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Synthesis/Regeneration 37   (Spring 2005)

Outside View: Faulty Frame, Savage Reality

by Devinder Sharma

US Trade Representative Robert Zoellick and Pascal Lamy, the European Union’s outgoing trade commissioner, have successfully managed to hoodwink developing country negotiators with the August 2004 World Trade Organization’s (WTO) multilateral framework agreement. They have gone back more than satisfied with the empty promise of reducing contentious agricultural subsidies, but in reality have received a legal stamp of approval from developing countries that allows them to increase grants.

Let us first understand the political ramifications. Agricultural subsidies have been (and will remain) the bone of contention in the ongoing trade negotiations. Disputes over the West’s agricultural subsidies, which amounted to $320 billion, led to the collapse of the WTO Cancun Ministerial in September 2003. The question is what made them change their stand during a US election year?

It is accepted that any move to significantly cut agricultural subsidies will be political suicide for rich countries. US President George W. Bush is unlikely to cut subsidies for his farmers during an election. European nations, especially France, Germany, and the Nordic countries, would have been faced with political turmoil if they made any drastic cut in subsidies. No political reaction in any developed country is enough of an indication rich countries have managed to protect their subsidies.

Paragraph 7 of the Framework for Establishing Modalities in Agriculture (July 31, 2004 final draft) says: “As the first installment of the overall cut, in the first year and throughout the implementation period, the sum of all trade-distorting support will not exceed 80% of the sum of Final Bound Total AMS (Aggregate Measurement of Support) plus permitted de minimis plus the Blue Box at the level determined in paragraph 15.” And in paragraph 15, it adds: “In cases where a Member has placed an exceptionally large percentage of its trade-distorting support in the Blue Box, some flexibility will be provided on a basis to be agreed to ensure that such a member is not called upon to make a wholly disproportionate cut.” Reading this together means all efforts made by developing countries to see the trade-distorting Blue Box is removed have been nullified. This allows developed countries to shift a large chunk of their agricultural subsidies (under the Green Box and Amber Box) to the Blue Box. In other words, the advantage developing countries gained with the termination of the Peace Clause on December 31, 2003 (under which the developing countries could not challenge agricultural subsidies in the rich countries) has been negated.

The framework actually provides a cushion to the United States and the EU to raise farm subsidies from the existing level. If you read the draft carefully, it becomes obvious the first installment of a cut in subsidies by 20% is not based on the present level of subsidies but on a much higher level that has been now authorized.

The framework actually provides a cushion to the United States and the EU to raise farm subsidies from the existing level.

If we were to add all the components as specified in the WTO framework, the EU subsidies will total around (including the under-notified coupled support) $67.23 billion, enough leverage to increase its subsidies. No wonder the so-called phase out of agriculture subsidies has not snowballed into political crises in any European country. Furthermore, the EU has $17.23 billion in Blue Box subsidies. This is a large amount, and paragraph 15 quoted above applies.

The United States, on the other hand, wants to shift $180 billion for 10 years that it has provided to farmers under the notorious Farm Bill 2002 to the Blue Box. Since the WTO will now specify the historical period from which the Blue Box implementation begins, it means the United States can protect the yearly installment of its counter-cyclic payments to farmers. In the case of cotton subsidies, where the United States provides a daily support of $10.7 million to its 25,000 cotton-growers, and where the ruling of the WTO Dispute panel has gone against US cotton subsidies, the WTO has refused to act. All the WTO general council has done is to “instruct the director general to consult with the relevant international organizations, including the Bretton Woods Institutions, the Food and Agriculture Organization and the International Trade Center to direct effectively existing programs and any additional resources towards development of the economies where cotton has vital importance.”

Special and Differential Treatment (SDT) was a measure originally carved out for developing countries given the varying levels of development and their need to be given some concessions in implementation. However, in reality this measure was actually used only by developed countries. Instead of dispensing with SDT, the framework legitimizes its application for rich countries, albeit developing countries have been promised a special safeguard mechanism. This is where developing countries need to exert pressure, and see they have the right to reimpose tariffs to block cheaper imports.

As if the massive subsidies were not enough, developed countries have used high tariffs to successfully block imports from developing countries. They have used special safeguards measures (SSG) to restrict imports from developing countries. Developed countries took advantage of this flexibility by reserving the right to use the SSG for many products.

Canada reserves the right to use SSG for 150 tariff lines, the EU for 539 tariff lines, Japan for 121 tariff lines, the United States for 189 tariff lines, and Switzerland for 961. On the other hand, only 22 developing countries can use SSG. These SSG measures remain under negotiations, which means these will continue for quite some time.

The question of market access assumes importance in the light of the special and differential treatment, special safeguard measures and domestic support (including Green Box subsidies) remaining intact in developed countries. Using a tiered formula, developed countries have managed to seek an overall tariff reduction from bound rates. The only defense developing countries have been allowed is to brand some of their important agricultural products as “sensitive” and bring some others under the “special product” category. But the fact is developing countries have already opened up their markets by phasing out or removing the quantitative restrictions or lowering tariffs. It is the developed world that has failed to reduce subsidies.

