Draft
THE INTERESTS OF DEVELOPING COUNTRIES
IN THE NEXT ROUND OF WTO AGRICULTURAL NEGOTIATIONS
By Stefan Tangermann
Institute of Agricultural Economics
University of Göttingen, Germany
and Tim Josling
Institute for International Studies
Stanford University, USA
Paper commissioned by UNCTAD for the Workshop on
Developing a Proactive and Coherent Trade Agenda for African Countries in Support of
their Participation in International Trade Negotiations
Pretoria, 29 June to 2 July 1999
ii
TABLE OF CONTENTS
1 Introduction
1
1.1
Perspective of Developing Countries
2
1.2
The Agricultural Agenda
4
2 The “Core” issues
7
2.1
Overall Approach to the Negotiations
2.2
Expanding Market Access
10
2.3
Curbing Export Subsidies
14
2.4
Domestic Support
17
2.5
Special and Differential Treatment for Developing Countries’ Policies
22
3 The “New” Issues
7
24
3.1
State Trading
24
3.2
TRQ Administration
26
3.3
Export Restrictions
28
4 The “Parallel” Issues
29
4.1
SPS Renegotiation
29
4.2
Regionalism
32
4.3
Preferential Systems and the Lomé Convention
34
4.4
Measures for Least-Developed and Food-Importing Countries
41
5 The “Related” Issues
43
5.1
Intellectual Property
43
5.2
Competition
44
5.3
Investment
45
6 Conclusions
47
Bibliography
50
1 Introduction
Developing countries make up the large majority of WTO members, and are
increasingly active in the deliberations of that body. Recent economic policy changes
in developing countries, emphasizing openness and market orientation, have given
them a much greater stake in the outcome of trade talks. This, together with the
emergence of global markets in sector after sector, has held out the prospect of
productive participation in world trade as a viable path to development. But it has also
increased the risks of exposing domestic markets and institutions to competition from
abroad, and made countries with inadequate infrastructure and inappropriate policies
vulnerable to marginalization in the global economy.
This paper attempts to define the interests of developing countries in the
agricultural part of the upcoming WTO negotiations (for convenience, the Millennium
Round). It is designed to lead to the formulation of a strategy and an approach to the
talks. Of course, other aspects of world trade will also be discussed in the
negotiations, and sometimes the agricultural interests will be subsumed in broader
strategic considerations. But agriculture is a vital part of the economy of almost all
developing countries, and the conditions in world trade in farm and food products are
of economic importance. Therefore formulating a coherent strategy for the
agricultural part of the negotiations is of significant importance for developing
countries.
The agricultural talks in the Uruguay Round were mainly concerned with
developed country agricultural policies and their impact on the trade system. The next
round of talks, starting this December, will be in large part a continuation of the same
process of liberating world markets from the distorting influence of market
interventions pursued for several decades in industrial countries. These policies
themselves are broadly acknowledged to have failed, not just by academic economists
extolling free markets but by politicians and farm leaders who realize that in the long
run agriculture succeeds where it satisfies market demand rather than relying on
government purchases or hidden consumer taxes. A competitive agricultural sector
can be a significant asset, but an uncompetitive industry is a continual drain on
government financial resources and a source of tension in trade relations. The process
of domestic policy change toward a new paradigm is well underway in industrial
countries, toward a market orientation of agricultural production along with better
targeting of assistance to rural areas (Josling, 1998a). This, with the encouragement of
the disciplines of the Uruguay Round Agreement on Agriculture (URAA), is
2
increasingly being done in a way that does not impose major burdens on other
countries through interference with the trade system.
Before the Uruguay Round, developing countries had been major losers from
the unreliability of the trade in agricultural goods, both as importers of temperate zone
agricultural products and as exporters of goods which compete with them. Price
fluctuations, depressed market prices as a result of competing export subsidies, and
impenetrable import barriers for sensitive goods were pervasive. The URAA
established rules on the type of import protection allowed, the conditions of export
competition and the nature of domestic support programs. However, much remains to
be done to reform the agricultural trade system. It is therefore in the broad interest of
developing countries as a whole to see the reform of world trade rules for agricultural
goods completed, along the lines indicated by Article 20 of the URAA.
This paper begins with a brief discussion of the perspective of developing
countries on the agricultural negotiations and then considers in more detail the
elements likely to emerge as a part of the core agenda for the agricultural talks. This is
followed by a discussion of some newer items which will arise in the agricultural
negotiations, along with some issues which are important to agriculture but are likely
to be handled in other parts of the negotiations. A short concluding section pulls
together the main arguments of the paper.
1.1 Perspective of Developing Countries
From the perspective of developing countries, five types of problems arise to
cloud the enthusiasm for the continued reform of the agricultural trade system.
Resolving these issues should go far toward defining the interest of developing
countries in the agricultural talks. The first is that many developing countries have
preferential access into the highly protected markets of the industrial countries. This
degree of preference not only assures them access but also contributes to price
stability. This implies that reform and liberalization, even if in the long run interest of
all countries, can have negative impacts on the developing countries that currently
enjoy the preference. Should developing countries therefore resist further
liberalization, such as a reduction in the EU’s high MFN tariff for sugar, on the
grounds that preferential access to the EU sugar market is currently beneficial? To
pose this problem suggests that ways may well have to be found to ensure that
countries with a heavy dependence on such preferential treatment are compensated or
otherwise encouraged to relinquish their special market access.
3
The second problem is that developing countries are particularly vulnerable to
fluctuations in world markets. As importers of temperate zone agricultural goods
developing countries often appear to benefit from cheaper sources of supplies when
these are “surplus” to market requirements. Food aid represents a formal distribution
of these surpluses, but the flood of subsidized exports from Europe and the US over
the years has also resulted in cheaper commercial imports of grain, oilseeds, dairy
products and meats. These low prices have kept import bills down but have also had
some negative effects in developing countries, such as encouraging importer
governments to neglect their own agricultural sectors. They have also been
responsible in many cases for destabilizing the price structure in domestic markets.
Often the subsidized imports seem to be available only when supplies on the world
market are adequate, and dry up when prices firm. But support for further reform of
agricultural trade, such as the removal of export subsidies in agricultural goods, may
require firmer assurances that food importing developing countries will not be
adversely affected by such a move. The Ministerial Declaration on this subject may
need to be strengthened and some elements incorporated into the WTO rules. Some
action may need to be taken to restrict the use of export taxes and embargoes, which
reduce the reliability of world markets as a source of food supply.
A third problem is that developing countries themselves have high tariffs on
agricultural goods. Sometimes the high tariffs are a result of protectionist policies in
the past: at other times they represent an attempt to collect tariff revenue. Moreover,
many developing countries use parastatal importing agencies to control imported
foodstuffs and agricultural raw materials. Most developing countries, however, are in
the midst of a radical transformation of their own trade and domestic agricultural
policies. This means that actual tariffs are often lower than those bound in the WTO
schedules. Regional trade agreements already allow imports from neighboring
countries at rates well below the MFN level. For these countries the prospect of
negotiations to lower the bound tariffs poses little or no threat to domestic producers.
But for those countries that have not undertaken a trade liberalization program which
extends to agriculture, the WTO negotiations on market access will directly impact
the level of protection afforded to domestic agriculture. These countries may be
tempted to withhold their agreement to improved market access. For these countries
there are special problems of coordinating the external and dimensions of agricultural
policy reform (Josling, 1998b).
Fourth, as a somewhat more technical problem, there are some issues which are
particularly relevant for the economic situation of many developing countries, and
where rules of the URAA and the way they are interpreted and implemented can
4
potentially cause more problems for them than for industrialized countries. For
example, high rates of inflation in developing countries have in some cases eroded
base period external reference prices to be used in calculating current domestic
support. Coupled with low domestic support levels in the base period, which led many
developing countries to declare zero accountable domestic support in the Uruguay
Round, this can create a situation where countries appear to violate their domestic
support commitments, without actually having granted much support to their farming
sectors.
A fifth problem is more complex. The deeper integration of the world economy
has facilitated and required a fundamental change in the nature of international trade
negotiations. Whereas in the early post-war period the trade system was essentially
concerned with trade policies operated at the border in the area of manufactured
goods, the WTO and the regional pacts cover virtually all goods and services and
relate to what might be considered “domestic” policies. The complexity of
international rules and their implications for policies administered internally strain the
resources and the governmental structures of many countries, but it puts increasing
strain on small countries and on those that have under-developed domestic
administrative infrastructure. Moreover the trade system for years was mainly
concerned with the industrial countries, with developing countries as spectators. The
much expanded WTO membership gives the opportunity for much wider
involvement,. But the exponential growth of meetings and international negotiations
strains the diplomatic budgets and human resources of all but the largest nations. This
issue has considerable relevance to agriculture, as more aspects of rural and food
policies become covered by international rules and as meetings on agricultural trade
issues proliferate. The topics to be considered in relation to agriculture in the
Millenium Round therefore, also, should include approaches to helping developing
countries to cope with the growing demand for human resources and institutional
arrangements required to conduct the negotiations and to implement their results.
1.2 The Agricultural Agenda
The agricultural agenda can be conveniently broken down into four categories,
inter-related but raising separate issues for developing countries. The first category is
that of the “core” agenda, mandated by the URAA and representing a continuation of
the process started in the Uruguay Round. This category contains the familiar topics
of market access, export competition and domestic support. The second category of
issues for negotiation includes those topics sometimes referred to as “new” issues,
5
though they have strong connections with the core agenda items. Among the topics
that could be grouped under this head are state trading; the administration of tariff rate
quotas (TRQs) (which has been elevated from a technical issue to a political
controversy by the WTO banana dispute); and the question of export restrictions,
which was made more urgent by the policies of some countries during the high price
period of 1995-96.
A third category of topics can be called “parallel” issues, having major
implications for agricultural trade and policy but lying somewhat outside the URAA
itself. This category includes such issues as the need for renegotiation of the SPS
Agreement, the question of regional trade agreements and their relation to the
multilateral system, and the issue of the future of commodity preferences. For many
developing countries these topics will have more impact on their agricultural trade
prospects than the core issues. A fourth category of topics one could call “related”
issues, even further from the main agricultural talks but still of potential significance
for the development of agricultural policies. These related items include the issue of
intellectual property, made more relevant to agriculture as a result of the move toward
the patenting of genetic material; competition policy, which could impinge on many
areas of agricultural trade where competition is less than “perfect” and markets are not
fully contestable; and investment policy, which touches the agricultural and food
sectors increasingly as foreign direct investment becomes an important avenue for
development in this area. Though these topics will typically be negotiated, if at all, by
diplomats unfamiliar with agricultural conditions, it is important that those
responsible for agricultural trade policy be aware of the linkages with these issues.
Taking all this together means that a complex set of issues has to be considered
when looking at developing countries' interests in the agricultural part of the
Millenium Round. In most of the four categories of negotiating topics, the five sets of
issues mentioned above that are particularly relevant for developing countries have to
be analyzed. To gain an overview of this complex structure, it may help to think of a
four-by-five matrix where the concrete issues to be considered in preparing for the
negotiations can be conveniently allocated to individual categories (see Table 1). In
this paper, only some observations and preliminary comments on major elements of
this matrix of issues can be offered.
We shall not in this paper describe in any detail the provisions of the Uruguay
Round Agreement on Agriculture and the commitments that WTO Members have
6
accepted in agriculture.1 We shall also generally not deal with the effects that the
URAA has had on international agricultural trade nor with the details of
implementation in major countries.2
Table 1: Matrix of Agricultural Issues and Perspectives of Developing Countries
DEVELOPING
COUNTRY
PERSPECTIVE
AGRICULTURAL AGENDA
Core Issues
New Issues
Parallel Issues
Preferential
Access into
Developed and
Regional
Markets
Reliability of
Supplies and
Market
Disruption
Market Access
TRQ
administration
Preferential
systems, regional
trade agreements
and GSP
Export subsidies
Export
restrictions
High Import
Tariffs and State
Import Agencies
Rules in WTO
with differential
effect on
Developing
Countries
Domestic
Infrastructure
and
Administrative
Weakness
Market access
State trading
Measures for
least-developed
and foodimporting
countries
Reciprocal
access
1
Domestic
support
calculations
Domestic
support
Related Issues
SPS Agreement
State Trading
SPS Agreement
Intellectual
property,
competition
policy,
investment rules
For a comprehensive account of the Uruguay Round negotiations on agriculture and the provisions of
the URAA, see Josling, Tangermann and Warley (1996).
