International Agricultural Trade: Domestic Support by Dr Melaku Geboye Desta CEPMLP, University of Dundee Scotland Graduate Institute of International and Development Studies Summer Programme on the WTO, International Trade and Development 15-16 July 2008, Geneva

Agricultural subsidies Subsidies: support to enterprises provided or mandated by government Types: – domestic/production and export subsidies Why bother? trade/production distortions: recipients gaining market share -- hence “unfair trade practices” Why do countries subsidize agriculture? The usual story: food security; culture; environment; voting; Then why subsidize exports? The other usual story high domestic support ► excess supplies ► lower world market price ► export subsidies = a simplistic view Focus: agricultural domestic support

Agricultural Domestic Support Terminology: domestic support, domestic subsidies, production subsidies (descending?) Domestic support: subsidies provided to producers regardless of export considerations Examples: EC market price support schemes and US counter-cyclical payments (or pre-96 deficiency payments): target prices, intervention agencies/purchases, stockpiling, etc. Why should countries worry about support given to farmers in another country? Production/trade distortions: “necessity” for export subsidies and market access barriers Exceptional difficulty for multilateral regulation

Domestic support: from GATT to AoA GATT: no strict discipline on domestic support Art XVI: then only one para no distinction between domestic and export subsidies only two legally meaningless obligations: the obligation to ‘notify’ subsidies (and not all) and in case of serious prejudice, the obligation to ‘discuss’ the possibility of limiting the subsidization

DSP: GATT to AoA ct’d Domestic support and national treatment: Why an issue? GATT Article III:8(b): “the national treatment provisions “shall not prevent the payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges applied consistently with the provisions of this Article and subsidies effected through governmental purchases of domestic products.” Italian agricultural machinery case Doctrine of reasonable expectations: protecting tariff bindings: From ‘case law’ to ‘legislation’ Australian Ammonium Sulphate 1955 understanding

The 1955 Understanding “a contracting party which has negotiated a concession under Article II may be assumed, for the purpose of Article XXIII, to have a reasonable expectation, failing evidence to the contrary, that the value of the concession will not be nullified or impaired by the contracting party which granted the concession by the subsequent introduction or increase of a domestic subsidy on the product concerned.” GATT, BISD 3S/224 Problem: scope of understanding limited to products with bound tariffs – agriculture with least bindings

The 1979 Subsidies Code Not much change here: conflict between two positions: “subsidies other than export subsidies are widely used as important instruments for the promotion of social and economic policy objectives and do not intend to restrict the right of signatories to use such subsidies to achieve these important policy objectives which they consider desirable.” such subsidies “may cause or threaten to cause injury to a domestic industry of another signatory or serious prejudice to the interests of another signatory or may nullify or impair benefits accruing to another signatory under the General Agreement, in particular where such subsidies would adversely affect the conditions of normal competition.” Balance struck: “seek to avoid causing adverse effects”

Domestic subsidies under the SCM Agreement The “traffic lights”: import substitution subsidies: “red box” most other domestic subsidies = “amber box”: actionable if causing adverse effects to others: injury to the domestic industry of another Member nullification or impairment of benefits (Article XXIII of the GATT); and serious prejudice to the interests of another member The “green box”: R&D; env’t; regional dev’t non-actionable? not really! (just different venue!) ended in 2000! (Art. 31 SCM) Non-specific subsidies: truly non-actionable

The AoA Discipline on domestic support Noble, but weak A tri-colour product – not a “traffic light”!? Amber: highly trade-distortive and hence subject to reduction commitments Blue: support provided subject to production-limiting conditions and which are exempted from reduction commitments Green: no or at most minimal trade-distorting effects and hence subject to no discipline at all NB: colours & boxes only pedagogical

Amber box support Approach: all trade-distorting support subject to reduction commitments Reduce what? AMS AMS: “the annual level of support, expressed in monetary terms, provided for an agricultural product or non-product specific support provided in favour of agricultural producers in general” Different versions of the AMS: Base Total, Annual Bound, Current Total, and Final Bound Reduction commitments: 20% of 1986/88, over 6 years; credit for post-86 reductions

Exemptions from AMS reductions Rule: all domestic support subject to commitments: “Subject to the provisions of Article 6, a Member shall not provide support in favour of domestic producers in excess of the commitment levels specified in Section I of Part IV of its Schedule” Art. 3:2 Exception: only if specifically provided Provided where? Art. 6: de minimis: 5% and 10% blue box: production-limiting conditions development box for developing countries: generally available investment subsidies; input subsidies to low-income farmers; for diversification away from illicit crops Annex 2: green box

Who can provide trade-distorting domestic support?

