WHY CANNOT U.S. AND EU REACH AGREEMENT ON AGRICULTURE (DOHA ROUND)?

Introduction

Agriculture and production of food began about 10,000 years ago. Hence, the world population could not have grown without the agricultural revolution. Without the development of agriculture, the modern and urban society would not have developed. Agriculture is defined as the utilization of natural resource systems to produce commodities which maintain life, including food, fiber, forest products, horticultural crops, and their related services.

Meanwhile, global trading has been a part of the world since the 1940s. As trade between countries began to grow so did the need for some sort of international commerce. In 1948, the International Trade Organization (ITO) was established, but fell through and triggered the creation of General Agreement on Tariffs and Trade (GATT). GATT was created through several negotiations, known as rounds.

For many years, GATT's policies held strong and offered many countries the international support they needed to remain prosperous in global trade. Though, as time went on, certain trade policies established by GATT were being undermined by countries in order for them to continue conducting business. GATT's rules and regulations were becoming obsolete in the rapid changing global economy. By the early 1980s the General Agreement was clearly no longer relevant to the realities of world trade as it had been in the 1940s. For a start, world trade had become far more complex and important than 40 years before: the globalization of the world economy was underway, trade in services - not covered by GATT rules - was of major interest to more and more countries, and international investment had expanded".

Agriculture is at the heart of the new “Doha Round” of multilateral trade negotiations that were launched by the World Trade Organization (WTO) at its ministerial conference in November 2001.

The Doha round of WTO negotiations began in November 2001. The purpose was to agree on the , and from there negotiate opening agricultural and . The intent of the round was to make trade rules fairer for developing countries.

Negotiations on agriculture began in early 2000, under Article 20 of the WTO Agriculture Agreement. By November 2001 and the Doha Ministerial Conference, 121 governments had submitted a large number of negotiating proposals. The declaration reconfirms the long-term objective already agreed in the present WTO Agreement: to establish a fair and market-oriented trading system through a programme of fundamental reform. Also, the programme encompasses strengthened rules, and specific commitments on government support and protection for agriculture. The purpose is to correct and prevent restrictions and distortions in world agricultural markets.

Again, the comprehensive negotiations on agricultute were verified but sufficient. So, before answering the question which is why US and EU cannot reach agreement on agriculture in Doha Round, it is necessary to see the aims and the framework of the negotiation. In general, the negotiations aimed at:

market access: substantial reductions
exports subsidies: reductions of, with a view to phasing out, all forms of these
domestic support: substantial reductions for supports that distort trade

The US and EU having a position of the key role in world trade, had to reach an agreement on the above mentioned aims. When the current round of World Trade Organization (WTO) talks was launched at the end of 2001, northern governments promised to overhaul agricultural trade rules—and their own farm policies, that commitment is at the heart of the so-called Doha "development agenda." Unfortunately, fine words have been followed by business as usual. Disagreements between the agricultural superpowers, the United States (U.S.) and the European Union (EU), have produced the familiar pattern of mutual recrimination and deadlock at the WTO, potentially jeopardizing the entire round. And neither protagonist shows any inclination to cut agricultural subsidies at home. So, by the end the EU reform of the Common Agricultural Policy (CAP) of June 2003 was at best a modest step in the right direction.

Meanwhile, developing countries have failed to develop the alliances that might shift the terms of the debate at the WTO.

Also, high tariffs and other trade barriers are used to keep imports out. Tariffs on agricultural goods in the EU and US are four to five times those applied to manufactured goods, and peaks in excess of 100 percent—for groundnuts in the US and dairy produce in Europe, for example—are common. But the poorest African countries may not be able to produce an exportable surplus of dairy products.

The legacy of the Agreement on Agriculture (AoA)

The 1994 laid the groundwork for agriculture negotiations in the Doha Round. The AoA was one of the major achievements of the Uruguay Round of multilateral trade negotiations: it was the first agreement to impose strict disciplines on agricultural trade. The AoA focuses on four areas of reform: market access, domestic support, export competition and sanitary issues. Under the agreement, members commit themselves to reducing import tariffs, export-promoting subsidies, and total aggregate support to agricultural producers. The agreement also takes into account the particular needs and conditions developing countries face and allow them a more gradual course of liberalization. The AoA exempts rural development programs and development-oriented domestic support when calculating total aggregate support, thus allowing countries to maintain certain subsidies and supports during the process of liberalization.

Another legacy of the AoA is the ‘Peace Clause,’ which protects the US and EU from being challenged by other WTO members on certain subsidies that could be seen as violating WTO rules. Since the clause expired in December 2003, members will be able to file suit against nations that have ‘trade distorting’ subsidies in place. The US and EU had hoped to extend the ‘Peace Clause’ at Cancun, but the talks ended before they had a chance to negotiation on this issue.