2 For information on implementation of the URAA in major countries, see IATRC (1994 and 1997),
Tangermann (1995,1996), Hathaway and Ingco (1995) and Ingco and Hathaway (1996). A large
number of studies by international organizations on the implementation and impact of the
Agreement on Agriculture on developing countries has been compiled in an unpublished document
provided by the WTO Secretariat under the Analysis and Information Exchange process (AIE/S7,
24 February 1998).
7
2 The “Core” issues
2.1 Overall Approach to the Negotiations
The core agenda for the next round of agricultural negotiations will in all
probability follow closely in the steps of the URAA. The triad of "market access",
"export competition" and "domestic support" seems to have proved a convenient set
of labels for defining obligations. It will no doubt be used again. Indeed, some of the
"new" issues mentioned below may be squeezed into the same categories when it
comes to conducting the negotiations. State trading issues, for instance, fall neatly into
those related to market access (the impact of importing STEs on the filling of
minimum access quotas) and those that relate to export competition (the pricing
behavior of single-desk sellers). However, for the sake of this discussion they will be
treated as distinct agenda issues.
Moreover, it is likely that the nature of approaches to be applied to the core
elements of the URAA will be very similar to that used in the URAA. Indeed, one of
the major achievements of the Uruguay Round in agriculture was to establish new
rules and new types of quantitative commitments that can be used as the basis for
negotiations in coming WTO rounds. There is no need any more to debate issues such
as the conversion of non-tariff barriers into bound tariffs or whether there should be
quantitative constraints on individual countries' export subsidies and domestic
support. It is very unlikely that elements such as these will be unraveled in the
Millennium round. Hence, as far as the core elements of the URAA are concerned,
major questions in the next round of negotiations will be the rates of reduction to be
applied, and the timing (start and end) of the new implementation period. In addition,
based on the experiences made since 1995, the URAA rules on the core elements may
need refinement here and there. However, it appears unlikely that the nature of the
core provisions for agriculture that will emerge from the next round of negotiations
will be fundamentally different from those that were agreed in the Uruguay Round.3
3
It is also worth noting that if the Millennium round negotiations on agriculture should fail completely
and not come to any conclusion, the URAA will continue to apply indefinitely (though without the
"peace clause" which expires in 2003). Moreover, all country-specific quantitative commitments
will continue to remain valid as they stand at the end of the current implementation period (i.e. in
2000 for developed and in 2004 for developing countries).
8
Less certain, though, is the starting point for any further reduction commitments
to be negotiated in the next round. It could either be the set of WTO commitments as
they stand at the end of the Uruguay Round implementation period, or actual policies
in a given reference period, or some mix of these two approaches. In the Uruguay
Round, actual policies in agreed base periods had to be chosen as starting points, for
the simple reason that commitments of the nature agreed under the URAA did not
exist in the past. Hence there was no choice but finding agreement on how to define
and measure the base tariff bindings from which reductions were to be made, and
where to start with the commitments regarding export subsidies and domestic support.
The agreement reached was laid down in a document called "Modalities for the
Establishment of Specific Binding Commitments under the Reform Programme".
Each individual country was then expected to suggest its own commitments on that
basis, in offer lists. Other countries could verify these offers, and if they had not
disputed them by a given date the offers were automatically turned into the
commitments that are now contained in the legally binding Schedules of all WTO
Members. It appears that not many offers were changed during the verification period
in the Uruguay Round, and criticism of the results achieved, expressed in terms such
as "dirty tariffication", was voiced mainly ex post.
As the experience made with the Modalities procedures and the verification
process in the Uruguay Round was not altogether encouraging it appears unlikely that
another attempt will be made at taking actual policies as the starting point for the
reduction commitments to be agreed in the Millennium round. Instead, the URAA
commitments as they stand at the end of the current implementation period will
probably be used, and further reductions to be made will start from there. This has
potentially important implications that are likely to be discussed in the negotiations. In
particular, where countries currently do not make full use of their commitments (by
applying, for example, tariffs at rates below those bound), some part or all of the
reductions to be agreed in the new round may not have any effect on actual policies
pursued as they will only squeeze out some of the "policy water" currently contained
in the commitments concerned. The advantage, however, of adopting this approach is
not only ease of negotiation but also that countries will in future not discouraged from
reforming their policies on a unilateral base more rapidly than required by the WTO
agreement.
An important question, to be taken into account in scheduling the preparations
for the Millennium round negotiations on agriculture and any analytical work to be
done in this context, is the likely duration of these negotiations. It is difficult to make
any forecast on this, and even during the negotiations any timetable agreed may turn
9
out to be unrealistic. The Uruguay Round lasted more than three years longer than
originally envisaged, mainly because an agreement on agriculture could not be found
by the deadline that had been set (December 1990). The Millennium round overall,
and the agricultural negotiations in it, could possibly take as long as the Uruguay
Round.4 Taking some countries' suggestions as to what they want to achieve or avoid
in the next round of agricultural negotiations it appears that long negotiations may be
required in order to bridge the wide gulf that lies between their positions. On the other
hand, there is one factor suggesting that some negotiating parties may have an interest
in limiting the Millennium round negotiations on agriculture to a much shorter period
than the Uruguay Round. The URAA peace clause expires in the year 2003 unless
there is explicit agreement among the negotiating parties that it should be extended.
Such agreement is unlikely to be found (if it is reached at all) without an overall
agreement on agriculture in the next round. In other words, some countries are likely
to have an interest in concluding the agricultural negotiations before the end of the
year 2003.
In the Uruguay Round, delay in concluding the negotiations was mainly caused
by resistance of the EU to an agreement that would have been acceptable to many
other countries. Is the EU likely to protract the agricultural negotiations again in the
Millennium round? At the moment it appears that this may not necessarily be the case.
In addition to its interest in extending the peace clause beyond the year 2003, the EU
has another reason for working towards an early conclusion of the next round, clearly
spelled out by trade Commissioner Brittan (1999). The EU wants to try and fold the
WTO negotiations on EU Eastern enlargement into the Millennium round. Accession
negotiations with the countries in Central Europe will take some time, but may be
largely concluded by the end of 2003, at least with the current five accession
candidates from Central Europe. Pursuing accession talks and enlargement
negotiations in the WTO in parallel would therefore from the perspective of the EU
also speak for trying to conclude the Millennium round, including the agricultural
negotiations, in 2003.
4
The “quad” countries, the EU, US, Japan and Canada, have apparently agreed to a three year time
horizon for the talks. This would fit in well with the timetable discussed below with respect to the
end of the Peace Clause and with the EU plans for enlargement. It also makes sense in terms of the
US Farm Bill, which will be up for reconsideration in 2003.
10
2.2 Expanding Market Access
The major market access question for the next round is likely to be how one can
initiate a process that would lead to a removal of the discrepancy between the level of
protection in agriculture and that in the manufacturing sector in a reasonable time
period. How does one get from tariffs of 100-200 or even 300 percent to the levels of
5 - 15 percent found in most other areas of trade? This looks to be a tall order: it
implies a continued period of significant tariff cuts extending well into the next
millennium. But the next Round of talks will not be a success unless a substantial step
is taken to reduce these high levels of agricultural tariffs. Developing countries will be
expected to play their part in such a step.
It is impossible at this time to say what the outcome of the negotiations on
agricultural tariffs may be in the next round. Given that many countries know that
further tariff reductions will squeeze out that “water” that has so far allowed them to
live reasonably comfortably with the new Uruguay Round tariffs, it may not be easy
to reach another round of reductions by 36 percent as achieved in the Uruguay Round.
However, anything much less than that would only prolong the conspicuous anomaly
of high agricultural protection. One other issue that is likely to be raised in the next
round of agricultural talks is the existence of many tariff peaks in agriculture, at levels
of 100 or 200 percent (ad valorem equivalent) and even more. Hence there will be
talks about the acceptability of cutting tariffs by more the higher they are, possibly by
using a tariff cutting formula such as the Swiss formula applied to industrial tariffs in
the Tokyo Round.5 This part of the negotiations will be particularly important for
developing country exporters of agricultural products as tariff peaks exhibit the
highest frequency and the highest rates in product sectors of particular interest to
them, such as sugar, tobacco, cotton, and prepared fruits and vegetables.6
Another way to tackle the problem of the high levels of tariffs resulting from
tariffication, not mutually exclusive with tariff reductions, is to expand the minimum
market access that forms a part of the provisions of the Agreement on Agriculture. A
possible approach is to continue the process of expanding minimum access as a
proportion of consumption. A further increase in TRQs, say, of one percent of the
level of domestic consumption in each year over a five year period would remove
much of their restrictive effect. In most markets the quotas would become non-
5
6
For a presentation of a few more such formulae for tariff reductions, see USDA/ERS (1998).
UNCTAD/WTO (1997).
11
binding before the five-year period was over. In effect, tariffication would have taken
place at the level of the reduced tariff applicable to the TRQ.7 The main political
objection to this could be that the “within-quota” tariffs were generally left to the
discretion of the importing country to fix at levels which they judged would attract the
guaranteed access quantity. Hence there may also be talks about limiting within-quota
tariffs to an agreed percentage of above-quota tariffs. Expansion of minimum access
TRQs, however, can have a direct impact on developing countries that have tariff
preferences. In some (though not many) cases, such tariff preferences have also been
bound in the Schedules agreed in the Uruguay Round, under the category of "current
access". In most countries' Schedules (though not in that of the EU) the minimum
access and the current access commitments were in effect combined in the same list.
Among the other market access issues, the Special Safeguard system is also in
need of some patching and more uniformity. Though subject to abuse, trade
safeguards are generally considered by governments to be a necessary concomitant to
trade liberalization and market access. The issue that is likely to arise with respect to
agricultural safeguards in the agenda for the next round is the use of the Special
Safeguard Provisions to try to maintain protection against imports. One way to avoid
the misuse of the Special Safeguard Provisions is to seek agreement on a sufficiently
low level of trigger prices. Wherever technically possible, trigger prices should be
identical (or equivalent) to the external prices used by the governments concerned in
calculating initial tariff equivalents in the UR. Governments had a tendency to use the
lowest plausible external prices for calculating tariff equivalents in their Uruguay
Round schedules. Hence, using the same prices as trigger prices for the Safeguard
Provisions would make sure that additional duties are not used too often, and are not
set too high. Attempts may (and should) also be made to phase out the use of the
Special Safeguard Provisions after the second implementation period, i.e. the one
following the Millennium round. This could be done by gradually adjusting the
percentages in both the quantity trigger provision and the price trigger provision year
by year so that the safeguards are less and less likely to cut in.
Developing countries have complex interests in the area of market access.
Exporters of agricultural products have an incentive to see trade barriers lowered. On
the other hand, many tropical products already enter duty free into the main industrial
markets. In these cases expanded market access into industrial markets may have to
come from actions other than tariff reduction, such as reducing domestic taxation. At
7
It would also be possible to devise a way to give countries the option of TRQ increases or tariff
decreases, as both lead to the same end point.
12
the same time, access into the developed country markets for temperate zone products
is often significantly restricted by high and sometimes prohibitive tariffs. It is in these
areas where preferences are particularly important. Reduction of MFN tariffs may
have no positive impact on the exports from the preferred country, and could actually
reduce sales and prices. Only when MFN tariffs are reduced so much that developing
country exporters can also gain from better access at MFN rates, may the resulting
market expansion offset the preference-reduction effect and the outcome be positive
overall for the developing countries that have benefited from preferences in the past.
Thus developing countries will no doubt establish their own preferred list of
commodities where they are in favor of developed countries expanding market access
through MFN tariff reductions, and the magnitudes of such tariff cuts that would be
beneficial to them.
As far as the Special Safeguard provisions in agriculture are concerned,
developing country exporters have a clear interest in seeing them eliminated, or at
least greatly constrained so that additional duties can be less frequently imposed, and
at lower rates. The Special Safeguard provisions were introduced as a concomitant of
tariffication, to reduce fears that conversion of non-tariff barriers into tariffs could
leave markets of the importing countries concerned with too little protection in times
of low world prices or rapidly expanding imports. Developing countries generally did
not engage in tariffication at the time of the Uruguay Round, though many had
switched from non-tariff barriers to tariffs in the context of unilateral trade policy
reforms. Instead, many took the opportunity to offer ceiling bindings where they did
not have bound tariffs before the Uruguay Round. Developing countries as importers
therefore do not have access to the Special Safeguard provisions, but as exporters can
be hard hit when developed countries imposed additional duties under these
provisions. Whether the developing countries should be allowed access to the
provisions of the Special Safeguard, whenever they adopted tariffication, is a matter
for consideration in the new round.
