U.S.-EC AGRICULTURE DEAL MAY HAVE PITFALLS FOR THE SOUTH.

Oct 13, 1992

U.S.-EC AGRICULTURE DEAL MAY HAVE PITFALLS FOR THE SOUTH.

GENEVA, 12 OCTOBER (CHAKRAVARTHI RAGHAVAN) -- As U.S. and the EC Ministerial level negotiations continue in Brussels Monday, and the two sides engage in some hard bargaining to compromise over their agriculture differences and conclude the Uruguay Pound, any compromise that would emerge seems likely to reduce even further the benefits to the developing countries, GATT observers suggest.

Figures of benefits of an Uruguay Round agreement on agriculture have been tossed around for some time - and all in the range of billions of dollars. These are apparently on the basis of the Uruguay Round deal on agriculture opening the way for the conclusion of the Round, including liberalisation of services and particularly the financial services and the agreement on Trade-related Intellectual Property.

Some of these remind one of the figures thrown about at Montreal in 1989 over the mid-term accord on Tropical Products. The GATT secretariat spoke of the concessions involving a "trade coverage" of 20-30 billion dollars.

Not only did most of the media at Montreal confuse trade coverage with trade benefits, but even some negotiators. The Malaysian Minister, on return to Kuala Lumpur, was quoted in the press as having spoken of the accord in terms of a Xmas gift of billions of trade.

An UNCTAD study, based on detailed analysis of the "concessions" and trade involved at individual product tariff line suggested that the total benefits would be in the range of 500-600 million dollars, and that even of this the largest benefit would go to the European Community itself.

But over the last week or so, the EC and the UK (holding the presidency) has been talking of 120-150 billion dollars being injected into the world economy, and spurring growth at a time when everything else, including the policies in the areas of money and finance, is dragging down the economy into recession.

Much of these estimations, of economists and politicians quoting each other, appear to be based on projections worked out on theoretical models, and on trade coefficients and price elasticities, of various products and groups of products.

The functioning of the global economy over the last decade has however shown that many of these assumptions, (usually spelt out in fine print in footnotes or technical annexes and often ignored by those who cite them), do not appear to be operating now in real life.

The fine print in the Dunkel Draft Text (DDT), and the capacity of trade policy administrators to find new ways of protection, would appear to raise further questions on the applicability of some of the known models.

Many of the purported benefits, and special exemptions, for developing countries envisaged in the Dunkel Text is dependent on bilateral and plurilateral negotiations that are yet to take place, while many of their obligations and costs have been spelt out.

The U.S.-EC differences, and possibilities of compromise, appear to turn on whether the payments to EC farmers under the proposed reform by the EC of its Common Agricultural Policy (CAP) could be put into a "yellow box", and placed above challenge in the GATT and whether the yellow box contents would be slowly phased out and if so over how long a period; if the EC has its way on the "yellow box" what practices and support measures of the United States, Japan etc will find their way into such an yellow box; how far the EC would agree to cut its subsidised exports, particularly volume cuts; and whether the U.S. would agree to rules to prevent future disputes and retaliation.

Some of the details involved on many of these matters cast some doubts over estimates used of the billions of dollars of gain for the developing world through liberalisation of trade.

Much of the published simulations and projections (by the World Bank, the Commonwealth Secretariat, UNCTAD, etc) are postulated on the proposals which were on the table at Brussels, and taking the base year from which the reductions are to be effected as 1986.

The Dunkel Draft Text has changed the base years for calculation, proposing the average of 1986-1988 as the point from which reductions are to be effected, while reducing also the percentage cuts.

In terms of levels of domestic support, the base year 1986 is the peak year of record support levels. The period 1986-1988 represents lower levels of support, as a result of the rise in world prices.

In 1986, support for cereals increased four folds in the EC, more than doubled in the U.S., and increased by 60 percent in Japan. Support for Soya also increased dramatically both in EC and Japan between 1984-1988; for sugar in doubled for Canada, while declining by half for the U.S. (relative to the 1984-1986).

If the 1986, base period were to have been used, the actual cuts to be effected would have been lower. But if the 1986-1988 period average is to be used, the levels from which cuts are to be effected are reduced, and thus even a lower percentage of cuts in fact become larger.

