Next steps for agriculture agreements

Doha’s rear-vision

Most trade pol­i­cy is made in the ‘rear-view’ mir­ror because of the need for polit­i­cal legit­i­ma­cy (con­sen­sus-build­ing, set­tle­ments among com­pet­ing inter­ests) and on account of lags in the infor­ma­tion avail­able to gov­ern­ment. Changes in the reg­u­la­tion of mar­kets tend to follow–rarely to lead–changes in tech­nol­o­gy, invest­ment, dis­tri­b­u­tion, pro­duc­tion etc. The Doha man­date was no dif­fer­ent in this respect from the first sev­en rounds of GATT/WTO trade nego­ti­a­tions. But two remark­able changes in the world econ­o­my over the peri­od ofthe Doha nego­ti­a­tions have made the objects in the rear-view mir­ror more dis­tant than they appeared at first.

The first change is due to the growth rates of most of the emerg­ing economies over last decade, reflect­ed in their rapid­ly grow­ing share of trade flows and accu­mu­la­tion of huge exter­nal bal­ances. Their trade per­for­mance affects both the cen­tral objec­tive of the Doha enter­prise and the man­age­ment of the enter­prise.

Although income inequal­i­ties among economies remain a major con­cern, pover­ty lev­els in the rapid­ly grow­ing, trade exposed, devel­op­ing economies, includ­ing the­largest low-income economies, are falling rapid­ly. The evi­dence for a link between open­ness to trade and ris­ing aver­age incomes, already demon­strat­ed by the “Asian Tigers” of the 1980s, has strength­ened with the rise of incomes in Chi­na, Viet­nam, Rus­sia and India. Accord­ing­ly, the Doha man­date to address the needs of devel­op­ment pri­mar­i­ly by open­ing mar­kets oth­er than devel­op­ing coun­try mar­kets such as Chi­na and India, which seemed lit­tle more than a rit­u­al­is­tic rec­ol­lec­tion of the GATT’s ‘enabling clause’ sev­en years ago, appears now as a bizarre and cost­ly rel­ic of an era bygone.

Merchandise trade surpluses

MerchTradeSurpluses_2007.gif

A direct con­se­quence of this mis­di­rect­ed objec­tive is that, in Doha’s pro­posed agri­cul­ture agree­ment, more than half of all devel­op­ing Mem­bers of WTO—including the world’s most suc­cess­ful trad­ing economies over the past decade—would have had few if any oblig­a­tions to open their mar­kets and many oppor­tu­ni­ties to exclude prod­uct mar­kets from any future bar­ri­er cuts.

Mean­while, some of these same emerg­ing devel­op­ing coun­tries con­sol­i­dat­ed their polit­i­cal influ­ence in the man­age­ment of the sys­tem. The cre­ation of the G-20 in 2003 was a symp­tom of this grow­ing influ­ence which was expressed in obscure ways, how­ev­er, owing to India’s rhetor­i­cal promi­nence (despite its much small­er trade foot-print), the spe­cif­ic con­cerns of Brazil and Indone­sia, and China’s reluc­tance to assert a lead­ing role that might expose it to nego­ti­a­tions dur­ing a time when its export per­for­mance had brought con­sid­er­able bilat­er­al pres­sure from Europe and the Unit­ed States.

The diver­gence between their rapid­ly grow­ing share of world trade (and trade sur­plus­es) and role in man­ag­ing the sys­tem, on one hand, and their min­i­mal con­tri­bu­tion to the col­lec­tive ben­e­fits of the sys­tem, on the oth­er hand, under­mined the cred­i­bil­i­ty of the Doha project as the nego­ti­a­tions con­tin­ued.

