Developing resistance

Published : Sep 12, 2003 00:00 IST

A joint text on agricultural trade reflecting a new spirit of concord between the United States and the European Union evokes a counter-offensive from developing countries.

THE singular lesson for developing countries from the Uruguay Round experience has been to be wary about any sign of concord between the United States and the European Union. And in the home stretch to the Ministerial meeting of the World Trade Organisation at Cancun, Mexico, precisely such signs of harmony have begun to emerge between the world's two most powerful traders.

After long and bitter divisions on the modalities for trade liberalisation in agriculture, the U.S. and the E.U. produced a joint proposal on August 13, reaffirming their intention to "establish a fair and market-oriented system through fundamental reform in agriculture". But following this strong preambular affirmation, the joint U.S.-E.U. text proved rather modest on detail.

In relation to an initial set of proposals circulated by Stuart Harbinson, the Hong Kong representative on the WTO and chair of the agriculture committee, the U.S.-E.U. text chooses the path of vagueness. Harbinson had a specific five-year time period for reducing budgetary outlays for export subsidies by 75 per cent. Concurrently, the quantities of agricultural produce that would attract export subsidies were also slated for reduction by a like amount. In comparison, the U.S.-E.U. text chooses not to define the time horizon over which export subsidies in products of "particular interest to developing countries" would be eliminated. It fails to specify a minimum number of products for which such commitments would be undertaken. And for all products not on this list, it merely promises an unquantified "commitment" to "reduce budgetary and quantity allowances for export subsidies".

Developing countries recognise that it was a gross error on their part to allow the developed world, E.U. in particular, to get away with extremely modest subsidy reduction commitments in the Uruguay Round. In relation to the base period of 1986-90, WTO members were obliged by 2001 to reduce budgetary outlays for export subsidies by a minimum of 36 per cent, and quantities subsidised by a minimum of 21 per cent. There was a quite meaningless concession thrown in for developing countries - which could anyway not afford the steep outlays involved - to employ subsidies in relatively larger proportions and over a longer time period.

This is not the only respect in which the tragedy of the Uruguay Round looks likely to repeat itself as farce in the Doha round. The recent E.U.-U.S. text is ambivalent on the issue of domestic support too. While urging that the "most trade-distorting" forms of domestic support for agriculture should be phased out, it provides for a retention of the purportedly less damaging forms. This overlooks the vigorous debate that has been under way within the WTO since 2000, on the precise influence of various forms of agricultural support on trade patterns.

In implementing the Uruguay Round agreement, the E.U. and the U.S. used the simple expedient of relabelling many of their subsidies. Price support is discouraged by the WTO and outlays incurred in this variety of operation are subject to reduction commitments. Income support, however, is permitted without any limit, provided it is decoupled from prevalent production and price levels. In addition, government financial participation in insurance and safety net programmes would be exempt from reduction.

Conventional wisdom within the WTO holds that income support - unlike price support - is not trade distorting or only minimally so. This overlooks the basic point that farmers who earn their living from government handouts rather than the land, can afford to sell their produce at rock bottom prices in the global market, effectively squeezing out the small peasants of the developing world.

Minimal (or de minimis) support that may be given to agriculture is currently pegged at 5 per cent of total agricultural production for the advanced market economies and 10 per cent for developing countries. The new text proposes that this be reduced to an unspecified figure.

In the category of "blue box" subsidies, the language adopted in the U.S.-E.U. text is identical to that employed in the final act of the Uruguay Round. Direct payments made to the farm sector under this category would be unfettered, provided it is based on fixed sown area and yields of various crops, and livestock payments are made on a "fixed number of head".

The only worthwhile concession given in the E.U.-U.S. text is that the sum of de minimis support, allowable domestic support and "blue box payments" will be reduced so that it is "significantly lower" than the corresponding figure in 2004. This commitment has been deemed altogether too vague for developing countries to set much store by.

RESPONDING rather quickly, India rejected the E.U.-U.S. proposal. Joining forces with China and a host of agricultural produce exporting countries - like Brazil, Argentina, Mexico, Thailand and South Africa - India tabled a counter-proposal within a week. This "framework joint proposal" urges that the "blue box" be completely eliminated and that all trade-distorting domestic support be reduced by a proportion to be determined by mutual consultations. The "green box" payments, which cover decoupled income support, should again be subject to a strict regime of reduction, to be worked out through negotiations.

