Status of the Doha Round and Agricultural Policy Reform Robert L. Thompson Chairman International Food & Agric. Trade Policy Council and Gardner Chair in Agricultural Policy University of Illinois December 7, 2005

American Leadership Was Key in Uruguay Round Ag Negotiations Got domestic agricultural policies on the negotiating table and got them capped Sold importance of decoupling payments from production of specific commodities Got export subsidies capped and reduced Sold importance of converting all non-tariff barriers to tariffs and to reduce them Hung tough on requiring sound science basis for sanitary & phytosanitary barriers Insisted on an iron-clad dispute settlement process

Uruguay Round Agreement on Agriculture: Accomplishments Increased market access as % of consumption Reduced export subsidies (value & volume) Converted all non-tariff barriers to tariffs Required scientific basis for all SPS barriers Acknowledged that some domestic agricultural subsidies can distort trade and categorized them by degree of trade distortion: –“Green box” = non trade distorting investments in public goods and decoupled income transfers –“Amber box” = trade-distorting (bound and reduced) –“Blue box” = trade-distorting, but offset by production controls or set-asides

But the Uruguay Round Did Little to Liberalize Agricultural Trade Uruguay Round established a useful framework But, it did little to open markets, and OECD countries are still spending over $750 million per day subsidizing their farmers Doha Round needs to be more ambitious than the Uruguay Round by closing loopholes and tightening disciplines to prevent circumvention of the intent of the agreement.

The 2002 Farm Bill Hurt U.S. Credibility Abroad The U.S., which had led global effort to reduce ag subsidies appears two-faced: increasing its budget authority for agricultural subsidies when it is telling the rest of the world to cut theirs Retreat on decoupling: By allowing bases to be updated, U.S. farmers know that “fixed payments” are not necessarily “fixed.” Counter-cyclical payments will reduce U.S. farmers’ responsiveness to market signals Marketing loans are effectively export subsidies, as are some forms of food aid and export credits.

The Doha Development Agenda

WTO at Creation of the WTO 1996Singapore Ministerial 1998Geneva Ministerial 1999Seattle Ministerial 2001Doha Ministerial 2003Cancun Ministerial 2005 Hong Kong Ministerial 2007?Completion of Doha Round

Why the Development Focus in This WTO Round? It’s in our economic self-interest: –50% more population by all in low income countries –Half the current population lives on less than $2/day. –They are the only potential growth market for agricultural products, but only if and when they can afford to eat meat, fruits, vegetables; edible oils. Trade is a more powerful engine of growth than aid. Persistent poverty can have adverse geopolitical effects (Doha soon after 9/11) and cause illegal immigration Developing countries are now the majority of WTO members; there will be no agreement until they perceive something of value in it to them (unlike the past). It’s the right thing to do.

The Global Trading Environment Hurts LDC Agriculture OECD protectionist barriers to LDC goods reduces their foreign exchange earning capacity and economic growth. OECD agricultural production and export subsidies depress world market prices below long term trend and increase variance around that trend Food aid is most available in years of OECD surplus, not LDC deficit. Depressed world market prices reduce returns to poor farmers, increasing their poverty, and slowing agricultural and national economic growth. Widespread poverty in LDCs impedes growth in their food demand, preventing them from fulfilling their potential as growth markets.

World Market Prices Depressed Below Long Term Trend Rice % Sugar 20 – 40 % Dairy Products 20 – 40 % Cotton 10 – 20 % Peanuts 10 – 20 % Source: World Bank. Global Economic Prospects 2002, Chap. 2.

Developing Countries’ Own Policies Impede Their Development Corruption and/or macroeconomic instability Lack of definition or enforcement of property rights and contract sanctity Underinvestment in public goods, such as rural infrastructure, education and R&D. Cheap food policies to keep urban consumers quiescent – often reinforced by food aid or subsidized exports from OECD Lack of technology adapted to local agro- ecological conditions (soils, climate; slope)

Key Outcomes Developing Countries Need from OECD Countries A more open trading environment that can stimulate faster economic growth Market access for goods in which developing countries have a comparative advantage Eliminate import barriers and domestic and export subsidies which depress world market prices and increase their variance Foreign aid and international lending for investment in necessary infrastructure, technology, know-how, etc. and to facilitate adjustment.