When it comes to the other side of the market access coin, the lowering of tariffs
in developing countries, a number of conflicting issues emerge. On the one hand high
tariffs are a regressive tax on imported agricultural goods which place a particularly
high burden on low-income consumers and at the same time distort domestic
incentives and lead to wasteful resource use. On the other hand governments need to
raise revenue and often feel that they have to protect the income streams of local
producers for more or less defensible reasons. Trade policy reform, such as has been
adopted by many countries, including many developing countries, involves the
development of alternative revenue sources and the removal of the most distortive
13
special interest protection. Those that have undergone this process may still have
bound tariffs at a high level, but not be using all the protection in their WTO
schedules. For them there is an opportunity to get “credit” for trade barrier reduction
without having a major impact on domestic markets.8 For those that have not reduced
tariffs unilaterally, the negotiations will provide an opportunity to build such tariff
reductions into the process of domestic reform.
An issue of particular interest to developing countries is the use of variable
tariffs in the context of fluctuating world market prices for agricultural products.
There are, again, two sides of the coin in this matter. On the one hand developing
countries have a strong interest in stable world market conditions, and therefore want
as many countries as possible to contribute to buffering world market instability. This
speaks for limiting the use of variable tariffs, because they insulate the importer
markets concerned and thereby aggravate instability on world markets. Developing
countries will, therefore, have an interest in seeing the variability of tariffs that the EU
uses in the cereals and the fruits and vegetable sectors eliminated.9 On the other hand
a number of developing countries, in particular from Latin America, themselves use
variable tariffs, in so-called price band schemes, to protect their domestic markets
against price fluctuations in international trade. One possibility in the next round
might be to treat this issue as an item under special and differential treatment, and
allow the use of such variable tariff schemes only in developing countries.
A final market access issue poses particular problems for developing countries.
This is the use in agriculture of the negotiating technique known as “Zero-for-Zero”
agreements. They have proved effective in certain sectors, such as computers or
software, in particular where the private sector has been closely involved. Such an
approach could be suggested for oilseeds, some livestock products and possibly even
for cereals. The problem that this poses for the trade system is that sectors which are
most sensitive will be left behind, leading to further market distortions. Dairy and
sugar, for instance, might (again) escape the main thrust of improved market access.
For developing countries the question arises as to whether the benefits of a tariff free
market for particular agricultural goods generally not of export interest is worthwhile
8
9
It is of course possible that negotiations on tariff reductions could be on the basis of applied rather
than bound tariff levels. But the complications of such a device probably make it unworkable, as
argued above with reference to the "Modalities" used in the Uruguay Round.
EU cereal tariffs are subject to a “maximum duty-paid” landed price, which acts much as a variable
levy, and fruits and vegetable imports are often subject to “entry” prices which trigger higher tariffs
when the offer prices are low.
14
if it implies less access improvement for other goods some of which could be
exported?10
2.3 Curbing Export Subsidies
If the high level of protection sets agriculture apart, the widespread use of
export subsidies is perhaps the most disruptive element in the operation of world
markets. Moreover, export subsidies are the element that still makes agriculture most
different from other sectors in the WTO, as export subsidies are plainly prohibited
outside agriculture. The practice of subsidizing exports of agricultural products has
been constrained by the Uruguay Round, but most of the subsidies are allowed to
continue in a reduced form. Countries that import agricultural products have been the
gainers in economic terms from the subsidies, but even among these countries the
disturbance of the domestic market has often caused problems. In the next round of
negotiations, it will be more difficult than ever to persuade countries who export
agricultural goods with little or no subsidy to allow countries such as the EU to
continue their market-distorting practices. A further push to rein in these subsidies is
therefore likely to be high on the agenda of the Cairns Group. Even the US, which
holds significant "rights" to export subsidies in the WTO, has made only very
cautious use of them recently, and therefore will be strongly interested in reducing, if
not eliminating, export subsidies in the Millennium round.
The Uruguay Round made a solid start to the process of removing export
subsidies in agricultural trade. For the first time there can no longer be any doubts as
to what (maximum) level of export subsidies a country can grant in agricultural trade.
However, several problems remain in the area of export competition. The question of
single-desk selling agencies for agricultural products is tied up with the issue of
export subsidies. Different marketing practices among exporters are inevitable, and
not in themselves undesirable. But international guidance is needed as to which
practices of parastatal export agencies are consistent with agreed conditions of
competition and which distort that competition. Now that the more clear-cut kinds of
export subsidy have been identified and constrained in the country schedules of
allowable subsidies, the next task is to clarify the definition as regards the actions of
state trading exporters. This would ensure that such actions, if deemed to be hidden
10
Complicating this issue is the fact that some of the “excluded” sectors may be those where access is
at the moment preferential, such as sugar. The question of preferences is dealt with more fully
below.
15
subsidies, could be counted against the schedule for that country. Along similar lines,
complex forms of export subsidies effectively financed by domestic consumers
(though often called producer-financed) may have to be brought under more effective
control.
The simplest way to continue the process of reducing the incidence of export
subsidies would be to extend the schedule of reductions agreed in the Uruguay Round.
As with the market access improvement, this could be done using the same base. This
would imply constraining the expenditure on such subsidies by another 36 percent,
thus removing 72 percent of the subsidy expenditure that was used in the base period.
Continuing the quantity reduction by another 20 percent would imply that 40 percent
of the volume of subsidized exports would have been removed from the market over
the two periods of reform. But since the remaining 60 percent would have to be
subsidized with only 29 percent of the expenditure, the disruption that could be
caused by such subsidies would be significantly reduced.
The continuation of the process of reduction would be constructive, but may not
be very ambitious. Elimination of export subsidies altogether would clearly have
significant advantages. But the pre-requisites for dispensing with export subsidies are
a renewed confidence in world markets, with firmer and more stable price levels for
the major products, and reduced dependence by the EU and the US on intervention
buying and storage schemes in domestic policies. The former condition depends on
the success of the Agreement in increasing trade and reducing protection. As for
domestic programs, it is possible that practice and sentiment in both the US and the
EU may have moved away from the use of market support policies to other
instruments by the turn of the century. If that were the case it could be politically
easier to get effective curbs on the use of export subsidies by the time of the
Millenium round. The new negotiations could, say, set the target to phase out export
subsidies over a five year period, by 2005.
In the Uruguay Round the use of export credits was agreed to be a form of
export subsidy, but it did not prove possible to bring it under the export subsidy
constraints. The OECD countries have negotiated a code for non-agricultural export
credits which puts limits on credit terms and the length of credit extension. It has so
far not been possible to include agriculture in this agreement, despite the URAA
undertaking to work towards internationally agreed disciplines. This leaves this topic
as one to be dealt with in the next Round. It should be possible to agree on the
allowable terms for such credit, and hence to calculate the magnitude of the subsidy
that is involved if softer credit terms are offered. The best way to deal with the
16
subsidy equivalent of such concessionary credit is to charge it against the export
subsidy constraints in the Schedule of the exporting country concerned.
Developing country interests in reducing export subsidies depend to a large
extent on whether they produce and export commodities that compete with the
dumped goods and whether the countries concerned have effective ways of
moderating the impact of fluctuations in world price due to export subsidies on the
domestic economy. Agricultural exporters among the developing countries have a
strong interest in seeing developed countries' export subsidies further reduced in the
next round of negotiations. Export subsidies in agriculture are largely a policy of
developed countries. With the exception of ten countries, developing countries have
no reduction commitments on export subsidies. This does not mean that they can
subsidize exports without limits. On the contrary it means that they must not subsidize
exports at all, except in the form of subsidies to reduce the costs of marketing exports
and internal transport and freight charges on export shipments, on which developing
countries did not have to undertake commitments. Thus by far the majority of
exporting developing countries can only gain by seeing export subsidies further
reduced in the next round, because this improves their competitive situation in
international trade, without imposing any further constraints on them.
Those few exporting developing countries that have non-zero commitments on
export subsidies would see the scope for their export assistance programmes further
constrained if the next round should result in another step towards reducing, if not
eliminating export subsidies. However, on balance even they are most likely to be
better of with further reductions of export subsidies. This is not only because their
own export subsidies are a drain on scarce government funds and distort the use of
domestic resources. It is also true because their export subsidies are small as
compared to those of some developed countries. As a result their exports are more
likely to suffer from distorted competition with exports from subsidizing developed
countries than they benefit from their own export subsidies. More than 83 percent of
all agricultural export subsidies worldwide in 1995 and 1996 were granted by the EU.
All developing countries, taken together with all but four developed countries (i.e. not
including EU, Switzerland, Norway, United States), accounted for no more than 2.4
and2.2 percent, respectively, of worldwide export subsidies in these two years.11
Interests are of course different in importing developing countries who benefit
from lower world market prices as resulting from the export subsidies provided by
11
All figures are from USDA/ERS (1998, p. 22).
17
other countries. However, these benefits are highly unreliable and therefore not
necessarily a good guide in formulating the WTO positions for the negotiations.
Indeed, when world market prices for agricultural products are high, and hence when
importing developing countries might most want to benefit from subsidized
shipments, export subsidies provided by the developed countries tend to be
particularly low and therefore of little use to the importing developing countries. On
the other hand, when world market prices are depressed, developed countries have
tended to engage in particularly large export subsidization, depressing world prices
even more and thereby potentially doing harm to domestic producers in importing
developing countries. All this was obvious in the first years of implementing the
URAA, when world market prices for cereals boomed and developed countries
greatly reduced their export subsidies, thus driving international prices even higher. In
these years (1995 and 1996) the EU, for example, granted far less export subsidies on
cereals than it could have done under its URAA commitments. However, when world
market prices for cereals collapsed after this boom, the EU turned back to large export
subsidies, in one case even using the "credit" for under-utilized commitments in the
year before in order to justify export subsidies in excess of its commitments (for rice
in 1996/97).
In other words, export subsidies granted by developed countries have been
unreliable, have tended to aggravate instability on world markets for agricultural
products, and have helped importing developing countries least when they might have
benefited most from them. Thus further reductions in export subsidies should not be
seen as being generally against the interest of importing developing countries. Rather
than opposing further reductions of export subsidies, developing country importers of
agricultural products, and in particular those heavily dependent on food imports, are
probably better off by supporting alternative approaches to improving their food
security, among others in the context of the Ministerial Decision relating to the
situation in the least-developed and net-food importing countries. This issue will be
taken up below.
2.4 Domestic Support
Although the biggest conceptual breakthrough in the URAA was the acceptance
by countries that domestic policies were a legitimate concern of trade talks, the actual
disciplines imposed on those policies through the reduction of the Aggregate Measure
18
of Support (AMS) were rather weak. The key question for the next Round is therefore
whether to strengthen or abandon the attempt to constrain domestic policies. The fact
that the AMS constraints have not been binding for the large majority of countries
does not mean that the constraints on domestic support have been ineffective. The
process of re-instrumentation of domestic support programs, away from those that
most impede trade, has begun. The AMS constraint on domestic policy puts useful
pressure on countries to continue this process.
The attraction to countries of adopting “green box” policies is both to guard
against challenge from trading partners and to avoid being counted toward the AMS.
The slow but fundamental changes that are taking place in the agricultural policies of
the major industrial countries need the encouragement and underpinning of
international agreements. The changes in these policies have generally been in the
direction of improving the climate for agricultural trade, in contrast to the policy
changes in the nineteen-sixties and nineteen-seventies which led to more trade
conflicts. The Uruguay Round was able to take advantage of these changes, such as
the 1992 Reform of the EU’s Common Agricultural Policy (CAP), and to get firm
commitments on future policy directions and support levels. But this process of
reform is still at an early stage and needs to continue in order to avoid a swing back
toward the costly and ineffective policies of earlier times.
