Contributions from
the Column
Focus

The risk of a rerun: little progress since Cancún

Business: chances for poor and rich countries alike

Rural development is not on the WTO agenda

Why NAMA threatens industrialisation


11/2005 		 

No scope for rural development

The agriculture agenda of the WTO fails to take account of weak members’ interests. Indeed, there is even a chance that the least developed countries could lose their present trade preferences. Developing and emerging nations are united on the issue of subsidies but divided over tariff reduction. So far, probable compromise at the upcoming Hong Kong summit would seem to mostly benefit rich countries and big agricultural exporters.


[ By Rudolf Buntzel ]

At the WTO ministerial conference in Hong Kong, many contentious issues will hinge on agreement being reached in the agriculture talks. Therefore, progress is particularly important in this sector. So far, however, rich-nation governments remain obdurate. This is especially true of the United States and the European Union even though they officially agreed to devoting the “Doha development round” to ensuring fair competition in the world market. At present, that competition is distorted by rich-world subsidies and trade obstacles.

The conference of the WTO’s supreme body is already under pressure from Washington. The US Department of Agriculture has announced that unless Hong Kong produces results, the present farm bill will simply be renewed in 2007 and run through to 2012. All over the world, experts considered the adoption of the current US subsidy package in 2002 a massive setback for multilateral trade talks. Renewing the farm bill would be a further affront – especially after a WTO panel ruled against the United States in the recent row over cotton.

Sadly, the negotiating tactics of the EU are also evasive at best. The EU views steps as concessions that other WTO partners would have taken for granted. For instance, the EU wants to be rewarded for its meagre reform of the Common Agriculture Policy (CAP) in 2003 or its assurance that export subsidies will be phased out in principle. From the poor countries’ viewpoint, however, these steps do not constitute substantial progress. The developing world was not impressed by the EU and US finally promising to put an end to export subsidies in the Framework Agreement of 2004 – without setting out a clear timetable for doing so. The big trade powers had already hinted at that promise in Doha in 2001.

What is more, the EU describes its 2003 CAP reform as an upfront concession for a WTO deal. By replacing animal and area premiums with a uniform farm payment, the reform uncouples EU subsidies from farm output and severes the direct link between support and products or production factors. As a consequence, $20 billion worth of subsidies were reclassified as support that does not distort trade. Measures so defined are not covered by reduction commitments under WTO agreements.

The real consequences of the EU reform remain slight, however, because it only affects around a quarter of all agricultural support. Moreover, the EU has only agreed to marginal reductions in price support – and then only for cereals of minor importance like rye and rice, which each account for only 0.3 % of EU agricultural added value. Other price reductions are slated for butter (7%), skimmed milk (2%) and cheese (2%). For the world market, these steps are irrelevant.

On the other hand, the reform will cause new trade distortions because supported farms will use the uniform farm payment to switch to products which are not currently subsidised – and thus present new competition for importers. This is why the negotiating partners feel the EU is wrong to expect credit for its CAP reform and feel under no obligation to make further concessions.

Since the Framework Agreement concluded in summer 2004, progress in agriculture negotiations has been slow. In July this year, the WTO’s General Council went into summer recess without a solid platform for Hong Kong. What is clear, however, is that the developing countries have never played as important a role as now. The failure of the Cancún summit two years ago made them aware of their veto powers. Their interests, however, are by no means identical.


Export competition

One thing all poor countries share is distrust in the developed countries’ farm policy – especially their export subsidies. As far as that issue is concerned, the fronts are clearly drawn along North-South lines. South Africa is the only developing country that makes (moderate) use of this instrument itself in excess of the WTO’s definition of marginal support.

