Published: The Financial Express, July 26, 2004,

By Pradeep S Mehta

Trade negotiators at Geneva are frenetically working out a framework agreement to break the deadlock on agriculture. But when the actual grind starts after the summer break, assuming that the framework is agreed upon this month, the subsidy issue is bound to be contentious. This is evident from the two recent dispute panel reports on sugar and cotton subsidies.

On May 9, the EU trade commissioner Pascal Lamy wrote to all WTO members about their resolve to cut down subsidies and reiterated the same at the WTO public symposium held in Geneva from May 25-27, this year.

On the issue of domestic support, the letter declares piously that the EU would “continue to aim for a very substantial reduction of all forms of trade-distorting subsidisation”. However, the paragraph on domestic support in the letter quietly ends with the observation that “green box” support — the so-called non-trade distorting subsidies — should remain insulated from the purview of any reduction.

Maintaining the distinction between trade and non-trade distorting subsidies is aimed at confusing the developing world. By stating that trade-distorting subsidies should be reduced, Mr Lamy wants to impress the trading community about the EU’s seriousness to reduce subsidies. But by stating that the “green box” subsidies should be kept outside the reduction purview, the EU also wants to retain the right of providing subsidies to its farmers.

The definition of non-trade distorting subsides in the Agreement on Agriculture (AoA) is quite vague and this has been exploited by the developed countries. According to the AoA, a subsidy has to satisfy two conditions to be termed non-trade distorting: That it should be publicly funded and it should not result in providing price support to producers.

The AoA also lays down certain policy-specific conditions to identify whether a particular subsidy is non-trade distorting or not. Most of the subsidies under this category are provided in the form of direct payment to producers which provide income support to the farmers. They are publicly funded; do not have the effect of providing price support and if they satisfy the policy-specific criteria for direct payments given in the AoA, they qualify as non-trade distorting subsidies. For instance, in the US, during 2000-02, direct government payments to farmers increased to $22.7 billion — a jump of 86%.

The non-trade distorting category is also used to provide massive subsidies under various heads like environment, R&D, marketing assistance etc. The sheer magnitude of these subsidies puts a big question mark on their non-trade distorting character. As long as the distinction between trade and non-trade distorting subsidies is maintained, any talk of subsidy re-duction would be a hollow exercise. Under the guise of non-trade distorting subsidies, rich countries would continue to provide huge subsidies to their farmers, which would eventually distort agricultural trade.

On the question of export subsidies, Mr Lamy’s letter mentions that the European Commission is willing to put all its export subsidies on the table, provided other countries exhibit full parallelism on all kinds of export competition. According to some estimates, the total amount of export subsidy being extended by the EC is $3 billion. US trade commissioner Robert Zoellick, in a letter written in January, had mentioned that the US is ready to agree to a date to phase out all export subsidies. Whether countries are able to negotiate an end date for elimination of export subsidies would depend on how countries like Canada, Australia, Japan and the US respond to the EC’s call of “parallelism”.

However, there is a silver lining in the existing situation. The negotiations on agriculture received a shot in the arm when the WTO Dispute Settlement Body recently adopted the preliminary ruling of the panel ruling against US cotton subsidies of more than $3 bn. The significance of this case is that many of the US’ so-called non-trade distorting subsidies, like the direct payment provided under the Farm Security and Rural Investment Act, 2002, have been challenged. Another aspect of the US subsidy programme which was challenged in this case is “export credit”. According to an Oxfam America study, the subsidy component of US export credit programmes amounted to $200 million in 2002. The ruling on the issue of export credit would go a long way in determining the future of tools like export credit to enhance market access of US farm goods. The US’ export credit is one area of export competition on which the EC demands full parallelism so that it can move ahead on reduction of export subsidies. This ruling has contributed to the deficient jurisprudence on farm subsidies in the WTO, though its substantive basis would be known only when the report is made public.

Another important dispute that could have a major impact on the existing agriculture scenario is the Brazil-EC sugar dispute where, once again, the EC’s direct payments to sugar producers and processors is under scrutiny. These two cases lay bare the so-called distinction between trade and non-trade distorting subsidies. Thus, the basic enunciation of these cases is that many subsidies that the EU and US claim to be non-trade distorting actually distort trade.

However, it seems that the developing countries in the ongoing negotiations are missing the point which these cases are illustrating. The proposal made by G-20 on a framework for establishing modalities on agriculture does not talk about farm subsidies. It focuses on market access and Special & Differential treatment.

The developing world should understand that they have a unique opportunity to argue for across-the-board reduction of all kinds of subsidies. This is because of a growing realisation in the EU and US that breaking the deadlock on agriculture is a prerequisite for the success of the ongoing trade negotiations. This is the time for developing countries to collectively demand scrapping any distinctions between trade and non-trade distorting subsidies. Distortions in agricultural trade due to subsidies can be minimised only if subsidies as a whole are reined in.