Agriculture Subsidies

In June 2003, the EU took a step towards liberalizing trade in agriculture ...

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Agriculture Subsidies

In June 2003, the EU took a step towards liberalizing trade in agriculture by approving reforms to its Common Agriculture Policy (CAP). Prior to these reforms, the CAP provided European farmers with market price supports, direct payments, and rural development schemes aimed at raising the standard of living of agriculture workers, ensuring adequate food supply, and adopting measures toward environmentally sustainable farming. The reforms are geared toward severing the tie between production and farm subsidies that have been the most trade distorting, while still allowing for support for the farming sector through other kinds of payments. However, the reforms also call for gradual phasing-out of all direct payments, particularly in areas like tobacco and sugar that were previously protected under CAP.

The US and Japan how no signs of compromise on agriculture subsidies. In fact, US added more subsidies when it passed the 2002 Farm Bill that increased government aid to agriculture by 80%. Although the US argues that this aid falls within the WTO limit on US subsidies, most countries agree that the bill violates the spirit of the Agreement on Agriculture. WTO members have also complained about Japan’s exceptionally high tariffs it places on certain agriculture goods, such as rice. These goods may have tariffs of several hundred times their selling price imposed upon them. Both nations seeming unwillingness to compromise has slowed the progress of agriculture in the Doha Round.

The impact of the liberalization of agriculture is a current issue as well.Liberalizing global trade in agriculture is crucial to achieving a major overall outcome in the Doha Round. Agriculture accounts for about half of the total potential benefits from global free trade for both industrial and developing countries. This sector is especially important for reducing global poverty, because about three-fourths of the world’s poor are in the rural sector and would stand to benefit from increased export opportunities. Developing countries have tended to stress the need to reduce agricultural subsidies in the Doha negotiations. In part, this reflects the fact that few developing countries can afford to provide subsidies to their own farmers. In part, however, it may reflect their reluctance to place their own agricultural tariffs on the table. As it turns out, industrial country farm subsidies are generally less important than their tariffs and tariff-rate quotas in their total protection against developing countries.

A diverse group of development and trade liberalization advocates agree that reduction of agricultural protection and subsidization in the world’s wealthy countries is necessary to strengthen both international growth opportunities and the global trade regime. WTO Doha Round negotiations on agriculture should compel policy change in industrialized countries to limit trade-distorting domestic subsidies for agricultural products, lower tariffs, increase market access, and eliminate export subsidies. In response to temporary hardships caused by an overall reduction in agriculture support, governments should have the flexibility to adopt temporary or limited domestic, and perhaps international, compensatory policies.

So, the agriculture framework (Annex A of the July 31 Decision) addresses the three “pillars” of agricultural trade liberalization identified in the 2001 Doha Ministerial Declaration: substantial reductions in trade-distorting domestic support; the phase-out, with a view to total elimination, of all export subsidies; and substantial improvements in market access.The framework now becomes the basis for establishing specific formulas, schedules, end dates and other parameters (modalities) for achieving those objectives during the next phase of negotiations now underway.

U.S. Proposal -- WTO Agriculture Negotiations

The United States proposes ambitious results in all three pillars of the agriculture negotiations: export competition, market access, and domestic support. The U.S. proposal is contingent on comprehensive reform in all pillars and meaningful commitments by all members, except the least developed countries. Special and differential treatment and other provisions of the July 2004 Framework will be developed in the negotiations to complement the elements below.

Timing

Two stage process: initial stage of significant reductions in tariffs and trade-distorting domestic support, and elimination of export subsidies, followed by a second stage of reductions culminating in the full elimination of remaining tariffs and trade-distorting domestic support.
First Stage: tariff and subsidy reductions would be phased-in over 5 years.
Interlude: reductions pause for five year period for review of effects of first stage reforms.
Second Stage: Unless Members agree to change course, further tariff and trade-distorting domestic support reductions would begin after the interlude, culminating in the total elimination of remaining measures after a 5 year phase-in period, which include safeguard mechanisms to assist transitional adjustment.

Domestic support

In agriculture, the most controversial is the expansion of the Blue Box exemption on domestic support reduction which would give developed countries, particularly the US, the flexibility to transfer its amber box trade-distorting subsidies to the blue box.

Amber Box: 60% reduction in the total Aggregate Measurement of Support (AMS) for the United States.
AMS cuts will be based on harmonization principle agreed to in the July 2004 Framework, requiring the deeper cuts by the larger subsidizers. Cuts will be based on the following parameters:

This provides for a more equitable balance by reducing the disparity in allowed AMS between the United States and the EU from a ratio of 4:1 to a ratio of 2:1.

Blue Box: Cap on “Blue Box” programs at 2.5% of the total value of agricultural production, instead of 5% as set in the July 2004 Framework.

de minimis: product-specific and non-product-specific de minimis cut by 50%.

