Agriculture

and the World Trade Organisation

This paper will discuss the core principles of the World Trade Organisations regulations governing the international agricultural trade. We will discuss the founding multilateral trade agreement, the Uruguay Round Agreement on Agriculture (URAA). Outline the primary goals of the URAA and the instruments used for implementing these goals. We will discuss the application of tariffication on all WTO members and the requirements of subsidy reduction by both developed and developing countries with regard to agricultural trade. We will be guided by, WTO Law, empirical research and critical commentary in attempting to highlighting the successes or failings of the current international agricultural multilateral system. In recapitulating the essence of URAA we will review the effects which the EU has posed for the URAA with particular focus on its Common Agricultural Policy (CAP) and finally the effects which WTO obligations have had on EU policy and the future of agricultural policy for both international institutions.

World Trade Organisation The General Agreement on Tariffs and Trade, more commonly referred to as GATT evolved almost by accident from its initial beginnings in the 1940s as a means of ensuring and securing a stable platform for international trade1, into a vast global intergovernmental organisation, the WTO. Its mandate for a higher standard of living for the worlds citizens, attainment of global employment, the growth of real income, effective demand and the expansion of production of, and trade in, goods and services would be achieved through the elimination of discriminatory treatment in international trade relations, global reduction of tariff barriers2 and a core ethos of non-discrimination between member countries. It banned the use of quantitative restrictions and trade distorting export subsidies as a means of domestic protection and set about a process of tariffication whereby its members would commit to transfer all quotas and restrictions on imports into customs tariffs. The members then agreed to bind these import tariffs at a set figure and through trade negotiations these customs tariffs would be progressively reduced. As well as providing a legal framework for international trade the WTO established a Dispute Settlement Understanding (DSU) to deal with breaches of its general agreements, it acts as a forum for trade negotiations, monitors

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Lowenfeld, A. F. (2008) International Economic Law: 2 Ed. (p 71) New York, NY: Oxford University Press nd Van Den Bossche, P. (2008) The Law and Policy of the World Trade Organization: 2 Ed. (p 86) New York, NY: Cambridge University Press

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national trade policies, provides technical assistance and training for developing countries and cooperates with other international organizations such as the World Bank and the International Monetary Fund. Agriculture Until the establishment of the WTO, agricultural commodities like any other good where governed by the articles of GATT. This meant that import quotas, export subsidies and restrictive commodity agreements between GATT members where prohibited. However exceptions to agricultural products such as Art. XI:2(c)3 and Art. XVI:34 and the wideranging waivers granted under Art XXV(5)5, resulted in a generally accepted departure from GATT member obligations with regard to agricultural products which was to continue up until the Uruguay trade rounds. Both the United States and the European Community were committed to maintaining farm income by keeping domestic prices above world markets, in doing so, domestic markets where insulated from world markets through quotas, high tariffs 6 and through variable levies governed in the EU by the Common Agricultural Policy (CAP). All these devices and in particular export subsidies limited the opportunities of developing countries to gain a market share in world markets that might have been available if agricultural trade was unmanaged. A report in 1958 by the Haberler Committee linked national farm income support programs and conditions of world agricultural trade. Subsequent committees attempted to measure the impact of developed countries policies on developing countries, these reports increased transparency in agricultural domestic policies and uncovered the most trade-disruptive instruments7 they created the political momentum needed to make agricultural trade a major element of the trade rounds that followed, but it was not until the Uruguay rounds that a general agreement on agriculture was reached by all members.

