Oct 26, 1992

U.S.-EC AGRICULTURE TALKS BREAKDOWN.

GENEVA, 22 OCTOBER (CHAKRAVARTHI RAGHAVAN) The bilateral talks between the United States and the European Community over their differences on agricultural trade issues - differences relating to the subsidy issues in the Uruguay Round negotiations, as well as their related but separate dispute on the EC oilseeds regime and implementation of two panel rulings against the EC - appear to have broken down, with the prospect of a looming trade war between the two that will not see any victor, and in the process will harm others too.

The breakdown has also brought into the open simmering deep differences within the EC Commission as well as EC member-States, and particularly amongst Britain, France and Germany.

These, along with the fact that the U.S. is in the last stages of an election campaign where the Republicans seem certain to lose the White House and see a stronger Democratic hold over Congress, will make the conclusion of trade negotiations more difficult.

On Wednesday night, U.S. agriculture negotiator (at official level), Joe O'Mara apparently walked out of a technical level meeting with the EC negotiator Guy Legras and saw the EC Agriculture Commissioner, Ray MacSharry, before flying back to Washington.

The U.S. also made an announcement that the talks had broken down and O'Mara was flying back. Even as he was flying back, EC Commission sources in Brussels denied press reports that the talks had broken down. There were reports that the EC Commissioners, Franz Andriessen and Ray MacSharry were also contacting Washington.

But other indications suggest that the negotiations have broken down, and the exercise on both sides is essentially public relations one, with the EC trying to make it difficult to retaliate quickly and the U.S. trying to show it had gone the last mile and the EC is to blame for the consequences.

The breakdown could result in Washington taking its long-threatened trade retaliatory action against one billion dollars worth of imports front the European Community, and most likely targeted against imports from France.

And if Washington does that, and there are some signs that this could come over the weekend, the EC is expected to undertake counter-retaliation, as it has announced it would.

Brussels reports suggest that the EC Commission has already readied the list of U.S. products imported into the EC that would be the target. These could well be some U.S. farm products, so that the various U.S. farm lobbies would be at loggerheads.

This would unleash a further round of trade conflicts and subsidy wars, and put even further back the prospects of an early conclusion of the Uruguay Round.

And given the current dynamics of the U.S. presidential campaign and the prospects (according to all polls) that Bush might lose, it would make the resumption of negotiations even more difficult at the GATT.

The GATT Director-General Arthur Dunkel, as a practitioner of professional optimism, in a statement relayed through his press office said Thursday that the setback would not end the Round. "I can't imagine", Dunkel was quoted as saying, "that the U.S. and EC would take the responsibility of breaking down the round at a time when we need so much a success as a signal to the very sluggish world economy".

GATT sources suggested that Dunkel was engaged in consultations and would meet with key negotiators next week to take stock and plan what could be done.

However, there was some scepticism on what the GATT official and his counterparts in the national capitals, particularly of the two, could do in what has now become an essentially political issue, involving politicians at the highest levels and needing decisions from them.

Though there is the general view that this is the last chance and that otherwise the Uruguay Round negotiations would be wound up and the GATT would collapse, no international negotiations take such a course. Even, if they are broken off, the warring participants at some stage try to come back to the negotiating table, armed as they might feel with greater bargaining power, in this case with the U.S. and EC trying bilateral measures to strengthen their trade positions.

But while bilateratism could increase their "markets" in third countries - in Latin America and some of the Asean for the U.S., and Europe and other Asian countries for the EC - it cannot gain for either the basic markets they are looking to, each other's, nor deal with the growing competition from Japan.

Only multilateral negotiations could perhaps do this.

Late reports from Washington Wednesday night indicated that the U.S. administration at its top levels, perhaps involving President Bush himself, was holding meetings to take a decision on the imposition of retaliatory penal tariffs on a range of imports from the EC for a value of about one billion dollars.

This one billion dollar figure is what the U.S. claims it has lost, in terms of market access, actual and expectations, when it exchanged concessions with the EC during the Tokyo Round for duty free imports of Soya, but which have been "nullified" by the EC's subsequent measures of domestic subsidies.

The U.S.-EC negotiations at top levels have been going on for the last few weeks - both on their differences over the agricultural package in the Dunkel Draft Text of the Uruguay Round as well as on the oilseeds dispute.

On the latter, where two rulings of GATT panels went against the EC, the latter chose the option, open to it under GATT, of not implementing the ruling but offering to compensate by "renegotiating" the bound zero-tariff schedule on Soya imports that it had negotiated with the U.S.

However, it chose to do this under the authority of the GATT Council (thus protracting and delaying a final outcome), and when the talks with the U.S. and others with initial negotiating rights or interested parties as principal suppliers to the EC market broke down, the EC threw issue the back into the GATT Council.

Thereupon, the U.S. demanded an arbitration to determine the extent of damage suffered by the U.S. - which could have been interpreted by the U.S. as a virtual sanction for retaliation which otherwise the EC could have blocked in the GATT Council because of the consensus decision-making. The EC opposed the arbitration and wanted the Council to consider the issue.