Trade ‘momentum’ of selected economies[1]

TradeMomentum_90-20.gifTradeMomentum_20-05.gif


The sec­ond ‘ret­ro­spec­tive’ aspect of Doha’s agen­da con­cerns agri­cul­ture, espe­cial­ly, where the Doha man­date adopt­ed the for­mat and objec­tives of the ‘con­tin­u­ing reform’ pro­gram of the Uruguay Round whose roots were in the 1980s. Thir­ty years ago, when this pro­gram was first cre­at­ed, export sub­si­dies were still grow­ing on the back of mas­sive trans­fers to agri­cul­tur­al pro­duc­ers in Europe, Japan and (to a less­er extent) North Amer­i­ca, behind quo­tas and vari­able levies at the bor­der. Devel­op­ing coun­try mar­kets for tem­per­ate agri­cul­tur­al pro­duce were small and volatile.

Doha fol­lowed the same path because it could—the tech­nol­o­gy exist­ed in the Uruguay Round agree­ment on Agriculture—rather than because these dis­tor­tions remained top pri­or­i­ties for the first decades of the 21st cen­tu­ry. The EC had already start­ed down the path to more fun­da­men­tal reform of its agri­cul­ture; the USA had all but aban­doned export sub­si­dies and had adopt­ed a reformist farm bill (with­in 4 years the two could agree on the elim­i­na­tion of export sub­si­dies because they had already got there). The real pri­or­i­ty for Doha, in 2001 as now, was mar­ket access reform in devel­op­ing as well as devel­oped coun­tries to clear away the excess pro­tec­tion left by the Uruguay Round mech­a­nisms.

But this pri­or­i­ty was mud­dled from the out­set by the belts-and-braces ‘devel­op­ment’ excep­tions for devel­op­ing coun­tries. Agri­cul­tur­al prices were at his­tor­i­cal­ly depressed lev­els in 2001 (grains at 70% of the 1995 price lev­els) and depressed trade and invest­ment flows (reces­sion in indus­tri­al­ized economies) had sharp­ened the focus of gov­ern­ments and mul­ti­lat­er­al insti­tu­tions on pover­ty in devel­op­ing coun­tries. Although the next sev­en years saw a rapid return to the high growth path that devel­op­ing coun­tries had estab­lished in the mid-1990s and prices in glob­al agri­cul­tur­al mar­kets that made con­cern about sub­si­dies irrel­e­vant in most com­modi­ties, the Doha man­date kept nego­tia­tors’ objec­tives fixed in the rear-view mir­ror.

Terms of Trade ($US prices)[2]

1989–98 1999–2006 1999 2000 2001 2002 2003 2004 2005 2006
Man­u­fac­tures 0.30 2.68 -2.40 -5.90 -3.80 2.30 14.10 9.30 3.40 4.40
Oil -1.20 23.94 37.50 57.00 -13.80 2.50 15.80 30.70 41.30 20.50
Non­fu­el pri­ma­ry com­modi­ties -2.20 7.31 -7.20 4.80 -4.90 1.70 6.90 18.50 10.30 28.40
Source: IMF World Eco­nom­ic Out­look, 2007

Seeing the world as it is

The absence of an explic­it demand from the half-dozen giant devel­op­ing economies (includ­ing Rus­sia, from now on) for a change in the man­age­ment of the trad­ing sys­tem can­not dis­guise the fact that this change has already tak­en place.

From 1947 to 2001, the accom­mo­da­tion between the USA, Europe and to a less­er extent Japan that formed the basis for the man­age­ment of the GATT and the WTO was reached between economies on the same ‘plane’. They were of sim­i­lar size and wealth and shared insti­tu­tions and his­to­ry. The change in the dis­tri­b­u­tion of world trade and pro­duc­tion that has already tak­en place removes that steady plat­form and replaces it with some­thing that is more like a set of steps. On one rank: large economies that are wealthy, dom­i­nat­ed by the ser­vices sec­tor and grow­ing slow­ly. On the oth­er: large economies that are grow­ing rapid­ly but are still poor by any stan­dards and pre­dom­i­nant­ly rur­al (or com­mod­i­ty based).

