Agricultural Subsidies and the Controversies Over Them at the Doha Round of WTO Negotiations

Introduction

Agricultural subsidies are the financial assistance provided by the government to the farmers through sponsorship of price-support programs (CE, 797). It was initially introduced by industrialized countries in the 1930s to reduce the volatility of prices for farm products and stabilize the income for farmers. In countries such as United States and France, which are prime exporters of agricultural products, agricultural subsidies have been designed to increase farm income in two different ways – either by raising the long-term level of prices above free-market levels or by providing direct payments to farmers (CE, 797). When the agricultural products are sold to developing nations at below market prices, it affects the domestic farmers in those countries and such subsidies create international trade barriers that are difficult to break. Due to various problems associated with subsidies, there are controversies in international business forums. One of the major tasks of the WTO is to promote trade negotiations. As such agricultural subsidies have been the center of many controversies in the WTO talks at Uruguay and Doha. This paper traces some of the negotiations and controversies around the Doha Round Meeting in 2001.

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URAA and United States

Agricultural subsidies in the United States, the European Community (now the European Union; EU),and Japan were issues of contentious debate in the Uruguay (1986–94) round of international trade negotiations under the General Agreement on Tariffs and Trade (GATT) and remain so in the World Trade Organization (WTO) (CE, 797). In the Uruguay Round talks, an agreement was reached to reduce agricultural subsidies, including 20-36 percent cuts in export subsidies and domestic support programs over five years, after further liberalization of agricultural trade will be negotiated within the WTO (Preeg, 82). The 1994 Uruguay Round Agreement on Agriculture (URAA) holds member nations of the WTO to control their domestic agricultural support programs. At that time, it was thought that programs that were subject to annual spending limits were those with the greatest potential for stimulating too much production and thereby distorting world agricultural trade. The Agreement aimed at establishing a fair and market-oriented agricultural trading system through certain reforms. WTO members were required to lower barriers to agricultural imports and to reduce their farm export subsidies. The URAA was unprecedented in that it was the first time after seven previous trade rounds that member countries accepted to modify their domestic agricultural policies to facilitate international trade. At the same time, the Uruguay round limits the flexibility and spending choices of its members during economic downtimes as well. As a WTO member and signer of the Agreement, these limitations affect the United States which was the leading voice in the call for agricultural trade reforms (Fedorov, 135). Since URAA, the US Congress has passed many bills assigning billions of dollars as ad hoc assistance to help agricultural producers to cope with poor market conditions. In 1996, the U.S. Congress passed the Freedom to Farm Act, which eliminated agricultural subsidies in favor of fixed payments to farmers. But this legislation only increased payments to farmers in the form of aid and 2000 aid to farmers had reached more than $22 billion, three times the 1996 level. (CE, 797).

DOHA Round

The Doha Ministerial in 2001 was declared the Development Round and was focused on helping the developing countries that constitute over 75% of the WTO membership, through the multilateral trading system. According to the Doha declaration it was sought to help developing countries to ‘secure a share in the growth of world trade commensurate with the needs of their economic development’ in two ways: providing them easier access to Northern markets by reducing import tariffs and gradually wiping out domestic and export subsidies, that lead to over-production of goods at very low prices, causing a serious price slump that affects the domestic markets of developing countries (Eldis, 1). The agricultural subsidies became one of the most contentious issues in the Doha Round where developed countries were accused of being selfish in providing domestic support and export subsidies that indirectly impacted farmers in developing countries. Developed countries were blamed for their stubborn adherence to protectionist policies in the realm of agriculture. However, developed countries argue that they are unable to provide agricultural subsidy cuts, as well as increased market access without supporting measures from developing countries on farm products. As long as low-income countries view agricultural subsidies as a major barrier to greater trade wealth and high-income countries perceive them as a way of preserving their cultural and industrial bases, the negotiations of Doha will continue to face roadblocks in its implementation.

Agricultural negotiations in the Doha Development Round were of four types: market access, domestic supports, export competition, and development issues (Eldis, 1). Market access includes reduction of import tariffs, rules for ‘special’ and ‘sensitive’ products, and a safeguard mechanism for protecting developing countries from global price fluctuations; domestic supports revolve around subsidy payments to farmers, which the WTO has classified into 3 different colored boxes, representing different levels of trade-distorting financial supports; an export competition that includes export subsidies, and food aid issues such as the dumping of Northern agricultural surpluses in developing countries; and development issues that deal with the recognition of the reduced agricultural capacity of many developing countries and thus the need for flexibility and ‘special and differential treatment (SDT) (Hebebrand, 3).