Some UNCTAD simulations, not published so far, suggested that a 30 percent reduction on the 1986-1988 base periods would result in loss in foreign exchange earnings for Africa could be about 431 million dollars, for Asia Pacific countries 216 million dollars, while the gains for Latin America and Caribbean would be about 93 million.

However, within the regions, some might have a positive benefit, while others would have a more negative effect.

This apart, in so far as developing countries are concerned, any assessments of gains and losses depend on some fine-tuned calculations, depending on the outcome of the bilateral and plurilateral negotiations, in the three separate areas of market access, export subsidies and domestic support.

While on a first reading, there are provisions for "special and differential treatment", a closer examination shows that the extent would vary from country to country (the GATT Director-General has quietly through his DDT established the graduation principle pushed by the North) and how much it could be extracted by each country in terms of the negotiations yet to take place and be completed.

This may not be as easy as outsiders may believe. For, with agriculture having become an industry, and its output and exports being looked at in the U.S. and EC in terms of ensuring future markets in the Third World, compromises reached by the Third World countries now could prove quite costly 5-10 years from now.

In market access, the Dunkel text calls, in the case of developed countries, for a reduction of ordinary customs duties (including those established by tariffication) to be reduced on a simple average basis of 36 percent for each tariff line from 1993 to 1999, with a minimum reduction of 15% for each tariff line. Where there are now no significant imports, a minimum access opportunity of no less than three percent of domestic consumption in the first year, rising to five percent in 1999 is to be provided. Also the current access opportunity is to be maintained through the tariffication process at no less than the average during the base period 1986-1988.

In the case of developing countries, while the Least Developed Countries (LDCs) are exempt from any reduction commitments, the others under S & D treatment have flexibility to apply lower rates of reduction, provided the rate is "no less than two-thirds" of that specified for the developed countries.

This would mean, in market access, non-LDC developing countries must apply a 24 percent cut on a simple average basis, with a minimum rate of 10 percent reduction for each tariff line. For products subject now to unbound customs duties, they could offer "ceiling bindings" on such duties.

Only restrictions maintained by them for balance-of-payments purposes will be exempt.

All other non-tariff import restrictions, including those resulting from activities of state trading bodies, have to be converted into tariffs and subject to the cuts. They also have to accord current and/or minimum accesses opportunities and expand them over 10 years.

This is not as simple as it may sound - given the difficulties in these countries in collecting price data, and trying to look at various non-tariff measures - from the level of the federal authorities, all the way down to local authorities and para-statal trading organisations.

If they do not fully take account of various non-tariff restrictions, and do not completely express them in tariff equivalents or do so inadequately, they would be the losers later - since non-tariffied restrictions have to go.

None of the developing countries, particularly their major ones, need be under illusions that the major fight is among the industrialised countries for their mutual markets. The United States at least is aiming at capturing the markets in the Third World, and ensuring they do not become too self-sufficient.

The so-called S & D treatment to the developing countries is also limited: they have only the option of negotiating within the parameters set out in the Dunkel Text in their bilateral and plurilateral negotiations. There is no specific exemption from binding the customs duties resulting from tariffication. It is an open issue whether the individual developing countries would have the technical expertise and negotiating power to work out individual exemptions for reduction commitments.

Given that agriculture in most countries of the South is subsistence, and its development in future would require some protection, developing countries may find themselves "naked" against the onslaughts of competition from North, whose agriculture has been developed behind high protective barriers for more than half a century and exported with subsidies to offset cheaper production elsewhere.

All participants, both developing and developed, are to be commit themselves not to resort to or revert to any measures that have been converted to tariffs.

But there are social safeguards measures enabling participants to have recourse to them in connection with the importation of an agricultural product specified in its schedule as being the subject of a concession and in respect of which the special safeguard provisions could be invoked.

This means that at the time the Round is completed and countries file schedules, through a footnote or annotation of their schedules, they have to give advance notice of the possibility that they might resort to special safeguards for a particular product or products.

Any one having recourse to the special safeguard provisions is to forego recourse to other safeguard measures under GATT. It would also mean that when countries have recourse to special safeguard, others cannot claim compensation and have to forego retaliation.

But if the concessions given and scheduled could be nullified without compensation through special safeguards, the question might well be asked what use are such concessions, in terms of GATT and trade policy theories of reciprocal concessions that are multilateralised and imparting certainty to the market access conditions.