Product-specific caps: establish product-specific AMS cap on 1999–2001 base.

Overall reduction in trade-distorting domestic support: substantial reductions in the sum of the allowed level of the amber box, blue box, product-specific de minimis, and non-product-specific de minimis based on the following parameters:

Green Box: no material changes in Green Box, specifically no expenditure caps.

Litigation protection (“peace clause”) for subsidy programs that stay under the new limits or conform to “green box” criteria.

Special and Differential Treatment. Slightly lesser reduction commitments and longer phase-in periods for developing countries to be determined when base parameters for developed country commitments established. Review of “green box” criteria to specify inclusion of non-trade-distorting development policies.

Market Access

Balancing the new proposal on domestic support, substantial reductions will be made in tariffs, yielding deeper cuts on higher tariffs as established in the July 2004 Framework, through a progressive formula based on the following parameters:

Meaningful access provided for priority products in key markets through the agreed formula, sectoral initiatives, and bilateral negotiations.

Developing countries will be subject to slightly lesser reduction commitments and longer phase-in periods to be determined when base parameters for developed country commitments are established. Developing countries must make meaningful commitments which reflect their importance as emerging markets.

As outlined in the July 2004 Framework, establishment of Special Safeguard Mechanism and Special Products for developing countries to provide transitional protection from import surges while still providing meaningful improvement in market access.

Export Competition

Export Subsidies: rapid elimination, no later than 2010 for all products with accelerated elimination for specific products.

State Trading Export Enterprises: elimination of monopoly export rights, termination of special financial privileges, and greater transparency.

Food Aid: broad discretion for donors to meet needs in emergency situations and low income countries, tighter disciplines to deal with other situations, but no requirement for “cash-only.”

Export Credits: bring government programs in line with commercial terms to prevent export subsidy.

Differential Export Taxes: end discriminatory tax levels across exported products.

EU Proposal -- WTO Agriculture Negotiations

The EU suffered from major and unresolved internal differences on agriculture. The EU is likely to see a strong counter reaction from its anti reform grouping, with efforts to press the EU to renegotiate the peace clause, delay commitments for the elimination of export subsidies and push for excessive exclusions to tariff reduction commitments in agriculture.

Domestic support in agriculture

Ambitious cuts in trade distorting forms of agricultural support – a 70% cut in the EU’s Aggregated Measurement of Support (AMS). An additional 65% reduction – at least - in agreed maximum levels of trade distorting ‘de minimus’ support and possible reductions in maximum agreed levels of partially distorting ‘Blue Box’ payments.

Market access in agriculture

Four tariff bands, with higher cuts for higher tariffs. Some limited flexibility around a linear cut in some bands. Highest band: tariffs over 90%, these would be cut by at least 50%.
A maximum agricultural tariff for developed countries as proposed by the G20, at a level “that will create a severe constraint for all developed countries.
Minimum recourse to sensitive agricultural products, and an explicit willingness to provide higher tariff rate quotas for sensitive products whose tariff cuts fall below the average cut for their band.

Export competition in agriculture

A reiterated offer to end all export subsidies, with an end date and ‘frontloaded’ timetable agreed at Hong Kong.

So, according to the above mentioned, the agriculture negotiations are divided into three ‘pillars’: domestic support, export competition and market access. The EU is proposing to reduce its aggregate measure of trade distorting support by 70% contingent on proportionate reductions from other major subsidisers like the US and Japan. Because the existing CAP reform has already moved 90% of EU payments into the non-trade distorting ‘Green Box’ the EU is able to offer to bind reductions on this scale through the WTO. The EU is proposing to divide agricultural subsidisers into three bands. In the top band is the EU, with other subsidisers below. The top band, in which the EU would be situated, would lock in the highest aggregate cuts (70%), with a reduced cut for the second band and a further reduced cut for the third ban. There is also propose a very substantial reduction in the de minimis category of subsidy, of at least 65% and potentially much more if others do the same.

To sum up, this means that all WTO members are permitted to provide minimal supports totalling no more than 5% of agricultural production for developed countries.

Why is there a US and EU dispute on agriculture at Doha Round Negotiations?

EU and US agricultural support policies have global implications, and for a simple reason: they are the world's key players in trade in agricultural products. Apart from being large import markets, they are the world's largest exporters. It follows that their policy interventions have an important bearing on prices for farmers elsewhere, including the developing world. Government support has increased output for a wide range of crops more rapidly than domestic demand. The result is that large surpluses and a dependence on exports to absorb them. Exports absorb more than one quarter of production of commodities such as wheat, rice, coarse grains and cotton in the US and of sugar, dairy and meat products for the EU. The US is the world's largest exporter of coarse grains, feed grains, and cotton, and a major exporter of wheat and rice, as well as being a large import market. Similarly, the EU is a major exporter of sugar, dairy, meat, and cereals.