The negotiations on export competition focus chiefly on phasing-out direct export subsidies. These subsidies still amount to around eight billion dollars worldwide. Since the 2004 Framework Agreement, the deadline and schedule for phasing out such payments have been matters for debate. The G20, an alliance of major emerging nations led by China, India and Brazil, wants to see disproportionate cuts made in the early stages of the agreement and total abolition within five years. For the European Union and the United States, that timetable would probably be too fast. On a parallel track, hidden export subsidies (such as misuse of food aid and export credits) are also on the agenda, but these items are negligible.
Domestic support

The second pillar of the negotiations deals with domestic support. Developing countries do not pay heavy subsidies. The complex rules of the Agriculture Agreement – which groups subsidies in “boxes” according to their alleged trade-distorting impact – are of little relevance for poor economies. Only nine emerging market nations and Papua New Guinea have reported “amber box” programmes, which are considered trade-distorting and are therefore subject to reduction commitments. These include, for example, flat-rate product subsidies and price supports.

In 2002, only five of those countries actually paid out “amber” subsidies – with a total volume of just under $ 2.4 billion. In comparison, the volume of “amber” subsidies paid worldwide stood at $ 115.4 billion. All other developing countries kept their domestic support below the de minimis level of 10 % of agricultural production value.

According to the 2004 Framework Agreement, “amber box” measures should be progressively reduced. The higher the level of domestic support, the higher the rate of reduction required. More radical demands for the total abolition of “amber” measures did not prevail in the negotiations.

However, the “amber box” is not the only subject for negotiation. Even more explosive is the debate on “blue box” subsidies, which are normally tied to programmes that limit production (for instance, land set-aside programmes). In the 2004 Framework Agreement, however, the United States introduced another “blue” support method to make its $ 10 billion counter-cyclical payment programme WTO-compliant. This package is not tied to production cuts. In return, the United States is offering to introduce a ceiling of five percent of agricultural production value for all “blue” measures. This level would not present a problem for either the United States or the European Union.

The developing countries, on the other hand, are calling for all “blue box” measures to apply only for a transitional period and then be phased out. They also want reduction commitments to relate to specific products and they would like to see total support volumes capped. And thirdly, they want production cuts verified, which will require a complex new system of monitoring.

Also under discussion is the “green box” of supposedly trade-neutral instruments that promote objectives such as environmental protection or landscape management. The EU is proposing new criteria for “green” subsidies, such as animal welfare. The developing countries, however, demand tighter definition and closer monitoring of the present twelve criteria, which they believe are being misused. Indeed, the European Union and the United States have each declared around $ 40 billion of subsidies to be “green”. The CAP reform of 2003 has doubled the total volume of EU “green box” programmes at a single stroke.

From the point of view of the poorer WTO members, this kind of “box shifting” serves to protect the status quo. After all, rich countries can use “green” instruments to provide indirect support for farmers, whose surpluses (of cotton, tobacco or sugar for example) continue to distort competition. Therefore, the developing countries would like to cap the “green box” as well. This demand, however, would lead to an immediate breakdown of the negotiations and is unlikely to play a key role in Hong Kong.


Market access

The emerging and developing nations have not closed ranks on the third pillar of agriculture negotiations: market access. This is because the interests of major exporters clash with those of net importers on tariff reduction. Conflict lines here run not only north-south but also across the development landscape.

In July, the G20 proposed a formula for tariff reduction based on five tariff bands for developed countries and four – different – bands for developing countries. Within each band, tariff reduction is linear and higher bands mena sharper reductions. For a while, the EU and the United States agreed to this proposal, seemingly putting an end to a years-long dispute. Later, though, the EU made its endorsement subject to provisos.

The G20 proposal caps developed country tariffs at 100 % and developing country tariffs at 150 %. Whether this formula is endorsed in Hong Kong, however, is still an open question. Another bone of contention is whether reductions within bands should be averaged over all products or applied on a product-by-product basis. It matters hugely how categories are defined and what bandwidth is assigned to them. That determines the degree to which tariff peaks for particular products are actually capped and markets exposed to genuine import competition.

The provisions for “sensitive products” in the 2004 Framework Agreement offer an escapte route for governments worried about opening markets too much. In principle, every WTO member is entitled to declare any product sensitive and thereby exempt it from the general tariff reduction formulas. But there is no decision as yet on how many products a country can declare sensitive and what it must do in return for such recourse. Designating sensitive products is sure to be linked to the granting of tariff rate quotas.