The special safeguard provisions and their details clearly show that the majors, including the EC and other Europeans, have every intention of using them to the hilt. While it might still be better than the current non-transparent non-tariff barriers, it could also reduce the anticipated benefits.

The special safeguards would be an additional protection to the conversion of 1986-1988 base protection levels into tariffs. It will diminish the benefit of the reduction commitment in force for any year during the implementation period, and would penalise through additional duties an upsurge in imports, beyond current or minimum access levels or improved competitiveness from an individual supplying country.

Some of the projections of "gains" to developing countries and exporters, based on normal trade theories and models, could thus prove to be very much less.

Perhaps even more, the hope that reduction of uncertainties would provide a boost to economies of exporting countries may produce much less results.

The Special safeguards are to remain in force for the duration of the reform process. The DDT envisages consultations and negotiations to continue the reform process before the end of the period.

Since the draft does not establish any maximum levels of protection, very high, and even prohibitive rates of tariff equivalents could be set. While the minimum access rule would mitigate this (for those seeking to export into such markets), the fact that special safeguard measures could be applied would mean even more limited trade benefits under the reform process. There will only be a change in the form of border protection rather than its extent, particularly for so-called sensitive products.

When the requirement for expanding current access opportunities are viewed along with reduction commitments on export competition, the exporters may have to trade-off less competition in third country markets from U.S. and EC subsidies and improved access in U.S. and EC.

Considering that the U.S. and EC are trying to cook their deal, in which each would be looking to protect their own interests and present it to others in a virtual take-it-or-leave-it basis, and given the way that the others are looking for early conclusion of the Round, even the trade-offs might prove difficult or illusory.

The General Agreement does not require "concessions", only encourages them. The Dunkel text on agriculture creates a new requirement to make concessions and bind them.

And as the current U.S.-EC oilseeds tangle shows, and contrary to the intention at the time the GATT was negotiated, countries will now find it more difficult and costly at a future point to renegotiate the bound concession, even if the circumstances change.

One positive element is that the various import restrictions maintained as exceptions under Art XI: 2, or through special waivers (U.S. for Sec. 22 of its agriculture law) or protocols of accession would be eliminated.

In the area of domestic support, for developed countries the Dunkel draft has provided for exemption (so-called green box) of specified and defined support policies. All others have to be reduced by 20 percent from 1993 to 1999. But if the support subject to reduction does not exceed five percent of total value of production of a product receiving product-specific support or five percent of value of total agricultural production in cases of sector wise support, it will be exempt from the cuts.

In case of developing countries some measures of specified domestic support are exempt, and the threshold percentage exempt from cuts will be 10% (instead of the five percent for developed countries). The developing countries could also apply lower rates of reduction, provided the rate is not less than two-thirds specified for the developed countries. This means they have to make a minimum of 13.33% cuts on domestic subsidies other than those specifically exempt.

While the industrialised countries, with their larger financial capacities, may have an easier task of conforming to "green box" criteria or to adjusting their programmes, the developing countries could find problems, particularly if they want to provide direct incentives to encourage food production where it is inadequate and income levels are low. This would be particularly so in large countries, whose markets are the prime targets for expanded exports by the U.S. and others.

And, as in other areas, developing countries having already agreed to compromises, may find that when the U.S. and EC compromise among themselves and, for example, create a new yellow box of non-actionable subsidy practices, the developing countries would find it difficult to retract concessions made in this sector or elsewhere.

In the area of export competition, the Dunkel text has set out six types of export subsidy practices and subjects to them to reduction commitments on budgetary outlay and volume. The budgetary outlay is to be reduced by 36 percent from 1993 to 1999, and volume (of subsidised exports) by 24 percent over the same period.

This really means that even after 2000, developing countries and their exporters have to contend against the 64 percent of export subsidy that the industrialised countries can provide. This "unfair" competition is not only on their export markets, but even their domestic markets - since it is the subsidised exports that influence the international price.

The reduction commitments on export subsidies for developing countries are to be no less than two-thirds of that specified for developed countries. But two of the practices covered in export subsidies are not to be part of the commitments of developing countries.

But the requirement (for developed and developing) not to introduce or re-introduce subsidies on export of agricultural products or groups of products which had not been subject of subsidies during the base period may prove inequitable to some participants - particularly if they expand domestic production and export their surpluses in markets where they will face the subsidised competition from those already subsidising.