Published: The Financial Express, April 20, 2004,

By Pradeep S Mehta

Agriculture continues the dog the debate at the WTO in Geneva. Following the Cancun debacle, negotiators are locked in to move the agenda forward. There is a 20-yard movement, but it is slow. Therefore, one needs to understand why agriculture trade talks drag all the time.

Agriculture came into the international trading system when the WTO was established in 1995. In 1947, when the General Agreement on Tariffs and Trade (Gatt) was established, trade in agriculture was the last thing on the minds of member countries. They were more concerned about promoting their domestic agriculture sector rather than international trading in farm goods. On the insistence of the US, nations were granted exemption from Articles XI and XVI of Gatt, which meant that they could freely support their farmers through subsidies and domestic support. Hence, in the initial years, “big brother” US was also interested in protecting its own domestic market rather than engage in trade.

The 60s saw a change in the attitude of the US and other countries. This was because of two reasons: first, the US had large stock of foodgrain and when these stocks were offloaded in the domestic market it infuriated farmers, because prices crashed. Second, the entry of the Soviet Union as a major food importer even though it had the potential to be a major food producer. Soviet Union became a major buyer of foodgrain, thus creating a panic over fears of both food shortages and price increases. This alarmed farmers in the US and elsewhere. Consequently, they raised barriers to protect themselves. All this turmoil and uncertainty combined with pressure from the big powers renewed the multilateral efforts to improve the trade rules in agriculture.

When the Uruguay Round was launched in 1986, a group of net-food exporting nations (both rich and poor) demanded the inclusion of agriculture in the negotiating agenda. This group was later christened as the Cairns Group after the name of the Australian island where they met to formalise their club rules. If their demand was not acceded, the Round would have moved far slower than it did. They sought to agree to a list of demands being made by the US and EU, such as intellectual property rights etc.

During the initial years of the UR talks, agriculture remained dormant. It was only after almost 6 years that the conflict between the US and EU, on domestic subsidies, came to the fore. Subsequently, a deal was struck on tariffs, including subsidies, and many of the unfinished items were left for future negotiations. One of the major outcomes of the UR was the Agreement on Agriculture (AoA), which along with the agreement on textiles & clothing were new to the Gatt disciplines. Besides these, three new deals were struck: TRIPs, TRIMs and Services. The farm accord reflected the shared agenda of the US and the non-European grain exporting countries, like the Cairns Group, with the EU and others happy that they were able to postpone the Armageddon.

The AoA, which came into effect from January 1, 1995, focused on three areas: export subsidies, market access and domestic support. The fourth pillar was food and safety standards etc. Article 20 of the AoA mandated the continuation of the negotiations. These began in March 2000 and stocktaking of the advances and proposals took place in March 2001 in preparation for the Fourth WTO Ministerial in Doha in November 2001. The Doha Round, including the agriculture talks, are scheduled to end by January 1, 2005 and the implementation of tariffs and subsidy cuts agreed to in the negotiations would be implemented from January 2006.

However, the time period of concluding the Round now stands extended, due to the failure of the Cancun meet. To define the issues under the AoA, a traffic sign analogy was adopted. Red denoted all subsidies banned from day one, while green was adopted for permissible subsidies. Amber was chosen to define subsidies that would be reduced over time. Another colour, which doesn’t exist in the traffic light system, was used: blue, to define subsidies that are tied to programmes that limit production. However, this system is not that simple.

These boxes meant that while some subsidies will be banned, others might be reduced gradually. All domestic support measures considered production- and trade-distorting fall into the ambit of the amber box. While developed countries are allowed to support 5 per cent of agricultural production, it is 10 per cent for developing countries. The members that have larger subsidies than the de minimis level at the beginning of the post UR are committed to reduce these subsidies within 10 years. The blue box has been put in place to check over-supply of a farm good. The green box subsidies were those that are the least trade distorting and include subsidies on R&D, safety net programmes etc.

As per the UR agreement, rich countries had to reduce their tariffs by 36 per cent and the poor by 24 per cent over the six-year period of 1995-2000, subject to a minimum reduction per product by 15 per cent and 10 per cent, respectively. This was done cosmetically, as tariffs were pretty high in the base year of 1998. It had no significant impact.

Much discussion has taken place regarding the merits and demerits of this agreement and its effect on the developing countries. A major part of these discussions have been regarding Article XIII. The so-called “peace clause”, agreed nine years ago, granted immunity to farm subsidies from being attacked under the WTO’s disciplines, which prohibit action against subsidies under the normal procedure of the Agreement on Subsidies. This immunity provision expired at the end of 2003. This has lead to the incidence of the major developed countries being exposed to the risk of their subsidies being attacked by other countries through formal disputes.

Brazil cast the first stone. It challenged America’s cotton subsidies, arguing that they violate a term in the peace clause that caps subsidies at 1992 levels. According to Brazil, the subsidies provided by US are way above the limit set under the clause. There is also a difference of opinion regarding the expiry date of the peace clause, with US stating that the countries whose accounting was based on 1995, the clause will expire after another six months. Along with two other Cairns Group members: Thailand and Australia, Brazil has also dragged the EU on another case involving sugar. The EU has been charged with subsidising surplus sugar for export beyond its WTO-agreed limit. However, EC has refuted these allegations.

Now that the peace clause, which had kept the WTO members from going after each others’ jugular, has expired, trade pundits predict trade disputes turning into battles. Therefore, it is evident that the major developed countries, the US, EU, Japan and Korea will be very keen to continue with the “peace clause”. Do we see the beginning of a war?