A guide to the Annex on Agriculture

The Chairman of the WTO’s General Council (Ambassador Oshima of Japan) published a proposed ‘framework’ for an agreement on the key topics of negotiation in the Doha round on Friday. In this post I am attempting to summarize the proposals for the most important of these topics—the reform ofworld agricultural trade—using as little jargon as possible. The proposed ‘framework’ takes the place of the agreement that was not reached at last September’s Cancún meeting of WTO. If adopted at the next General Council meeting of WTO at the end of July, it will form the basis on which the negotiations will continue. In fact, there is likely to be another long pause in the talks over the period to next March while the US elections take place and the current European Commission—whose mandate expires in a few months—is replaced. The important annex on Agriculture, summarized below, has been drafted by the Chairman of the Agriculture Negotiating Group (Ambassador Grosser of New Zealand) after the Members of the Group proved unable to come up with their own framework for agriculture. The text of the full Framework proposal is available “here(link to the ITCSD site: a pdf file about 100k)”:http://www.ictsd.org/ministerial/cancun/docs/JOB(04)-96.pdf h4. Introduction The text begins by recalling that the purpose of the negotiations is to adopt reforms that will result in ‘substantial and effective cuts in protection and trade-distorting support’. The Doha decision added some qualifications to that objective that are repeated in the Annex: there must be ‘operationally effective’ provisions that allow special treatment of developing countries’ interests as they affect their development goals, and some ‘non-trade’ concerns such as animal welfare issues and environment should be taken into account. The Annex adds two non-controversial principles that go beyond the Doha mandate.


“Credit”
The starting point for reform will be the _bound_ levels of Members’ committments on border protection, domestic support payments and export subsidies made at the end of the Uruguay Round in 1995.

This recommendation builds-in ‘credit’ for reforms in countries that have already opened their markets by more than the amount they promised in 1995 or have reduced their expenditure on farm or export support by more than they promised—as many have. This is only fair, of course, and it’s a practice that encourages countries to go ahead with reforms between rounds of WTO negotiations, confident that they won’t be _weakening_ their negotiating positions.

But the consequence of this ‘credit’ provision is to _reduce the impact of reforms_ by the extent of the initial ‘slack’ represented by the credit. For example; if a country is obliged to cut a tariff by 30 percent from the bound rate, but has already reduced it by 20 percent from that rate, then its obligation will be only to achieve another 10 percent reduction. The reforms eventually adopted will _seem more ambitious on paper_ than they will be in the market place.
“Harmonization”
The second new principle confirmed by the Annex is that countries with higher levels of protection and support will have to make bigger cuts. This principle applies in the Annex at both the level of countries and at the level of individual programs: the higher the level of protection the bigger the cut will be.

But the harmonization principle is weak; it *does not override* the principle of ‘special and differential treatment’ for developing countries. Many of these countries have much higher average rates of protection for agriculture than the industrialized countries. They will not have to make greater cuts in thier barriers, however, despite the ‘harmonization’ principle.

The harmonization principle also seems to be overridden by the provisions for ‘sensitive’ products and developing countries’ ‘special’ products.

