The Chair of the agricultural negotiations at the WTO, Crawford Falconer, released his latest version of the draft modalities for an agricultural agreement on Friday last 8 February. This is the culmination of a series of intensive meetings since early January among a representative group of some 37 WTO members. Although there are still many square brackets in the text, representing areas where final political agreement will only be reached in the context of an overall trade-off against concessions in the non-agricultural market access (NAMA) negotiations, the text provides greater clarity on many of the more contentious issues that were outstanding in the previous incarnation of these draft modalities last July. These contentious issues include some of particular interest to developing countries, such as issues like the designation of Special Products and the operation of the Special Safeguard Mechanism. In this post, we look at some implications of the draft text for the EU.
The export competition pillar of the text is relatively straightforward for the EU, given that it accepted that export subsidies should be eliminated by the end of 2013 at the Hong Kong Ministerial Council in 2005. However, there is still debate on the phasing of the reductions particularly with respect to the quantity commitments. While it might seem obvious to phase these out in equal annual instalments from the date of entry into force of the agreement, the other alternative in square brackets (which presumably is that pushed by the EU as it would seem more favourable to it) is to maintain a standstill on subsidised export quantities until the end of the implementation period at the lower of either the current applied quantity levels at the date of entry into force or the bound levels reduced by 20%.
The EU will have reduction commitments with respect to Overall Trade-Distorting Domestic Support (“Base ODTS” – the sum of its Final Bound Total Aggregate Measure of Support (AMS), eligible Blue Box support and de minimis support) as well as its Final Bound AMS. The reduction figure for its Base ODTS is left undecided (between 75 and 85% is suggested in square brackets) while its AMS reduction has now been agreed at 70% (this represents a firming up of this percentage which was in square brackets in the July 2007 text). The EU’s own proposal had been 70% in both cases.
Compared to the July 2007 draft, a larger downpayment for both reductions is now expected. The Base ODTS will be reduced by one-third on the first day of implementation as compared to 20% previously, followed by five equal reductions in subsequent years. For the AMS reduction, a downpayment of 25% (in square brackets) is now proposed on the first day of implementation, followed by five equal reductions in subsequent years. No AMS downpayment had been included in the July 2007 draft.
Product-specific AMS ceilings will come into force on the first day of implementation at the average level of support provided to a commodity during the Uruguay Round implementation period 1995-2000, but these ceilings will not be reduced over the Doha Round implementation period.
The cuts in de minimis support (proposed at either 50 or 60%) remain in square brackets as in the July 2007 draft, and it also remains unclear whether these will be effective from the first day of implementation or phased in through five equal instalments. In any case, de minimis support may face bigger cuts if this is necessary to meet the ODTS reduction commitments.
Blue Box support will be limited to 2.5% of the average total value of agricultural production in the 1995-2000 base period and product-specific ceilings will apply, although new is the possibility of larger Blue Box product-specific payments provided there is a corresponding reduction in the equivalent product-specific AMS ceiling.
The EU’s switch from coupled direct payments to the Single Farm Payment has greatly reduced its exposure to these reduction commitments, and research by INRA economists Jean-Pierre Butault and Jean-Christophe Bureau suggests that the lower AMS ceiling should be possible to meet given the CAP reforms which have taken place (though important here will be changes in the way the beef and sugar AMS is calculated to take account of the abolition of intervention prices in these sectors). The ODTS ceiling is likely to be more constraining (particularly if the higher 85% reduction commitment was agreed) but even the 75% figure could prove a squeeze. However, there is some leeway in that the required de minimis reduction (either 50% or 60%) will be less than the EU’ own proposal of 80%, which suggests that it believes there is some headroom here which it could use if necessary to meet its ODTS target.
Market access – the broad outlines
The market access pillar is the most complex of the three, not only because of the need to draft a text which allows for various exceptions to the standard formula cuts, but also because of the need to take into account conflicting developing country interests when it comes to developed country tariff cuts. These revolve around the interactions between tariff escalation, tropical products and preference erosion.