The def­i­n­i­tion of objec­tives for the trad­ing sys­tem from now on must take this ‘stepped’ con­fig­u­ra­tion of the lead­er­ship into account. The indus­tri­al­ized coun­tries’ post-war e conom­ic recov­ery and growth defined the objec­tives, sec­toral focus and pro­gram of the GATT. Under its new lead­er­ship, WTO will need more than one set of objec­tives, sec­toral focus and pro­gram in the future. Some­how, it will have to fit them into a coher­ent whole in order to main­tain a mul­ti­lat­er­al con­sen­sus.

Poles of the trading system

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How that coher­ence can be man­aged is the ques­tion that gov­ern­ments now need to answer. It is very unlike­ly to be the ‘sin­gle under­tak­ing’ that yoked the Doha nego­ti­a­tions to the world of the late 1980s. But what will stand in its place, and how some of the most valu­able acqui­si­tions of that peri­od can be retained (espe­cial­ly the unique Dis­putes sys­tem) under dif­fer­ent prin­ci­ples is far from clear. Very like­ly, a sta­ble sys­tem of rec­i­p­ro­cal oblig­a­tions will have to accom­mo­date the dif­fer­ences in the pre­oc­cu­pa­tions of the WTO mem­ber­ship in a way that the ‘sin­gle under­tak­ing’ does not: for exam­ple by allow­ing for ‘crit­i­cal mass’ agree­ments among sub­sets of the WTO mem­ber­ship that retain, how­ev­er, some cru­cial char­ac­ter­is­tics of the MFN prin­ci­ple.

The ‘devel­op­ment’ ori­en­ta­tion of the Doha round was more spin than sub­stance since no trade agree­ment is well adapt­ed to advanc­ing eco­nom­ic growth much less devel­op­ment. But devel­op­ment strate­gies still hold the clue to where the glob­al trad­ing sys­tem is head­ed. The styl­ized account is this: poor devel­op­ing economies with pre­dom­i­nant­ly rur­al pop­u­la­tions and enor­mous demo­graph­ic and infra­struc­ture (phys­i­cal, non-phys­i­cal) chal­lenges nec­es­sar­i­ly have spe­cif­ic eco­nom­ic strate­gies and pri­or­i­ties.[3] They have the capac­i­ty deter­mine these pri­or­i­ties with a high degree of auton­o­my because they play a cru­cial role in world mer­chan­dise and asset mar­kets to the ben­e­fit of them­selves and their wealth­i­er trad­ing part­ners. Any future glob­al regime must pro­vide for this pol­i­cy auton­o­my in a way that WTO’s sin­gle under­tak­ing does not, but also for the inter­ests of devel­oped economies in mov­ing ahead on a rapid trade lib­er­al­iza­tion tra­jec­to­ry, pos­si­bly at a tan­gent to the direc­tions of the giant emerg­ing economies in the short term but wher­ev­er pos­si­ble on an inter­sect­ing path.

Next steps for agriculture

Obvi­ous­ly, the strate­gic chal­lenge from now on is more com­plex. GATT/WTO has nev­er offered quick wins but under the old con­fig­u­ra­tion it was rea­son­ably clear what a ‘win’ meant. From now on, we must con­sid­er not only the pace of progress but also the def­i­n­i­tion of ‘progress’ itself, which will be dif­fer­ent for some economies than for oth­ers. The chal­lenge for Aus­tralian indus­try is to make sure each step in a mul­ti­lat­er­al trade strat­e­gy rep­re­sent mea­sur­able progress toward open­ing mar­kets, not some com­po­nent of a ‘ran­dom walk’ through the trad­ing sys­tem (one step for­ward, one step back) that leaves progress in the hands of arbi­trary polit­i­cal process­es.

The July 2008 drafts for a Doha agree­ment on agri­cul­ture were much too close to such a ‘ran­dom walk’. They promised some improve­ments in mar­ket access for some Aus­tralian agri­cul­tur­al com­mod­i­ty exporters if all of the IOUs on ‘sen­si­tive’ and ‘spe­cial’ prod­ucts and the lim­its on the SSG and the full impact (oth­er­wise) of the ‘tiered’ tar­iff for­mu­las were hon­ored. But even then, the result would have fall­en a long way short of ‘sub­stan­tial improve­ment’ for most prod­ucts. The top tiers of the tar­iff cuts bare­ly plumbed the water or bound-rate over­hand of devel­oped or devel­op­ing mar­ket pro­tec­tion on tem­per­ate prod­ucts and some mar­kets (Chi­na, India, Indone­sia) would have had an almost ‘free ride’ under var­i­ous sta­tus excep­tions.

