Dec 22, 1989

EECíS REFORM PROPOSALS HAVE SOME NON-NEGOTIABLES.

GENEVA, DECEMBER 20 (BY CHAKRAVARTHI RAGHAVAN)ó The European Community Wednesday put forward in the Uruguay Round GATT Negotiating Group on Agriculture its proposals for agricultural trade reforms, making clear that some aspects of it are non-negotiable.

Under the terms of the Mid-Term Review (MTR) accord in this area, and the programme of work adopted, all proposals in Agriculture, as in other areas, are to be tabled by December, when the first phase of the post-MTR work was targeted to be completed.

The EEC tabled its proposals on the very last day before negotiators adjourned for Xmas vacations.

The EEC proposals in effect would involve some commitments for "reduction" of current levels of support and protection.

These commitments for reduction would be for five years and reviewed in the fourth year of programme.

It would include "some elements" of tariffication of external protection (favoured by the US and the Cairns Group), subject however to overall "rebalancing" of existing tariff levels, meaning reduction in some areas (where protection is not needed in terms of world market prices) and increase in others (where the market prices are lower).

In tabling the proposals Wednesday morning at the meeting of the negotiating group on agriculture, EEC Director-General for Agriculture Guy Legras, is reported to have made clear that some of the proposals and concepts in the EEC paper were not "negotiable".

The "non-negotiables" were issues related to the EEC's "dual pricing" (higher prices on domestic markets and at ruling world market prices for exports), any kind of proposals that would make price regulation impossible, and using 1986 as the benchmark year for judging the level of support from which reductions are to be made.

The EEC proposals for "reduction of support" will cover, not all agricultural products, but a few which in the EEC view need priority attention: cereals, rice, sugar, oilseeds, milk, beef and veal, pigment, eggs and poultrymeat.

The EEC placed its proposals, about not allowing full play of market forces, in the content of its arguments about specific characteristics of agriculture - a view, which was challenged by the U.S. and some of the Cairns Group members.

The special characteristics and rationale put forward by the EEC included:

* Weak price elasticity resulting in large price variations and leading to imbalances between supply and demand,

* Production influenced by climatic variations, and responding excessively to price variations,

* Production adjusting abruptly in succession of cyclical crises without public price intervention, thus forcing ICs to pursue objectives of guaranteeing and stabilising prices paid to producers and ensuring security of supply to consumers at reasonable prices.

(Several of these arguments and "economic facts" have often been cited by Third World countries at UNCTAD in pushing for international commodity agreements for management of demand and supply of commodities principally exported by them. But there apart from the US, the same EEC (at instance of the FRG and others) along with Japan and others, who agreed in the agriculture group with the EEC rationale oppose any intervention with market forces.)

The EEC acknowledged that such policies created very serious problems by promoting "structural imbalances" with production increasing continuously while demand was limited by saturation of food consumption in ICs, and with support mechanisms and "high levels" of protection resulting in "unreasonable attenuation" of relationships that should exist between production and the market.

In view of the several uncertainties about long-term prospects for supply and demand, and consequences of changes in prices after the negotiations, the balance between supply and demand needed for stabilisation of major products could not be predicted.

Hence negotiations should only aim to "progressively reduce" support to the "extent necessary" to re-establish balanced markets and a more market oriented agricultural trading system.

No final level of support could be set "a priori" or "in abstracto", and any final objective with theoretical or ideological fervour would disrupt and slow the negotiations, the EEC warned.

The EEC said that the commitments to reduce support and protection should be measured in terms of an "aggregate measurement of support", and the measures to be included in the "Support Measurement Unit" (SMU) should be defined in such a way that contracting parties might not escape from their commitments.

The SMU should be precise and clear, and cover all measures having a real impact on production decisions of farmers, including mainly measures to support market prices, direct payments linked to production or to factors of production and measures aimed at reducing input costs which are commodity specific or where a distribution according to main commodities is feasible.

For products where SMU calculation is not technically feasible, equivalent commitments should be undertaken.

It should also cover processed agricultural products.

The SMU should be calculated with reference to a fixed external price, in order to remove uncertainties caused by fluctuations in market and exchange rates.

The commitments to reduce support should involve "clear movement" towards reduction of support, with the scale of movement related to the world market situation.

A mechanism should be developed so as to better relate agricultural policies to market developments, with commitments to reduce support expressed as a percentage reduction of SMUs, and commitments undertaken on a regular basis but varying by product or groups of products the EEC paper suggested.

The commitments to reduce support at the first stage could be made for five years, with a review undertaken in the fourth year to determine to what extent and what rate the reduction in support should be pursued.

