Agricultural subsidies are the big sticking point in WTO negotiations. This paper traces how agricultural negotiations have played out in the Agreement on Agriculture and the July Framework. It suggests negotiating options for India in the run up to the Hong Kong Ministerial in December 2005.

By Parthapratim Pal

Fellow, Indian Council for Research on International Economic Relations

SUMMARY

Negotiations on agriculture in the World Trade Organisation (WTO) have become a major bone of contention between developed and developing countries. The issue of agricultural subsidies, in particular, is being seen as a formidable obstacle to any agreement. The paper ‘Agricultural Subsidies and Negotiations: Strategies and Options’ examines the July Framework in light of the subsidies issue (click here to read the full text of the paper).

The paper points out that some provisions of the framework will allow developed countries to maintain and, in some cases, even increase domestic farm support and still remain WTO-compliant. In most cases, though, the July Framework only provides broad guidelines and leaves the field open for specific modalities of subsidy reduction to be decided through negotiations. For this reason, it is important that developing countries thoroughly understand the issues that are up for negotiation.

The paper’s introduction gives an overview of the subject and explains why subsidies have become important in trade negotiations. It sums up what the Agreement on Agriculture (AoA) and the July Framework were expected to deliver, and whether these objectives have been met.

DOMESTIC SUBSIDIES IN DEVELOPED COUNTRIES

The second section reviews the status of domestic farm subsidies in developed countries since the implementation of the Uruguay Round Agreement on Agriculture. It discusses:

  • How farm subsidies are structured.
  • How reduction commitments have been met in some cases and evaded in others.
  • The likelihood of developed countries cutting subsidies to levels that will meet the development agenda of developing countries.

The section explains how many developed countries increased their domestic subsidies while, at the same time, fulfilling their WTO subsidy reduction commitments through ‘box shifting’ -- shifting prohibited subsidies (Amber Box subsidies) to the permissible Blue and Green Box subsidies, which are supposedly less trade-distorting. This shows why defining subsidies correctly is an important part of the ongoing negotiations.

THE JULY FRAMEWORK AND DOMESTIC SUBSIDIES

The July Framework was seen as a major breakthrough after the stalemate at Cancun. While it included all the points that developing countries were keen to include, closer scrutiny reveals many loopholes. The third section of the paper subjects paragraphs 6 to 16 of Annex A (‘Framework for Establishing Modalities in Agriculture’) of the July Framework to a thorough scrutiny and shows up the loopholes that allow developed countries to maintain high domestic subsidies.

For example, subsidies are required to be cut from the bound level of the Aggregate Measure of Support (AMS), not the actual level. In high subsidising countries such as the EU, the current level of AMS is 40% lower than the bound level, so EU countries will not have to make any reductions even if a 40% reduction is called for.

There are many grey areas in the Agreement on Agriculture (AoA), as in de minimus support. Developing countries are exempt from reduction if most of the support is given to “subsistence and resource-poor farmers”. However, there is no definition of “subsistence and resource-poor farmers”. India has submitted a proposition to the WTO saying that farmers owning 10 hectares or less of land be thus categorised, since 80% of farmers in India fall into this category.

DOMESTIC SUBSIDIES AND THE JULY FRAMEWORK : IMPLICATIONS FOR INDIA

Multilateral rules regarding domestic farm subsidies can have an impact on India through two different routes:

  • The way government provides subsidies to its farm sector.
  • The impact of subsidies in the international market.

The subsidy reduction formula suggested in the July Framework is unlikely to cause any problems for India because its current domestic subsidy levels are well below the permissible de minimus level, both in product-specific subsidies and non-product-specific subsidies. For product-specific subsidies, support level was negative for all the years reported by India, and the non-product-specific subsidies for India was only about 1.2% of the total value of agricultural production in the latest year reported by India.

Domestic subsidies provided to their farmers by developed countries have a much greater impact on India’s agriculture sector. Post-WTO, some sectors of Indian agriculture have been badly hit. The paper quotes studies that show that India is competitive in rice, wheat and cotton. Exports of these crops have been hit by low international prices, a result of the protection afforded by developed countries to their producers.

India can also emerge as a competitive supplier of sugar and dairy products if distortions in the international market are eliminated.

High international domestic and export subsidies can make products uncompetitive even in the domestic market. In a free trade regime, it may be argued that farmers should be encouraged to shift from crops in which they are uncompetitive to crops where they have the competitive advantage. This is difficult for poor farmers who cannot switch to cash crops easily. Besides, volatility in the price of cash crops makes it dangerous for farmers to switch to these non-foodgrain crops and give up the food security that traditional crops provide.

The only protection India can impose is high tariffs, since, under AoA rules it cannot use non-tariff barriers or the special safeguard measures. Though India’s bound tariff rates are high, at 300%, it is important to allow for some headroom (in the form of differences between bound and applied tariff rates) and flexibility in tariff application. In the ongoing negotiations, developing countries should link the issue of tariff reduction with the level of subsidisation in developed countries.

Alternatively, India can push for special safeguard measures to be made available to developing countries, as also protection for some agricultural commodities in the form of ‘special products’ and ‘sensitive products’.

CONCLUSIONS AND NEGOTIATING OPTIONS FOR INDIA

The final section sums up the proposals put forward by the G20.

  • There should be a tiered subsidy reduction formula with high coefficients for countries with high trade-distorting subsidies.
  • Blue Box or minimally-trade-distorting subsidies should be correctly identified and defined. US attempts to include counter-cyclical payments in the Blue Box category should be resisted.
  • Green Box subsidies should be tightened and should take into account the requirements of developing countries.
  • De minimus level of subsidies should be reduced for developed countries but not for developing countries.

The paper concludes that the G20 proposals are on the right track. However they will be resisted by developed countries. One way of pressurising developed countries will be to link market access in developing countries to levels of domestic subsidies in developed countries.

The paper cautions against reintroduction of the Peace Clause. The G20 movement should resist any attempts to break it. Talks that India and Brazil have held with the US and EU should not give the impression that they are negotiating on their own behalf rather than on behalf of the G20 as a whole.