The only basis on which the deal was ‘doable’ was that these mea­ger improvements—the for­ward steps—came at no imme­di­ate cost oth­er than, pos­si­bly, the exten­sion of GIs. They did, how­ev­er, have a high struc­tur­al cost. They cement­ed into place a new series of cat­e­gor­i­cal (‘sen­si­tive’, ’spe­cial’) and sta­tus (‘net food import­ing’, RAMs etc.) excep­tions for prod­uct groups and coun­try groups and made per­ma­nent a num­ber of pro­ce­dur­al excep­tions (SSG, peace clause) that were once sup­posed to be tem­po­rary. This gob­bledy­gook would have con­tin­ued to dis­rupt cross-bor­der agri­cul­tur­al busi­ness; prob­a­bly ensur­ing the ‘spe­cial’ legal sta­tus of agri­cul­ture would nev­er be elim­i­nat­ed from the trad­ing sys­tem rules. That alone rep­re­sents a prospect that should dis­suade Aus­tralian pro­duc­ers and exporters from any res­ur­rec­tion of the Doha agen­da.

In the post-Doha trad­ing sys­tem, the pri­or­i­ties for Aus­tralian agri­cul­tur­al pro­duc­ers and exporters will now be shaped by two dif­fer­ent oppor­tu­ni­ties that may be on dif­fer­ent time-scales

Regional Trade Agreements

We already have agree­ment to the nego­ti­a­tion of three impor­tant region­al FTAs: with ASEAN, Chi­na and Japan. There is also a rea­son­able chance of estab­lish­ing a nego­ti­a­tion with Korea, but the tim­ing may depend on the rat­i­fi­ca­tion of the USA/Korea FTA.

The three cur­rent nego­ti­a­tions are lag­ging bad­ly with few or no recent signs of progress. Whether and when these nego­ti­a­tions will lead to agree­ment also depends on spe­cif­ic fac­tors: the motives, oppor­tu­ni­ties and pres­sures for agree­ment are dif­fer­ent in each case. But one thread that links the delay in all three is the degree of ‘com­pre­hen­sive’ cov­er­age on which Aus­tralia insists and, in the case of Chi­na, our appar­ent­ly lim­it­ed con­ces­sions on motor vehi­cles and our restric­tions on for­eign invest­ments. Since ‘com­pre­hen­sive’ cov­er­age often relates to agri­cul­ture, there seems to be lit­tle prospect of quick­er progress on these agree­ments unless the Aus­tralian gov­ern­ment reduces its ambi­tions in a way that will appar­ent­ly hurt prospects for agri­cul­tur­al exports to those mar­kets.

Clos­er inves­ti­ga­tion is like­ly to show, how­ev­er, that the bar­ri­ers faced by each indus­try have dif­fer­ent degrees of sig­nif­i­cance and that Aus­tralian agriculture’s com­mer­cial con­cerns do not require ‘com­pre­hen­sive’ agree­ments. For exam­ple, in Japan, there are few agri­cul­tur­al prod­ucts where Aus­tralia could expect to see sub­stan­tial increas­es in vol­umes or mar­gins on a dis­crim­i­na­to­ry basis. Although some improve­ments in both could be expect­ed e.g. in dairy pow­ders, some hor­ti­cul­ture, and pos­si­bly fresh pork the oppor­tu­ni­ty for sig­nif­i­cant increas­es is lim­it­ed by the slow growth of most Japan­ese com­mod­i­ty mar­kets, our exist­ing high shares and returns and the lim­its of Japan­ese flex­i­bil­i­ty in a dis­crim­i­na­to­ry deal that disfavored either the USA or EC. In Chi­na there are much larg­er vol­ume oppor­tu­ni­ties, despite China’s high lev­el of self-suf­fi­cien­cy in many hor­ti­cul­tur­al, cere­al and live­stock prod­ucts because of the size of the mar­ket. But prices in Chi­na in most com­mod­i­ty mar­kets are below the pre­mi­ums avail­able in oth­er mar­kets. Accord­ing­ly, dif­fer­ent indus­tries have dif­fer­ent pri­or­i­ties for the Chi­nese mar­ket. The same is true of the ASEAN mar­ket where the most sig­nif­i­cant bar­ri­ers are now found in par­tic­u­lar prod­uct areas (dairy, hor­ti­cul­ture) and mar­kets.

