BY: David Laborde and Eugenio Díaz-Bonilla, IFPRI
Export subsidies for agriculture have been a contentious issue. A particular anomaly in the multilateral trading system framework is that while export subsidies in industrial products have been banned under WTO rules, they are still allowed for agricultural products, including some that are rather industrialized, such as dairy and meat products.
In recent years, the use of export subsidies has been declining but did not disappear as agricultural and food prices increased significantly since the lows of the early 2000s. Those export subsidies were not needed to sell in world markets, and the WTO allowances have been above the levels actually utilized (what sometimes is called “water” in the commitments). With prices recently trending downwards, however, and some projections suggesting further weaknesses in those values, the unused part of the WTO allowed export subsidies (the “water”) may be utilized.
In the run up to the 10th WTO Ministerial Conference in Nairobi, Kenya, the possibility of integrating agricultural export subsidies in the general WTO framework has again re-emerged. There are proposals that would impose specific limits for the elimination of export subsidies. Some of the proposals also address other aspects of export competition, such as export credits and guarantees, state trading enterprises (STEs), and food aid, and require further details and transparency in notifications in all aspects of export competition.
As a contribution to the negotiations, we have run simulations in a global, dynamic CGE model to analyze the potential use of export subsidies if prices decline further. The unused margin of exports may reach some $11 billion USD. Its full use would displace almost $11.5 billion USD in agricultural production in middle and low income countries while supporting the expansion of the sector in high income countries (particularly in the European Union, which has the largest level of allowed export subsidies under WTO rules).
In our simulations, the decline in world food prices somewhat increases the aggregate welfare in middle and low-income countries (0.03 and 0.11 percent of their respective incomes in 2020) due to the implicit redistribution of income from high income countries. However, that redistribution negatively affects agricultural investment and the wages of unskilled workers in rural areas, highlighting the negative impact of those exports on the attempts to alleviate poverty and attain long-term food security in developing countries. Furthermore, export subsidies are used when world prices are low but not when prices are high, exactly the opposite that vulnerable consumers and countries need. Poor consumers in developing countries would be far better supported by a global food stamp program with vouchers that can be utilized to buy domestic production in their own countries.
In fact, a modeled scenario with a global food stamp (GFS) financed by the countries using export subsidies leads to the same food consumption gains as in our export subsidy scenario, but at a cost that it is only half the amount spent in the export subsidy scenario ($6 billion USD versus some $11 billion USD). The positive changes are even stronger for the poorest countries. The GFS also leads to increases in agri-food value added in high, middle and low income countries, while export subsidies led to increases in high-income countries but to declines in middle and low income ones.
The negotiations leading to Nairobi offer the possibility of finally unifying the treatment of export subsidies under the Agreement on Subsidies and Countervailing Measures (ASCM), thus eliminating the special treatment of the Agreement on Agriculture (AoA). The 2008 Modalities provide a template for this task, which can be adjusted to the dates suggested by the current Chairman of the CoA or based on other proposals presented.
We should hope that the Nairobi negotiations finally put an end to the distortions and inequities generated by the continuous exemption of agricultural export subsidies from the disciplines that apply in general to the use of that policy instrument.
David Laborde is a Senior Research Fellow and Eugenio Díaz-Bonilla is a Visiting Senior Research Fellow in the Markets, Trade and Institutions Division at the International Food Policy Research Institute (IFPRI). Read the full paper on this subject.