The introductory section of the Annex also contains a reference to the concerns of developing country cotton producers. It doesn’t promise any special rules for cotton trade reform but it gives cotton a high priority under the mechanisms described in the reform framework. h4. Domestic support The proposed decision on domestic support payments confirms that the principle of ‘harmonization’ will apply to the cuts that industrialized countries will have to make in trade-distorting farm support payments. Higher levels of support measured in ‘absolute or relative terms’ will have to be cut more than lower levels of support. The cuts to support will be made using a ‘tiered’ formula apporach that will see deeper cuts made in the higher tiers (groups of products with higher levels of support). This provision will be welcomed by the USA that has insisted that reforms should take first address the much higher levels of support paid by the EU before imposing cuts on its own support payments. The ‘credit principle’ will also apply; the level of supports will cut from the level agreed in 1995, not from any lower levels that might apply today. The objective will be ‘substantial and effective reduction’ in both the Total level of trade distorting support[1] and in each individual support component (e.g. support programs for a particular crop).  This means that it should be difficult to meet the objective of substantial overall reductions in support by cutting some programs heavily and some not at all. The ‘tiered approach’ will describe the minimum level by which overall support must be cut in each tier, highest to lowest.  The overall support cut for any tier is the sum of the cuts in the three different components: the cuts in Total support, the cuts in de minimis levels[2] and reforms to the blue box[3]. Countries can make bigger cuts in one of these components than in another, as long as they meet the requirements for * the minimum cut in each component
* the minimum cut in the overall level for the given ‘tier’ of support There will be different formulas for cuts to the Total, de minimis and blue-box programs. The support programs that make up the Total level of support will be individually ‘capped’ at the product level to make sure that there is no switching of support from one product to another as the total is cut. The proposed rules on domestic supports are thus more coherent across the whole agricultural sector than the proposed rules on market access, which allow greater ‘flexibility’ for ‘sensitive’ and ‘special’ products.

Blue box
This category of support was introduced at the last minute in the Uruguay Round to accomodate the European Community’s ‘compensation’ payments to farmers whose production ‘entitlements’ were being cut as part of the 1992 reforms to the Common Agricultural Policy (CAP). The payments were linked to production (and therefore could be _trade-distorting_ by definition) but were designed, in fact, to maintain the income of farmers whose production was being _cut_. They were classic agricultural _adjustment_ payments, not the sort of thing that the WTO should be _penalizing_.

The USA wants to redefine the blue box so that its own ‘counter-cyclical’ adjustment payments qualify as ‘blue’.  Under the new rules, which extend the definition of ‘blueness’, these payments will also be considered ‘blue’. But the overall size of a country’s ‘blue box’ will be capped by a factor—to be negotiated—related to historical levels of agricultural production. This is intended to ensure that no Member can minimize its obligations to cut support by re-defining its support programs from the ‘amber’ to the ‘blue’ box.
Green box
These are payments that may have some farm-income support component but are not likely to have any trade-distorting effects because they do not directly relate to farmers’ production decisions. ‘Green’ payments are not subject to any cuts. The framework proposes to tighten the criteria for the ‘green box’ but does not say how.

h4. Export competition The main objective of this section of the Framework is to define and ‘lock in’ the elimination of all forms of agricultural export subsidies as a headline result of this round of WTO negotiations. The key to securing the elimination—already agreed in principle by the main subsidiser, the European Community—is to establish the policies covered by the agreement and the date for elimination.

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Coverage
Export subsidies as they are recorded in the schedules of committments of individual countries established at the end of the Uruguay Round, plus government export credits or credit guarantees repayable at terms longer than 6 months, plus subsidies or underwriting payments by state trading entreprises, plus food aid that is used as a means of surplus disposal or that has the effect of displacing commercial sales.

These definitions seem to leave some room for further refinement in the negotiations. For example, the question whehter the monopoly sales powers of state trading enterprises is itself a ‘subsidy’ has been left for further negotiation. A noteable omission from the proposed coverage is the use of differential export taxes that the USA maintained is equivalent to an export subsidy.
Date for elimination
Still to be negotiated. The elimination is to be achieved progressively in annual installments probably over a period dictated by the EC’s current ‘Agenda 2000’ reform program, which concludes in 2010.
There is a provision for longer time-frames for the elimination of any export subsidies used by developing countries (presumably, via STEs) and for the use of longer-term—that is, subsidised—credits in the case of food exports to the poorest countries and developing countries dependent on food imports. Finally, a ‘special circumstances’ clause will be negotiated that would allow the use of longer-term export credits in cases such as the 1997 Asian financial markets crisis. h4. Market Access The harmonization principle will be implemented in the formulas for improving market access (cutting tariffs and expanding the volume of tariff quotas[4]) by establishing ‘tiers’ or ‘bands’ of tariffs. Deeper cuts will apply to the higher tiers. The credit principle will also apply; cuts will be made from bound tariff rates. As part of the ‘special and differential’ principle, no least-developed country will be asked to make any reductions in tariffs (comment: no economist would say that this “concession” is likely to be helpful to countries such as Bangladesh). The level of the duty applying to (each?) tariff will define the ‘bands’. But the number of bands and the thresholds for each band are to be negotiated later. The single advance in any of this is the proposal that there be only one ‘approach’ to cutting tariffs for all countries and all tariff bands. But what that approach will be—and whether it will be a simple mathematical forumla such as a ‘swiss’ or a ‘linear’ cut, or whether it will be a more complex hybrid formula—is left for later decision.