The constraints on domestic support through the Aggregate Measure of Support
(AMS) are acknowledged to have so far been the least effective of the Uruguay
Round bindings as far as quantitative reduction commitments are concerned. But this
does not mean either that they will not be useful in the future or that a continued
reduction would not be appropriate. A continuation, in the next round, from the same
base with the same rate of reduction would be a relatively modest move, and yet even
that will eventually result in 40 percent of the “coupled” domestic support having
been removed or converted into less trade-distorting types of program. But it would
be even more effective to “catch up” with the reductions in import barriers and export
subsidies. Thus one could envisage an agreed reduction of (say) 52 percent in the
expenditure on price-related policies.
The ‘blue box’ containing the US and EU direct payments which were granted
exemption from challenges under the Blair House Agreement was a creature of its
time, necessary to get agreement to go ahead with the broader Uruguay Round
package. It is, however, still a somewhat awkward bilateral deal not appreciated in
other parts of the world. Such an anomaly can surely be removed in the next round.
The policies of the US and the EU themselves are changing for internal reasons. The
US Fair Act goes further than ever before to make the payments to farmers decoupled
19
from output and therefore compatible with the green-box. The EU may soon consider
a similar move as a continuation of the reform started in 1992, in order to make the
CAP consistent with Eastern enlargement. The task for the Millennium round will be
made much easier if the EU and US have both modified their payments such that they
meet the conditions laid down in the green box. The “blue-box” can essentially be
emptied and locked.
The green box presently contains a number of policy instruments that, while
probably less trade distorting than price or income supports still encourage an
expansion of output. Sometimes they are related to such otherwise sensible programs
as crop insurance, but incidentally increase the incentive to produce by reducing risk.
Other programs may be indirectly linked with production even though the main
reason for payment is not output. This might be true of certain environmental
payments, which could lead to an increase in output. But to re-open the definition of
the green box might allow some developed countries to argue that it be expanded, to
include food security policies and barely-decoupled support schemes designed to keep
farming in certain areas. It is unlikely that it is in the interests of developing countries
to make it easier for developed countries to continue agricultural support programs
under different guises.
One constructive change in the constraints on domestic support could be a
decision to make the AMS specific to individual commodities. This was the original
intention in the Uruguay Round: it was at the Blair House negotiations between the
US and the EU that the notion of aggregating the AMS over all commodities was
introduced – essentially to weaken its impact. The AMS could thus be made more
binding at a stroke by defining commodity-specific amounts of “coupled” price
support expenditure that could then be reduced over time.
Most of the constraints on domestic support impinge on developed countries. It
is tempting to think of this item on the agenda as having little relation to developing
countries' interests. This would be misleading. Developed country domestic polices
for agriculture and rural areas represent the largest programs for transfers of funds to
agriculture. They help to shape the pattern of global agricultural production.
Reforming these policies is bound to be of significance in the future of world
agriculture. In addition, developing countries are vitally interested in a well
functioning international trade order where world market conditions are not distorted
by policies. With continued reductions in tariffs and export subsidies for agricultural
products, these most obvious and directly distorting policies are increasingly brought
under control on a world-wide level. However, if domestic agricultural policies in the
20
developed countries were to remain only loosely controlled, then they could take over
the role that border protection and export subsidies played in the past.
The agricultural policy debate in some developed countries seems to point in
this direction. Talk about issues such as "non-trade concerns" (already mentioned in
the URAA), the "multifunctionality" of agriculture, or the "European Model of
Agriculture" is prevalent in some developed countries, and it appears to gain more
strength the more there is pressure to reduce traditional trade policy instruments.
Though meant by some politicians to justify avoidance of further reduction
commitments on tariffs and export subsidies, in the end the issue will be resolved as
one of acceptable domestic support measures as the international drive towards
continued reductions of tariffs and export subsidies is likely to be simply too strong.
The "non-trade concerns" may then well be used to justify more generous domestic
support, and if that support is given in a non-decoupled way, it can do as much harm
to international trade as the traditional trade policy instruments did in the past. Hence
developing countries should have the same interest in seeing developed countries
reduce and re-instrument (towards decoupling) their domestic support as they have in
seeing them cut their tariffs and export subsidies.
With regard to the other side of this coin, i.e. constraints on domestic support
policies in developing countries, it should be noted that no more than 12 developing
countries have reduction commitments on domestic support. Again this does not mean
that all other developing countries can provide unlimited support. On the contrary
they cannot grant any domestic support at all, with some important exceptions. One
exception is the de minimis provision under which developing countries can provide
product-specific support up to 10 percent of the production value and non-productspecific support up to 10 percent of the value of total agricultural production. Another
exception relates to certain investment and input subsidies that developing countries
can grant outside any WTO constraint. These exceptions are likely to remain
untouched by any agreement on continued reduction commitments (though they may
or should be changed for other reasons, see below).
In other words, domestic support policies in a large majority of developing
countries would not be affected by any further general reduction commitments on
domestic support that may be agreed in the next round of agricultural negotiations.
Hence the interest of the majority of developing countries regarding domestic support
is rather clear – they should argue for large reductions and tight rules, as this will
primarily limit the distortions that developed countries can cause.
21
This position should not be affected by the difficulties some developing
countries have with particular "technical" elements of the way domestic support is
measured. All WTO members have to notify their agricultural policies to the WTO
Secretariat in regular intervals, irrespective of whether they have reduction
commitments or not. This provision makes sense because only in this way is it
possible to see whether countries have honored what are effectively their zero or, in
the case of domestic support, their de minimis commitments. In calculating their
current domestic support, all countries have to follow the URAA rules. For market
price support, i.e. where some form of an administered support price applies, the
calculation is to be based on the gap between the current administered price and the
fixed external reference price from the 1986-88 base period. This provision was
thought to help some developed countries that feared declining world market prices
might force them to reduce their domestic support prices in parallel. However, it turns
out to cause difficulties for countries with high rates of inflation as current support
prices increase in nominal terms while fixed reference prices remain constant. Such
difficulties were anticipated during the Uruguay Round negotiations, and the URAA
contains a provision stipulating that "due consideration" should be given to the
influence of "excessive rates of inflation" on the ability of the countries concerned to
honor their domestic support commitments. In the next round of negotiations, there
may be a point in finding a solution that goes beyond these vague terms. One
possibility would be to allow all countries with rates of inflation above an agreed
threshold to convert their external reference prices (and current administered prices)
into a less inflationary currency, or into Special Drawing Rights, or to specify their
commitments in real terms.
Another "technical" difficulty that some developing countries have in the area
of domestic support is that the presence of zero commitments (because they claimed
zero or de minimis support in the base period of the Uruguay Round) requires them to
keep support below the 10 percent threshold for each individual product. As a result,
these countries have less flexibility regarding policies for individual products than
countries with non-zero commitments. In the latter case, only the total AMS for all
products is relevant, and even if that is low it may well suffice to provide scope for
support of more than 10 percent for one or a few products. If, on the other hand, a
country has a zero commitment it cannot trade off higher support for one product
against lower support for another. This is because the de minimis provision applies at
the individual product level rather than at the aggregate level (except for non-productspecific support). To some extent this makes economic sense, as significant
distortions of resource use could arise if individual products were supported at a level
much higher than other agricultural commodities. However, the same constraint on
22
the shifting of support across products does not apply in the developed countries that
have non-zero commitments on domestic support. If the next round of negotiations
should make the AMS commitments product-specific, then this asymmetry would
disappear. If on the other hand the developed countries cannot agree to break AMS
commitments down to the product level, then the developing countries with zero
domestic support commitments may have a reason to argue for some more flexibility
regarding application of the de minimis provision. For example, a 5% aggregate de
minimis could replace the current 10% product-specific de minimis.
2.5 Special and Differential Treatment for Developing Countries’ Policies
Most governments, if they could chose, would like to see other countries’
policies constrained by rigid disciplines while maintaining as much freedom as
possible for their own policies. Developing countries, though, have specific reasons
for aiming at more flexibility for their policies. These reasons do not have to be
spelled out here in any detail.12 Though some of them are increasingly questioned, not
the least by some developing countries themselves, special and differential treatment
(S&D) in the sense of allowing developing countries more flexibility in applying
WTO rules to their own policies will continue to be an element of WTO provisions,
and is most likely to remain a part of the agricultural rules after the next round of
negotiations. Developing countries know that one price they pay for having more
flexibility through S&D is a weakening of their influence on the rules from which
they want exemptions. Their governments also know that in their domestic policy
debates it can often be extremely useful to rely on well specified and reasonably
strong multilateral disciplines. However, they also often have an interest in somewhat
wider scope for their domestic and trade policies.
The URAA and the rules governing its implementation contain a number of
S&D provisions for developing countries’ policies. Under the procedures outlined in
the “Modalities” paper, developing countries were allowed to offer ceiling bindings of
tariffs (rather than binding the tariff equivalents of their previous non-tariff barriers)
and to apply lower rates of reduction in the areas of market access, domestic support
and export subsidies (but not less than two thirds of those to be applied by developed
countries). The least developed countries were exempted from reduction
commitments. The possibility to delay tariffication (the “rice clause”) also came in a
12
For a discussion of special and differential treatment see for example Hindley (1987).
23
special form for developing countries. The implementation period for making
reductions under the URAA was ten years (i.e. until 2004) for developing countries,
rather than the six years (until 2000) for developed countries. With regard to the
URAA disciplines for domestic support, developing countries can use a higher
percentage for de minimis support that does not have to be reduced (ten rather than
five percent). They can exempt certain subsidies from reduction commitments
(investment subsidies generally available to agriculture; input subsidies generally
available to low-income or resource poor producers; support to producers to
encourage diversification from growing illicit narcotic crops). The “green box” rules
on public stockholding for food security purposes and domestic food aid allow for the
provision of foodstuffs at subsidized prices to urban and rural poor in developing
countries. Developing countries are not required to undertake commitments for two
types of export subsidies (subsidies to reduce the costs of marketing exports of
agricultural products; internal transport and freight charges on export shipments on
terms more favorable than for domestic shipments). The URAA provisions on export
prohibitions and restrictions do not apply to developing countries unless they are netexporters of the foodstuff concerned.
As far as the general S&D provisions for developing countries’ policies in the
URAA are concerned, they may well survive the next round of negotiations
unchanged. There is also not much reason for developing countries to try and change
them (except possibly the de minimis rules, as discussed above). Whether both lower
rates of reduction and a longer period for making them in developing countries should
also be agreed in the next round is a different issue. These two provisions taken
together mean that the process of policy reform in developing countries, which
eventually is in their own interest, gets increasingly out of line with that in the rest of
the world. In particular, the longer implementation period for reductions in developing
countries means that they will still be engaged in reductions while the next round of
negotiations is already being conducted. If this approach is continued for a few more
rounds of WTO negotiations, then the rhythm of policy reform in developing
countries will become more and more asynchronous with the rhythm of WTO rounds,
unless it happened that the extra time developing countries have for reductions is no
longer than the time used for conducting WTO negotiations on the following round of
reductions. Lower rates of reduction in developing countries, on the other hand, do
not create that type of problem.
24
3 The “New” Issues
Three “new” issues have arisen in the years since the Uruguay Round that are
primarily problems that have become noticeable as a result of the changes brought
about by the Round. They include the issue of state trading, exposed by the
tariffication of non-tariff import barriers, the administration of tariff-rate quotas
(TRQs) which were designed to allow minimum access in previously-closed markets,
and the question of export restrictions, which was not considered in depth in the
Round. Each of these is of considerable significance to developing countries.
3.1 State Trading
There are three separable issues surrounding state trading. One is the question of
whether state trading importers can reduce market access below the levels agreed in
the Schedules. The second question is whether exporter state traders can use “hidden”
export subsidies to increase market share. The third issue is a concern that exporters
with exclusive or special privileges can exploit consumers by using their monopoly
power.13 The first two of these are largely agricultural issues, and will probably be
subsumed in the agricultural talks. The third issue is more general, and should rightly
be dealt with in the broader discussions on competition policy (Josling, 1996).
The issue of state trading enterprises that have special or exclusive rights in
import markets can be thought of as an extension of the problem of market access.
Under WTO articles, state trading importers are not supposed to grant more protection
than that given by the bound tariff (Article II:4, GATT 47). Countries could however
go further than just ensuring that state trading importers do not give more protection
than the bound tariff. It would be possible for instance to link implementation of the
TRQs with the import operations of state traders, perhaps converting the TRQ into an
obligation to import rather than an opportunity. This could reduce the suspicion that
STEs might be responsible for the under-fill of the quotas. At the other extreme one
could mandate that all (or a share) of the TRQ be marketed through private channels,
thus providing some competition for the STE and allowing price and markup
comparisons to be made.