But first to the standard formula commitments. The EU will reduce its tariffs on a tiered basis with four thresholds. There has been no advance on the formulation included in the July 2007 text. Although the thresholds are set (at 20%, 50% and 75%), the reduction commitments within each band continue in square brackets. For the highest band of tariffs above 75%, for example, the bracketed cuts range from 66-73%.
What is new, however, is a commitment to a minimum average cut on final bound tariffs which is suggested (in square brackets) as 54% including and taking account of the more limited tariff cuts for Sensitive Products. This could imply a further discipline on the selection of Sensitive Products (depending on whether the application of the standard formula brings the EU’s average cut close to the 54% target or not), as any lower tariff cut on these products must be offset not only by expanded tariff rate quota access, but also by additional tariff reductions on other products if the EU, in part because of its designation of Sensitive Products, falls below this minimum average cut.
If tariff cuts are required to meet the proposed modalities for tropical products and tariff escalation cuts respectively, then the actual average cut in final bound tariffs could even exceed 54% or whatever target figure is finally agreed.
This minimum ‘average cut in tariffs’ figure appears to be based on the Uruguay Round formula rather than the alternative, and more meaningful, ‘cut in the average tariff’ concept. It is possible to produce a high average cut in tariffs by cutting relatively small tariffs by 100% and much more important tariffs by relatively less (although the tiered formula agreed for the Doha Round will prevent the most blatant exploitation of this loophole which took place during the Uruguay Round). The cut in the average tariff is a much more meaningful indicator of the level of ambition of a country’s tariff offer, and it is a pity that the agreement will perpetuate the economically illiterate indicator of the average cut in tariffs (the AMS concept itself, of course, is another example). (DG Agriculture has produced a useful explanation of the differences in these concepts in its MAP briefs series).
The EU’s own market access offer would have led to an average cut in EU tariffs of 39% but a much bigger cut in the EU’s average tariff on agricultural imports of 47% (as discussed in the MAP brief). The G20 proposal would have led to an average cut in EU tariffs of 52%, so the 54% minimum requirement (after allowing for Sensitive Products) really pushes the EU to the limit of its negotiating mandate.
Market access – the fine print
Not only is the average reduction commitment important, but the pattern of cuts across commodities. This will be mainly determined by the tier in which each commodity’s tariff falls, but it will also be determined by the interaction of the Special Agricultural Safeguard, Sensitive Product status, tariff escalation cuts, tropical product cuts and preference erosion products.
The text remains ambiguous on the future of the Special Agricultural Safeguard (SAS), which plays an important role in adding to protection for butter, sugar, poultrymeat and some fruits and vegetables in the EU. The alternative wordings in square brackets suggest either that the SAS would expire on the first day of the entry into force of the agreement or that the number of tariff lines eligible for SAS treatment should be limited to 1.5% of scheduled tariff lines (this would apparently open up the possibility of allowing more countries to use the SAS as compared to the July 2007 text which would have limited the number to 50% of the existing tariff lines with SAS treatment, as this would appear to rule out extending SAS to new tariff lines).
The debate on the permissible number of Sensitive Product tariff lines goes on. While the 4-6% range mentioned in the July 2007 modalities text remains in square brackets, a potentially significant change is that in the denominator for this percentage the adjective ‘dutiable’ now appears in square brackets. The absolute number of Sensitive Products clearly depends on whether the 4-6% proportion applies to all tariff lines or just to dutiable ones. There was no ambiguity in the July 2007 text – only dutiable tariff lines would be counted. The fact that potentially all tariff lines might be included in calculating this proportion in the new text could allow a trade off to accept a lower headline percentage. Its importance for the EU should not be exaggerated – relatively few agricultural products – perhaps 15-20% – enter at an MFN duty-free bound rate, but it does provide an extra margin of wriggle room in the final negotiations.
