Given the prevalence of these distortions and the importance of agriculture to developing countries, the need to create a framework to tackle agricultural trade issues is stronger than ever.
Both developed and emerging economies have been accused of protectionism. Developed countries often heavily subsidise their farmers, while developing countries often impose high import restrictions that inhibit free trade.
Developing countries are advocating two instruments to defend their concerns of food security, farmers’ livelihood and rural development. The first is the Special Safeguard Mechanism (SSM), allowing for the temporary raising of tariffs. The other is the concept of Special Products (SP), which proposes to create a list of products that directly impact the developmental concerns of developing countries and should not be subject to tariff reductions under the Doha talks.
Paragraph 7 of the Hong Kong Ministerial Declaration states:
Developing country members will also have the right to have recourse to a Special Safeguard Mechanism based on import quantity and price triggers, with precise arrangements to be further defined. Special Products and the Special Safeguard Mechanism shall be an integral part of the modalities and the outcome of negotiations in agriculture.
What this means is that a WTO member country will have the right to impose SSMs if it finds that imports are increasing to the extent that local markets are being disrupted (a ‘volume’ trigger) or if there is a collapse of the international price of that commodity which undermines or threatens to undermine the otherwise viable domestic production (a ‘price’ trigger).
The leading bloc arguing for SP and SSM is G33, which comprises more than 40 developing countries, including India and China. Although all WTO members have acquiesced in principle to establishing a SSM, some developed countries, particularly the United States, and some developing countries with an export interest in agriculture (such as Thailand, Paraguay, Argentina, Uruguay) have sought to restrict the use of SSMs. They seek, in particular, to limit the number of times it can be used and the extent to which it can be used to raise tariffs.
The main justification for SSM and SP is that international commodity prices remain extremely volatile. Studies show that there has been no systemic decline of volatility in the post-WTO period, and that import surges have been common in developing economies. A Food and Agriculture Organization report states that: ‘Indeed, import surges seem to be more common in product groups that are subject to high levels of subsidies in exporting countries, notably diary/livestock products (milk products, poultry parts), certain fruits and vegetable preparations and sugar’. Against this backdrop, developing countries are worried that the ambitious tariff reduction proposals being negotiated at the Doha Round will leave their domestic agriculture sector, and by extension their economies more generally, vulnerable. A SSM would provide a measure of insurance.
Unlike in industrial production, the production cycle of agriculture does not allow for sudden halts and rapid restarts in production. If cheaper imports lead to a fall in domestic production and the decreased demand persists for more than a few weeks, farmers may be forced to switch to other crops. It could be difficult for them to return to the original crop even when the price of that crop becomes favourable again in the medium term. Price volatility thus makes farmers disinclined to implement long-term plans to build capacity in particular crops, which would lead to economies of scale, and exposes farmers and the nation to damaging fluctuations in income.
Normal safeguards are insufficient to address this problem. When the price of industrial products declines factories can increase their inventory and save for when prices rise again. But when demand for domestic agricultural products is reduced, small farmers in developing countries find it difficult to store their product in the hope of a return to higher prices because of the lack of storage facilities and the perishability of agricultural products. What is needed is a mechanism to reduce the severity of fluctuations in prices. A SSM can do this.
The agriculture sector is a large part of the developing world and thus supports the livelihoods of a significant portion of its population. The viability and dynamism of the developing world’s agriculture sector thus remains essential to secure success in the developing world’s poverty alleviation strategies. The next ministerial at Bali in December must ensure pressure remains on developed nations to meet the aspirations of developing countries with regards to the global agriculture trade.
Rohit Sinha is a research intern and Geethanjali Nataraj is Senior Fellow at the Observer Research Foundation, New Delhi.
Would the authors be able to elaborate on why some developing countries (they mentioned Thailand, Paraguay, Argentina and Uruguay) want to restrict the use and extent of protection afforded by SPMs? I presume they do not want the block of 40 developing countries advocating for SPMs to be able to prevent their own agricultural exports from entering these developing country markets. Thai rice for example, would be looking to export to developing economies as well as developed economies. This seems an important point in the context of determining what changes to global trade rules would be best for developing countries overall. I’d also like to ask whether the authors have any thoughts on what prospects there are for SPMs and the like to actually be implemented at the WTO? I’d say not much. It seems to me that the WTO is a mechanism for improving trade norms, not a vehicle for promoting a global development agenda. It seems difficult enough to have developed countries agree to lower tariffs even where doing so would seem to be to their financial benefit (the US, for example, needs budget savings) and the benefit of their consumers. Trying to get them to lower their tariffs AND acquiesce to other economies maintaining varying degrees of protection might be a bridge too far. Also, do any researchers in this area worry that allowing SPMs and the like will simply give certain developing countries a back-door out of their obligations, that they will then abuse and thereby undermine the entire trade liberalisation agenda? If I were working to liberalise trade in general I would certainly be wary of a mechanism that allowed short-term political considerations to enter into tariff decisions. This would seem to undermine the whole idea of a ‘rules-based’ system because it makes countries’ adherence to the rules remain heavily dependent on their unique domestic political situations. They could essentially excuse themselves from the rules whenever it suited them.
There are some additional points to consider.
The higher import barriers are, the thinner is world trade and the greater are the fluctuations in world prices. Seeking exemptions from tariff reductions is not a good way to achieve reductions in the volatility of world prices.
There is a already a safeguard clause in the WTO agreements – however, it requires the importing member to establish that the increased flow of imports is causing serious injury to domestic producers. What the G33 is asking for is a right to impose safeguard measures without having to prove the an increased flow of imports is causing injury to domestic producers. All other WTO members were prepared to accede to this request so long as the importing members did not use the SSM to increase the import tariffs above the bound rates existing before applying any of the Doha Round tariff reduction. In fact they were prepared to allow modest increases above those pre-reduction tariff bindings.
There is nothing in the WTO rules which prevents farmers or farmers cooperatives from selling their crops forward at fixed prices or trading in futures contracts or taking price insurance.
WTO rules would allow the government to provide a guarantee to buy produce at certain prices. This can however count as a subsidy that must be counted within the Members cap on Aggregate Measure of Support.
However, if such a guaranteed price is no more than 5% above a fixed reference price established under the WTO Agreement on Agriculture, it need not be counted when assessing whether the country has exceeded its AMS cap.
If the Member pays an income supplement to the farmers that is not based on how much they produce or what price they sell it, then that payment is not counted when assessing whether the country has exceeded its AMS cap.
The other major culprit not mentioned in the article is that the draft agreement also contains special and differential treatment for a group of rich countries. These countries seek lesser tariff reductions for what they describe as sensitive products – so Japan gets to reduce its 700% tariff on rice by only 20%, the US gets to reduce its 100% tariff on sugar by only 20%, Norway gets to reduce it 500% tariff on what by only 20%, Canada gets to reduce its 359% tariff on various milk products by only 20%.
The pressure on these rich countries to reduce their import duties was substantially reduced when the principal reaction of developing countries was “Me Too” – i.e we want exemptions too. See the story told here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1032484
If India and other countries complaining about rich country barriers to imports of agricultural products want to fix the system so that there is freer trade in agricultural products, they have to join in the common undertaking to reduce barriers.
Brett Williams
Brett G Williams Law Office – Specialist in International Trade Regulation.
External Lecturer in WTO law at the Australian National University College of Law.