultural sectors with huge subsidies, they are also protecting key agricultural products behind high tariff barriers. This is possible because of the way they manipulated the process of tariffication under the Uruguay Round.

At the outset of the Agreement on Agriculture, many developed and some developing countries set very high tariffs, enabling them to implement tariff reduction commitments without experiencing any real loss of protection for their domestic producers. As a result final bindings for the EU for 2000 are almost two thirds higher, and for the US more than three quarters higher, than the actual tariff equivalents for 1989-1993.

Furthermore, because countries are allowed to achieve tariff reduction commitments by aggregating reductions across a range of different products, they have been able to reduce tariffs on less sensitive products – the ones they do not produce themselves – while maintaining high tariffs (tariff peaks) on goods they do produce.

In order to protect domestic food manufacturers from competition, it is common for tariff rates to increase with each step in the processing ladder. This is known as tariff escalation and inhibits the growth of agricultural processing in developing countries. Meanwhile, developing counties are opening up their markets through reduced tariffs, consistent with their commitments under the Uruguay Round. Improved market access is an important issue for some developing countries.

2.4 The special and differential treatment for developing countries and the effect

Under the AoA, special and differential treatment is provided for developing countries. Developing countries may implement the agreement over a period of up to ten years and, in general, the reduction commitments in each area of the agreement for developing countries are two-thirds of those for developed countries. The special and differential treatment covers three main issues related to agriculture:

Market access.

The AoA has a twofold aim: improve the transparency of existing protection measures and facilitate their reduction, and open domestic markets to more imports.

Developed countries are to cut bound tariffs by 36% over six years, and developing countries are to make 24% cuts over ten years. These are average cuts for all agricultural products; however, a minimum reduction of 15% for developed countries and 10% for developing countries is required for each product.

A minimum import threshold is stipulated for each sector of agricultural production where there are non-tariff barriers. This was set at 3% of domestic consumption in 1995 and is increased progressively to 5% by 2000.

Domestic support.

The types of support included in amber box are calculated using the Aggregate Measurement of Support (AMS) and are subject to reduction. Developed countries must reduce this support by 20% over six years and developing countries by 13.3% over 10 years.

Under the de minimis rule, countries are exempted from reducing product-specific support that does not exceed 5% of the total value of production of that product (10% for developing countries) and non-product-specific support that does not exceed 5% (10% for developing countries) of the value of total agricultural output.

Developing countries are also exempted from reducing support for agricultural investment, input subsidies for low-income farmers and support to encourage diversification from growing illicit crops. These types of support are allowed under special and differential treatment.

Export subsidies.

The AoA aims to cut export subsidies. The agreement requires developed countries to cut the value of export subsidies by 36% and to reduce the volume of subsidized exports by 21% over six years.

Developing countries must reduce the value of subsidies by 24% and volume of subsidized exports by 14% over ten years. Because of developing countries’ higher marketing costs, subsidies to reduce the costs of marketing and transporting exports both domestically and internationally are excluded.

2.5 Limits to special and differential treatment in the AoA

The vast majority of special and differential treatment in the AoA fails to address their purported objectives efficiently.

This disappointed result is causes by two reasons: first, some provisions in the AoA give developed countries the chance to keep promises unconsummated. Second, although there are favourable provisions for developing countries, there are still some troubles for them to fulfil their obligations.

2.5.1 The unconsummated promises of developed countries.

The developing countries have not achieved their anticipation in the AoA. The most important reason is developed countries did not carry out their promises in deed.

Market access.

The main expectation of developing countries for Uruguay Round is that developed countries could open their markets, at least in agriculture field which has being highly protected.

Under the tariffication commitments of the AoA the WTO members have to convert most non-tariff barriers to tariff on agricultural imports and declare upper bounds for tariff rates. Most developed countries take advantage of such ‘convert’ to collect high tariff, which is even higher than non-tariff barriers in equivalent effectiveness.

Although tariffication appears to be a significant step forward, in most developed countries average agricultural tariffs are higher than non-agricultural tariffs.

They use ‘special safeguard measure’ acclimatize themselves to such transition in order to protect their farmers. The special agricultural safeguard was designed to address disturbances in domestic markets arising from the removal of non-tariff measures, either in terms of a surge in imports or a decline in domestic prices.

However, the modest use of special safeguards suggests that countries’ concerns regarding import surges for tariffied commodities were not warranted. That means they will take some restrictive measures as long as the volume of imports exceeds a trigger level or the price of the imported product falls below a trigger price.

Domestic support.

In terms of provisions in the AoA, developed countries should cut their domestic support on agriculture. However, the sum of such support is increasing.

Developed countries must reduce domestic support by 20% during 1995 to 2000. But the supports which included in green and blue boxes are exempted from cuts and there was no limit placed on them. In addition, the US and EU insisted on a ‘Peace Clause’, which prohibited any challenges to subsidies levels until January 1, 2004, to give the members time to adjust their policies.

In this way, developed countries cut the supports in amber box and added lots of the supports in green and blue boxes at the same time. For example, the farmers who live on poultry feed in US and EU have not received support from governments directly. However, the corn for feeding poultry is in the scope of domestic support. Such indirect support brings African farmers into trouble and leads increasing of the sum of domestic support.