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Offered exceptions with regard to import restrictions aimed at protecting agricultural domestic production. Allowed export subsidies for agricultural or primary products provided the subsidies where not used to gain more than an equitable share of world trade. 5 GATT Art. XXV Joint Action by Contracting parties section 5:- In exceptional circumstances not elsewhere provided for in this Agreement, the CONTRACTING PARTIES may waive an obligation imposed upon a contracting party by this Agreement; Provided that any such decision shall be approved by a two-thirds majority of the votes cast and that such majority shall comprise more than half of the contracting parties. 6 nd Lowenfeld, A. F. (2008) International Economic Law: 2 Ed. (p 318) New York, NY: Oxford University Press 7 Ingco, M. D. & Croome, J. (2004). Trade Agreements: Achievements and Issues Ahead. In Ingco, M.D. & Nash J.D. (Eds.) Agriculture and the WTO: Creating a trading system for development (p 25). Washington, DC: Oxford University Press and The World Bank Co-publication

The Uruguay Round Agreement on Agriculture (URAA) is still the governing agreement on international agricultural trade today. It contains 21 articles and applies to all agricultural products except for fish and forestry products. The agreement affected developed and developing countries differently but its common goal was to ensure a more transparent, demand driven, market orientated international agricultural trade sector. It focused primarily on (i) market access, and (ii) agricultural support programs, both domestic and export based: i. Market access; in aligning agricultural trade rules with current trade in other goods it was agreed that all barriers to imports should be subject to tariffs only. This meant a prohibition of import quotas and quantitative restrictions for all products between members. All non-tariff measures (NTMs) where converted into tariffs8. Once tariffs where established these where binding, members then agreed to reduce these by an average of 36% over 6 years for developed countries and 20% over 10 years for developing countries. Developing countries where not required to convert NTM into tariffs in the same way as developed countries, they could opt to bind tariffs quite high. Countries agreed to preserve existing market access and to create greater access. Members allowing import opportunities of more that 5% of the domestic market agreed to maintain these opportunities while other members undertook to create opportunities equivalent to 3% of domestic demand rising to 5% by the final implementation period. ii. Agricultural support; not all subsidies (agriculture support programs) distorted trade to the same extent. In some countries though the widespread use of production related subsidies led to increased agricultural production in certain products above the market equilibrium level. This excess production had to either be stockpiled or exported. With world market prices often much lower than the protected domestic prices, exports required export subsidies.9 Thus one subsidy led to another. Even without exports, domestic supports increase production and reduce demand for imports, thus affecting trade.

NTMs where converted into tariffs using the price-gap method, the difference between domestic and world market price would be attained and this would represent the new tariff. 9 Ingco, M. D. & Croome, J. (2004). Trade Agreements: Achievements and Issues Ahead. In Ingco, M.D. & Nash J.D. (Eds.) Agriculture and the WTO: Creating a trading system for development (p 31). Washington, DC: Oxford University Press and The World Bank Co-publication

The negotiators of URAA classified agricultural support according to a traffic light system; red for unauthorised, amber for subject to discipline and green for freely granted. Red box, (unauthorised), related to export subsidies and was cover by Art. 9 of URAA10. It imposed special commitments to reduce these subsidies within 5 years for developed countries and 10 years for developing countries with all members committed to creating no further export subsidies. Amber box, (subject to discipline), this covered domestic support that could significantly impact trade, the general assumption being any support based on price and/or volume of output of the domestic producer could lead to a significant trade impact and thus should be subject to reduction commitments.11 Similar to the market access commitments above, WTO members agreed to reduce amber subsidies12 by 20% by 2000 for developed countries and 13.3% by 2004 for developing countries, with exceptions for developing countries covered under Art. 6:2 of URAA.13 Green box, (freely granted), covered supports which were considered to have no or at most minimum trade distorting effects. The URAA set two key requirements for these supports, (i) they must have no, or at most minimal trade distorting effect and (ii) they must be provided by through publically funded government programs. 14 Green box supports included direct payments to farmers, and in order for such payments to qualify they must not be linked to current production and can be provided even if there is no production.15 These subsidies are allowed and can even increase while still abiding by WTO law. A final category, blue box payments, appeared following the Blair House agreement. The choice of the colour reflected the different nature of the subsidy, which was
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Art. 9.2(b)(iv) subsidy reduction for developed countries World Trade Organization, (2000) European Communities Proposal: The blue box and other support measures to agriculture. Committee on Agriculture Special Session. (G/AG/NG/W/17), p 1. 12 Calculated by obtaining the AMS, or aggregate measure of support according to the provisions of Art. 6 URAA 13 investment subsidies which are generally available to agriculture in developing country Members and agricultural input subsidies generally available to low-income or resource-poor producers in developing country Members shall be exempt from domestic support reduction commitments that would otherwise be applicable to such measures, as shall domestic support to producers in developing country Members to encourage diversification from growing illicit narcotic crops. Art. 6:2 URAA 14 URAA: Annex 2, Domestic Support: The basis for exemption from the reduction commitments. Art 1. (a) and (b) 15 Ingco, M. D. & Croome, J. (2004). Trade Agreements: Achievements and Issues Ahead. In Ingco, M.D. & Nash J.D. (Eds.) Agriculture and the WTO: Creating a trading system for development (p 32). Washington, DC: Oxford University Press and The World Bank Co-publication

