The new WTO Director-General Roberto Azevêdo gave a rather downbeat assessment last week to the WTO Trade Negotiations Committee on the state of play of the texts which are meant to be agreed at the Bali Ministerial Council in early December. In an earlier post I discussed the issues put on the table by developing countries to make up the agricultural element of this Bali ‘mini-package’. These include new rules to deal with underfill of tariff rate quotas, a halving by developed countries of their ceilings on allowed export subsidies, and an exemption for developing countries from regular WTO disciplines on purchases of food products from low-income farmers at government-set prices when used for public stock-holding.
According to the Director-General, the state of play as of 12 November last on these three elements is as follows:
Let’s start with the G33 proposal [on public food security stocks. I have a positive feeling here. We still have one or two areas which are more sensitive, particularly on safeguards, and also on the duration of the work programme. But I get a sense that both sides are working in good faith with a genuine desire to find a solution.
I know this will not be easy. It is an issue of both political and economic significance. But I am not in a negative mood. Every time that we have discussed this issue I have found constructive engagement on both sides. So I am hopeful that we will get there.
Tariff rate quota administration is, unfortunately, a different story. Despite some genuine attempts at convergence, no material progress has been achieved. And this is not just the state of play over the last few days — this has been the situation for quite a while. After several weeks of no movement towards convergence, I am beginning to wonder what we could do even if we had more time to try.
I am also concerned about export competition. It is true that we have made some progress on a number of aspects. But there is still the central issue of whether some kind of down-payment could be required — or, if not, what kind of tangible commitment could be put in place towards making concrete progress in the near future. Again, a big question mark hangs over this issue.
The main focus of the discussions has been on the public stock-holding issue introduced by the G-33 group of developing countries. These countries have traditionally taken defensive positions in the agricultural negotiations (the TRQ underfill and export competition issues were introduced by the G-20 group which has more offensive export-oriented interests).
WTO rules for agricultural trade are required to take their impact on food security into account, as it is one of the non-trade concerns listed in the preamble to the Agreement on Agriculture. However, the intellectual case for the G-33 proposal is weak and the proposal itself has the potential to lead to damaging trade distortions, not least for other developing countries.
It is regrettable that the G-33 proposal, despite being circulated by the WTO secretariat to members as paper JOB/AG/22, remains restricted. While the main proposals in the paper have been well-flagged in the online media, it is an unsatisfactory state of affairs that a key proposal on which delegates have spent months of negotiating time remains formally restricted to the wider public.
Last week, the South Centre, a Geneva think tank which is close to developing country thinking on WTO issues, published a report by a group of eminent persons which set out the intellectual rationale for the G-33 proposal. Unfortunately, this report muddies the waters as to the purpose of this proposal by conflating the role of food stocks as a food security instrument with that of government intervention schemes to stabilise or even guarantee farm incomes.
Existing WTO rules on food security stocks
There are two relevant provisions in the Annex 2 to the WTO Agreement on Agriculture which sets out the requirements for government measures to qualify for the Green Box and thus be exempt from disciplines or ceilings on government expenditure on these measures. They are the rules on public stockholding for food security purposes and the provision of domestic food aid.
The provision on public stockholding for food security purposes sets out the rules governments must follow when maintaining public stocks either for price stabilisation or emergency distribution. To qualify as Green Box expenditure, food purchases by the government shall be made at current market prices and sales from food security stocks shall be made at no less than the current domestic market price for the product and quality in question. If foodstuffs are acquired at administered prices, then the difference between the acquisition price and the external reference price must be accounted for in a country’s Aggregate Measure of Support (this is the so-called Amber Box which covers all significant trade-distorting measures of support). Most developing countries have a zero AMS entitlement and must limit trade-distorting support to their de minimis entitlement of 10% of the value of domestic production (for non-product specific support) and a further 10% for product-specific support (the percentages for China are 8%).
The provision on domestic food aid permits expenditure on subsidising food consumption to be treated as Green Box provided that, when in the form of direct food distribution to low-income households, food purchases by the government must be made at current market prices and the financing and administration of the aid shall be transparent.