It is also per­ti­nent to our region­al (and mul­ti­lat­er­al, see below) strat­e­gy that most of these coun­tries (not Chi­na) are sub­stan­tial net food importers for whom the high price out­look and con­cerns about food secu­ri­ty for urban pop­u­la­tions are near the top of the agen­da.

Con­sid­er­ing that prices in world mar­kets are like­ly to remain above his­tor­i­cal (post 1970s) aver­ages in real terms for the medi­um term[4], we have the oppor­tu­ni­ty to be selec­tive about the prod­uct cov­er­age in these agree­ments. For the sake of restor­ing momen­tum to these negot iations, we should focus on those prod­ucts and mar­kets where the poten­tial returns are great­est rather than adhere to a dog­mat­ic view about the cov­er­age of the agree­ments.

This does not mean omit­ting any prod­uct from the legal scope of an agree­ment; rather, it means tai­lor­ing the lib­er­al­iza­tion sched­ules to include only our top pri­or­i­ties and using our rep­u­ta­tion for secure and com­pet­i­tive sup­ply, with some degree of gov­ern­ment assur­ance, as a bar­gain­ing chip to secure low­er bar­ri­ers where sup­ply assur­ance would be in the inter­ests of our­selves and our cus­tomers.[5]

WTO

Pick­ing up the draft texts where they lay at the end of July 2008, would only com­pound the errors of the Doha round. It is time to aban­don the ‘sin­gle under­tak­ing’ in agri­cul­tur­al nego­ti­a­tions and to devise bet­ter approach­es based on pluri­lat­er­al mar­ket access agree­ments that bring togeth­er those trad­ing part­ners who have iden­ti­fied an inter­est in reduc­ing mar­ket access bar­ri­ers in order to e.g. cut the (urban) con­sumer penal­ty while allow­ing pro­duc­ers to take full advan­tage of high costs, or; to improve sup­ply secu­ri­ty, or; for macro­eco­nom­ic rea­sons to improve eco­nom­ic per­for­mance (etc. etc.).[6]

So-called ‘crit­i­cal mass’ agree­ments are win­ning atten­tion as a poten­tial way out of the nar­row con­straints of nego­ti­a­tions under the sin­gle under­tak­ing. They already have an encour­ag­ing track record in WTO in NAMA and Ser­vices. It is unclear whether they will work in Agri­cul­ture but there is no rea­son in prin­ci­ple why they should not, espe­cial­ly in those prod­ucts where a high pro­por­tion of glob­al trade is con­fined to a rel­a­tive­ly small num­ber of WTO mem­bers. The WTO prece­dents (e.g. the Infor­ma­tion Tech­nol­o­gy Agree­ment) have con­cerned mar­ket access rather than than ‘rules’ (such as export or pro­duc­tion sub­si­dies), but there are also prece­dents in GATT for the nego­ti­a­tion of rules with­in a CM that could con­tribute to reduc­ing oth­er dis­tor­tions such as pro­duc­tion sub­si­dies.