13
This problem also is highlighted by the probable entry of China into the WTO. China’s state owned
corporations could have considerable market power in agricultural markets.
25
The quantification of export subsidies and their reduction has left more visible
the distinction between those countries where exports are privately sold from those
where a parastatal controls such exports. There is widespread concern in those
countries where trade is by private firms that the state trading enterprises can obtain
cheap credit from their governments, offer better terms to buyers, and generally
compete unfairly with the private trade. To the extent that these practices could be
labeled as export subsidies, the issue is one of monitoring and transparency. But some
commonly used devices such as price pooling (giving the producer an average price
over several destinations or time periods) are also seen as giving the producer an
unfair advantage. It might therefore be a matter for negotiation as to whether any
constraints need be placed upon STEs with regard to their producer pricing policies.
Many developing countries use state trading agencies to control domestic
markets and to regulate trade. Any change in the WTO rules on state trading will thus
have a direct impact on these countries. However, it is questionable whether it is in
the longer run interest of developing countries to obtain exemptions from, or more
flexibility in, applying the stricter rules on STE activities that may be negotiated in the
next round. There is now widespread agreement that STEs have in many cases
hampered economic development in developing countries, and added to distortions of
incentives that reduce the efficiency of resource use. Many developing countries have
therefore found it beneficial to leave trading activities increasingly to private
enterprises, while influencing market conditions through conventional measures of
trade and market policies such as tariffs and subsidies. If developing countries were to
receive special treatment regarding the operations of their STEs, this could send the
wrong signals regarding the longer run desirability of relying on state controlled
monopolies in agricultural trade.
On the other hand, as was indicated earlier, this “intrusion” into the internal
structure of markets in developing economies could pose problems for those for
whom the infrastructure is still unable to support a competitive private sector fulfilling
the many roles of importing and distributing agricultural and food products. In these
cases it would be undesirable to compel privatization and other changes in the market
system before it was able to support such a move. For some time to come, parastatals
may therefore still have a place in developing country food trade and marketing in
order to provide stability, administer nutritional programs and prevent the abuse of
market power by private firms. This is another case where “special and differential
treatment” may play an important role.
26
3.2 TRQ Administration
The TRQ system has become a major concern for the health of the agricultural
trade system. A total of 1366 tariff rate quotas were notified to the WTO Secretariat
under the reporting requirements of the Uruguay Round. Such arrangements are
particularly common in the markets for fruits and vegetables (350), meat products
(249), cereals (215), dairy products (183) and oilseed products (124). Thirty-six
countries undertook such commitments in their Uruguay Round schedules. Among
those administering the greatest number of such quotas are Norway (232), Poland
(109), Iceland (90) and the European Union (85). One worrying feature of the TRQ
system is the degree of “underfill” of the quotas. The simple average quota “fill” for
the years 1995 and 1996 was 64 percent and 63 percent, respectively, suggesting that
the allocation mechanism is not yet adequate, that parastatals are effectively keeping
imports out or that within-quota tariffs are too high to allow imports to compete.
Though one can still argue that the TRQs are in most cases an improvement on the
non-tariff barriers that were in place before the Round, they pose a potential threat to
the further liberalization of trade.14
The negotiations on agriculture will have to address the issue of developing a
more uniform system for the administration of the TRQs. The issue of disparity of
methods of allocation of TRQs is one of the most urgent tasks for the new agricultural
round. TRQs for agricultural imports have created a new wave of governmental
interference with trade through licensing procedures and provided a playground for
rent-seeking traders - who will in turn have an incentive to lobby for the continuation
of the high above-quota tariffs. The question is how to prevent the TRQs from
interfering any more than necessary with the competitive development of trade.
Developing countries have a direct interest in the method of allocation. To
allocate the TRQs to the exporting country government, as is done for instance in the
case of US sugar imports, implies a deliberate attempt to influence the pattern of trade
in favor of the recipient countries. This has in the past been done to target
development aid or reward political friendship. Such non-market allocation schemes
may have had their purpose. They do not, however, promote the competitive trade
system that is the fundamental goal of the WTO.15 Efficient producers can make no
14
15
Data from WTO Secretariat based on the first two years notification to the Committee on
Agriculture.
The US sugar import regime, involving the establishment of TRQs for traditional suppliers, was
introduced in 1982, and thus predates the Uruguay Round. However, the quotas are now included in
27
headway against the assured market shares of the quota holders. Even allocating
TRQs by country based on historical market shares does not ensure that the sourcing
of supplies for the importer bears any necessary relation to the competitiveness of the
supplier. Hence, even if developing countries on aggregate may have an interest in
receiving specific allocations under TRQs, competition among them and hence
benefits to those developing countries that have particular comparative advantages
will continue to be denied if country-specific allocations of TRQs remain a
widespread practice.
The simple solution to the efficiency problem is allow quotas to be auctioned, as
has been suggested in some academic circles.16 This would seem an economically
sensible solution to the problem of the capture of rents and to counteract the
incentives to keep the system in place. But this is also a reason why exporters in
particular are likely to resist such a move. If the TRQs were auctioned to the exporter
the impact would be much like a tariff. The exporter would bid up to the height of the
tariff concession for the right to sell in the import market. The capture by the
government of the rent through the auction process in effect turns the TRQ into a
quasi-tariff, with the height discovered through the auction process. Where the TRQs
replace previous access agreements in which the quota was allocated to the exporter,
the result of the auction would be to reduce the return from selling into this market.
Thus there could be considerable resistance to the auctioning of TRQs, at least in
those cases.
The best solution may in the end be to steadily increase the TRQs, until the
issue of how to allocate them is rendered moot. But this will have major implications
for the developing countries that consider their current market access “guaranteed” by
TRQs. The TRQs which embody preferential access agreements for certain
commodities are in place to ensure that the access quantity will not be reduced. This is
not the same as guaranteeing preferential access relative to other suppliers. The TRQs
16
the WTO Schedule for the US as part of its commitments made in the Uruguay Round. An
argument might be made that the quota allocations were in any case likely to be distorting trade, as
they took no account of changes in costs among suppliers. They were also of dubious consistency
with GATT Article XIII, which endorses the use of market shares for the initial allocation of quotas
but argues that they should be revised when changed circumstances render that allocation distorting.
The recent WTO panel report in favor of Ecuador’s claim that it should have received a larger share
of the EU banana market has confirmed the interpretation of Article XIII that quotas should change
to reflect cost and competitiveness among suppliers.
Tangermann (1997a) explores the arguments in favor of auctioning the TRQs. The issue of
auctioning quotas was addressed some years ago by Bergsten and colleagues (Bergsten et al, 1987)
in the context of US import policy. Auctioning quotas has not so far caught on with politicians and
policy makers.
28
emerging from the Uruguay Round are designed to open previously closed markets.
They will tend over time to dilute the advantages of preferential access. Thus there
could be a conflict of interest between the desire to use TRQs to expand market access
and the fact that such an expansion will eventually remove the benefits of preferential
access.
3.3 Export Restrictions
The practice of export taxes and export restraints through quantitative controls
also urgently needs to be addressed in the Millenium round, and could conveniently
be included under the heading of export competition. Within the GATT export
controls are generally disallowed, though export taxes are deemed innocuous. Article
XI of GATT 1947 prohibits quantitative export restrictions but makes an explicit
exception for “export prohibitions or restrictions temporarily applied to prevent or
relieve critical shortages of foodstuffs or other products essential to the exporting
contracting party”. There is a clear conflict between the ability of exporters to
withhold supplies to relieve domestic shortages and the reliability of the world market
as a source of supplies for importers.
In the next round of WTO negotiations, developing country importers have the
opportunity to lead a movement to constrain the ability of exporters to restrict
supplies. After all, restraints on exports are no less inconsistent with an open trade
system than restraints on imports. Export taxes could be included under the same
qualifications as quantitative restrictions. The argument has already surfaced in
connection with the Food Security Declaration appended to the Uruguay Round
Agreement (the Ministerial Decision on Measures Concerning the Possible Negative
Effects of the Reform Program on Least-Developed and Net Food-Importing
Developing Countries). It seems inconsistent to leave in place the possibility of export
taxes and quantitative restrictions that have an immediate and harmful impact on
developing country food importers. Hence developing countries have a strong interest
in banning export taxes on agricultural products in the next round of negotiations.
29
4 The “Parallel” Issues
In addition to the specifically agricultural issue are a set of topics which have a
direct impact on agricultural trade policy, and need to be factored in to any strategy.
These include the question of the SPS Agreement and the related issue of the
licensing of the products from biotechnology, the issue of regional trade agreements,
including whether they should include agricultural trade, and the controversial topic
of preferences, which mainly affect a small number of agricultural commodities. Once
again, the developing countries have a major stake in the outcome of discussions in
these areas.
4.1 SPS Renegotiation
Conflicts arising from different sanitary and phytosanitary (SPS) standards have
posed problems in the GATT for many years. Under the GATT 1947, sanitary and
phytosanitary measures which impinged on trade were covered by Article XX(b),
which allows countries to employ trade barriers “necessary to protect human, animal
or plant life or health” which would otherwise be illegal so long as “such measures
are not applied in a manner which would constitute a means of arbitrary or
unjustifiable discrimination between countries where the same conditions prevail, or
as a disguised restriction on international trade” (Josling, Tangermann and Warley,
1996, p.209). But Article XX had no teeth: there was no definition of the criteria by
which to judge “necessity”, and there was no specific procedure for settling disputes
on such matters. The attempt in the Tokyo Round to improve on this situation through
the Agreement on Technical Barriers to Trade (1979), known as the Standards Code,
also failed. Though a dispute settlement mechanism was introduced and countries
were encouraged to adopt international standards, relatively few countries signed the
Code, and a number of basic issues were still unresolved.
Intensive negotiations in the Uruguay Round led eventually to a new SPS
Agreement that tried to repair the faults of the existing code. This Agreement defined
new criteria that had to be met when imposing regulations on imports more onerous
than those agreed in international standards. These included scientific evidence that
the measure was needed; assessment of the risks involved; and recognition of the
equivalence of different ways of testing and sampling. In addition, the dispute
settlement mechanism was considerably strengthened under the WTO to make it
30
easier to obtain an outcome that could not be avoided by the losing party.17 The force
of the SPS Agreement comes in part from the more precise conditions under which
standards stricter than international norms can be justified and partly from the
strengthened dispute settlement process within the WTO. In this regard, much was
expected of the panel report in the beef-hormone dispute between the EU on the one
hand and Canada and the US on the other. This was widely seen as a test case for the
new SPS Agreement. The SPS Agreement has been usefully clarified by the beefhormone dispute settlement Panel and the subsequent Appellate Body report, as well
as by the outcome of other disputes in this area.18The SPS Agreement was reviewed
earlier this year. The SPS Committee which conducted the review found few places
where the Agreement was not working. Moreover, the US and the Cairns Group are
not likely to wish to tamper with a hard-won agreement that has “science” at its core.
But the EU has let it be known that a few amendments would not be out of place. The
adverse ruling in the beef-hormone case could perhaps be rendered moot by a wellcrafted clause written into a revised SPS Agreement. The main issue of contention is
that of the role of “consumer concerns” in setting SPS standards. European consumers
are often taken to be more cautious when it comes to health issues than those in other
industrial regions, and this caution plays itself out in the media and the activities of
pressure groups. Governments feel an obligation to respond to this, and to enact
regulations such as the ban on the use of hormones in beef production even though
scientific advisory panels have concluded that there is no risk to human health from
hormones if properly used. The question as to whether the trade system can tolerate
regulations that take into account subjective or “irrational” consumer demand fears is
one of the most contentious issues in trade policy between the US and the EU.
Developing countries also have an interest in the application of science-based
SPS rules. As those countries that rely heavily on tourism know, consumer confidence
can be fickle and requires constant attention. Many developing countries have
achieved a sound reputation as suppliers of quality foods and agricultural raw
materials. Any attempt by developing countries to weaken or request exemption from
the rules that instill confidence in high income consumers could be disastrous. So long
17
The Decision on the Application and Review of the Understanding on Rules and Procedures
Governing the Settlement of Disputes (the Dispute Settlement Understanding) provides a
framework for the better enforcement of panel rulings. To block the adoption of a Report from a
Panel now requires consensus. Any party may appeal the ruling (on issues of law), but the
Appellate Body Report is final.
