Trade officials have entered the last stretch of talks before the WTO’s ninth ministerial meeting in Bali, with an outline deal for a “small package” of measures now due to be wrapped up. If achieved, this December’s package would ideally include an agreement on trade facilitation, select agriculture issues, and some components related to developing countries. As far as agricultural issues are concerned, consultations have been held on three topics: food purchases at administered prices in developing countries as part of public stockholding programs; disciplines on export subsidies and similar measures; and new rules on the administration of tariff rate quotas for imports.
In this post, we will focus on the first topic. The G-33 developing country coalition – a group of countries with large populations of smallholder farmers – has sought greater flexibility to allow them to purchase food at administered prices from low-income, resource-poor producers. The G-33 proposal involved three elements, all of which relate to domestic farm support payments that are exempt from any cuts or ceiling under WTO rules, on the basis that they cause no more than minimal trade distortion – known as ‘green box’ subsidies by negotiators. Two proposed changes would ease current requirements on domestic food aid and food stockholding programs by allowing food purchased at administered prices (in other words, prices above the prevailing domestic market price) from low-income or resource-poor producers to be exempt from countries’ maximum permitted ceiling on trade-distorting support . The group also proposed that a range of schemes primarily used by developing countries – such as farmer settlement, land reform, and other programs to promote rural development and poverty alleviation – could be classed as green box payments under a new clause. A sub-set of G-33 members later identified four variables that could potentially be modified or clarified so as to provide developing countries with greater flexibility under WTO rules. These included the ‘de minimis’ ceiling (which is set at 10 percent of the value of production for most developing countries) and three elements used to calculate countries’ levels of market price support: the external reference price, which is based on a 1986-88 benchmark; the volume of eligible production; and the level of administered prices. Finally, some G-33 members have argued that price inflation in recent decades has eroded their ability to run some types of programs covered under WTO rules have proposed three options to address this concern. The first option would be to agree that developing countries could use a three-year rolling average to calculate how much their food stockholding purchases contribute to their overall farm subsidy limit, instead of benchmarking support against the external reference price. These countries would also be allowed to use the previous year’s average price in the three largest suppliers of foodstuffs in the domestic market. The second option would be to agree on a draft decision allowing WTO members to take into account excessive rates of inflation – i.e., higher than 4 percent – in calculating the contribution of food stockholding programs toward overall farm subsidy commitments. The final option would be to agree a ‘peace clause’ exempting these programs from legal challenge (Bellman, et al., 2013).
Since a number of other countries are eager to ensure that any additional flexibility does not create new trade distortions or undermine food security, trade officials are exploring whether various safeguards and conditions should apply to any country wishing to make use of these proposed new flexibilities. Accordingly, the potential agreement being discussed is expected to:
- cover developing countries’ public stockholding programs related to food security;
- be limited to staple food crops;
- be subject to on-going provision of information that would allow WTO members to monitor each country’s situation;
- incorporate safeguards or guarantees aimed at avoiding potential spill-over effect on other countries’ markets;
- be subject to notification and monitoring in the WTO Committee on Agriculture.
Most nations provide some level of support to their agricultural sectors. Different types of support can affect producers and consumers, both in the supporting and in other countries. One of the pillars of the WTO Agreement on Agriculture limits trade-distorting agricultural domestic support; as a consequence, the measures of domestic agricultural support that should be included in the green box are highly contested. This has led to lengthy negotiations between different countries and coalitions. Developed and developing country farm exporters in the Cairns Group and the G-20 seek tighter restrictions on green box criteria, while some developed countries – such as the EU and Japan –would like to expand these criteria to include new areas. Meanwhile, developing countries in the Africa Group and the G-20 want greater recognition for farm support programs that they are currently using or might want to use in the future. More generally, developing countries remain concerned that, while WTO rules currently allow countries that have historically provided substantial levels of trade-distorting farm support to continue to do so, subject to a maximum ceiling, others – in practice, largely developing countries – can only provide such support up to the ‘de minimis’ level set under the global trade body’s rules. From this perspective, the G-33 proposal is consistent with a more general strategy aiming at enlarging the ‘degrees of freedom’ available for developing countries.
What consequences would expanded support for agriculture by developing countries have for global trade flor? Some interesting insights can be gleaned from the case of China. In 2012, China reported spending $75 billion on agricultural support, equal to about 11 percent of the value of its agricultural output (Gale, 2013). Chinese officials introduced minimum procurement prices for rice and wheat in 2004-05 to act as a floor under market prices. In 2008, officials began raising these minimum prices annually; they also added price supports for corn, soybeans, and rapeseed. Additional price supports were introduced in 2009 (pork) and 2011 (cotton) to keep domestic prices on a steadily rising path and to prevent erosion of net returns to farmers. From 2008 to 2013, Chinese support prices (in U.S. dollars) rose over 60 percent for wheat and corn, 90 percent for indica rice, and 100 percent for japonica rice (these increases include the effects of a 20-percent appreciation of the Chinese currency against the U.S. dollar). The price support programs, an appreciating Chinese currency, and domestic inflationary pressures have pushed Chinese prices above global market prices in recent years. When China joined the WTO, it agreed to lower tariffs on imported commodities. Consequently, the policies that raised domestic prices above global market prices ended up boosting imports. By 2011, Chinese farm prices for most major commodities were 20-30 percent higher than prices in the United States. China also increased its imports of commodities primarily supplied by other countries; as a result, Chinese rice mills and processors have begun blending cheaper imported rice from Vietnam and Pakistan with more expensive domestic rice to maintain profit margins.
The case of China shows that not taking into account the relationship between domestic and global trade policies may lead to unintended consequences, and that support programs can (partially, at least) turn into subsidies for foreign farmers. The existing rules of the Agreement on Agriculture, and those being negotiated in the Doha Round, were envisaged for a world of (policy-induced) low market prices. High agricultural prices since 2006 have not eliminated the need for traditional disciplines on price-depressing domestic support, although the problem is not producing too much per se, but rather producing the wrong products in the wrong places. It’s worth recalling that production-stimulating policies are not the only ones that create distortions on global markets. Supply restrictions and demand-augmenting measures also contribute to higher agricultural prices and could dominate future agricultural policies. WTO disciplines are needed in this context, but focusing on border policies seems to be much more relevant than any further discussion about the extent to which domestic measures may affect production.
References
Bridges Weekly Trade News Digest 17(34). October 17, 2013.
Bellmann, C., J. Hepburn, E. Krivonos, J. Morrison. 2013. G-33 proposal: early
agreement on elements of the draft Doha accord to address food security. ICTSD Program on Agricultural Trade and Sustainable Development Information Note. Geneva: International Centre for Trade and Sustainable Development.
Gale, F. 2013. "U.S. Exports Surge as China Supports Agricultural Prices." Amber Waves. October 24, 2013.