For developing countries, the Framework Agreement also refers to a vaguely defined category of “special products” that can be selected on grounds of food security, livelihood security and rural development needs. So far, however, there are no clearly spelled out provisions for how that is to be done. These issues are high on the agenda of the poorer developing countries, who fear being disadvantaged again in Hong Kong. This is especially so since protection for special products is now all that is left of demands for a “development box” with measures promoting agricultural progress.

Such complaints are raised by the G33, a group of developing nations with primarily defensive farm interests. G33 members do not feel well represented by the G20, although major countries take part in both groups.

The G33 insists that the list of special products needs to be open-ended in terms of numbers and volume. Each country should be able to designate products itself in order to exempt them from reduction commitments and tariff contingents.

The group is also unhappy about the present Agreement’s clause on “Special Safeguard” against import surges. This instrument is at present almost exclusively available to the rich countries that secured it in the Uruguay Round in the early 1990s, due to their specific way of tariffication. Many developing countries would like to see the Special Safeguard eliminated. On the other hand, they demand a “special safeguard mechanism” for themselves – one that does more than just provide a temporary shield against surging imports. They want a mechanism that can protect them from dumping by industrial countries – with no requirement to present evidence of harm. The expression “special safeguard mechanism” does appear in the Framework Agreement, but the passage containing it is phrased in such general terms that it reflects none of the progress made in negotiations in recent years. No mention is made of dropping the “special protection clause” for the industrial countries.


Problems ignored

The conference in Hong Kong will thus be looking for solutions to a catalogue of unanswered questions. What is problematical from the poorer countries’ point of view, however, is that a number of important issues are not on the agenda. So far, for instance, poor countries have benefited less than they had hoped from the liberalisation of market access to industrial countries.
The reason is that liberalisation works on the principle of most-favoured-nation treatment (MFN), with all importers paying the same customs duties. At present, however, the weakest participants in world trade are often accorded special preferences, such as those granted under the Cotonou Agreement to former colonies of EU member states (ACP states).

Only 11 % of the industrial world’s agricultural imports from developing countries are currently transacted under MFN-tariffs. Accordingly, poor countries get precious little out of multilateral tariff cuts. On the contrary, the value of existing privileges is debased. This applies particularly to the group of LDC (least developed countries), who are fighting for tariff- and quota-free access to all rich economies – something they have already been granted by some partners including the EU, South Korea and New Zealand. The interest in retaining such preferences is acknowledged in the 2004 Framework Agreement only in weak, non-binding language.

On top of everything, the WTO agricultural negotiation agenda assigns no time at all to the issue of “non-tariff barriers”, which totally block some poor country exports. Quality standards, rules of origin, sanitary and phytosanitary measures and other such hurdles put many poor countries at a competitive disadvantage because they do not have the necessary infrastructures and techno-scientific capacities to comply. They therefore need transitional rules and trade assistance.

None of these issues are on the agenda. Indeed, the WTO hardly takes anything into account except for the interests of the industrial countries and the big agricultural exporters.


Conclusion

The agricultural negotiations in Hong Kong will be difficult. For one thing, many disputes still need to be resolved; for another, many WTO members’ vital interests have been excluded from the talks in advance. Once more, just like in earlier rounds, the industrial nations have so far succeeded in establishing their agricultural interests without making overly painful concessions.

On some points – such as the general tariff reduction formula –, the European Union and the United States are at odds. If they find a compromise, they may succeed in pushing through a WTO agreement in their interest, because the developing countries are divided.

By doing little to meet others halfway, however, the EU and the US also risk condemning the summit to failure, which would make progress impossible in all other areas of negotiations and place a question mark over the entire multilateral trade system. That would probably have worse implications for poor countries than for the trade superpowers, who can also pursue their objectives in bilateral negotiations.

Dr. Rudolf Buntzel
is an agriculture and trade expert with the Protestant Church Development Service (Evangelischer Entwicklungsdienst – EED) in Berlin.
r.buntzel@gkke.org