The Council failed to take a decision, and the U.S. began talking of retaliation, and the EC spoke of things being also readied by it for counter-retaliation, when the two sides sought to settle the range of disputes - both Uruguay Round and oilseeds - through bilateral Ministerial level talks at Brussels, and later at the Ministerial meeting of the Quad (Canada, EC, Japan and the U.S.). At the latter both sides spoke of a like "breakthrough", and resumption of talks at the senior official and technical level.

It was this technical level talks that was broken off Wednesday, taking issues back again to the brink.

Though the media reports have all been speaking of the breakdown as having been caused by the U.S. Soyabean producers lobby having vetoed a possible U.S.-EC deal - on the ground that it would not ensure increased Soya imports into the EC - there is some ground for the view that the U.S.-EC differences are more basic and relate also to the Uruguay Round and the volume commitments product-wise on subsidised exports.

The Dunkel draft text, officially known as the draft final act, called for cuts in agricultural support and subsidies requires, in the area of export subsidies. cuts in terms of budgetary outlay and also volume, namely that exports of subsidised agricultural products should be reduced in volume terms (taking the average of 1986-1990 base period) by 24 percent over a six year period (beginning 1993, when the agreement was at that time expected to be brought into force).

The EC had made clear, when Dunkel presented his text in December 1991, that this was not acceptable and the agriculture text would have to be modified.

Since then, the multilateral talks (more form than substance) in Geneva, and the bilateral U.S.-EC talks in Washington and Brussels, have been around the type of modifications that the EC demanded.

These included in effect putting into the draft text, into a separate box, the reform measures that the EC has agreed to do domestically in its Common Agriculture Policy including the direct compensatory payments it would make to farmers for taking land off production and making these payments beyond challenge under GATT for "subsidisation", as well as for "flexibility" in shifting its reduction commitments to various products.

And while the EC has been always pointing to the autonomous reforms it was introducing in its CAP, it has never been willing to spell out its cuts individually in terms of access or border protection, domestic subsidies for production and subsidies for exports. It has always been arguing that the cut in domestic support would inevitably be reflected in greater border access and less exports.

In the U.S.-EC discussions, focusing in the Uruguay Round on subsidised exports, various figures have been mentioned - including a 24 percent reduction or a 21 percent reduction or EC agreeing to 24 percent reduction in volume with some "swing" or flexibility over the six year period to compensate for excess subsidised exports in one year over the next or in terms of products.

All these in reality relate to the question of cereal imports and exports as also of Soya and animal feeds. There have been some reports that the EC has been asking for an 18 percent reduction commitment and flexibility or swing in apportioning the cuts.

The American side at one stage thought it had clinched the deal on the Uruguay Round, and shifted the focus the oilseeds issue. Both sides have generally agreed that the two are linked.

While the current breakdown is blamed by the EC on the oilseeds issue - and the EC has been suggesting that compromises have been vetoed by the U.S. Soya producers/exporters who, according to the EC, have lost their EC market share, not because of EC protection but because of more competitive imports from Argentina and Brazil, and had vetoed any possible deal - the Americans claim that the EC was slipping out of even what they had thought had been clinched, namely, the Uruguay Round agriculture issues.

France, right through, has been steadfastly opposing a deal, insisting that no deal struck with the Bush administration would stick beyond the elections, particularly since Bush would lose anyway.

The EC Commission negotiators, as well as Germany and Britain, wishing to help a Bush win if possible, have been leaning on France, particularly after its Maastricht referendum, to give way.

This German stance, and breaking away from the 1991 joint position with France over agriculture, has been helped even more since under the CAP reform agreed to, its uneconomic farm production, as well British agriculture in several areas, would continue to receive protection, while it is the more competitive French agriculture that will bear the brunt of cutbacks in support and competition from the U.S. - in the EC markets and in export markets.

It is from this perspective that the French have been repeatedly challenging the EC Commission negotiating a deal, arguing that Andriessen and MacSharry cannot go beyond the mandate given to them by the EC Council, namely the CAP reform package.

This has thus become a high political issue, and one that cannot be resolved by technical gimmicks - fashioned whether by the EC or GATT officials.

Whether or not Bush retaliates, it is difficult to see the Round being wound up before 3 November.

And if it spills over beyond and in the unlikely event of Bush winning, he is clearly less likely to yield.

And if he loses (as seems most likely short of a last minute surprise that the U.S. Voters provide in the voting booths), and if the deal is seen by Clinton as not attractive enough for the U.S., the Round will get further delayed.

Until Clinton moves into the White House in January, the negotiations would remain paralysed. It is unlikely to receive such a high priority in any new administration, more so when Cabinet members (a new Trade Representative, as well as Commerce and Agriculture Secretaries) have to be named and would need to map out their own policies.

It might need fresh Congressional authority too for fast track approval.

Also, the French Parliamentary elections due in March will make France dig in even further. And the French making clear that the entire European Community Rome treaty was based on the CAP, and the advantages it gave to France within the EC vis-a-vis Germany etc in agriculture, and any attempt to override France would hence jeopardise the EC itself, no early resolution seems feasible.

And given the general view that Clinton (and Congress) would want to bring into the negotiations environment and workers rights issues - it would need re-negotiating the Punta del Este mandate.

The Uruguay Round may thus be going round and round for a while.