Sensitive products
The bulk of the section on market access is taken up by an attempt to define the exceptions to the ‘single approach’ to cutting access barriers.

The annex creates an category called ‘sensitive products’ that has not had any formal place in any former WTO agreement on agriculture. The definition of this category is very loose but more precise in the case of indusrialized than in the case of developing countries. The list of ‘senstive’ products is to include, at most, the list of products that are protected by tariff quotas. Unfortunately, this is a long list in economies such as the EC, other West European countries and North America: at the end of the Uruguay Round, the EU had tariff quotas covering 87 agricultural products, the United States 54 and Korea 67. But Norway had 232 product-level tariff quotas and Poland 109. Furthermore, virtually all such products have very high duties as part of the ‘out of quota’ tariff. Estimates by the Economic Research Service of the US Department of Agriculture shows that the average over-quota tariff rate is 128 percent or more than twice the simple average rate of agricultural tariffs. Many countries that maintain tariff quotas have out-of-quota rates more than twice, and as high as *six times* the average of their own agricultural tariff. The average in-quota rate is 63 percent[5].

The degree of liberalization proposed for this potentially long list of highly protected products is *remarkably weak*, apparently reflecting the insistence of the EC that the provisions for ‘sensitivity’ should be integral to the liberalization methods. Import competition is to be ‘substantially improved’ for all sensitive products by a combination of cuts to the out-of-quota tariff and expansion of the volume of the tariff quota (the volume that benefits from the lower in-quota duty rate).  But the amount of improvement in access implied by the word ‘substantially’ is left for future negotiation with the addtional caveat that “the final negotiated result [must also reflect] the sensitivity of the product concerned”.
Other elements
Several important decisions are left for decision after further negotiation: whether there will be provisions adressing the issue of *tariff escalation*, the continuation of the *special agricultural safeguard*, the improved *administration of tariff quotas* and the elimination of *in-quota tariff rates*.
Developing Countries
Developing countries will be required to make smaller cuts to market access barriers in each of the tariff ‘tiers’. In addition to being able to designate ‘sensitive’ products that will be subject to a “substantial” level of improvement in market access including an expansion of tariff quotas, developing countries will be permitted to designate a ‘certain number’ of tariff lines as ‘special products’ for which no quota expansion will be required. They will also have access to a ‘special safeguard mechanism’ whose actions (blocking imports to some degree on a temporary basis) will be defined in further negotiation.

fn1. The so-called Total AMS is the sum of all trade-distorting payments. ‘AMS’ stands for the ‘aggregate measure of support’: it aggregates payments up to the sector level, for example all livestock programs. The Total AMS sums the AMS in every sector: livestock, grains, horticulture etc etc. fn2.  A ‘floor’ level of support that is not subject to any reform; the floor will be lowered by this agreement fn3.  A category of payments to producers that are part of a “production limiting” program: these payments are said to be ‘blue’ because they’re a sort of mixture of ‘green’ and ‘amber’ box payments fn4. A tariff-quota is a two-part tariff; one part has a high rate of duty—usually so high that it prevents competition from imports—and one part has a much lower rate of duty. But the low duty rate is restricted by volume: after a certain number of tonnes imported (or units imported) the low rate of duty is no longer available and any addtional imports must pay the higher duty rate. Of course, this restricts imports to the ‘in quota’ volume in almost all cases. fn5. “Profiles of Tariffs in Global Agricultural Markets”:http://www.ers.usda.gov/publications/aer796/ (AER-796) page 25

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