1. The Doha Round Lecture 21 The Economics of Food Markets Alan Matthews

2. Lecture objectives To ensure you have sufficient understanding of the issues in the Doha Round agricultural negotiations to be able to follow the debate and explain its implications for the EU and the CAP This lecture takes the story up until the July 2004 Framework Agreement

3. Reading WTO agricultural backgrounder ICTSD www.ictsd.org and www.agtradepolicy.orgwww.ictsd.org www.agtradepolicy.org World Bank Trade Notes FAO briefs EU DG Trade and USTR websites Anania et al. Agricultural Policy Reform and the WTO Matthews TEP paper plus Framework Agreement commentaries

4. Chronology Third WTO Ministerial Meeting in Seattle in November 1999 failed to launch comprehensive negotiations Article 20 negotiations: –Analysis and Exchange –the EU’s Comprehensive Negotiating Proposal, December 2000 Doha Mandate, November 2001 EU’s Specific Drafting Input, January 2003 Harbinson Modalities, Feb/March 2003 Adoption of the Fischler Reforms, June 2003 EU/US Joint Initiative, August 2003 Cancún Ministerial, September 2003 Derbez draft

5. Chronology EU’s offer to eliminate export subsidies, May 2004 Framework Agreement, July 2004 Paris May 2005 agreement on AVEs Dalien July 2005 G20 proposal on market access Zurich Oct 2005 proposals on market access Hong Kong Ministerial, December 2005

6. Chronology New deadline of April 2006 to reach agreement on modalities Chairman Falconer’s reference papers April-June 2006reference papers July 2006 Suspension of Doha Round January/Feb 2007 Revival of the Round?

7. Negotiation issues in agriculture Market access Export subsidies Domestic support Special and differential treatment (S&DT) for developing countries Non-trade concerns Peace clause

8. Tariff reduction issues High bound tariffs remained in agriculture after URAA – 62% on average Tariff-cutting approaches –Request and offer vs formula approach –Linear vs harmonising formulae –Cocktail formulae Principles suggested –Progressivity, flexibility, proportionality, and effective market access –Latter raises the question of ‘binding or tariff overhang’

9. Illustration of tariff overhang Tariff overhang is where a cut in bound tariffs would have no effect in cutting current applied tariff rates – no increase in effective market access Bound tariff pre-Doha Bound tariff post-Doha Applied tariff Bound tariff 50% cut

10. Example of Swiss formula T 1 = aT 0 /(a+T 0 ) With parameter a of 140, a tariff of 350% is reduced to 100% With parameter a of 60, tariff reduced to 51.2% With parameter a of 16, tariff reduced to 15.3%

11. Blended and banded formulae Banded (or tiered) formula, where higher bands would be subject to a higher average reduction Blended formula, where tariffs are reduced according to a mix of three approaches: the Uruguay Round approach, the Swiss formula, and cutting tariffs to zero. Harbinson proposed using UR formula within each band Options for flexibility – UR formula, sensitive products

13. Formula: P d = P 0 ( 1 + 0.64 t ) or Pd = P0 ( 1 + 0.76 t )

14. Measuring the level of ambition “Cuts in the average tariff” vs. “Average of the tariff cuts” Former is the comparison of the average tariff level pre- and post- negotiations Latter is measured as the average of all individual percentage cuts Was the method used in the Uruguay Round, and also by US in criticism of the EU proposal Latter method has no economic meaning because a high average cut can by obtained by cutting low tariffs by a large amoung

15. Illustration of average tariff cuts ProductInitial tariff CutFinal tariff Cut in average tariff A1006040 B10208 C10208 Average4033.318.753.3

16. Level of ambition in Oct 2005 proposals Average tariff before cuts Average tariff after cuts Cut in the average tariff Average of tariff cuts EU28154739 US1584837 Canada21105238 Japan61206640 Brazil372630130 India116723836

17. Sensitive products July 2004 Framework Agreement “Without undermining the overall objective of the tiered approach, Members may designate an appropriate number, to be negotiated, of tariff lines to be treated as sensitive, taking account of existing commitments for these products. The principle of ‘substantial improvement’ will apply to each product. ‘Substantial improvement’ will be achieved through combinations of tariff quota commitments and tariff reductions applying to each product. However, balance in this negotiation will be found only if the final negotiated result also reflects the sensitivity of the product concerned.

18. Sensitive product issues How many tariff lines allowed sensitive? What should be allowed deviation from the tariff cutting formula (20%? 50%? Sliding scale 40-60%?) How should the corresponding TRQ increase be calculated –As percentage of domestic consumption –Expansion based on existing TRQs –Expansion based on current imports

23. Other tariff issues Should there be a tariff cap? Tariff escalation Should specific tariffs be forbidden? Future of Special Safeguard mechanism (SSG) Administration of TRQs Tropical products Preferences and preference erosion

24. TRQs Recall that a TRQ has three elements – quota, in-quota tariff, out-of- quota tariff Increase minimum access or reduce in-quota tariff Effect depends on whether TRQ is binding TRQ administration judged on quota fill and bias in the distribution of trade (auctions, first come first served, historic shares, applied quotas)