18 The Dispute Settlement process has fared less well, as both the beef-hormone and banana cases have
yet to lead to WTO-compliant policy changes. For a discussion of the way in which the SPS
Agreement has worked see Roberts (1998).
31
as best practices are adopted in growing and handling food, the market will continue
to welcome goods from all countries. But some developing countries may need
assistance in meeting these standards. In that case the developing country support for
the SPS Agreement will be premised on mechanisms that allow those countries to
upgrade their own SPS regulations internally to meet the high levels required by the
global market.
One new issue in the area of food safety and environmental impacts is that of
the issue of licensing of transgenic plants, usually called Genetically Modified
Organisms (GMOs). This issue could be the “ghost at the banquet” at the start of the
new Round Though not yet the subject of a trade conflict, the slow pace of licensing
GMOs in Europe and the reluctance of European consumers to accept food products
containing GMOs is about to clash with the rapid adoption of the new seeds
containing the biotechnology in the US, Argentina, Canada, Brazil and Mexico. The
prospect of a segmented market for corn, soybeans and their derivatives (including
livestock feed and meat from animals which have consumed such feed), with
countries choosing between "American" and "European" food standards is real. The
resulting trade conflict could significantly impact on the climate of the agricultural
talks.
Developing countries have in many cases already shown a concern for the issue
of GMOs, in particular at Cartagena at the time of the debate on the Biosafety
Protocol which would have come under the Biodiversity Convention. This Protocol
aimed to ensure for each country the right to ban imports of GMOs and products that
contain modified plant material. This would have provided a direct challenge to WTO
procedures, in particular the SPS Agreement. The fate of the Protocol will be decided
sometime next year: the controversy will undoubtedly spill over into the agricultural
talks.
The issue of biotechnology is however more complex that the licensing of
imports or domestic use of GMO products. It also relates to the concerns about market
structure and intellectual property, as discussed below, as well as to the whole issue of
new agricultural technologies and their role in agricultural development. Many of the
proponents of the adoption of GMOs argue that this is the best way to increase yield
and reduce the use of chemicals in agricultural production. In the absence of new land
for agriculture, biotechnology offers the possibility of designing plants to make better
use of the current farm resources. Opponents are wary about the structural
implications of the adoption of the technology and its effect on small farmers and low
income countries. The question of how the major protagonists choose to deal with
GMOs, as a “narrow” SPS issue or as a sui generis topic requiring a whole new
32
agreement, may have considerable bearing on the progress of the agricultural
negotiations as well as on the future spread of the technology.
4.2 Regionalism
The most significant challenge to the WTO comes from the success of a parallel
means of trade liberalization, that within regional trade pacts.19 The recent growth of
regionalism, unlike many of the earlier regional trade pacts has significant
implications for agriculture. Many regional trade agreements have in the past left
agriculture out of the free-trade provisions, in deference to the political sensitivity of
the sector and the potential conflict with domestic policy objectives. The situation is
rapidly changing. NAFTA, MERCOSUR, the Andean Pact, CARICOM and the CER
between Australia and New Zealand all include agriculture in their free trade
provisions (Josling, 1997). The countries of Central Europe have included agriculture
fully in the Baltic Free Trade Area (BFTA) and in a more limited way in the Central
European Free Trade Area (CEFTA)(Josling, Tangermann and Twesten, 1998). The
Europe Agreements which aim for free trade between the Central and Eastern
European countries on the one hand and the EU on the other hand also include
agriculture albeit with some temporary quantitative limits. In Asia the process has
gone less far: the countries of ASEAN have been unwilling to incorporate agriculture
as an integral part of their free trade area (AFTA), though some commodities are
included. To the extent that these agreements do include agriculture, this gives them a
new significance in the process of liberalizing agricultural trade and necessitates some
coordination with the multilateral process.
The fact that the new brand of regional trade agreement includes agricultural
trade within the bloc is clearly a mixed blessing. It carries with it the danger that high
cost production will be sheltered and supported in these trade blocs, as Europe’s
regime of free trade within the EU has done. But this “trade diversion” arose because
of the high level of support and protection at the border. 20 Today’s new regional blocs
seem to have learned the lesson. In other blocs trade creation seems to have been the
dominant effect, helped in large part by the domestic policy reforms which have gone
19
20
Regional trade agreements include free trade area, in which each country keeps its own tariff
autonomy, and customs unions, where a common external; tariff is agreed. Preferential trade
agreements, which do not require reciprocity, are discussed in the next section.
Trade diversion occurs when a country imports goods from a high-cost source as a result of a
preferential or free trade arrangement. The importing country pays too much for the product, and
more competitive suppliers in other countries are denied sales.
33
hand in hand with the regional trade pacts. Freer regional trade in agricultural
products seems therefore in most cases to be consistent with, and hence a step
towards, global trade liberalization. The only major qualification is that each member
of a Regional Trade Agreement (RTA) should reduce tariffs on third-country
agricultural trade so as not to increase regional preferences and hence generate trade
diversion. This could either be done jointly through agreement with other members on
external protection, in the case of a customs union, or independently through
unilateral liberalization in the case of a free trade area. Multilateral negotiations
become the best way to keep down the level of protection against non-partner imports
so as to avoid trade diversion. If both internal and external protection is progressively
removed the regional and the multilateral paths in effect go hand-in-hand toward the
same goal (IPC, 1998).
The potential conflicts between regional and multilateral trade agreements
urgently need to be resolved. In the case of agriculture the next WTO round should
integrate global and regional liberalization processes. This could be done by
establishing targets for multilateral agricultural trade liberalization that are consistent
with those already announced within the regional and supra-regional groups.
Negotiations could even be facilitated by the adoption of collective positions by
regional blocs, though one would need to avoid the proliferation of different states in
the negotiations themselves. The multilateral talks could incorporate these supraregional negotiations as ways of achieving the global targets and focus on the
relationship among such groups and between those groups and outside countries.
From the perspective of developing countries, one of the issues that needs
clarification is the relationship between the 1979 Enabling Clause21 and the general
GATT rules governing regional trade arrangements (GATT Art. XXIV). It is often
said that the Enabling Clause relaxes the general GATT conditions for creating free
trade areas or customs unions that include only developing countries.22 In particular, it
is thought that for RTAs among only developing countries the Enabling Clause drops
the condition that “substantially all the trade” is covered; relaxes the requirement that
trade among the members of such RTAs is completely free; and supplements the
condition that RTAs must not raise the average level of protection against excluded
countries by requiring that the RTA among developing countries not constitute an
impediment to MFN tariff reductions or create undue difficulties for trade of other
21
Decision of 28 November 1979 on “Differential and More Favourable Treatment, Reciprocity and
Fuller Participation of Developing Countries” (GATT BISD 26S, p. 203 ff.).
22 See Finger and Winters (1998).
34
countries. However, the legal status of the Enabling Clause in relation to GATT Art.
XXIV is not clear. The Enabling clause does not mention Art. XXIV. It therefore is
“unclear whether the Enabling Clause applies in situations where that Article does
not, or affects the terms of application of that Article, or represents, for developing
countries, a complete alternative to the Article. Indeed, views differ as to whether the
Enabling Clause provides an appropriate basis for all regional arrangements among
developing countries or, as some governments maintain, was not intended to cover
arrangements of major significance that, up to 1979, would have been handled under
Article XXIV.” (WTO Secretariat, 1995, p. 18).
The Uruguay Round has not changed the legal provisions in this regard.
However, it is not really clear whether it is in the interest of developing countries to
have the applicability of the Enabling Clause to RTAs among themselves confirmed
in the next round of WTO negotiations. If regional arrangements are seen, as argued
above, as one road towards global trade liberalization, then it does not help to have the
requirements to be met by RTAs relaxed for developing countries. Moreover, as a
growing number of RTAs include both developing and developed countries, and as
several RTAs begin to overlap through simultaneous membership of individual
countries in more than one RTA, special rules for RTAs among developing countries
become less and less.
4.3 Preferential Systems and the Lomé Convention
Preferences have been a part of the trade system for several decades, with little
discussion. This changed with the recent elevation of the EU's preference system to
the highest level of trade diplomacy. The overall role of development-oriented
preferences for agricultural products is likely to be considered in the Millennium
round. For a long time, preferential treatment of imports from developing countries,
allowed in the GATT as an important exception to the two fundamental principles of
most-favored nation treatment and reciprocity. Institutionalized in the form of the
Generalized System of Preferences (GSP), it played an important role in commercial
diplomacy between developing and developed countries. However, the situation has
changed markedly. Near-elimination of industrial tariffs in developed countries has
greatly reduced the role that trade preferences can play as an instrument to overcome
cost disadvantages of countries that are still at an early stage of industrial
development. Moreover, the benefits of trade preferences have tended to be
35
concentrated on a small number of strongly export-oriented developing countries
whose economic growth allowed them to graduate from the ranks of GSP
beneficiaries. In addition, as preferences under the GSP are unilaterally determined by
the developed countries, they can and do attach strings to them, such as the adoption
of given labor standards, cooperation in drug control, and other policy conditions.23
Not all participants in the international trading systems, though, see the role of trade
preferences declining in the same way. It has been observed that “trade preferences
are fading away as part of multilateral trade liberalization, but they remain as part of
development folklore” (Robertson, 1999, p. 59). Quite apart from the economic
effects of trade preferences, many commentators argue that insistence on nonreciprocity may not be in the long-run interest of developing countries as it tends to
undermine their influence in the multilateral trade regime.
Contrary to the situation in industrial products, in agriculture many tariffs are
still extremely high in the developed countries, not the least on products of particular
export interest to developing countries. Hence there are still potential economic
benefits that can be derived from preferential access to developed countries’
agricultural markets. However, the same protectionist sentiments that lead developed
countries to erect the high trade barriers also get in the way of them granting generous
preferences for agricultural imports from developing countries. As a result,
agricultural products have not been important elements of preferential treatments
under the GSP schemes of most industrialized countries. In particular, temperate zone
agricultural products have been largely excluded from preferential treatment, or
received preferential treatment only within tight quotas. For tropical products, on the
other hand, developed countries’ MFN tariffs are zero or relatively low anyhow, and
therefore preferences do not help very much.
Under these conditions, a strategic question for developing countries is whether
the “negotiating capital” they have is better used in WTO negotiations on further
reductions of MFN tariffs in agriculture or in attempts at deepening and expanding
tariff preferences under GSP schemes. Though the appropriate response to this
question may differ from case to case, overall the MFN route is probably the more
promising approach. GSP schemes will probably continue to be unilateral policies,
extended on a “voluntary” basis by the developed countries concerned, and differing
among the importing countries. Negotiating better agricultural preferences in these
schemes is bound to run directly against the agricultural lobbies in the individual
developed countries, who can always argue that their respective country should not do
23
See Roessler (1998).
36
what other developed countries fail to provide. In WTO negotiations on MFN tariff
reductions, on the other hand, all countries are in the same boat, and developing
country exporters can join forces with agricultural exporters from developed
countries, as has happened in the Cairns Group. Tariff reductions are therefore more
likely to be achieved in multilateral WTO negotiations, rather than in country-tocountry negotiations on GSP schemes.24
Moreover, the international trading regime for agricultural products is gradually
moving towards a situation of lower tariffs. To reach relatively free trade in this area
will still take some time. But assuming that the Millennium round can agree on
another 36 percent reduction of agricultural tariffs (from their pre-UR level), then
only 28 percent of the original tariffs will be left after the next implementation period,
and one more round of WTO could suffice to eliminate many agricultural tariffs
altogether. If and when that happens, agricultural preferences will largely have lost
their value, as most industrial preferences have lost their value already. Hence, efforts
to improve agricultural preferences should be seen as investing limited negotiating
capital in a business that will not be very profitable in the long run. Making use of any
significant agricultural preferences that could potentially be obtained in the short run
requires adjustments in domestic production and market structures in the developing
exporter countries concerned, and these adjustments may well turn out to have been in
sub-optimal directions in the long run when preference margins evaporate because of
MFN tariff reductions. From this perspective the more promising approach probably
is to work towards larger MFN tariff reductions in the next round of WTO
negotiations on agriculture. This is not to say that existing agricultural preferences
under GSP schemes should be eliminated. As a matter of fact, it may be worthwhile to
explore in the Millennium round the possibility of binding these so far unilateral
preferences in the WTO.25
Perhaps the most dramatic action of the WTO dispute settlement panels to date
has been a result of the dispute over banana exports to Europe. A panel found that
several of the mechanisms used to allocate banana imports under the EU’s regime of
quantitative restrictions violated international trade rules. The dispute has put banana
exporting countries at odds with each other and led to the (mistaken) view in some
countries that the WTO itself is a threat to the economies of small, low income
nations which are heavily dependent on the crop for export earnings. The banana issue
24
There may be an attempt to harmonize and multilateralize the current GSP schemes, though it is not
clear whether they would be more generous in the area of sensitive agricultural goods.
