Overview of the WTO Agreement on Agriculture
3rd World Dairy Producers Round Table
Pretoria, South Africa, 5-7 May 2003
by David King, Secretary General of IFAP
Situating the WTO
Why is the World Trade Organisation one of the most important international institutions in the world? Well, it goes back to the situation after the Second World War when countries met in a town called Bretton Woods to set up three international institutions to stabilise the world economy and promote global economic development. These institutions are:
1. The World Bank - the World Bank was established to provide low-cost loans to help promote economic development in developing countries. However, these loans came with conditions. They essentially required governments receiving loans to have "good governance" and to follow a path of economic liberalisation.
2. The International Monetary Fund (IMF) - the IMF was established to provide very large loans to stabilize the economies of countries that have run into serious balance of payments difficulties. IMF funds have been used by both industrialised and developing countries.
3. The third international institution that was supposed to the set-up in Bretton Woods was the World Trade Organisation. However, they did not succeed in setting up the WTO at that time. Instead, they had to be satisfied by a General Agreement on Tariffs and Trade for certain goods, essentially manufactured products. These are known as the GATT rules. The GATT also includes a legally-binding dispute settlement mechanism to ensure that ‘contracting parties’ (countries that are GATT members) honour their commitments.
For over 50 years, these GATT rules served as the basis of four successive rounds of negotiations to reduce border protection on manufactured goods, and to help stimulate global economic growth. Average tariffs on manufactured goods have been reduced to 5 per cent, compared with an average tariff level of 50 per cent in agriculture (and up to 700 per cent for some sensitive farm products in certain countries).
As a result of the Uruguay Round negotiations, that were concluded in Marrakech, Morocco in 1996, the World Trade Organisation was at last established. At the same time, other agreements were added to the GATT. Thus rules were set up for services, called GATS (General Agreement on Trade in Services), for trade in intellectual property, called TRIPS, for trade in investment measures, TRIMS etc..
The Agreement on agriculture
Agriculture was brought into the WTO under at the GATT rules - the rules that relate to trade in goods. However, agriculture is different in many respects to manufactured goods. The Uruguay Round Agreement therefore set up a separate Agreement on Agriculture within the GATT Agreement, which allows agriculture to do certain things that are not allowed in other sectors e.g. to use export subsidies. Not all countries think that agriculture is different and should have special rules, but most do.
There are three main parts to the Agreement on Agriculture. These are:
- Rules for market access
- Rules for export competition
- Rules for domestic support.
Market access
Under the GATT rules, the only form of border protection that is allowed is the tariff. Tariffs are import duties. These are paid either as a fixed duty e.g. so many dollars per tonne, or as a percentage of the value of the imports, or as a mixture of both of these.
Protection in agriculture was often in the form of import quotas, so these had to be tariffied. Import quotas and other forms of border protection were therefore converted to an equivalent level of protection in the form of a tariff. These tariffs were then “bound”, which means that they were fixed at maximum levels of protection that cannot be increased (without making extra concessions to other countries to compensate).
In practice, there was a lot of "dirty tariffication" in the Uruguay Round. The tariff equivalents that were negotiated in the Agriculture Agreement gave countries, in some cases, a higher level of protection than they had before. This was the case mainly for industrialised countries. In the case of developing countries, the bound levels of protection were much lower than in the industrialised countries. The reason was that at the time, developing countries had just come through a period of structural adjustment policies at the hands of the World Bank. These structural adjustment policies obliged developing countries to liberalise their economies, and so when the Uruguay Round negotiations came along, protection had already been reduced to a low level. It was these low levels of protection that were generally 'bound' into the GATT commitments on agriculture of the developing countries.
For countries that ‘tariffied’, a special ‘safeguard mechanism’ was established to protect against import surges. Since most developing countries did not have any quotas to tariffy, they did not have access to the special safeguard mechanism.
Tariff rate quotas (TRQs) were established in order to make sure that traditional suppliers could keep the same level of access, especially developing countries. TRQs also allowed importing countries to protect sensitive products. The guideline for tariff rate quotas was to allow in 5 per cent of domestic consumption. Tariffs on imports within the quota were very low so that the quotas could be filled; tariffs on imports exceeding the quota were very high in order to prevent more product coming in.
Export competition
The second part of the Agreement on Agriculture concerns export competition.