It is claimed that such supports which developed countries are using cannot distort trade. But in fact, they may make farmers able to sell their products in a lower price than those who do not have such supports.

Export subsidies.

According to the provisions of export subsidies in the AoA, at the end of 2000, developed countries need to cut 36% of export subsidies of period time. That means they can still keep 64% of original export subsidies.

Developing countries have the desire to cancel export subsidies, however, it is hard to implement. For example, EU still holds 90% of the export subsidies of the world. Although the proportion of export subsidies reduced from 31% to 14% during 1990 to 1999, it is only one aspect of problem. During the same period, the common agriculture policy payout went up from 24.9 billion dollars to 39.5 billion dollars. Therefore, the export subsidies only declined one third but not 55%.

Part Three: Conclusion

Developed and developing countries should consider the following recommendations to rebalance the inequalities in the Agreement, particularly the current imbalances between subsidies and tariffs.

S&DT and other issues

• The introduction of a mechanism within the AoA that would allow developing countries to adjust their tariff levels in accordance with the level of production and trade distorting subsidies in the exporting country. The aim would be to address the problem of the accumulated effects of high levels of production and trade-distorting subsidies provided to agriculture in developed countries. No proof of injury would be required from the importing country – the existence of subsidies to a product would be sufficient to trigger the measure.

• Only developing countries should have the flexibility to deal with price volatility and import surges through the special safeguard mechanism. The mechanism should be available for all products.

• There should be no extension of the ‘Peace Clause’ at the end of 2003. The following long-term measures should be included to put development and food security at the heart of the AoA:

• Developing countries should have the long-term flexibility to exempt agricultural products from tariff reductions – on the basis of a positive list approach – on the grounds of concerns related to food security, rural development, poverty alleviation and livelihood conservation. They should also be allowed to increase bound tariffs where these have been set at low levels. No compensation to other

WTO members would be required.

• The 1994 Marrakesh Decision should be overhauled and made operational to ensure that support is provided to compensate NFIDCs for any rise in food prices.

• The WTO should considerably strengthen its disciplines by prohibiting all forms of food aid, except those provided in full grant form and channeled through the World Food Programme or affiliated organizations. Existing bilateral food aid programmes should be regarded as export subsidies and phased out in a period to be negotiated.

Market access to the North

• Immediate duty free and quota free access to all developed markets for all products exported from LDCs.

• Tariff regimes to be simplified and made more transparent and all non ad valorem tariffs to be converted to ad valorem tariffs.

• Tariff escalation to be eliminated and tariff peaks reduced.

However, because of the concerns outlined above not bring benefits (particularly pro-development benefits) unless most, if not all, of the following conditions are initially met. The developed world and international donors should support developing countries to:

• Develop national policies to address inequalities in access to productive and marketing resources, especially for women, and make them available on favourable terms. These include land, water, credit, inputs, market information, marketing facilities and services, appropriate technologies and physical infrastructure as well as public services such as health care and education.

• Establish national policies to ensure that low income producers benefit from any widening of market access, through the integration of trade policy with poverty reduction strategies. Agricultural policies should prioritize the promotion of smallholder production, food security and sustainable agriculture, not large-scale commercialization.

• Promote and develop value-added processing.

• Develop national policies that diversify agricultural production while taking care not to increase the vulnerability of small farmers by over exposing them to cash crops.

• Develop policies, skills and infrastructure to enable processors and exporters meet product standards in the North.

• Enact strong national and international competition policies – outside the WTO – to address corporate profit levels and the distribution of profits in supply chains. This would also include developing better methods of regulating the activities of transnational corporations especially in relation to technology transfers, tax avoidance and restrictive business practices.

• Devise methods of stabilizing primary commodity prices at remunerative levels.

Domestic subsidies and Export subsidies

• The immediate elimination of the de minimis provision for developed countries.

• The phasing out of Amber Box subsidies in developed countries. Financial (or other assistance) should be given to developing countries – with their full consultation – that are affected by the erosion of preferences.

• The immediate elimination of Blue Box subsidies.

• A review analyzing the impact on production and trade in developed countries of Green Box subsidies. All Green Box subsidies must be fully decoupled from production and targeted only at the delivery of public goods. Any Green Box subsidies found to increase production and trade should be eliminated. The amount of remaining Green Box subsidies should be capped.

• The implementation of supply management policies in developed countries to curb overproduction of agricultural products.

• The immediate elimination of all forms of export subsidies in developed countries.

• The following subsidies in developing countries to be exempt from reduction commitments; – assistance related to investment in agriculture; – assistance to input subsidies for agricultural production; – assistance to producers to encourage the diversification from growing illicit narcotic crops; – assistance below the de minimis level for developing countries should be aggregated (no restrictions should be imposed as to the level of support provided within that level to any specific crop);- subsidies to reduce the cost of marketing of agricultural products, as well as reduction in the cost of the internal transport and freight charges on export shipments.

Dumping

• An immediate prohibition on agricultural dumping. The OECD should calculate and publish the full production costs of all agricultural products in developed countries and other large exporters, in order to provide a ‘point of reference’ against which the dumping of goods can be measured.