linked to factors of production but not to price and volume of output, and which was implemented under production-limiting programmes.16 This subsidy was used inter alia in the EU and provided payments to farmers based on fixed areas, crop yields, or livestock numbers. To an economist, international trader or prudent business mind the entire concept of subsidies appears illogical. Take for example, a government who grants subsidies to domestic farmers who produce 5 tonnes of tomatoes in a year. Assuming that this is a valuable grant, that farmer will produce 5 tonnes of tomatoes that year regardless of demand. This subsidy will in turn affect the global demand for tomatoes, pushing the global price down and maintaining a high domestic price propped up by government protection. As mentioned above the weak global price will require domestic producers to avail of export subsidies in order to recoup costs of exporting. From this example we see a domestic production based grant, leading to an export grant which serves to maintain a higher price for produce for the citizens of the domestic country, stunts the growing ability of any emerging international tomato growers who are unable to compete with the domestic country, and to top it off costs the government of the domestic country money to implement and maintain the subsidies. The practical application of the URAA although serving to promote transparency, and appearing to protect developing countries agricultural sectors by allowing extra time for implementation of subsidy reduction and market access. In reality has had little benefit, as the majority of developing countries do not have the resources to pay their farmers subsidies, while the main developed countries being the USA and EU provide massive subsidy protection to their respective agricultural sectors, of which +/-70% will remain legally after completing the URAA subsidy reductions. The current traffic light system of subsidy categorization also enables developed countries to switch amber box subsidies to green box or blue box subsidies while still maintaining domestic protection. Empirical study shows that while these countries (EU & US) reduced their reducible subsidies (amber box) to 80 per cent, they at the same time raised the exempted (green & blue box) subsidies substantially. The result is that total domestic subsidies in developed countries are now much higher compared to the base level in 1986-88. Thus, in the EU, the subsidy in the base period

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World Trade Organization, (2000) European Communities Proposal: The blue box and other support measures to agriculture. Committee on Agriculture Special Session. (G/AG/NG/W/17), p 1.

1986-88 was US$83 billion, and it was increased to US$95 billion in 1996. In the United States, the corresponding levels are US$50 billion and US$58 billion.17 A recent United Nations report highlights the severity of the issue in stating: - Rich countries spend just over 1 billion US$ a year on aid to developing country agriculture and just under 1 billion US$ a day supporting their own agricultural systems. For a fraction of what rich countries spend subsidising the overproduction of crops like rice and sugar, it would be possible to meet the nancing requirements for achieving the MDGs18 in areas such as education, health and water. Adding insult to injury, the subsidies in rich countries not only divert resources but also reinforce poverty in poor countries. Industrial countries are locked into a system that wastes money at home and destroys livelihoods abroad. When it comes to world agricultural trade, market success is determined not by comparative advantage, but by comparative access to subsidies an area in which producers in poor countries are unable to compete.19 The European Union The EU is an economic or customs union in the eyes of WTO law pursuant to Art. XXIV of GATT.20 This article allows for the implementation of regional trade agreements (RTAs) within the global multilateral trade framework and recognises that so long as trade restrictions do not rise for countries outside the customs union or free trade area following implementation of the agreement then such agreements can be of benefit to international trade as, (i) they maintain the ideology of liberalizing global trade through trade negotiation, and (ii) they can act as spurs to the more hesitant development of the multilateral system.21 The EUs Common Agricultural Policy (CAP) is a unique agricultural policy worldwide; it constitutes the first successful attempt to create a single policy for an economic sector,
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Khor, M. (2002) The WTO Agriculture Agreements: Features, Effects, Negotiations and What is at Stake. (p3) Penang, Malaysia: Third World Network. Retrieved http://www.twnside.org.sg/agriculture_analytical.htm 18 Millennium Development Goals, 8 goals which include halving world poverty, halting the spread of HIV/AIDs and providing universal primary education by 2015. 19 Human Development Report, (2005). International Cooperation at a Crossroads: Aid, Trade and Security in an unequal World. (p 130) Published for the United Nations Development Program. 20 Art. XXIV(4) The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories. 21 Consultative Board; Sutherland, P (2004) The Future of the WTO: Addressing institutional challenges in the new millennium. (p 29) The Erosion of non-discrimination. Switzerland: World Trade Organization.