Many developing countries make use of guaranteed prices which results in the acquisition of stocks which may, or may not, have a food security rationale. The situation in India, for example, which is the main driver behind the G-33 proposal, is described by Jacoby as follows:
The Government of India … sets minimum support prices (MSPs) at which major food crops are, or at least can be, procured for eventual release into the nationwide public distribution system (PDS). In practice, however, the level of procurement, and thus the extent to which the MSPs are binding, varies greatly by crop and state, and even within states…. The principal foodgrains, rice and wheat, have, in recent years, been the overwhelming focus of government procurement efforts, concentrated in the states of Punjab and Haryana, often for lack of storage capacity and marketing infrastructure elsewhere. By contrast, procurement of pulses and oilseeds has been minimal, as market prices have consistently exceeded MSPs.
Rationale for the G-33 proposal
Public food stocks can play an important role in developing countries, although stock-holding is expensive so alternative measures to address these problems should also be explored. It should be underlined that there is no WTO constraint on governments buying food either to build public stocks or for distribution to low-income households provided this is done at market prices. There are also a wide range of other Green Box measures open to developing countries that can be used to support small farmers and rural development.
The basis for the G-33 proposal, as set out in the South Centre report of eminent persons, is that the current WTO Agreement on Agriculture (AoA) provision limits the ability of developing countries to provide price support to their small farmers because any such price support must be declared as part of the AMS and some developing countries are now close to their AMS or de minimis ceiling.
The problem is compounded because of the method prescribed to calculate a country’s AMS which requires a comparison of the administered price with an external reference price set at 1986-88 world market prices. As both world market and domestic food prices have soared since then, taking these years of low world market prices as the base inevitably inflates the AMS calculation, exacerbating the difficulty for developing countries to stay within this constraint.
So, at bottom, the G-33 proposal is about providing price support to producers. The main element of the proposal is that government purchases with the objective of supporting low-income or resource-poor producers should not be included in the AMS calculation. As an alternative, the G-33 has proposed mechanisms to alter the AMS calculation to achieve the same objective.
Lessons from the CAP
There is a significant emotional charge to the G-33 proposal because, after all, both the US and the EU have provided price support to their producers since the 1930s and, for some commodities, continue to do so. The EU’s continued use of safety net intervention, for example, is reported to the WTO as part of its AMS.
However, the G-33 proposal goes beyond this. In order to acquire public stocks, the government administered price has to set the market price so that farmers are encouraged to produce for the government outlet. Essentially, the G-33 proposal replicates the worst features of Europe’s Common Agricultural Policy during the 1980s when high guaranteed prices for farmers led to the build-up of unsaleable surpluses of grains, beef, milk powder, butter and other commodities which ultimately had to be disposed on world markets with the aid of export subsidies.
There is an inherent contradiction in the use of price support to provide assistance to low-income and resource-poor producers. As every student of the CAP knows, the one thing price support does not do is benefit poor farmers, given they have so little to sell. In India’s case, this argument applies even more strongly as many marginal farmers are net food purchasers who are hurt in the short-run by higher food prices (though the paper by Jacoby argues that this static partial equilibrium story does not hold when labour market adjustments are taken into account; he finds that rising food prices give a strong upward lift to rural wages which benefits the poor rural households and more than compensates them for the higher cost of purchased food).
Part of the G-33 case for their proposal is the need to correct the imbalance in the treatment of subsidies between developed and developing countries. It is indeed indefensible that those countries that were the greatest sinners in the past in terms of providing trade-distorting subsidies to their farmers continue to have the greatest freedom to provide such subsidies under the AoA. However, it is this inequity which the Doha Round is designed to address and, as discussed in this paper, the draft Doha modalities would go a long way to redressing this historic injustice.
The solution is not to level up the playing field by pursuing greater flexibility for developing countries to provide trade-distorting support. Given the changing patterns of world trade the most likely effect will be to damage other developing countries. Pakistan, for example, has broken ranks with the G-33 proposal because it fears the impact on its rice market if India were to offload its expensively-acquired rice stocks on the thin world market for rice.
It appears the current negotiations are focused on a limited interim measure, for example, a peace clause, whereby WTO members would agree not to make a complaint under the dispute settlement arrangement against a country where price guarantees to low-income farmers are linked to public stock-holding for a limited period. The attraction of this interim solution to those countries concerned about the potential distorting effect of this measure is that the measures would have to be explicitly reported and would be closely monitored, making it easier to determine the WTO compatibility of the measures at the end of the interim period. Whether a potential deal along these lines can be agreed will be known within the week at the expiry of the Director-General’s deadline for texts to be ready for the Bali Ministerial by 21 November.