The required ‘payment’ for Sensitive Products in terms of increased tariff rate quota access is spelled out in much more detail in this text, although crucial percentages are still enclosed in square brackets. Countries would have the option to deviate from the tiered reduction formula by between one-third and two-thirds of the cut that would otherwise apply. New access opportunities on an MFN basis of between 3-5% (for the minimum deviation) and 4-6% (for the maximum deviation) of domestic consumption expressed in physical units would have to be created. Economists with some justification cringe at the thought of creating new managed trade flows. Indeed, how attractive this trade-off will be to producers of sensitive products in the EU remains to be seen.
An unusual connection is made in this section between Sensitive Products and a country’s maximum tariffs. While the draft text does not prescribe a maximum tariff, if a country has more than 4% of its [dutiable – square brackets in text] tariff lines in excess of 100 per cent ad valorem, then, for its Sensitive Products it must apply a further percentage point TRQ expansion, the exact amount left to be determined. The EU will not be in this category, but this measure seems targeted very specifically against some of the G-10 countries that will continue to have high tariff protection even after this agreement is implemented.
For some commodities, such as beef, rice, sugar and bananas, specific developing country concerns come into play. Apart from beef, these are listed as potential members of the tropical products list, but they also appear on the indicative list of preference erosion products (it must be stressed that both lists appear in square brackets so there is no agreement yet on their composition). The implications of being on either list are contradictory.
The intention is that developed countries will reduce tariffs on tropical products by more than warranted by the application of the tiered formula. Two alternatives appear in square brackets. Either scheduled tariffs less than 25% are eliminated and tariffs greater than 25% are reduced by 85%, or tariffs less than 10% are eliminated and tariffs greater than 10% would be reduced by the top tier tariff reduction (somewhere between 66-73%) except for products in the top tier where the reduction percentage would be the tariff escalation reduction rate increased by 2%. As the tariff escalation reduction rate could be 1.3 times the normal cut in the tier, this could imply tariff cuts of 88% or even more for sugar, rice and bananas.
On the other hand, the desire to limit damage to preference-receiving countries means that developed countries are asked to limit the tariff cuts they make on preference products, which for the EU include beef, rice, sugar and bananas. The suggested modalities here also appear in square brackets, but include either that no tariff cuts would take place on preference products for 10 years, or a more limited commitment that the tier tariff reduction would take place over a period two years longer than normal.
The text observes that, where there is an overlap between products on the tropical products list and the preference erosion list, it is the tropical products provisions which should prevail, but again provision is made for a list of exceptions which remain to be defined. For the EU, where sugar falls will obviously be of critical importance, although the treatment of preference products could have important implications for beef as well.
Finally, the text would require significant changes in the way the EU schedules its agricultural tariffs in its provisions on tariff simplification. It seems to be agreed that between 90-100% of all bound tariffs shall be expressed as simple ad valorem tariffs, and that this change would take effect from the first day of the entry into force of the agreement, with phasing in arrangements for countries with the biggest changes to make. This appears to be contradicted later in the text where another provision states that compound and mixed tariffs shall be converted into simple ad valorem tariffs by the end of the first year of the implementation period. As nearly all the EU’s agricultural tariffs are mixed or compound tariffs, this will represent a substantial overhaul of the EU’s tariff structure. Specific tariffs bear more heavily on low-value exports typically exported by developing countries, so this should be of benefit to developing country exporters, albeit leading to some additional competition for EU producers.
Much work has clearly been done by the negotiators to narrow the significant differences outstanding at the end of last summer. Although some important decisions remain to be taken, the probable outline of a final agreement is now much clearer. The EU has made significant concessions to get to this point, not only in accepting the phase out of export subsidies but in the scale of the tariff reductions it appears willing to accept, in spite of the room for manoeuvre offered by the various exception clauses discussed above . Were a Doha Agriculture Agreement to be signed along these lines, it would have enormous significance for the shape of the EU’s agricultural policy in the post-2013 period.
What remains to be seen, however, is whether the negotiating momentum can be maintained in the next couple of months and, more important, whether either the sitting US President or his successor have any hope of steering an agreement through an increasingly protectionist US Congress.