implemented in a unified manner over the territory of a number of independent states and which governed their relationship not only with one another but with the rest of the world.22 High internal farm prices, strong market intervention and border protection were its essential characteristics from the start, with variable import levies and variable export subsidies constituting the main instruments of border protection.23 The governance of all market access policy, and subsidy maintenance and distribution was vested in the European Union; as such member countries such as Ireland could only lobby for certain policy outcomes with the EU maintaining the overall deciding power. For the first 25 years of the CAP the commodity support regime remained largely unchanged, there were no binding limits on agricultural policy expenditure and the regime operated largely in isolation from world market trends. Pressure for change came following attack from trading partners within the Uruguay Round multilateral trade negotiations of its prohibitive tariffs and persistent dumping of subsidized surplus products on the world market. Following the obligations imposed by the URAA reform in 1992 substantially reduced support prices for cereals and beef, however these cuts were to be partially compensated by direct producer payments, newly introduced by the blue box measures which the EU had lobbied for in URAA negotiation. CAP reform also came by way of a new scheme of agricultural and rural development subsidies. The system involved introducing a two pillar system of support for rural areas within the EU. The first pillar would constitute market management and income support measures for agriculture, which would include amber, green, and blue box supports. The second pillar would involve a rural development policy which would be aimed at subsidising and supporting rural areas and include the Communitys commitment to integrate environmental protections in agricultural policies. However in the run up to the Agenda 2000 reform which was intended to prepare the EU for policy setting prior to enlargement showed agriculture still represented 45% of the entire budget spending.24 Conclusions From our discussions above, empirical research and the critics of the URAA we see that in reality the wide ranging and serious trade distorting measure of the of developed countries have not been properly addressed by the URAA. If any further evidence is required to prove
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Fennell, R. (1997) The Common Agricultural Policy: continuity and change. (p 1) Oxford: Clarendon Press Burrell, A. (2010) The CAP: looking back, looking ahead. In Skogstad, G. & Verdun, A. (2010) The Common Agricultural Policy: Policy Dynamics in a Changing Context (p 7) Oxon, UK: Routledge 24 Burrell, A. (2010) The CAP: looking back, looking ahead. In Skogstad, G. & Verdun, A. (2010) The Common Agricultural Policy: Policy Dynamics in a Changing Context. Oxon, UK: Routledge