WTO Members agreed to adopt four bands for structuring tariff cuts, with the higher bands being exposed to higher cuts. The G-20 countries called for an average cut of 54% for developed countries. However, there has been no consensus on these ranges, as developed countries feel that developing countries (G-20) do not follow the requirement that they take two-thirds of the cuts taken by developed countries (Hebebrand, 4). Due to such conflicts, their negotiations on exemptions on special products have been made very difficult. Developing and developed countries will be able to designate “special products” for which tariff cuts will be more lenient than those required by the formula (Kaufmann and Heri, 1039). This would be especially applicable in the case of culturally significant foodstuffs, such as Japanese rice and Mexican corn. ‘Special Products’ are those items that are listed by a developing country as being very important to its overall growth and the Food and Agriculture Organization of the United Nations (FAO) has developed a methodology for identifying Special Products by appropriate indicators for the three criteria of food security, livelihood security, and rural development. In addition, it was also agreed that developing countries should “have the right of recourse to a Special Safeguard Mechanism based on import quantity and price triggers” to protect them against price slumps and import surges. This would be done by excluding ‘special’ products from the full extent of tariff reduction or permit the imposition of an additional tariff in the face of sudden increases in imports as a special safeguard mechanism. Both the measures of categorizing some products as Special Products and the new Special Safeguard Mechanism offer the countries flexibility in coping with the fluctuations of international trade and protect small-scale farmers (Kaufmann and Heri, 1039). The Hong Kong Meeting has reiterated the same stand of protecting such small farmers but it has been opposed vehemently by developed countries.

According to the Doha Round of talks, there are three categories of countries: developing countries that require the least amount of reduction in tariffs; developing countries that have proposed a “Development Box” to address needs such as food security and protection of small farmers livelihoods; and developed countries that think such measures would lead to large scale subsidization by developing countries (Hebebrand, 3). The Uruguay Round differentiated between three colored boxes: the amber box for trade-distorting support which is linked to production; the blue box support policies that are constrained by supply or marketing controls, and lastly green box support which is not linked to production (Hebebrand, 3). Members agreed to be within limits for the amber box, but no such agreements were made to blue and green box support. The consensus reached by these different groups of countries was to review the Green Box criteria to ensure that is more development-oriented and better suited to the problems faced by developing countries. In addition, it was decided that the “current permissible ceiling for developed countries” under the Blue Box will be reduced from 5% to 2.5%. It was also decided at Doha to phase out all forms of export subsidies through negotiations. This was reinforced at the Hong Kong Ministerial Conference where Ministers agreed on the parallel elimination of “all forms of export subsidies and disciplines on all export measures with equivalent effect… by the end of 2013”. In the context of development, it was decided that there would be a focus on issues such as food security, monetization, re-exports, etc. It was agreed that a “safe box” would be developed to cope with emergency food requirements.

In the EU and the US, agriculture contributes only about 1-2% of the total value of their income. Despite the marginal economic value of agriculture, the sector is heavily subsidized and protected in both of these industrialized trade giants. Though the US has expressed a desire to remove all trade barriers, it faces political pressure from groups such as cotton farmers who are very important to the Republican vote. The poorer developing countries of the Doha Development Round, the G90, are dependent on agriculture and they work towards ensuring they get special treatment to strengthen their weak positions. Between the two groups of rich developed and poor developing countries, there are ‘advanced’ developing countries, such as Brazil, which are endowed with large and efficient agricultural systems. This group desire to have more liberalization to give them a competitive advantage.

