Published:The Financial Express, April 22, 2004

By Pradeep S Mehta

In the last piece, (April 20) I had travelled down the history lane on how the farm accord came into being at the WTO and why it will continue to hold the Doha Round to ransom. The peace clause, negotiated under the AoA (agreement on agriculture) to protect their subsidies, has now come under attack. The European Union (EU) had hoped to get an extension of the peace clause earlier this year at the WTO’s ministerial meet in Cancun, Mexico. But the talks fell apart when the G-20, an ad hoc coalition of developing countries, proved to be feistier than anticipated. Indeed, as one EU official told a news agency: “In this sort of atmosphere, everyone might start throwing things at each other”. Therefore, the main reason for the failure at Cancun was agriculture.

At Doha, it was agreed that the framework for the modalities of the negotiations would be agreed to in 2000, but that did not happen. What raised the hackles of WTO members was the US move just after Doha, which raised domestic support to farmers. Though the increase was within the ceiling on the aggregate measurement support (AMS), the so-called “amber” box, it queered the atmosphere. Added to this, the steel tariffs and increase in other protectionist measures, sapped the confidence of its trading partners.

There are various degrees of protection provided by countries to their agriculture sector. Japan and EU lead the pack, with Japan having an average protection rate of 93.7 per cent. It is this protection in the form of export subsidies and domestic support that is a bone of contention among the WTO members. While India might be having a high bound tariff, the applied tariff is much lower compared to other countries. To kick-start the stalled Doha Round, the WTO members met in Geneva from March 22-26, 2004. Different viewpoints emerged regarding the outcome of this meeting. While it is easy to say that the talks failed, what we need to keep in mind is that agriculture is an extremely sensitive issue. The Committee on Agriculture (CoA) has decided to meet again in April to make another attempt. In fact, the CoA has decided to meet every month for the next three months and have a final meeting in July 2004 to work out a final deal.

There is immense pressure on the EU to bring down agriculture subsidies, while the EU has been refusing to commit a date. This is is not being taken well by the developing countries, like India, who have refused to cut their farm tariffs till subsidies by the developed countries are cut.

Today, the EU faces numerous and intense challenges. A recent spat between EU trade supremo Pascal Lamy and WTO chief Supachai Panitchpakdi is one such instance. In a letter, Mr Lamy said OECD estimates of $300 billion annual producer estimates in its 30-member countries had been arrived at by putting monetary value on tariff protection and price differences between markets, and that the actual subsidies were much lower. He said the honest figure would be around $100 billion for all OECD countries and less than $45 billion a year in the EU. Responding to the debate, the OECD secretariat said the figure of approximately $300 billion included not just direct support, but general services for the farm sector, which include research and development. More importantly, the amount of transfers to producers include support provided through artificially high prices paid by consumers due to high import tariffs and export subsidies. Thus, the total support to farmers in the EU, through both these mechanisms, was $106 billion. Of this, $61 billion came from consumers and $45 billion from taxpayers.

The EU’s Common Agricultural Policy, characterised by government intervention at all levels, consumes about one-half of the total EU budget annually. It continually stimulates surplus production that must be subsidised into export markets. At home, it sharply boosts consumer prices. The CAP soon could become even more expensive as 10 new member countries slated for admission add to the surplus capacity.

In an interesting move, according to the Financial Times, the EU plans to split the opposition, both the Cairns Group and G-20 by weaning away the Mercosur block: Argentina, Brazil, Paraguay and Uruguay, through preferential trade concessions. These countries have been the most ardent adversaries of the EU in farm trade talks. The offer, that is expected to amount to nearly one-third of the total agricultural trade concessions to these four, will be offered as a quid pro quo if the EU can get better market access through lower industrial trade barriers, investment liberalisation and opening of services and government procurement. As the icing on the cake, the EU has promised to go further, if these four refrain from pressing it to liberalise its agriculture. In the words of Jose Alfredo Graca Lima, Brazilian ambassador to the EU: “The Brussels plan was ‘very innovative’ and could ‘legitimise’ the CAP in international trade negotiations”.

This plan will anger other farm exporting nations, such as Chile and Thailand, which belong both to the Cairns Group and G-20, as well as richer countries, like Australia and New Zealand. For them it will be double jeopardy, as it will out-price their own exports to EU and break their united efforts in pushing the Doha Round. Lima feels that both India and China will not have any objections, as they are not exporters to EU. Second, EU’s deal with the four Mercosur countries do not include export subsidies, which will remain on the Doha agenda.

If the EU’s plan succeeds, then it will certainly affect the solidarity of the G-20 and Cairns Group. However, one wonders it will be such an easy task, as there are other considerations too, and the jury is still out. Be that as it may, a decision needs to be made before August because after that EU will be busy appointing its new Commission and US will have its presidential elections, which would again cause a time lapse.

If the EU and US want to move and wrap up the Doha Round, they will have to respond to the G-20’s justified demands. Also, the EU will have to respect the specific commitments with smaller ACP countries which contain preferential but limited access to its market. But then yet again, it is bound to the compromise recently reached on the reform of CAP.

In an interesting move, the EU is planning to split the Cairns Group and the G-20 in one stroke. The US and EU argue that the developing countries need to reduce their tariffs which act as strong non-trade barriers. Countries like India might have high bound tariffs but the applied tariff rate is quite low. Also, developing countries face market access problems, which includes third countries also, due to the subsidies given by developed countries, like Japan and EU. The countries cannot compete with the low prices prevalent in these developed countries and thus lose out on markets.

Also, sometimes developed nations put prohibitive tariffs on products, somewhat like Japan’s 800 per cent import tariff on rice. Sanitary and Phytosanitary measures (SPS) are another non-tariff trade barrier used by developed countries to restrict market access. For instance, in a study by World Bank, it was proved that the standard of aflatoxins (natural contaminants) implemented by EU were much higher than the agreed international standards and will have a negative impact on African export of cereals, dried fruits and nuts to Europe. As a consequence, Africa (nine African countries) incurred a total negative loss of $1070 million, which translates into 1.5 million mandays of jobs. There are similar instances of NTBs that prevent poor countries from expanding their markets.

Keeping in view this state of affairs, we should not expect radical changes in the stance of countries. But even a small change should be seen as a significant step in the survival of multilateralism and the triumph of developing nations.