The reductions should be measured against the reference year of 1986, and credit given for measures taken by participants since the adoption of the Punta del Este Declaration.

While the EEC argued that the 1986 date as benchmark was part of the MTR accord about giving credit to the post-Punta measures of reduction of support, the US and others challenged it.

Taking 1986, as the benchmark year would enable the EEC even to raise levels of support on some agricultural products, some of the Cairns Group members privately explained. The U.S. and others who since then have increased their support, particularly for export subsidies, would be forced to cut back.

The EEC insisted that tariffication of existing protections and support measures would not provide a reasonable and convincing solution, because of the variegated types of import regimes and protection and support systems.

If there was exclusive reliance on customs tariffs as a protective mechanism, and if tariffs were to be reduced to zero or low levels after a period, trade in agricultural products would be on a totally "free and chaotic basis", and such arrangements would not be "viable" and would lead to a cycle of crises in agriculture with inevitable social and political consequences, the EEC argued.

Reliance on tariffication mechanisms, would not also reflect such support instruments as "deficiency payments" (used by the Americans to support their farmers) that might have as much impact on trade as frontier measures.

Despite these reservations, the EEC said it was willing to consider "elements of tariffication", making clear that this would involve "rebalancing" of protective tariffs (reducing on some products and raising that on others).

Border protection for products included in the list of SMUs, as well as their derivatives and substitutes, would be assured by a fixed component expressed as an absolute value and reduced at a similar rate as SMUs.

But there would be a "corrective" factor to take account of fluctuations in exchange rates and in world market prices when they went beyond certain agreed limits.

In effect, the EEC proposal implied that while fixing protection in terms of tariffs, it would reserve the right to vary it on basis of exchange rate variations, as well as when world market prices moved beyond an agreed range - a variation of its current practice of variable levies.

The EEC suggested that similar arrangements should also be made for exports, implying continuance of its dual pricing system and export subsidies within limits, with the further stipulation that amounts granted to support exports could not exceed that levied on imports i.e. financing export subsidies through import levies.

As for Third World countries and the s and d treatment assured to them, the EEC would allow them a "degree of flexibility" in application of whatever rules are adopted for reduction of support and protection, with the "flexibility" varying according to the "actual level of development and development needs of the countries concerned".

The "flexibility" is to be applied by restricting the commitments to a "limited number of products" and expressed in terms that might differ from those applied to ICs, and with the magnitude of reduction and time-frame for implementation varying according to the specific needs of the Third World countries concerned.

The way the EEC proposals have been worded, and taking account of its positions in other rule-making groups like those on GATT articles, etc., it would appear to have attempted to present itself as supporting the Third World case for S and D treatment, but leaving itself leeway to whittle it away later by applying "graduation" theories to the countries hoping to benefit from the flexibility.

While the Community would not insist on "full participation" by all Third World countries in the reduction of support and protection, those with "significant export interest" or which are "relatively advanced economies" should participate in the commitments, either to draw benefits given by others or to better solve their internal agricultural problems.

As for problems of net food importing countries, during a transitional period the additional burdens caused should be alleviated through supply of agricultural and food products in the form of donations or concessional sales with an important grant element.

These should be monitored through notification procedures of Articles XVI of GATT, thus ensuring transparency.

The Lleast Developed Countries (LDCs) would be provided special financial assistance for development of agricultural production during the transition period.

In some preliminary comments, Egypt noted that its own annual food import bill of four billion dollars would increase by a billion more as a result of the proposals for reduction of agricultural support and consequent increase in world market prices. While the EEC plan made some reference to the problems of food importing countries, the financial assistance proposed would be confined to LDCs.

Mexico and Peru, two other net food importing countries also spoke in a similar vein. Mexico also noted that while talking about "agricultural reform" only a limited range of products were covered.

Canada, Argentina and Australia (all members of the Cairns Group) were among, those who were reported to have expressed concern over the "non-negotiable" parts of the EEC proposals.

Argentina was also concerned over the EEC's proposals for "rebalancing" of tariffs, pointing out that this would result in intensification of protection rather than the "liberalisation" of trade promised by the Punta del Este declaration.

In a similar vein, Brazil reportedly pointed out that the objective was not to "redistribute" levels of protection but reduce them.

Switzerland and Japan were among those who felt that the EEC paper represented a "balanced" approach, reflecting the characteristics of agriculture. Switzerland however felt that the "non-trade" aspects needed more stress. Also the tariffication approach seemed tailored to meet EEC needs.

The U.S. was disappointed with the EEC proposals, and challenged the economic basis of the EEC analysis.