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At Doha, an agenda for a new multilateral negotiation was launched but it has met with frequent delays and progress has been very slow. The first major deadline for the DDA was the WTO meeting at Cancun, Mexico in September 2003, during which there was to be an updated agenda and review of the DDA (Ravenhill, 167). However, negotiations broke down when developing countries registered their displeasure at the agricultural subsidy practices of the United States and the European Union. For example, According to Nariman Behravesh, the U.S. government pays about four billion dollars in subsidies to over thirty thousand cotton farmers in the South, encouraging them to grow more cotton. This extra cotton supply has depressed the price of cotton in the world market by roughly 35%, threatening the livelihood of about ten million cotton farmers in the West African countries of Benin, Burkina Faso, Chad, Mali, and Senegal where low wages and perfect weather conditions for growing cotton give these countries a competitive advantage that is blunted by U. S. subsidies (Behravesh, 60). Hence, four West African producers of cotton demanded a sectoral initiative to eliminate cotton subsidies in countries such as the USA, EU, and China (Ravenhill, 167). They received a response that suggested that African nations must look to diversifying their agricultural products which indirectly was taken to mean that they should stop growing cotton. This response angered the Africans. Originally, the Doha Round, the ninth multilateral negotiation to be held under the GATT/WTO regime, was expected to reach culmination by January 2005. However, due to the controversies at the Cancun meeting in September 2003 between developed and developing countries, this could not be achieved. The members managed to revive the negotiations with a new approach to the Doha Work Program by adopting the July Package at the WTO General Council on 1 August 2004. The July Package extended the Doha Round deadline beyond January 2005 and established December 2005 for the next round of talks in Hong Kong (Ravenhill, 167). The July Package also promised to negotiate on the issue of cotton. The negotiations slowed in early 2005, with developing countries pressing the developed countries to reduce domestic subsidies and import tariffs, whereas the developed countries felt that they cannot do so without the developing countries giving them reciprocal concessions on industrial tariffs and services. In the Hong Kong Talks in December 2005, the negotiations continued but were futile. In the meeting, it was decided that agricultural subsidies must be eliminated by the year 2013, and a deadline of 30 April 2006 was set for the tabling of full modalities in agriculture (Lee and Wilkinson, 230). Pascal Lamy, the WTO director-general felt that the Hong Kong Meeting helped in putting the Doha Round back on track (Lee and Wilkinson, 230). The 30 April 2006 deadline could not be met as the EU was unwilling to reduce its agricultural tariffs and the US was unwilling to give concessions on its subsidies. By 2007, the conflicts over the subsidies escalated as developing countries too did not agree to make any concessions to developed countries. In 2007, the negotiations appeared to have reached a deadlocked stage. Although there is no fixed date for the negotiation to end, the legislation that is known as the Trade Promotion Authority that authorizes the US officials to conclude a trade agreement without Congressional amendments expired in July 2007 after which it becomes less likely that the Doha Round negotiations would continue.

There has been a lot of criticism aimed at the demands of the developing countries concerning the Doha Round. Chairman of the Agricultural Negotiations, Falconer, in his reference paper on special products has said that sometimes the demand for tariff cuts has led to exemptions from tariff cuts of over 90% of all tariff lines (Hebebrand, 8). US Negotiator Susan Schwab referred to “the three S’s” (sensitive, special products and the SSM) as a “black box” of loopholes: “If you in effect allow for developing countries, for example, to have a process that shields 94-98 percent of their market, my goodness, how could you possibly argue that you made progress?” (Hebebrand, 8). Developing countries on the other hand are not satisfied with the market access provided and feel that they contradict the development goals of the Doha Round. Some developing countries, i.e. Thailand and Malaysia, have pointed out that the very broad exemptions are not in the best interests of developing countries when one takes into consideration the increasing amount of international trade taking place among them (Hebebrand, 9). The argument that protection from imports supports small-scale farmers is also debatable. Sometimes, in the more developed of the developing countries, where both small-scale farmers and commercial farmers co-exist, there is a chance that they will choose to keep them within the label of developing countries to avail of the exemptions (Hebebrand, 9). This will not serve the original purpose of the Doha Round. Moreover, there is the possibility that larger and wealthier developing countries might come under pressure to provide domestic support to their farmers and the ranks of G-10 would increase. Some, however, argue that broad exemptions do not matter as they are less likely to be followed in practice. This is similar to the argument that tariff reduction deals that are just sufficiently effective to cut the water in the tariff, help in paving the way for future negotiations in the next Round and also the argument that the Doha Round, by initiating the concept of sensitive and special products, may not be successful in creating exemptions, but would pave the way for these products to be liberalized in the future.

Works Cited

Behravesh, Nariman (2008). Spin-Free Economics: A No-Nonsense, Non-Partisan Guide to Today’s Global Economic Debates. McGraw Hill Professional Publishers.

CE (The Columbia Encyclopedia) (2007). Agricultural Subsidies. The Columbia Encyclopedia, Sixth Edition. Columbia University Press, New York, 2007.

Eldis (2009). What is the Doha Round. Web.

Fedorov, V. Larry (2003). United States Agricultural Trade: Trends, Policy and Direction. Nova Publishers.

Hebebrand, Charlotte (2006). Doha Suspension. IPC Reflection Paper. Web.

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Kaufmann, Christine and Heri, Simone (2007). Liberalizing Trade in Agriculture and Food Security – Mission Impossible? Vanderbilt Journal of Transnational Law, Volume: 40, Issue: 4.

Lee, Donna and Wilkinson, Rorden (2007). The WTO After Hong Kong: Progress In, and Prospects For, the Doha Development Agenda. Routledge Publishers.

Preeg, H. Ernest (1998). From here to free trade: essays in post-Uruguay round trade strategy. University of Chicago Press.

Ravenhill, John (2008). Global Political Economy. Oxford University Press.

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