Green Box Measures Measures with “no, or at most minimal, trade-distorting effects or effects on production” Basic criteria: only directly-government-financed schemes (no transfers from consumers), and no price support to producers Policy-specific criteria: about 12 categories: general services, public stock-holding for food security; domestic food aid; decoupled income support; etc.

Decoupled Income Support: a Green Example Annex 2, Para. 6: Decoupled income support (a) Eligibility for such payments shall be determined by clearly-defined criteria such as income, status as a producer or landowner, factor use or production level in a defined and fixed base period. (b) The amount of such payments in any given year shall not be related to, or based on, the type or volume of production (including livestock units) undertaken by the producer in any year after the base period. ... (e) No production shall be required in order to receive such payments US Upland Cotton: not all direct payments are decoupled or green

The Peace Clause (AoA Art. 13) During the implementation period, notwithstanding the provisions of GATT 1994 and … the Subsidies Agreement: (a) domestic support measures that conform fully to the provisions of Annex 2 to this Agreement shall be: (i) non-actionable subsidies for purposes of countervailing duties; (ii) exempt from actions based on Article XVI of GATT 1994 and Part III of the Subsidies Agreement; and (iii) exempt from actions based on … paragraph 1(b) of Article XXIII of GATT 1994; (b) domestic support measures that conform fully to the provisions of Article 6 of this Agreement including direct payments that conform to the requirements of paragraph 5 thereof, as reflected in each Member's Schedule, as well as domestic support within de minimis levels and in conformity with paragraph 2 of Article 6, shall be: (i) exempt from the imposition of countervailing duties unless a determination of injury or threat thereof is made in accordance with Article VI of GATT 1994 and Part V of the Subsidies Agreement, and due restraint shall be shown in initiating any countervailing duty investigations; (ii) exempt from actions based on paragraph 1 of Article XVI of GATT 1994 or Articles 5 and 6 of the Subsidies Agreement, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year; and (iii) exempt from actions based on … paragraph 1(b) of Article XXIII of GATT 1994, provided that such measures do not grant support to a specific commodity in excess of that decided during the 1992 marketing year; (c) export subsidies that conform fully to the provisions of Part V of this Agreement, as reflected in each Member's Schedule, shall be: (i) subject to countervailing duties only upon a determination of injury or threat thereof based on volume, effect on prices, or consequent impact in accordance with Article VI of GATT 1994 and Part V of the Subsidies Agreement, and due restraint shall be shown in initiating any countervailing duty investigations; and (ii) exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5 and 6 of the Subsidies Agreement.

Art. 13 summarized/simplified: green box: Complete protection: no unilateral or multilateral action (including under SCM; GATT Art.XXIII:1(b) amber box, blue box, dev’t box and de minimis: countervailable (but pls show due restraint in initiating investigations) exempt from SCM and GATT Art. XXIII:1(b) if support to a specific commodity does not exceed the 1992 level Expired but will it come back under the Doha process?

US Upland Cotton: Salient Features Complainant: Brazil Third Parties: Benin, Chad, Argentina, Australia, Canada, China, the EU, India, New Zealand, Pakistan, Paraguay, “Chinese Taipei” and Venezuela Complaint: various US domestic support and export subsidy measures inconsistent with US obligations under AoA, SCM and GATT 1994 E.g.: Production flexibility contract payments and direct payments are not green, hence in violation of AoA: Production flexibility contract payments (Direct payments under 2002 Act): payments made regardless of what the producer chose to grow, and whether or not the producer chose to produce anything at all. However, there were limits to this planting flexibility. Specifically, payments were reduced or eliminated if fruits and vegetables (other than lentils, mung beans, dry peas and, since 2002, wild rice) were planted on upland cotton base acres, subject to certain other exceptions

The Peace Clause, DSP, and US Upland Cotton Defence: direct payments are green, and in any case are within the US commitment levels, thus protected by the peace clause Issue: e.g. are direct payments as defined above decoupled income support under Para. 6(b) of Annex 2 AoA? Finding: several US measures not in conformity with AoA art. 13; hence not exempted from action under SCM Agreement and GATT 1994; many in violation of US commitments; hence must be removed

AB on decoupled support: US Upland Cotton “Paragraph 6 of Annex 2, entitled ‘[d]ecoupled income support’, seeks to decouple or de-link direct payments to producers from various aspects of their production decisions and thus aims at neutrality in this regard. Subparagraph (b) decouples the payments from production; subparagraph (c) decouples payments from prices; and subparagraph (d) decouples payments from factors of production. Subparagraph (e) completes the process by making it clear that no production shall be required in order to receive such payments. Decoupling of payments from production under paragraph 6(b) can only be ensured if the payments are not related to, or based upon, either a positive requirement to produce certain crops or a negative requirement not to produce certain crops or a combination of both positive and negative requirements on production of crops.” Para. 325. “A program that disallows payments when certain crops are produced relates the amount of the payment to the type of production undertaken.” Para. 331.

