The Agreement on Agriculture (AOA)
 ‘Spectrum’ – Research & Consultancy Group

Introduction

India signed the GATT treaty on 15^th April 1994 at Marrakesh. This treaty introduced agricultural trade in the multilateral agreement for the first time. The aim of this treaty was to free up agricultural trade from physical controls. The agreement aimed to replace all physical controls on agricultural trade by bound tariff rates. It was agreed that these rates then will be reduced over a period of time. The overall objective of the treaty was to provide a framework for the long-term reform of agricultural trade. Signing of this treaty marks a significant move towards the objective of increased market orientation in agricultural trade.

A summary of multilateral trade negotiations before the Uruguay Round
 

Ever since the days of the Uruguay Round negotiations there has been a strong view in India that the country would stand to benefit from the trade liberalisation in the agricultural sector. The earlier views were that the results of the Uruguay Round in the agricultural sector would bring significant welfare gains for a number of developing countries. The broad conclusions drawn by these studies were that countries like India and China would gain substantially as a result of the introduction of the discipline under AoA. The more recent years have however seen a degree of toning down of these projections. A recent study by the Australian Bureau of Agricultural and Resource Economics (ABARE) is a case in point.

The main thrust of the WTO’s AoA is to remove past production and trade distorting practices and to facilitate a fair and market oriented agricultural trading system. This is supposed to improve predictability and security for importing and exporting countries alike. Early analysis of the likely effect of the AoA on world markets predicted that cuts in domestic agricultural sector support and the eventual removal of agricultural trade barriers and agricultural export subsidies would lead to much higher volume of world trade in agriculture and infuse more transparency in agricultural trade. However, after almost seven years of implementation, the AoA, its impact on the world agricultural trade has been at best, modest.

It was agreed in the AoA (Article 20) that agricultural negotiations would be reopened by the end of 1999 to continue the reform process in the agricultural sector. The first rounds of talks were held in November 1999, in Seattle, USA. The next round is scheduled at Doha in Qatar.

Overview

The Uruguay Round agreement is a significant first step towards liberalizing agricultural trade and making agriculture a less distorted sector. It is being implemented over a six-year period (10 year for developing countries) that began in 1995. Least developed countries do not have to make commitments to reduce tariffs or subsidies.

New Rules and Commitments

The objective of the AoA is to reform trade in the sector and to make policies more market oriented. This would improve predictability and security for importing and exporting countries alike.

The new rules and commitments apply to:

• Domestic support: subsidies and other programmes, including those that raise or guarantee farmgate prices and farmers’ incomes

• Market access: various trade restrictions confronting imports

• Export subsidies and other methods used to make exports artificially competitive

The agreement does allow governments to support their rural economies, but preferably through policies that cause less distortion to trade. It also allows some flexibility in the way commitments are implemented. Developing countries do not have to cut their subsidies or lower their tariffs as much as developed countries and they are given an extra time to complete their obligations. Special provisions deal with the interests of countries that rely on imports for their food supplies, and the least developed economies.

Domestic Support

The AoA distinguishes between support programmes that stimulate production directly, and those that are considered to have no direct effect.

Domestic policies that do have a direct effect on production and trade have to be cut back. WTO members have calculated how much support of this kind they were providing (known as “total aggregate measurement of support” or “AMS”) for the agricultural sector per year in the base of 1986-88. Developed countries have agreed to reduce these figures by 20 per cent over six years starting in 1995. Developing countries are making 13 per cent cuts over 10 years. LDCs do not need to make any cuts.

Measures with minimal impact on trade can be used freely- they are in a “green box”. They include government services such as research, disease control, and infrastructure and food security. They also include payments directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture and direct payment under environmental and regional assistance programmes.

Also permitted, are certain direct payments to farmers where the farmers are required to limit production (“blue box”), certain government assistance programmes to encourage agricultural and rural development in developing countries and other support on a small scale when compared to the total value of products or products supported (5 per cent or less in case of developed countries and 19 per cent or less in case of developing countries).