Why U.S. Agriculture Should Support Developing Country Priority in WTO Developing countries are the only potential growth markets of the future -- but only if they enjoy broad-based economic growth -- which will come only if they are allowed to export what they produce relatively most efficiently. Developing countries now make up the majority of WTO members. There will be no agreement in the current trade negotiations until they feel there is something of value in it for them (unlike past trade agreements).

Brazil Cotton Case

The WTO Cotton Case: Brazil’s Allegations U.S. policies in 2002 Farm Bill stimulated larger production and exports of cotton This depressed the world price of cotton, reducing the earning potential of Brazilian cotton growers The U.S. cotton program violates the Uruguay Round Ag Agreement, of which the U.S. was a principal author (with the E.U., against whose sugar policy Brazil brought a successful case) The U.S. and E.U. should change those policies or pay compensation (EU starting to change it)

The WTO Cotton Decision Certain U.S. policies depressed the world market price by enough to cause “serious prejudice” to interests of other exporters: –Marketing loan –Loan deficiency payments –Counter-cyclical payments –Market loss assistance payments –Step 2 cotton payments Other U.S. policies didn’t: –Direct payments –Crop insurance subsidies –Production flexibility contract payments

Cotton Decision (cont’d.) Certain payments, which the U.S. reported as decoupled (green box) payments should have been categorized as “amber box;” since they were not fully decoupled (fruit & veg exception). If they had been, the U.S. would have exceeded its allowed aggregate measure of support. Export credit guarantees are export subsidies and should be eliminated before July 1, 2005, as should Step 2 cotton payments, which are subsidies to both domestic consumption and exports of cotton.

Implications of Cotton Decision for 2007 Farm Bill Congress heeded the URAA AMS cap when it wrote the 2002 farm bill, but it ignored the fact that marketing loans work as export subsidies and can depress world market prices. Need to change marketing loan, LDP and CCP provisions for cotton and other program crops. The fruit and vegetable production exclusion in qualifying for direct payments needs to be changed. This will bring huge political opposition from fruit & vegetable growers, esp. California. Note: The U.S. cannot claim any credit in the Doha Round agreement for changes it makes in policies found to be in violation of the URAA.

The Doha Development Round of Multilateral Trade Negotiations

Food and Ag Trade Issues High tariffs, including tariff peaks, water in tariffs, and tariff escalation Quantitative restrictions to imports (TRQs) Subsidized competition (export & dom subsidies) Aggregation (in determining export subsidies, domestic support, market access; minimum access) Subsidies linked to production of specific commodities Technical barriers to trade (e.g. labeling; certification) Sanitary & phytosanitary barriers (only science-based) Trade-related intellectual property issues (GIs; brands) Trade related investment measures (transparency) Customs procedures

Doha Round Progression Doha Ministerial declaration (Nov. 2001) Individual country/region proposals Chairmen’s discussion drafts US-EU text just before Cancun G-22 text Cancun Ministerial -- Derbez text July 31, 2004 Framework Agreement Oct. 10, 2005 U.S. Proposal, followed by EU and G-20 proposals

Key Players in Doha Round Agricultural Negotiations United States European Union (now 25) G-20 (Brazil, India, China, S. Africa, +) Cairns Group (Australia, New Zealand, +) G-10 (Japan, Korea, Norway, Switzerland,+) Other developing countries (the majority of members, but heterogeneous interests)

Framework Agreement July 31, 2004 Eliminate all forms of ag export subsidies Reduce trade-distorting domestic subsidies (highest the most, but exceptions possible) Reduce tariffs (highest the most, but exceptions allowed if increase minimum market access) Tighten definition of what subsidies are “non- trade distorting” Allow developing countries smaller cuts over longer period (definition? exempt LDCs completely? exempt “sensitive products”?)