Several countries use export subsidies to allow them to sell on world markets. The export subsidy makes up the difference between the cost of production in high-cost countries and the world market price. The use of export subsidies was brought under WTO disciplines, and they are to be phased out over successive negotiating rounds. Other forms of export support, such as export credits, or commercial food aid also come under the WTO.
Since the use of export subsidies is not allowed under the GATT agreement, a ‘peace clause’ for agriculture was agreed in the Uruguay Round that says that countries cannot challenge these subsidies during the implementation period of the Agreement on Agriculture. The peace clause expires on 31 December 2003, unless it is extended.
Domestic support
It was recognised during the Uruguay Round negotiations that certain agricultural subsidies stimulate production and create export surpluses, so distorting international trade. Such trade-distorting subsidies include market price guarantees, and payments linked to production.
The Agreement on Agriculture stipulates that all forms of trade-distorting subsidies should be ‘subject to reduction commitments’.
Subsidies that do not directly stimulate production are allowed. Such subsidies include direct payments to farmers for nature management, etc. or payments for research and extension services.
A set of coloured ‘boxes’ was set up in the Agreement on Agriculture to classify the different types of domestic support. The system was based on traffic lights, except that there was no ‘red box’ of prohibited subsidies. All trade-distorting domestic support was placed in the ‘amber box’, and made subject to cuts. The level of support was calculated by an Aggregate Measure of Support (AMS). To evaluate the benefits received under price support programs, the difference between the world price and the domestic price of a product was calculated, and multiplied by the volume of production. To this was added any direct subsidies that distort production.
Where support for a product was 5 per cent or less of the value of production for that product, it was exempt from cuts. This is known as the “de minimis” exemption. For developing countries, the “de minimis” exemption was set at 10 per cent of the value of production.
Non-trade distorting support was place in the ‘green box’, and this was not subject to cuts. This arrangement provides an incentive for countries to convert market price support (which distorts markets and trade) into direct payments to farmers (which do not distort markets and trade), so shifting support from the amber to the green box.
In between the amber and the green boxes is a ‘blue box’. This box was agreed at the last minute to cover domestic subsidies that are paid under production-limiting programs. If a country brings in a quota system to limit milk production, or a set-aside scheme to take land out of crops, then it is making an effort to reduce surpluses that are disposed of on world markets. The compensation payments made to farmers under production-limiting programs are obviously linked to production (paid on a per head of livestock, or a certain crop area), and cannot go in the green box. They were therefore placed in the blue box, and exempted from cuts. In future negotiating rounds, there will be pressure to make some reduction in blue box payments, so that they are treated differently from green box payments, but less harshly than amber box payments.
Special and differential treatment for developing countries (SDT)
The WTO Agreement on Agriculture exempted the Least-Developed Countries from any reduction commitments. Developing Countries were allowed lesser cuts and longer time frames to achieve the cuts. The “de minimis” level was also higher than for industrialised countries –10 per cent compared with 5 per cent, as already stated.
Developing countries did not negotiate very well in the Uruguay Round. They feel that the WTO Agreement on Agriculture legitimises the relatively high levels of support and protection of industrialised countries for their agriculture, while at the same time obliging developing countries to ‘bind’ their support at very low existing levels, effectively forfeiting the right to support their agriculture at the levels allowed to industrialised countries (if ever they had the financial resources to do so).
In the future rounds of WTO negotiations, developing countries will be looking for measures to correct what they consider to be serious imbalances in WTO rules against them. In particular, they are seeking:
- Measures to protect their agriculture from ‘export dumping’ of subsidised surplus agricultural products onto their local markets
- Sufficient tariff protection to allow them to meet food security needs and develop local agriculture
- Increased market opportunities to sell their agricultural products in the industrialised countries, where consumers have the highest purchasing power.
Conclusion
IFAP supported the inclusion of agriculture in the WTO during the Uruguay Round negotiations. A multilateral rules-based system for managing international trade is preferable to the ‘law of the jungle’ in which the strongest trading partners set the rules. However, the rules for agriculture in WTO must ensure that farmers everywhere are able to achieve a reasonable standard of living for the work that they do, in both exporting and importing countries. In this regard, there is much progress to be made in correcting the imbalances in the agricultural trading system against farmers in the developing countries. Further, WTO rules need to be more accommodating of the diverse situations of agriculture in different countries, and the diverse aspirations of the people of those countries.
Thank you for your attention.