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Obama and Modi must cook up a solution on food subsidies and the WTO

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In Brief

The young Narendra Modi government has not covered itself in glory on the international trade policy front.

At the second ministerial meeting of the Regional Comprehensive Economic Partnership (RCEP) negotiations in late August, New Delhi proposed a jaw-droppingly low rate of trade liberalisation for industrial goods.


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Its insistence earlier this year at the WTO on re-negotiating the ministerial decision on public stockholding for food security purposes has halted the December 2013 Bali Package in its tracks and thrown the Doha Development Agenda into further disarray. India’s obstinacy is tactless: trade facilitation is the least objectionable element of trade liberalisation imaginable. New Delhi must reverse course forthwith and re-join the global consensus on multilateral trade.

When Prime Minister Modi greets President Obama in the Oval Office on Tuesday, he should convey that India will withdraw its hold on the trade facilitation agreement protocol with immediate effect, and that New Delhi will in good faith find a permanent solution to the public food provisioning impasse on the Bali timeline — while reserving the option to apply pressure on the multilateral trade system if the inverted, and unjust, features of the Uruguay Round Agreement on Agriculture are not revised.

As per the domestic support pillar of the 1994 Uruguay Round agriculture agreement, public stockholding programs for food security purposes in developing countries are exempt from subsidy reduction commitments so long as the accumulation of such stocks is undertaken at prevailing market prices and corresponds to transparent and predetermined food security targets. If domestic procurement is undertaken at a support/acquisition price that exceeds the market price, a price differential multiplied by the eligible production procured is treated as a trade distorting subsidy and assessed towards that country’s aggregate measure of support ceiling. Most developing countries, including India, voluntarily notified a zero aggregate support measure — meaning that they would limit their trade-distorting domestic support, if any, to a 10 per cent de minimis ceiling on an individual product-specific basis.

For Uruguay Round agricultural agreement accounting purposes, however, once the support/acquisition price exceeds the market price, the unit price differential is not calculated using the global market price as the base. Instead it is calculated using an external reference price that is out of date (it uses a base period of 1986–88) and out of touch with domestic rates of food inflation.

The perverse net effect of this skewed accounting is that even though India’s recent support prices for rice and wheat are a bare smidgeon above the international market price, because this latter price is substantially above the 1986–88 base price, the measured subsidy bill has breached or is close to breaching the 10 per cent product-specific de minimis ceiling. The rollout of the Indian government’s gargantuan national food security program will shatter whatever ambiguity remains on this accounting front, even if domestic procurement prices remain almost at par with international prices. This is a travesty: so long as stocks do not leak overseas, New Delhi’s food provisioning program does not in principle distort international markets.

In the meantime, US support for its sugar sector in 2011 exceeded the (5 per cent) product-specific de minimis ceiling eight times over, yet due to the high bindings notified in its non-product-specific subsidies category, Washington was able to shunt the excess trade-distorting sugar support to this latter category and still remain within its Uruguay Round Aggregate Measurement of Support (AMS) ceilings. The scale of the United States’ post-Uruguay Round rice and wheat subsidies, too, aside from being the decisive factor in ensuring their commercial viability, has depressed international market prices. This upside-down state of play — permissible trade-distorting subsidies hoarded primarily by the rich and powerful, with a fallback option to switch between product and non-product specific support — must not be allowed to stand. The quibbling on the banks of Lake Geneva on this must end.

When President Obama meets Prime Minister Modi, he should make clear that his administration will support the effort to update the WTO agriculture agreement’s external reference price using a 3-year or 5-year rolling average price, or, alternatively, forgo the counting of food stocks that are transparently acquired and released at reasonable administrative prices in low-income countries for food security purposes from AMS calculations altogether. This latter option is no giveaway; the Doha Round agriculture negotiations chair, Crawford Falconer, offered a ‘clean’ (implying there were no differences among members) modalities text in December 2008 that had affirmed the same. A work program which pares down trade-distorting non-product specific subsidies by dividing up country-wise aggregate measures of supports on a product-by-product basis and then applies maximum reduction commitments to the most subsidy-reliant items, should also be initiated.

Equally, Modi on his return to New Delhi should ensure that his government’s administered price purchases of grain are synchronised with the requirements of the public distribution system and food security needs. They are vastly in excess of requirements currently. He should also gradually disentangle support for producers from protection for consumers by hastening the rollout of his predecessor’s electronic direct benefits transfer scheme. This will minimize the large illegal diversions of subsidized grains to the open market. In the interim, he should contemplate transferring a fraction of the market value of production in the form of cash payments to farmers. Cash subsidies, as opposed to price supports as per WTO rules, are calculated using the market price, not the external reference price.

Democratic societies have not done a terribly good job of reconciling rural livelihood interests with multilateral trade liberalisation. In the late 1940s, the discriminatory application of US import quotas linked to domestic price supports adversely tipped the balance in the negotiations on the stillborn International Trade Organization’s charter. In July 2008, the discord between the US and India over the special safeguard mechanism for smallholders was a proximate cause of the breakdown in the Doha round of trade negotiations. Obama and Modi must not let this history go on repeating itself.

Sourabh Gupta is a Senior Research Associate at Samuels International Associates, Inc and an EAF Distinguished Fellow.

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