Major domestic support issues in Doha Amber box domestic support include the following: (1) should it be eliminated or just reduced? if the latter, by how much? and (2) should the aggregate commitments be replaced by product-specific commitments? Blue box: to keep or not to keep!?  Green box: tightening the criteria? The peace clause: any hope of resurrection?

July 04 Framework on domestic support Overall: support harmonization – a tiered formula Q.: But domestic support commitments are not product specific: how can this be? misleading? A.: inter-country harmonization rather than between products within a country: a different sense than the tiered formula in market access 20% overall reduction from base level promised in first year; all non-green domestic support included in setting base level Additional formulae to be designed for each type of non-green support Final Bound Total AMS: a tiered formula again Harmonization product specific support to be capped at average level some product-specific reduction to be expected De minims: subject to negotiations Blue box: capped at max 5% of a member’s average annual agricultural production – later indications to cap it at 2.5%! S&D: longer implementation periods, lower reduction levels, and continued availability of AoA Art 6.2 Green box: to be reviewed and clarified

DSP in the HK Ministerial “there will be three bands for reductions in Final Bound Total AMS and in the overall cut in trade-distorting domestic support, with higher linear cuts in higher bands. In both cases, the Member with the highest level of permitted support will be in the top band, the two Members with the second and third highest levels of support will be in the middle band and all other Members, including all developing country Members, will be in the bottom band.” the Member: the EU the two Members: the US and Japan all other Members: largely the poor Trade as an instrument of development?! “There is a need for calling a spade a spade rather than a digging implement tailored to certain terrestrial conditions.” Ag Chair!

On the Doha table (overall cuts): Bands Thresholds (US$ billion) Cuts 1 >60 70%-80% 2 10-60 53%-75% 3 0-10 & all developing countries 31%-70%

On the Doha table (FBT AMS cuts): Tiers Cuts 1 (EC) 70% 2 (US and Japan) 60% 3 (the rest) 37%-60%

May 2008 Modalities Draft: overall (OTDS) cuts Bands Thresholds (Base OTDS US$ billion) Cuts 1 >60 (i.e. EC) [(75) (85)]% 2 10-60 (i.e. Japan and US) [(66) (73)]% 3 10 or < (all other countries) [(50) (60)]% Developing countries with FBT AMS commitments 2/3rds of 3 [(50) (60)]% Developing countries with no FBT AMS commitments Exempt

May 2008 Modalities Draft: OTDS ct’d Implementation: Developed countries: reduction in six steps over five years Two highest tiers (EU, Japan, US): 33% down payment plus five equal annual installments All other countries: 25% down payment plus five equal annual installments

May 2008 Modalities: FBT AMS Tiers (in USD Billions) Cuts Implementation period >40 (i.e. EC) 70% 25% down payment + 5 equal annual installments 15-40 (i.e. US and Japan) 60% <15 (i.e. all other countries) 45% DDCs: 6 steps over 5 yrs Developing countries with FBT AMS commitments (those with <$100 mil. exempt) 30% 9 steps over 8 yrs

Conclusion: Development Issues Context: negotiations v. dispute settlement The issue of subsidies – often a divisive one even among African countries A love-hate relationship with export subsidies: e.g. EU export subsidies benefit some (e.g. sugar exporters) while harming others (e.g. cotton) Could we say the same for the dispute settlement system? (again cotton v. sugar) Long-term implications: only positive?

Readings Official Documents: Texts of GATT 1947; Agreements on Agriculture and SCM Uruguay Round Modalities for the Establishment of Specific Binding Commitments Under the Reform Programme, GATT doc. MTN.GNG/MA/W/24, 20 December 1993 Doha Revised Draft Modalities For Agriculture, TN/AG/W/4/Rev.2, 19 May 2008 Primary Readings: Karen Halverson Cross, “King Cotton, Developing Countries and the ‘Peace Clause’: The WTO's US Cotton Subsidies Decision”, 9(1) Journal of International Economic Law (2006), pp. 149-195 WTO, Unofficial Guide to Revised Draft Modalities, 19 May 2008, at http://www.wto.org/english/tratop_e/agric_e/ag_modals_may08_e.pdf Cases: United States – Subsidies on Upland Cotton, WT/DS267, Panel Report (8 September 2004), and AB Report (3 March 2005)