The U.S.-E.U. proposal speaks of reducing tariffs on agricultural imports using a mix of formulae. It takes the two proposals that were actively considered in WTO councils - one advocating a linear reduction and the other suggesting a radical harmonisation through the "Swiss formula", which would reduce higher tariffs by greater proportions - and mixes them up in a rather curious fashion. A certain number of products would be subject to tariff cuts in accordance with a linear formula, while certain others would be cut in accordance with the Swiss formula. A third category of products would be completely duty free.

The E.U.-U.S. proposal also suggests that where tariffs exceed a certain prescribed "maximum", they shall be reduced to the prescribed level. Alternately, countries would be obliged to provide increased market access in those lines through quotas (so-called tariff rate quotas, or TRQs).

India has moved quickly to reject the tariff proposals as also the suggestion that TRQs be expanded. With a large part of its work force dependent on agriculture, tariff is one area in which India cannot afford to yield ground. TRQs similarly, are perceived as a device that would merely permit highly subsidised exports from developed countries, at the expense of domestic producers.

The alternative proposal submitted by India and other like-minded countries suggests, instead, that a differential set of market access obligations be accepted by the developed countries. The tariff reduction proposals are not significantly different from those embodied in the U.S.-E.U. draft, though the specific quantitative commitments and commodity groups covered remain to be worked out.

In contrast, in the Indian proposal, developing countries accept tariff cuts of a fixed average and minimum proportion. They would not be obliged to expand TRQs and would be entitled to adopt special safeguard measures, whose scope would be determined in accordance with the tariff cuts they undertake.

The framework proposal submitted by India and other countries is remarkable in that it seems to harmonise the interests of developing country exporters and economies that have a strong defensive interest in protecting their domestic markets. An area that it leaves untouched is the so-called "peace clause", which exempts subsidies and support measures introduced by various countries from challenge in the WTO under the agreement on "countervailing measures". Originally scheduled to expire in 2003, the E.U.-U.S. draft text has rather ominously resurrected the "peace clause" as an "issue of interest". India has opposed any extension of this enforced restraint on the right of developing countries to defend their interests in agricultural trade. This could be another terrain of intense debate at Cancun.

The achievement of the U.S. and E.U. in evolving a joint text is not insignificant and points to a hardening coalescence between the world's rich in their effort to prise open developing country markets. A cursory examination of the text would show, however, that the truce is transient and may not hold in the face of stronger resistance from developing countries.

It has for long been a complaint of the E.U. that its export subsidies are unfairly targeted when the food aid and export credits granted by the U.S. enjoy virtual exemption from scrutiny. The recent joint text seeks to delicately negotiate its way around this issue by promising a "phasing out of export subsidies" in a schedule that is "parallel in its equivalence of effect on export subsidies and export credits". This effectively reduces the argument on export subsidies to a bilateral matter between the U.S. and the E.U. If the former fails to curtail its use of credits, the latter would feel no obligation to reduce its subsidies. In the bargain, the interests of the developing countries are consigned to the fringes.

The new spirit of concord between the E.U. and the U.S. - even if it is illusory - needs to be seen in the context of the hard bargaining under way over industrial tariffs. Since May, the proposals associated with the Swiss representative to the WTO, Pierre-Louis Girard, has held the field in the area of "non-agricultural market access" (NAMA). This text proposes a radical harmonisation of tariffs globally through the "Swiss formula", which impacts proportionately higher on high tariffs. In addition, it recommends zero tariffs on a number of products - such as automobile components, electronic and electrical goods, fish and fish products, textiles and clothing, footwear and leather goods.

India was not entirely happy with the harmonisation formula. But in the context of successive budgets in the 1990s having reduced customs duties across the board, the problem of transition was not considered too difficult. The "zero tariff" proposal entailed a distinct set of difficulties. But on balance, it was considered an acceptable risk since the alternative would be that the growing number of regional trading blocs would work out their own preferential access conditions, shutting India out.

Mid-August, almost concurrently with their proposals on agricultural trade, the E.U. and the U.S., with Canada joining in, staked out a radically different negotiating stance. Rather than target average tariff rates for reduction commitments, the new text proposed specific commitments for each tariff line. Using the customary industrial classification code, this would mean binding commitments for every country in each tariff line, without the latitude to spread out the average in a manner that protects its industrial interests. This proposal is a strong pointer towards a whole host of new pressures being brought to bear on developing countries at Cancun. The developing country counter-offensive on agriculture has in this sense, not come a moment too soon.

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