25 See the proposal for a WTO Preference Scheme by Oyejide (1997).
37
is the most contentious trade policy issue in the area of preferences and will go some
way to influencing future trade relations between the ACP and Europe, the US, and
Central America. Whatever emerges from the resolution of this conflict will certainly
change markedly the assumptions on which the preference systems such as the Lomé
Convention are based.
The same fundamental considerations, of course, also apply to preferential
schemes for selected groups of developing countries, such as trade preferences
granted under the Lomé Convention, as to general preference schemes. However,
there is an extra reason for skepticism regarding the longer run usefulness of trade
preferences granted by developed countries under such closed-shop schemes, because
they are likely to change markedly in the next decade. The Lomé Convention itself
has been declared to be in contravention of international trade rules. The first banana
panel raised the issue of the legality of the Convention under the GATT. The
Convention could hardly be justified as a part of a Free Trade Area, under Article
XXIV of the GATT as it was non-reciprocal. ACP countries did not have to grant
duty-free access to the products of Europe. Non-reciprocal preferences are allowed
under the Enabling Clause for giving advantages to developing countries. But the
justification of the Lomé Convention as a manifestation of “special and differential
treatment” in favor of developing countries, encouraged by the GATT, was rendered
doubtful by the fact that many developing countries (in Asia, mostly) did not qualify
for ACP assistance and trade benefits. In the days before the WTO this conflict
between the global trade rules and the trade and development policy of the major
players was largely ignored. The reports of panels were merely put on one side if the
country whose policy was criticized chose to block adoption. Now, with a clearer set
of rules and a stronger procedure to enforce them, the conflict can not so easily be
ignored. The Lomé Convention has been granted a waiver until the year 2000 from
the obligation to conform with the WTO rules. If such a waiver is still required after
that year it will have to be renewed annually. This will increase the pressure to bring
the relationship between the EU and the ACP into conformity with global trade rules.
The approach considered as the longer run alternative to non-reciprocal
preferences under the Lomé Convention is a free trade arrangement between the EU
and the ACP countries, or a set of such arrangements between the EU on the one hand
and individual groups of ACP countries on the other. As discussed in the previous
section, agriculture can no longer be excluded from such regional arrangements, and
hence it is likely that one day in the not too distant future the agricultural preferences
that in the past were granted under the Lomé Convention will be replaced by
reciprocal regional preferences negotiated under free trade arrangements. This does
38
not guarantee, though, that access to EU agricultural markets for the ACP countries
will be wide open. The history of recent RTA negotiations conducted by the EU,
including those with the countries in the Mediterranean basin, South Africa and
MERCOSUR, has provided ample evidence of the EU’s resistance to opening up its
borders for agricultural imports from its RTA partners.26 However, it is difficult to
imagine that any successor arrangement(s) to the Lomé Convention could include
conditions for access to EU markets less beneficial than those provided under the
Lomé Convention. In that sense, even if the result of the ongoing negotiations
between the ACP states and the EU is some form of extended Lomé IV-type
arrangements for an interim period should be, anything agreed on agriculture in these
negotiations is likely to be a stepping stone for future RTA negotiations between the
ACP countries and the EU.
The same considerations that were suggested above for agricultural preferences
under GSP schemes apply to the specific agricultural preferences granted by the EU to
the ACP countries. In the longer run any such preferences will lose value as
preference margins will inevitably be eroded by MFN tariff reductions to be agreed in
the next rounds of WTO negotiations. However, in the case of preferences agreed
under RTAs, such as those that will one day replace Lomé Convention type
preferences, one other distinction between preferential and MFN tariff reductions
should also be kept in mind. Given that more and more of agricultural trade will have
to be included under rules as disciplines on free trade arrangements are tightened , the
EU will find it increasingly difficult to exempt significant parts of agriculture from
trade liberalization within its various RTAs. Free trade within the RTAs, however,
tends to undermine the sustainability of high levels of protection as traditionally
provided by the CAP. Hence, negotiations on reducing agricultural trade conditions
barriers within RTAs may well trigger further reductions in the EU’s MFN tariffs on
agricultural products. Indeed, the growing importance of RTAs and the need to
include agriculture more fully in them is now often cited as a reason to engage in
further reforms of the CAP. Thus the ACP countries would indirectly contribute to the
process of liberalizing the EU’s overall agricultural regime by pushing hard for
further EU concessions on agricultural imports from ACP countries in the context of
post-Lomé RTAs.
Which particular agricultural products are the most interesting candidates for
further preferential treatment by the EU vis-à-vis the ACP countries is a matter of
26
For an analysis of agricultural preferences provided by the EU in the framework of the EuroMediterranean Agreements, see Tangermann (1997b) and Grethe and Tangermann (1999).
39
quantitative analysis, which will be provided in a future report following-up on this
paper. At this time, comments can only be offered at a more general level, relating to
two sets of issues, the implementation of preferential TRQs, and the treatment of the
Lomé provisions for sugar and beef in the context of CAP reform.
Where preferences for ACP agricultural exports to the EU are constrained by
quotas, and where these quotas are fully utilized, the licenses used to allocated such
quotas carry an economic value, known as the quota rent. The economic benefit
represented by the quota rent in most cases flows to the trader who receives the
license to conduct trade under the preferential quota. In the EU it has generally been
the practice to have such licenses issued by EU authorities, to traders based in the EU.
This is not specific to trade with the ACP countries but is the case in EU trade with all
third countries, wherever TRQs are used. As a result of this EU practice, quota rents
and hence much of the benefit resulting from the trade preference generally accrue to
EU citizens, even though the beneficiaries of the preferential trade arrangement
concerned are supposed to be the exporting country.27 ACP countries have good
reason to argue that this is not appropriate, and hence that the regime should be
changed such that these economic benefits flow to them.28 One way to achieve this is
to agree with the EU that licenses for trade under preferential quotas are in future
issued by the exporting ACP countries concerned, to ACP traders, rather than by the
EU. Where preferential TRQs are not country-specific but apply to the ACP countries
as a group, allocation should be done by a joint ACP institution, through an
auctioning process.29 The auctioning fees would then accrue to the ACP community
and could be used to finance joint development- or trade-related activities.
Sugar and beef are the two products under the core CAP regimes for which
given ACP countries have received the most financially valuable preferences.30 The
value of these preferences, though, depends directly on the level of price support
granted to EU farmers. The EU is in the process of reforming the CAP, and has
decided, under the Agenda 2000 program, to reduce the level of price support for beef
by 20 percent in the near future. The EU sugar regime was not included in the Agenda
2000 decisions, but will undergo increasing pressure for reform as well in the years to
come. As a minimum, some of the parameters of the EU sugar regime, possibly
including the level of price support, will have to be adjusted very soon because an
27
See Tangermann (1997b) and Grethe and Tangermann (1999).
See McQueen et al. (1998).
29 ibid.
30 Bananas also fall under a common domestic regime, though this is one that was put together in the
context of ensuring market access for overseas countries.
28
40
unchanged policy will not be consistent with the EU’s export subsidy commitments
under the URAA. Any reduction of EU domestic price support in these two markets
will directly reduce the economic benefits that currently accrue to the ACP exporters
concerned.
In the EU the position has been adopted that farmers’ income losses resulting
from price cuts under the CAP should be compensated, more or less fully, through
direct payments. Hence such payments were introduced when cereal support prices
were cut under the 1992 MacSharry reform of the CAP, and price cuts under Agenda
2000 will also be accompanied by direct payments to EU farmers. For the ACP
countries currently benefiting from sugar and beef preferences, it is tempting to
suggest that they should also be compensated through payments from Brussels. There
is no reason why this option should not be explored in negotiations with the EU.
However, the sugar case appears more promising in this regard than that of beef. This
is because the Sugar Protocol under the Lomé Convention provides for guaranteed
prices on ACP shipments to the EU, while in the case of beef there is only an indirect
and informal relationship between EU price support and export revenue of ACP
exporters, working through the market price mechanism.
As mentioned above, the banana issue is likely to exert a major influence both
on the attitudes of countries toward preferences and on the mechanisms which will be
suggested for modifications to those aspects of trade policy. There will be an attempt
to resolve the issue, at least on a bilateral basis between the US and the EU, before the
Seattle Ministerial. One solution under consideration would entail moving to a simple
tariff for all bananas entering the EU, at a higher level than that currently charged on
imports from Central America but with free entry of ACP bananas unconstrained by
quotas. This solution would be defensible under the WTO and consistent with the
trend in agricultural policies towards bound tariffs rather than quantitative restrictions.
But it may not be possible to move quickly to such a system. In the meantime quotas
are likely to continue and the focus will be put on the way in which the licenses (and
hence the quota rents) are allocated. In this connection, it could be advantageous for
ACP countries to push for country quotas which can be distributed (or sold) by the
exporting country government rather than the current allocation of licenses to firms
based on past sales.
41
4.4 Measures for Least-Developed and Food-Importing Countries
During the Uruguay Round negotiations, concerns were voiced that the
agricultural trade reforms to be agreed might result in higher world market prices for
food, lower surpluses on developed countries’ domestic markets and reduced stocks
and that these developments might threaten food security in a number of developing
countries. Such concerns were recognized in the Ministerial Decision on Measures
Concerning the Possible Negative Effects of the Reform Programme on LeastDeveloped and Net Food-Importing Developing Countries adopted at Marrakesh. The
Ministerial Decision was intended to establish mechanisms to ensure that the effects
of the URAA did “not adversely affect the availability of food aid at a level which is
sufficient to continue to provide assistance in meeting the food needs of developing
countries”. However, rather than adopting any quantitatively defined commitments on
food aid, the Ministerial Decision essentially provided encouragement to the activities
pursued under the Food Aid Convention. It also called for technical and financial
assistance to the developing countries concerned; for differential treatment in favor of
least-developed and net food-importing developing countries in any agreement on
agricultural export credits; and for improved access by these countries to financing
facilities provided by the international financial institutions, in order to help them to
finance normal levels of commercial imports.
Discussions about implementation of the Ministerial Decision have kept the
WTO Committee on Agriculture busy in many of its meetings. However, it is less
clear whether the Ministerial Decision has had any noticeable effect on actual
assistance provided to the developing countries concerned, through food aid or in
other forms. The minimum annual contributions of food aid under the Food Aid
Convention, which stood at 7.517 million tonnes of grains (wheat equivalent) under
the 1986 Convention, were reduced to 5.35 million tons under the 1995 Convention.
Actual shipments of food aid, which amounted to 9.66 million tonnes per year on
average in the period 1990/91 to 1994/95, declined to 6.13 million tonnes per year on
average in the period 1995/96 to 1997/98.31 The most recent Food Aid Convention,
entering into force on 1 July, 1999, has further reduced the minimum annual
contributions of cereals, to 4,9 million tonnes, though other foods have now also been
included, with a value of shipments equivalent to 130 million. Under the new
Convention, contributions can also be expressed in value, rather than in quantity
31
Data are from an unpublished document on actions taken within the framework of the Ministerial
Decision provided by the WTO Secretariat.
42
terms. This could add to the tendency for shipments to be the smaller the higher world
market prices are.
This is not the place for a discussion of the merits and drawbacks of food aid.
However, as long as food aid is requested by developing countries and provided by
developed countries, one consideration should be that it is reliable, and in particular
that the quantities provided are not inversely related to world market prices for food.