Price support and market access restrictions have a major bearing on the agricultural trade balances of the US and the EU. The US posts a large surplus in agricultural trade, typically in the range of $10-20bn (WTO website). This surplus helps offset deficits in other areas. Representatives of the EU like to point to Europe's deficit in agricultural trade as an example of a commitment to open markets. Such claims face two fundamental problems. First, agricultural trade balance is a weak proxy for openness: matters of geography, history and competitive advantage are far more relevant. Second, over the past decade the EU has reduced its deficit from almost $7bn to $200m. Exports (which are subsidised) have grown far more rapidly than imports (which face high tariffs). To the extent that support policies in the US and the EU encourage production, reduce import demand, and generate exportable surpluses, they depress world prices. The impact on world markets will be determined by the volumes exported and their size relative to world trade: the larger the increase, the larger the price-lowering effect. In addition, policies that insulate producers from world prices have the effect of transferring adjustment costs elsewhere, destabilising world prices in the process. This is especially true where support is counter-cyclical, or inversely related to market price trends.

Conclusion

To conclude, the question is raising again: who are the ‘winners’ and ‘losers’ and who benefits from these policies?

According to the research by Oxfam the distribution of subsidies among farmers in both Europe and the US is more unequal than the distribution of income in Brazil, one of the world's most unequal countries in terms of income. The biggest 25 percent of EU subsidy recipients receive more than 60 percent of all subsidies. In the U.S. 60 percent of farmers get no support at all, while the biggest 7 percent account for 50 percent of government payments. The large slice of subsidies directed toward sugar and dairy producers makes up part of this distorted picture. To make matters worse, most of the benefits generated through agricultural support do not even reach producers: the supports are capitalized into higher land values and higher input prices. According to OECD (Organisation for Economic Co-operation and Development) estimates only 25 percent of price supports end up as net income gain for farmers. The system results in unfair distribution and is highly inefficient. In the long run it provides false signals to the incoming generation of farmers and contributes to loss in equity for many. Furthermore, it contributes to disarray in world agriculture and to poverty worldwide. In short, whoever wins from the farm subsidy bonanza in rich countries, it is the developing countries that lose in aggregate.

So, small farmers in developing countries suffer on several counts from rich-country farm policies. Northern production subsidies lower prices for farm produce. Unable to compete against subsidized competition, the world's poorest farmers are often pushed out of international and even domestic markets. The upshot is an agricultural trading system in which success depends less on comparative advantage than on comparative access to subsidies. Small farmers are efficient, innovative, and potentially competitive, and creatively combine farming with off-farm work. But the world's poorest farmers cannot compete against the world's richest treasuries, nor should they have to.

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African countries could do so for beef, sugar, and cotton. Beef and sugar, however, are the most protected products in the EU, even more than dairy products, and U.S. cotton policy hinders African growth.

Dembele, N. & Staatz, J. 1999 The impact of market reform on agricultural transformation in Mali. Paper presented at the Fourth Agricultural Transformation Workshop, Tegemeo Institute/Egerton University and Eastern and Central Africa Policy for Agricultural Policy Analysis, June 27-30, 1999. Nairobi

http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#aAgreement

Ditching the peace," The Economist Global Agenda, January 1, 2004.

http://europa.eu.int/comm/agriculture/capreform/index_en.htm

“EU Policies: The CAP, Natural Resources, and Illegal Logging,” BRIDGES Trade BioRes Weekly, Vol. 3, Number 18, 16 October 2003

http://www.nationalaglawcenter.org/crs/index.phtml#farmbills

Baffes, J &. Meerman, J. 1997. From prices to incomes: agricultural subsidization without protection? World Bank. Washington DC.

For a detailed analysis of the new modeling projections, see Frank Ackerman, “The Shrinking Gains from Trade: A Critical

Assessment of the Doha Round Projections,” Tufts University, GDAE Working Paper No. 05-01, October 2005: http://www.ase.tufts.edu/gdae/Pubs/wp/05-01ShrinkingGains.pdf

http://www.un.org

Anderson, K., Hoekman, B. et al. 1999. Agriculture and the WTO: Next steps. Second Annual Conference on Global Economic Analysis, Avernaes Conference Centre, Helnaes, Denmark. 20 - 22 June.

“Sharing the Gains from trade”, Reviving the Doha Round, published by Group of Thirty, Washington, 2004

Anderson, K. 2002. Economy wide Dimensions of Trade Policy and Reform. In Hoekman et al. (eds.). Development, Trade, and the WTO: A Handbook. Washington DC: The World Bank.

Bailey, M & Fowler, P. 2001. Is the WTO serious about reducing world poverty? A development agenda for Doha. Oxfam International.