Overall Domestic Support Present: Categorizes all support policies in one of three boxes, with only amber box total (“aggregate measure of support” (AMS)) capped. U.S. proposes: –Cap blue box, trade-distorting de minimis, and non-trade distorting de minimis each at 2.5% of agricultural GDP –Cap sum of amber box + blue box + trade-distorting de minimis + non-trade distorting de minimis policies, and reduce this total 75% (less for countries with lower total subsidies). This would significantly increase maximum allowed support in US and EU! Very large cuts would be required to cause any reduction in actual support. U.S. proposes 75% for highest subsidizers, with declining percentages for lower subsidizers)

Amber Box Framework Agreement said “Substantial reduction in the overall level of its trade-distorting support from bound levels” U.S. proposes –Full phase out over 15 years: 60% in first 5 years; rest in last 5 years, with higher/lower % reductions in countries where higher/lower AMS. –Product-specific caps at levels Open issue –Highest levels of support reduced the most? E.g., rice, cotton, sugar; dairy in the U.S.

Blue Box Present: Trade-distorting policies that have measures that offset their production-inducing effect, e.g. set-aside or quota on production or sales. No cap at present. Tentatively agreed in Framework Agreement: –Broaden to include “direct payments that do not require production,” e.g. counter-cyclical payments [no link to current production, but per unit payment is based on current market price, so not green box]. U.S. proposal: Redefine blue box and cap at 2.5% of total value of all national ag production (including non-program crops).

Green Box Present: No cap. Doha Round Agreement likely to encourage shifting as much money as possible from amber to green box payments. –Essential not to cause a land price collapse Brazil cotton case affirmed that direct payments are “green” only if there are no constraints whatsoever on what can be grown on land receiving payments. –U.S. must either delete fruit & vegetable exclusion or include direct payments in amber box Open issue: Tighten definition of “minimally trade-distorting”

Market Access The most difficult pillar on which the least has been agreed to date Framework Agreement says: –Substantial increase in market access though tariff cuts or tariff rate quota (TRQ) expansion –Categorize all tariffs into “bands,” each with a different reduction formula, with the highest tariffs to be reduced the most. –Allow each country to designate an “appropriate number” of (politically) “sensitive products” on which smaller cuts can be made. –Increase tariff-rate quotas (TRQs) on “sensitive products” on which tariffs are cut less than formula would otherwise require. –Make cuts from bound rates. –Allow developing countries to use “special safeguard” –Developing countries can make smaller cuts over longer period

Market Access (cont’d) U.S. proposal would –Reduce tariffs by 55-90% (highest tariffs cut the most) –Cap tariffs at 75% in high income countries (a little higher cap elsewhere) –Limit “sensitive products” to less than 1% of tariff lines “with full compensation” via TRQ expansion –Allow “developing countries” Special Safeguard and Special Products –Internationally competitive developing countries (read Brazil) must provide meaningful increase in access to their markets FYI: U.S. has TRQs on sugar, dairy, cotton, peanuts, and beef.

Export Subsidies Present: Cap on volume and value of export subsidies on agricultural policies. The E.U. has agreed to eliminate all direct agricultural export subsidies by a (yet to be agreed) date certain WTO Cotton Case mandated that the U.S. must eliminate subsidy component in export credits and export credit guarantees (marketing loans?) Conditions yet to be agreed: –Date: U.S. proposes –Eliminate subsidy element in U.S. food aid –Mode of operation of state-trading enterprises (STEs), e.g. Canadian Wheat Board, must preclude possibility to subsidize exports.

Special & Differential Treatment of Developing Countries Allow smaller cuts phased in over a longer period Allow each developing country to designate a (yet to be defined) number of “special products” that can be protected Exempt LDCs completely from adjustment ???? There remains politically divisive issue of definition of “developing country” (as opposed to a least developed country (LDC)).

Prospects for Rest of Negotiations U.S. initially proposed reducing its trade- distorting ag subsidies substantially (now full phase out), but only if other countries provide much greater access to their markets. – US lost credibility when reversed course in the 2002 Farm Bill. U.S. was seen as the impediment to progress until tabled its bold proposal on Oct. 10, 2005, which put the EU on the defensive. The EU is proceeding with its reforms (including sugar), sifting from amber to green box, while absorbing 10 new members. – Increased market access would require faster transition.

Prospects (cont’d.) Developing countries won’t open their markets as long as world market prices are depressed by ag subsidies in OECD countries –And they have more than half of the votes in the WTO. Expectations lowered for Hong Kong Ministerial; not for the Round Expect modalities to be finalized in early spring 2006 Doha Round could still be wrapped up in mid