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The deal on agriculture: hopes and fears
By Hussain H. Zaidi
The recent WTO deal at Geneva whereby the rich
developed countries have agreed to eliminate
export subsidies and drastically reduce domestic
subsidies given to their farm sector is being
put to varying interpretations. On the one hand,
it has been termed "a landmark agreement", "the
beginning of the end of all subsidies", which
will provide a level playing field to the farm
products of developing countries in both
domestic and export markets. On the other hand,
the deal has been described as merely a sham,
which will perpetuate the unfair international
farm trade. In order to appreciate the
significance of the pact, it is better to first
look at the relevant provisions of the WTO
agreement on agriculture and the subsequent
developments.
 The
agreement on agriculture aims at fully
integrating the agriculture sector within the
GATT/WTO system. Although the GATT had developed
rules for subsidies on industrial products, it
had failed to bring farm subsidies under its
discipline. The agreement divides subsidies into
two types; (a) export subsidies, and (b)
domestic subsidies. Export subsidies aim at
enabling farmers to sell their products in
export markets, and are considered the most
trade distorting of all subsidies. While GATT
rules revised by the Agreement on Subsidies and
Countervailing Measures (SCM) prohibit export
subsidies on industrial products, export
subsidies on agricultural products have been
allowed under Article 9.1 provided members
commit themselves to reducing both the amount of
subsidies and the quantity of subsidised
exports. The article contains a list of these
subsidies, which include direct subsidies
contingent upon export performance as well as
subsidies to reduce the cost of export marketing
and shipment.
As for domestic support or subsidies, it is
agreed that they should not adversely affect
export competition or market access. Domestic
subsidies are further classified into subsidies,
which distort trade and those, which do not. The
subsidies, which have the effect of distorting
trade have to be reduced, while subsidies which
do not have such effect are declared exempt from
reduction. The latter type of subsidies is also
called Green-box subsidies. The fundamental
condition for subsidies to qualify for the
Green-box is that they have little trade
distorting or production or price related
effect. Such subsidies include public service
programmes - food security, research and
training, advisory, inspection, infrastructure
and marketing services-as well as certain types
of direct payments subject to the condition that
they do not affect the type or volume of
production. These include income support and
insurance measures, and payments made under
environmental, regional assistance and natural
disaster relief programmes.
Unlike Green-box subsidies, Blue-box subsidies
are production specific direct payments. But
still they are exempted from reduction
commitments because they are made under
"production limiting programmes" subject to the
conditions that the payments are based on fixed
areas or yields, are made on the 85 per cent or
less of the base level of production and in case
of the livestock are made on a fixed number of
head.
All other domestic support measures, which have
a direct impact on price or production and thus
distort trade has to be reduced. They are also
referred to as Amber-box subsidies.
Even in case of non-exempt domestic support,
they need not be reduced if they are below "de
minimis" level, which is defined as the
percentage of the value of a product produced.
It is 5 per cent in case of developed countries,
and 10 per cent for developing countries.
Developing countries by and large depend a lot
on the agricultural sector directly or
indirectly for income and employment generation
and export earnings. They, therefore, are
desperate to safeguard the interests of their
farm sectors, which are endangered by
protectionist policies of the industrial
nations. These countries dole out nearly $1
billion a day subsidies to their farmers, which
comes to more than $300 a year. In Japan,
subsidy per cow is $2555, while in case of the
USA and the European Union it is $1057 and $803
respectively. The USA provides $19 billion
annually in subsidies to its farmers of which
nearly $4 billion are provided to the cotton
growers only. Most of the cotton payments were
ruled illegal by the WTO recently. However,
instead of complying with the WTO ruling, the
USA has tried to reclassify the non-exempt
subsidies by widening the scope of the Blue-box
These subsidies, which make the farm products of
industrial countries price competitive and thus
increase their production according to the law
of demand and supply, have a two-fold effect on
developing countries. One, agricultural exports
from developing countries being priced out by
cheaper farm products of developed countries
cannot compete with them in export markets. Two,
the cheap products are dumped into the markets
of developing countries and affect the domestic
farm products. For instance, the USA in the
guise of food aid dumps cheap food products into
developing countries' markets. Because of these
subsidies, poor countries lose $24 billion a
year.
Under Article 20 of the Agreement on
Agriculture, the members committed themselves to
fundamental reforms for establishing "a fair and
market-oriented" agricultural trading system.
Under the agreement, export subsidies and export
credit guarantees with repayment period longer
than six month will be eliminated "by the end
date to be agreed." What this end date will be
is anybody's guess. However, the general
perception is that it may take 10 to 15 years or
even more to eliminate export subsidies given
the high level of these subsidies and the slow
pace of WTO negotiations. "Substantial"
reduction in trade distorting domestic support
as agreed upon in the Doha Declaration is
re-affirmed by declaring that, "Each member will
make a substantial reduction in the overall
level of its trade distorting domestic support."
The higher the level of trade distorting
domestic support, the greater will be the
reductions. Final bound total aggregate measure
of support as well as `de minimis' levels will
be substantially brought down. Blue box
subsidies will be legitimate subject to the
condition that the same will not be more than 5
per cent of a country's average value of total
production during "an hstorical period".
The historical period will be worked out in
future negotiations. The agreement also provides
for reviewing the Green box criteria to remove
the production and trade related effects of such
domestic support.
The main drawback of the agreement is that it
offers little in concrete terms. For one thing,
no time frame has been given within which export
subsidies will have to be abolished. The longer
these subsidies continue, the more developing
countries will suffer. Two, trade distorting
domestic subsidies will be substantially reduced
not eliminated. This may enable developed
countries to get their subsidies reclassified
from exempt to non-exempt category. Three, both
the USA and the EU have in the past linked
removal of subsidies to greater market access-an
issue which has not been properly dealt with by
the Geneva agreement. And they may make such
demands in future negotiations.
According to EU trade commissioner Pascal Lamy,
the present Doha round could be completed by the
end of 2005 when the next ministerial conference
commences at Hong Kong. However, this is very
much doubtful. In case the conclusion of a
legally binding treaty on these reforms is
delayed, the entire process may be disrupted.
WTO members must not be oblivious of the expiry
of the US fast track legislation, which limits
the powers of US Congress to alter trade deals
struck by the executive, in 2007. In the absence
of the fast track legislation, it is feared, the
US may not adopt the new deal. Another related
concern is the presidential elections. The
framework agreement has come in for sharp
criticism at the hands of many Democrats. The
Senate minority leader, a Democrat, accused the
Bush administration of "selling out farmers at
the negotiating table". This suggests in case
the Democrats return to power early next year,
they may repudiate the Geneva agreement
especially in the face of the fact that it is
not legnding. Besides, one-third of total US
agricultural production is exported and removal
of subsidies will severely affect the
competitiveness of the exports.
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Pakissan.com; Advisory Point
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