Unfortunately this cannot be said about food aid flows in the past. There was a clear
tendency for food aid to be the lower the higher were world prices. As it happened,
world market prices for cereals increased sharply shortly after the conclusion of the
URAA. This had probably little to do with the results of the Uruguay Round.32 In any
case, in that period food aid would have been more useful to food-deficit countries
than in earlier periods of lower world market prices for cereals. However, rather than
increasing, food aid shipments declined after the Uruguay Round.
It is difficult to see what could be done about the tendency of food aid
shipments to be lower the higher world market prices are for cereals, as long as donor
countries are unwilling to commit to larger minimum shipments under the Food Aid
Convention. However, there may be a close relationship between willingness of fooddeficit developing countries to support further liberalization of international
agricultural trade on the one hand, and guaranteed access to food aid at time of
particularly high world market prices on the other hand. Thus firmer commitments of
the developed countries not to reduce food aid shipments in periods of high world
market prices could be an item on the agenda for the next round of WTO negotiations
on agriculture.
32
The price rise after the Uruguay Round may have echoed policy responses that had anticipated the
outcome of the Round. In particular, some countries (not the least the EU) appear to have run down
their surplus stocks through subsidized exports before the end of the Uruguay Round, so as to have
more breathing space to deal with new surpluses after the export subsidy commitments entered into
force. As a result, cereal stocks were at a historical low when the implementation period of the
URAA began. This may well have contributed to the price peaks on world cereal markets
immediately after the conclusion of the Uruguay Round, though fundamentally the price rise was
caused by production shortfalls in several parts of the world at that time.
43
5 The “Related” Issues
The globalization of the food and agricultural sectors that has taken place over
the past two decades has changed the policy environment in crucial ways.
Globalization brings new challenges and requires new policy approaches, both
domestically and internationally. Moreover the old policies often get in the way of
those that are needed for the new food system. Nowhere is that more clearly seen than
in the area of trade policies.
The main focus of international trade policy has traditionally been the
conditions of access into markets. As globalization has progressed so the scope of
trade rules has expanded. The new trade policy environment has a number of different
elements. These include the health, safety and environmental rules that ensure quality
and acceptability in discriminating markets; codes for the treatment of foreign direct
investment; and the codification of the rights granted to the owners of intellectual
property. To flag the relevance of these issues for the next round of agricultural
negotiations, some "new" facets of agricultural trade policy arising from globalization
are very briefly discussed below.
5.1 Intellectual Property
Among the newer aspects of international trade policy is the setting up of rules
regarding intellectual property. The emergence of international rules predates the
GATT Uruguay Round, with the establishment of the World Intellectual Property
Organization (WIPO), but there was insufficient incentive for countries without
intellectual property protection to join. But the breakthrough came in the Uruguay
Round when the negotiating countries signed the Trade Related Intellectual Property
(TRIPS) agreement. TRIPS brought a degree of harmonization to the disparate
treatment of patents, copyrights and trade-marks in various trading countries.
One important area of the food and agricultural sector where the rules on
intellectual property are significant is in the input industries. The seed sector, in
particular, has already made use of such international facilities to try to reclaim some
revenue from farmers. The ability to patent plant varieties has been a controversial
topic for some years. Now one has the possibility to patent particular manipulations of
genetic material that are the fruits of biotechnology. This would give a much greater
chance for companies to license new varieties to others to plant. Though plant
breeders rights have been recognized since the 1930s in the US, it has proved
44
impossible to patent improvements that come through selection in the field (landrace
crosses) and not easy to see the justification for doing so. But when the improvement
comes in the laboratory, as a result of using particular genetic material in a biotech
process, the pressure for and the feasibility of restricting unlicensed use increases.
This is of concern to those who fear that the highly concentrated seed industry
could extract considerable profits from farmers world wide, as they would have to pay
from season to season for planting even their own retained seed. Many developing
countries have already expressed their worries on this score, and farmers have not
been slow to voice their own fears. For continued progress in this important area of
agricultural technology it is imperative that some agreement is reached which would
allow research to continue and at the same time avoid the possibility of excessive
rents from the ownership of intellectual property vested in natural materials.
5.2 Competition
It seems plausible that a global trade system needs global competition laws.
This conclusion has had little effect so far on trade policy discussions. Whilst some
countries are calling for full scale negotiations on international competition policy,
others maintain that the most you can do is to make sure that each trading country has
its own anti-trust policy in place. The minimalist approach is unlikely to be
satisfactory in the long run. Trade itself is a stimulus to competition: the best policy
for curbing misuse of market power in any one country is an open trade system. But
the very openness of the trade system allows large firms to develop market power in
the world market. Global competition policy will eventually be more about market
power in world markets than about enforcing competition policy in each national
market.
The issue of competition also is at the heart of another potential problem facing
the agri-food system. State trading can lead to the lack of contestable markets,
denying consumers of the benefits from competitive prices and levels of service.
Importing parastatals have no need to keep margins down, and may not purchase the
qualities that consumers would demand. Without the threat of failure the incentive to
innovate is missing. Export agencies have often lagged in selling techniques, failing to
develop new markets and new uses for products. In some cases they pay farmers less
that competitive prices for their products and impose higher than necessary
distribution costs on the sector. The question which such agencies pose is whether
private or cooperative enterprises could perform the functions of the parastatal in a
45
more efficient manner? If so, the problem remains how to devise international
competition rules which would encourage such private activities without losing sight
of social responsibilities?
Concentration of economic power is not confined to public agencies given
monopoly rights in importing or exporting. Private firms can also have significant
market power to influence prices. Privatization itself can lead to market dominance by
a few private firms. Should there be any rules relating to the use of market power in
international markets? What are the dangers that the rules are trying to prevent? Is the
problem the withholding of supplies to raise the price of commodities? This seems
relatively unlikely in the case of basic foods, but could happen with vital agricultural
inputs. . Or is the problem one of dumping and market disruption? The incorporation
of anti-dumping rules in a set of more comprehensive competition regulations has
been suggested by many trade economists.
Whatever is agreed in the area of competition policies in the next round of WTO
negotiations will have significant implications for global agriculture. Developing
countries may have to play the role of watchdog in the area of competition policy. The
majority of large firms, in agriculture and food as in other areas, are still based in the
developed world. Concentrations of market power will therefore always have a
tendency to be of benefit more to industrial countries. But domestic markets are often
less than competitive in developed countries. A framework for competition policy
thus could help developing countries in two respects: improving market structure at
home and avoiding abuse of market position by others in world markets. Without such
a framework, many of the benefits of an open trade system may be elusive.
5.3 Investment
The global system, whether in agri-food products or in automobiles or
computers, depends on investment. Capital accumulated in one country is invested in
others, to the mutual advantage of both economies. But global investment also
requires rules, and these are not yet fully developed. Several issues are at stake in the
area of investment. Among these are the assurance by the investor that the assets
owned by foreigners will not be expropriated; that earnings from investments can be
taken out of the country; and that there will not be undue restrictions (such as
requirements to use domestic inputs or to export a share of outputs) on the foreign
operation. To some extent markets already send signals about the requirements for a
favorable investment climate. Firms have alternatives, and countries that maintain
46
policies that are not investment-friendly may lose the opportunity to participate in the
global division of labor regardless of international rules.
The development of a global food and agricultural sector has been largely
stimulated by foreign direct investment (FDI). This has enabled developing as well as
developed countries to establish modern food processing and retailing sectors. Supply
chains, reaching from the raw material producer to the ultimate consumer, have been
set up which cross borders and continents. If developing countries are to participate
fully in this international food market the conditions have to be attractive for
investment. The global reach of food retailing and processing requires the assurance
that facilities abroad will not be expropriated and that undue restrictions are not
placed on the repatriation of earnings. Supply chains also need the environment of
predictability that comes from an open investment policy.
Some start to the forging of an investment policy was made in the Uruguay
Round, with a limited agreement on Trade Related Investment Measures (TRIMS).
More recently, the OECD countries have been trying to work out a Multilateral
Agreement on Investment (MAI). At present the MAI is moribund, a victim of both
bad publicity and unfavorable reactions from the non-OECD countries. It was widely
characterized as a charter for the multinational corporations. But the EU has promised
to raise the issue again for inclusion in the next Round of trade talks. Developing
countries have an interest in seeing an investment regime which balances the interests
of the investor in guarding against undue interference in commercial decisions with
the concerns of the host country that the investment is beneficial in economic and
social terms. The continued growth of the global food industry depends to an extent
on the satisfactory resolution of this issue.
47
6 Conclusions
In assessing the interests of developing countries in the specific agenda for the
new agricultural trade negotiations there are two kinds of questions to ask. The first is
whether the measure contemplated, if implemented by others, has acceptable or
beneficial consequences for developing countries or whether it tends to harm their
interests? The second question, the other side of the coin, is whether developing
countries themselves can accept the same measure applied in their own economies?
Obviously the answer to these two questions may differ. This points up the key
strategic issue for the developing countries as they approach the next round of
agricultural negotiations. How can one support the continuation of desirable reforms
in agricultural trade without at the same time paying a high price in terms of domestic
policy autonomy and the structure of preferential access currently enjoyed.
One traditional way out of this dilemma is through “special and differential
treatment” (S&D). If changes that are implied by a particular measure would be
appropriate for developed countries but less applicable, or difficult to implement, for
developing countries then S&D could be invoked. But there has always been an
implicit cost to S&D, which inevitably shows up in terms of less influence over the
agenda for those countries that choose to opt out of, or delay, certain disciplines. It
may well be the time to redefine S&D to identify a small set of trade policy areas
where developing countries have particular difficulties, and to forego the broader use
of the concept as a way of delaying adjustment. Developing countries are the
emerging markets that developed countries require for continued trade expansion, in
food as in many other goods. Developing countries generally stand to gain from this
process of trade expansion. It may be more advantageous to participate fully in the
trade liberalization, ensuring that the products and markets of interest to developing
countries are included, rather that take advantage of “opt out” provisions which
essentially allow others to set the agenda.
It is apparent that the interests of all developing countries are not alike. The
premise of this paper is that there are enough similarities of interest to define a
"developing country" position on the major issues, even though the importance of
individual issues may differ among countries and regions. The success of any strategy
which is developed will depend on whether such a coincidence of interest exists.
Developing countries will generally benefit from a continued liberalization in
agricultural markets, involving further reduction of tariffs, an elimination of export
subsidies and the tightening of constraints on domestic support in the industrial
countries. Many of the problems of world trade in agricultural products stem from the
48
policies pursued in industrial countries to support commodity prices. Developing
countries have borne the brunt of the instability and unreliability of agricultural
markets. Support for further efforts at reform would be in the general interest of
developing countries.
Developing countries that have not yet completed the reform of their domestic
and trade policies to take advantage of global markets and the decline of preferences
will face a challenge from the continuation of reform. In these cases countries should
seek time to coordinate this reform with WTO commitments. The benefits to the
individual country from the continued improvement of market access and the curbing
of disruptive subsidies are proportional to the extent of involvement in world markets.
Domestic reforms thus play an essential role in the trade negotiation strategy of
developing countries.
Current preferential systems should be reviewed both with a view to deriving
lasting benefit from the access opportunities and with the prospect of inevitably
declining levels of preference. Some erosion of preferences is inevitable, but this will
be offset by the fact that such preferences are most valuable on products where
protection is high (for example, sugar). In such cases the pace of liberalization is
likely to be slow. As the value of such preferences will decline over time it is not
worth expending a large amount of negotiating “capital” in preserving them at current
levels. Settling the issue of the role of preferences in the trade system is essential to
regain the stability needed for investment and growth.
Regional trade agreements offer a parallel trade policy path that should
eventually lead to more open world markets. Developing countries should encourage
the inclusion of agriculture in these agreements and should ensure that external
protection is low enough that significant trade diversion does not occur. The
conversion of current preferential agreements to reciprocal FTAs could be both a way
to resolve the issue of preferences within the multilateral system and of strengthening
regional cooperation and market integration.
Developing countries in the same region (and in particular when members of the
same trade bloc) should consider pooling resources and negotiating positions in
matters relating to agriculture, so as to avoid duplication of effort and underrepresentation at meetings. Developing countries should consider how to make use of
established groups of countries, such as the Cairns Group, to maximize their
effectiveness in the negotiations. If a parallel group of “food importing” countries
were to be formed, it could be useful to agree on a strategy with the Cairns Group.
49
Two or more competing groups of developing countries would effectively limit the
impact on the agricultural negotiations.
50
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