25. Domestic support AMS trade-distorting support: how much reduction? Reduction method – should support be reduced by a given amount or to a particular level? Limit product-specific support/ De minimis – what to do about it? Blue Box – eliminate it or discipline it? Green Box – should criteria be tightened? Should additional measures be allowed, e.g. non-trade concerns

26. Export competition Export subsidies – various roads possible to full elimination (by commodity, by tightening value and volume constraints) Export credits – discipline by rules, or by constraining government outlays? Food aid – is food aid a form of subsidised export? Exporting State Trading Enterprises – issues over government guarantees, monopolistic and monopsonistic powers, ability to price discriminate, price pooling

27. Initial US position Two phase process, leading to complete liberalisation Elimination of export subsidies within 5 years Use of harmonising tariff reduction formula to ensure maximum tariff is 25% Expansion of TRQs Limit AMS to 5% of value of agricultural production and eliminate Blue Box Limited SDT for developing countries

28. Initial EU position Continuation of UR formula for tariff reductions (36% on average with 15% minimum) 55% cut in AMS subsidies over 6 years Reduction in export subsidy expenditure by 45% and elimination for specific products SDT for developing countries, including free access for the least developed countries Emphasises non-trade concerns such as food labelling, animal welfare, geographical indications and precautionary principle in the agricultural negotiations

29. The Harbinson draft Cutting high tariffs more than low tariffs using a banded approach Introduced formula to tackle tariff escalation Proposed doubling TRQs Elimination of export subsidies over 10 years with parallelism on export credits, food aid and export STEs 60% reduction in AMS over 5 years Either moving Blue Box into AMS or capping Blue Box and reducing by half over 5 years Revisiting Green Box but making environmental and animal welfare payments eligible

30. Market access – level of ambition? Harbinson proposal 2003 Current tariff level Average cutMinimum cut < 15%40%25% 15% - 90%50%35% >90%60%45%

31. The July 2004 Framework Agreement Followed the failure at Cancun and the Lamy/Fischler letter offering to conditionally eliminate export subsidies Pre-modalities document – set out principles to guide the negotiations but contains no figures and little structure

32. July 04 Framework Agreement – market access Tariff cutsSubstantial improvement in market access through tariff reductions from bound rates. Single approach for all countries: tiered formula to ensure progressivity. Types of reduction commitments within bands and number of bands to be negotiated. Role of a tariff cap to be evaluated. Designation of an “appropriate number” of sensitive products, which would be subject to a mix of tariff cuts and TRQ expansion. Tariff rate quotasReduce in-quota tariffs and improve administration (as part of balance of concessions). Some TRQ expansion for all sensitive products.

33. July 04 Framework Agreement - market access SafeguardsFuture of special agricultural safeguard (SSG) under negotiation. Establish new special safeguard mechanism (SSM) for developing countries. Special and differential treatment for developing countries Proportionately less tariff reductions for developing countries, with longer implementation period. Developing countries may designate special products on criteria of “food and livelihood security,” which would be subject to more flexible treatment. Fullest possible liberalization of trade in tropical products and alternatives to illicit narcotic crops by developed countries. OtherTariff escalation reduced by formula to be agreed upon. Erosion of preferences to be addressed using Harbinson Para 16 as reference.

34. July 04 Framework Agreement – domestic support Amber BoxReduce total aggregate measures of support (AMS) substantially by use of tiered formula: greater efforts to reduce support by countries with higher Amber Box payments. Cap product-specific AMS levels at historical averages. Reductions in total AMS should lead to product-specific reductions. Blue BoxRedefine to include payments with production limiting requirement and those with no production required: include payments based on fixed areas and yields and headage as well as payments based on less than 85% of base production. Cap payments to 5% of agricultural production from start of implementation period.

35. July 04 Framework Agreement – domestic support Green BoxReview Green Box criteria and improve surveillance and monitoring. De minimis levelNegotiate the reduction of the level of de minimis support. Special and differential treatment for developing countries Developing countries have longer implementation periods. Developing countries have lower reduction coefficients and higher de minimis levels. Developing countries retain the use of Article 6.2, allowing extra scope for domestic program.

36. July 04 Framework Agreement - export competition Export subsidiesEliminate export subsidies by a credible end date. Schedule and modalities of reductions to be agreed. Export creditsEliminate export credits, guarantees, and insurance programs with repayment period of more than 180 days. Food aidEliminate food aid that is not in conformity with disciplines to be agreed. Disciplines will be aimed at preventing commercial displacement. Other food aid issues (role of international organizations, humanitarian and development issues, and provision of aid in grant form) will be discussed in negotiations. State trading enterprises Eliminate trade-distorting practices of state trading enterprises. Further negotiation on issue of use of monopoly powers.

37. July 04 Framework Agreement – export competition Special and differential treatment for developing countries Longer implementation periods for reductions and elimination. Developing countries to continue to benefit from Article 9.4 exceptions. Appropriate provisions for export credits in line with Decision on Least Developed and Net Food-Importing Countries. Developing countries to receive special consideration in negotiation of disciplines on STEs. Ad hoc temporary financing arrangements relating to exports to developing countries may be agreed in exceptional circumstances. Export restrictions Strengthen disciplines on export prohibitions and restrictions.