The strength of the ‘crit­i­cal mass’ approach is that it would allow inter­est­ed Mem­bers of WTO to reach ear­ly agree­ment on a rec­i­p­ro­cal basis to open mar­kets with­out impli­cat­ing those Mem­bers whose poli­cies or devel­op­ment strate­gies would pre­clude their accep­tance of the oblig­a­tion, while also pro­vid­ing a secure basis for the exten­sion of ben­e­fits on an MFN basis, once the ‘crit­i­cal mass’ of par­tic­i­pa­tion has been reached.[7] The chal­lenge of this approach is to define an appro­pri­ate crit­i­cal mass. On the one hand, an agree­ment on agri­cul­ture that poten­tial­ly extend­ed unrec­i­p­ro­cat­ed MFN ben­e­fits to e.g. Chi­na or India or Rus­sia might not attract the adher­ence of e.g. Japan or Europe or the Unit­ed States. On the oth­er hand, an agree­ment among coun­tries account­ing for a sub­stan­tial pro­por­tion of trade in a prod­uct or sec­tor such as grains or sug­ar would cre­ate a frame­work for sup­ply secu­ri­ty and price sta­bil­i­ty that most pro­duc­er coun­tries would want to join what­ev­er their trade-expo­sure.

As with RTAs, the oppor­tu­ni­ties that arise from a CM need to be test­ed in the mar­ket; from the per­spec­tive of inter­est­ed par­ties, the per­ceived ben­e­fits will change as the poten­tial CM mem­ber­ship grows. Giv­en this, and the vari­ety of com­mer­cial, eco­nom­ic and secu­ri­ty con­cerns that may moti­vate economies to par­tic­i­pate, there seems to be no way to define the oppor­tu­ni­ties for gains from a poten­tial CM agree­ment a pri­ori.

Final­ly, prod­uct and even sec­tor CMs do not nec­es­sar­i­ly stand on their own.[8] It is like­ly that a CM approach to lib­er­al­iz­ing mar­kets for agri­cul­tur­al prod­ucts will have to be matched by CMs in NAMA and Ser­vices in order to suc­ceed.


[1] Momen­tum is defined as each country’s share of world mer­chan­dise trade (‘mass’) weight­ed by the annu­al aver­age rate of growth of that country’s trade over the pre­ced­ing decade (‘veloc­i­ty’). The Unit­ed States dom­i­nates the shape of the poly­gon over three decades to 2000. Chi­na first begins to cap­ture a share of the trade momen­tum in this group in the 1980s and con­tin­ues pulling on the shape of the poly­gon through the 1990s when Mex­i­co emerges (thanks to the ‘NAFTA effect’). From 2000 through 2005 there is a dra­mat­ic redis­tri­b­u­tion toward Chi­na with a ‘spike’ toward the Russ­ian Fed­er­a­tion, bal­anced to an extent by the con­tin­u­ing weight of Euro­pean economies. Source: UNCTAD Hand­book of Sta­tis­tics (2007) and own cal­cu­la­tions.

[2] Exporters of non-fuel com­modi­ties saw a strong and steady improve­ment in their pur­chas­ing pow­er with respect to e.g. man­u­fac­tured imports over the peri­od from 2001 to 2006 (although their oil import bills rose even more strong­ly).

[3] These spe­cif­ic strate­gies are some­times held up as evi­dence for the ‘many recipes’ approach to con­trast them with the (alleged­ly) mono­lith­ic approach­es of the lib­er­al ‘Wash­ing­ton Con­sen­sus’.

[4] Cur­rent prices for food commodities–two or three times the 2001 levels–are like­ly to be tem­po­rary, how­ev­er.

[5] See my note for the FTA Ref­er­ence Pan­el on ‘A Lay­ered Approach’ to FTA nego­ti­a­tions.

[6] The same rec­om­men­da­tion can be made for NAMA

[7] Those economies that accept the oblig­a­tions of the agree­ment will enjoy some addi­tion­al priv­i­leges in terms of the right to man­age the agree­ment and access to dis­pute set­tle­ment under the agree­ment.

[8] There is some evi­dence, for exam­ple, that a deal between the USA and EC on the reduc­tion of duties and the pro­tec­tion of GIs for spir­its (‘Scotch’) was part of the pack­age that got the ITA to launch stage.

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