the severe damage that in particular subsidies cause to the development of demand driven agricultural markets two recent dispute settlement cases have found that subsidies in developed countries are directly responsible for price suppression on the international market. In a dispute between Australia and the European Communities regarding export subsidies on sugar,25 the dispute settlement panel ruled that EC export subsidies have allowed it to export sugar below its cost of production. Similarly, in another dispute Brazil alleged that US domestic subsidies to its producers and exporters of upland cotton has led to price suppression in the international market.26 There is no doubt that the EU is the main offender of trade disruptive policies on the international agricultural market with the US coming in a close second. As a major agricultural trading power with an agricultural sector which, in general, has limited international competitiveness, the EU has strong interests in limiting liberalization in farm trade. Therefore, progress in the ongoing efforts to liberalize world farm trade in large partly depends on the extent to which the EU accepts the underlying paradigm of the URAA and reforms its agricultural policy to bring it into conformity with this paradigm.27 Indeed if we look back at the key characteristics of the CAP, high internal farm prices, strong market intervention and border protection they represent the complete antithesis of the WTO mandate and WTO core objectives. One strong contention with EU and US agricultural policies is both countries not only distort domestic prices through subsidizing but also encourage domestic farmers to export their produce, thus national policy becomes an indirect effect on international trade. If domestic subsidies are to continue the lesser of two evils may by to adopt a similar approach as seen in Japan, Switzerland and Norway, where although trade-distorting support in comparison to agricultural production represents 58 percent, 71 percent and 81 percent respectively they do not at least export their farm products to other countries28 and thus do not threaten the farmers of other countries directly. Although this may have the effect of halting global agricultural trade altogether.

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EC Export Subsidies Sugar (DS265) 2005 Parthapratim, P. (2005) Agricultural Subsidies and Negotiations: Strategies & Options. (p 6) Hong Kong Series II: CENTAD. 27 Daugbjerg, C. & Swinbank, A. (2009) Ideational Change in the WTO and its Impact on EU Agricultural Policy Institutions and CAP. European Intergration, Vol. 31 (No. 3), pages 311-327 28 Bhagirath Lal Das commenting on the current WTO negotiations on agriculture, November 2005. Retrieved from http://www.twnside.org.sg/title2/twninfo304.htm

The effects the WTO has had on EU trade policy and its Common Agricultural Policy has been significant in theory but in practice has served only to cause the EU to redistribute its subsidies in a WTO compliant manner. Developed countries still maintain 80% of export subsidies after the URAA subsidy reduction period, Amber box subsidies are still 80% following URAA, and green box subsidies, the subsidies which allegedly pose little or no effect on trade represented 22 billion Euro and US$ 50 billion in subsidy protection for the EU and US in 2000.29 While at the same time developing countries have been forced to open their markets to international agriculture in the same albeit slower manner as developed countries but are burdened with a less developed agricultural sector which is unable to compete with the larger farms and producers of the developed countries. What the future holds for international agriculture will depend on the political bargaining abilities of developed and developing countries post-recession, the market orientation of global economies and the future path of the Common Agricultural Policy. Some commentators30 predict for CAP a continued evolution towards stronger market orientation, a greater focus on public good provisions (second pillar) and more devolution of decision making to member states. I would feel quite sceptical of this outlook, with agriculture being a particularly politically sensitive topic for the EU, which has been confirmed by the French President Nicolas Sarkozys stance on ensuring agricultural protections remains by openly refusing to sign the new world trade deal in its current form.31 With the Doha Development Agendas single undertaking policy now including agricultural trade the likelihood of a replacement for the URAA (which from or discussion is well overturn) will not worryingly appear anytime soon. The Doha declaration reconfirms the long-term objective already agreed in the present WTO agreement: to establish a fair and market-orientated trading system through a program of fundamental reform. The program encompasses strengthened rules, and specific commitments on government support and protection for agriculture. The purpose is to correct and prevent restrictions and distortions in world agricultural markets.32

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Bhagirath Lal Das commenting on the current WTO negotiations on agriculture, November 2005. Retrieved from http://www.twnside.org.sg/title2/twninfo304.htm 30 Burrell, A. (2010) The CAP: looking back, looking ahead. In Skogstad, G. & Verdun, A. (2010) The Common Agricultural Policy: Policy Dynamics in a Changing Context. Oxon, UK: Routledge 31 th The Irish Times, 24 July 2008, Irish farm Association welcomes Sarkozys refusal to sign WTO Deal. 32 WTO, (2010) Understanding the WTO (p 80) Switzerland: World Trade Organisation

From its declaration one can be satisfied that the objectives the World Trade Organisation has set for itself are easier said than done, but the benefits to developing countries and citizens worldwide would be clearly visible following a successful agreement. It should be stressed that the use of market protection as a means of domestic sector growth and maintenance is clearly a flawed instrument and one of no use in modern domestic economics.

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