This “benevolence” is no justification for developing countries to rejoice. Developed countries have also been allowed the same provisions, which means they can term some crucial commodities as sensitive and thereby deny market access. For instance, the United States, the EU, Japan and Canada maintain tariff peaks of 350–900% on food products such as sugar, rice, dairy products, meat, fruits, vegetables and fish, which can be easily brought under the category of “sensitive,” and some 25–40 of the sensitive tariff lines under the tariff rate quota can be easily protected under this category.

In any case, let us not forget a country like India cultivates some 250 different crops a year whereas Europe does not grow more than 25. For India to say areca nut are not sensitive products would mean destroying the livelihood of thousands of farmers cultivating areca nut from cheaper imports. For Europe, getting a score of crops protected under “sensitive” and “special products” will be justified. But to expect WTO to accord “special product” status to more than 200 crops from India would be asking for the impossible.

International NGOs have said the EU had withdrawn aid to Kenya, the most vocal of the African countries.

If you are wondering why developing countries still agreed to reach an agreement and that, too, within five days of intense negotiations, let us take a peek at what transpired behind the scenes through arm-twisting and coercion.

The leader of the Group of 20 developing countries, Brazil, was among a number of developing countries that were thrown a sugar-coated bait just a week before the negotiations entered the decisive phase. On July 23, 2004, the US announced its sugar quota allocation for 40 countries. This system allows these countries to export a fixed quota to the US at a lower tariff rate.

The largest recipients were the Dominican Republic (185,335 metric tons) followed by Brazil (152,691 metric tons), Philippines (142,160), Australia (87,402), Guatemala (50,546), Argentina (45,281).

International NGOs have said the EU had withdrawn aid to Kenya, the most vocal of the African countries. It may be recalled that Kenya was the country that had staged a walkout at Cancun thereby leading to the collapse of the WTO ministerial meeting. This time, the EU withdrew $60.2 million in aid to Kenya on July 21 under the pretext of “bad governance.” British Trade Minister Patricia Hewitt has already gone on record stating that London was using its influence to persuade developing countries.

While negotiations and the debate over the outcome of the ongoing parleys continue unabated, agricultural exports from the Organization for Economic Cooperation and Development (the richest trading block) continue to rise.

Between 1970 and 2000, the EU’s share in agricultural exports increased from 28.1% to 42.7%. France increased its share from 5.7 % to 8.1%, Germany from 2.6% to 5.9% and Britain from 2.7% to 4.1%. In India, agricultural imports have multiplied four times, and more than 63% of edible oils worth $3.2 billion a year are now imported. Ten years ago, India was almost self-sufficient in oilseeds production.

Despite the World Bank repeatedly painting a faulty picture of the gains that would result from the implementation of the WTO trade agenda, the fact remains: surging food imports have hit farm incomes and had severe employment effects in many developing countries. Unable to compete with cheap food imports, and in the absence of adequate protection measures, income and livelihood losses have hurt women and poor farmers the most. The resulting loss in livelihood security and the accelerated march toward hunger and destitution will only lead to large-scale displacement of farming populations all over the developing world.

The WTO Agriculture Agreement

Color Boxes

The following explanation about the colored boxes of the WTO comes from the WTO web site: http://www.wto.org/english/tratop_e/agric_e/agboxes_e.htm

In WTO terminology, subsidies in general are identified by “boxes” which are given the colors of traffic lights: green (permitted), amber (slow down — i.e. be reduced), red (forbidden). In agriculture, things are, as usual, more complicated. The Agriculture Agreement has no red box, although domestic support exceeding the reduction commitment levels in the amber box is prohibited; and there is a blue box for subsidies that are tied to programs that limit production. There are also exemptions for developing countries (sometimes called an “S&D box,” including provisions in Article 6.2 of the agreement).

Amber box

All domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box, which is defined in Article 6 of the Agriculture Agreement as all domestic supports except those in the blue and green boxes. These include measures to support prices, or subsidies directly related to production quantities. These supports are subject to limits: “de minimis” minimal supports are allowed (5% of agricultural production for developed countries, 10% for developing countries); the 30 WTO members that had larger subsidies than the de minimis levels at the beginning of the post-Uruguay Round reform period are committed to reduce these subsidies. The reduction commitments are expressed in terms of a “Total Aggregate Measurement of Support” (Total AMS) which includes all supports for specified products together with supports that are not for specific products, in one single figure.

Green box

In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion (paragraph 1). They have to be government-funded (not by charging consumers higher prices) and must not involve price support. They tend to be programs that are not targeted at particular products, and include direct income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include environmental protection and regional development programs. “Green box” subsidies are therefore allowed without limits, provided they comply with the policy-specific criteria set out in Annex 2.

Blue box

This is the “amber box with conditions”— conditions designed to reduce distortion. Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production (details set out in Paragraph 5 of Article 6 of the Agriculture Agree- ment). At present there are no limits on spending on blue box subsidies.

Devinder Sharma is a New Delhi-based food and trade policy analyst. Comments to dsharma@ndf.vsnl.net.in

[27 mar 05]

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