India’s Position

India does not provide any product-specific support other than market price support. Product specific support as calculated for 1995-96, for almost all the products (rice, wheat, cereals, pulses, groundnut, soyabean, etc) are negative. This is so because value of market price support is calculated in the following manner:

Value of market price support = (administered price-fixed world price)*(Actual current production), where the fixed world price for the AMS is the 1986088 average value of world market price for the commodity.

As India’s domestic administered price is much less than the international reference price, the product specific support for most commodities is negative.  India’s non-product specific support is also below the de minimis level.

India is not required to reduce its domestic subsidies as the AMS worked out to be –22.5 per cent of the total value of agricultural production. It is much less than the stipulated ceiling of 10 per cent. Almost all the developed countries provide much higher support to their farmers which will be discussed later.

Market Access: Tariffication

The new rule for market access in agricultural products is “tariff only”. Before the Uruguay Round, some agricultural imports were restricted by quotas and other non-tariff measures like import and export licensing. These have been replaced by tariffs. Tariffs are considered more friendly than NTBs. The level of protection provided by NTBs was often opaque and hard to measure. A tariffs only regime provides a much more transparent framework.  According to the agreement, the unweighted average tariff cut must be 36 per cent (24 per cent for developing countries) and each tariff item need to be reduced by 15 per cent of the 1986-88 tariff equivalents (10 per cent for developing countries). Least developed countries are exempted from any tariff reductions.

The tariff provisions can be summarized as under:

The commitment of reducing tariff by 36 per cent on a simple average basis can be attained by making rather larger cuts in tariffs for commodities that do not compete with domestic production or large percentage cuts in tariffs that already were very low, the 36% average reduction could be achieved with minimal cuts in politically sensitive tariffs.

This will be clear from an example: A country has four items three sensitive ones are subject to 100% duty rates and one with a 4 percent duty. Reducing the three high tares to 85% and eliminating the 4 % rate would give an unweighted average cut of 36.25 percent. This would fulfil the commitments of a 36% unweighted average reduction in tariff, without exposing sensitive products to any serious international competition.

The proposed method of setting tariff equivalents in the Uruguay Round is based on a method of calculating the gap between the internal (domestic) price and the external (international) price. Though simple to calculate this method of calculating a tariff equivalent does not always accurately reflect the level of protection given by the existing NTMs. This method of calculation often resulted in significantly higher initial tariffs than more precise calculations might have produced.

This was done in the following way:

1. By selecting a high base period: The choice of 1986-88 as a base period tied tariffication to a time when protection was at its highest.
2. By overestimating the domestic price and/or underestimating the international price: Countries often inflated the gap between the two prices thereby increasing the tariff equivalent calculation. This practice, referred to as “dirty tariffication”.

As a result, initial tariff bindings, are in many cases far higher than the actual tariff equivalents of the time. This effectively postponed the time when these countries would face any real international competition. For example, in the case of the EU, the findings for the year 2000 are almost two-thirds above the actual tariff equivalent for 1989-93 and for the United States they are more than three-quarters above.

India’s Position in this case

India initially proposed to eliminate its QRs over a seven-year period (1997-2003). But the WTO gave a ruling that the restrictions had to be phased out by the year 2001. These QRs can be replaced by tariffs. During negotiations between 1947 and 1962, India had committed to zero tariff bindings on rice, plums, grapes, dried skimmed milk, maize and many other agricultural product. But after the Uruguay, India has bound its tariffs at a very high level. India’s bound rate on primary agricultural products is 100 per cent; for processed food it is 150 per cent and for edible oils the tariff rate is 300 per cent.

Tariff Quotas

Member nations with NTBs in place at the time of Agreement were allowed to adopt Tariff Rate quotas (TRQs) as a transitional instrument. The intent is that all TRQs will eventually be transformed into simple tariffs. TRQ was a system of a two stage tariff-lower tariff rates for specified quantities, higher rates for quantities that exceed the quota.

Of the 134 WTO members, 33 countries notified TRQs to the WTO in 1996. Notified and enforced TRQs are concentrated in a few countries. In both cases, six countries account for over half the TRQs and ten countries account for two-thirds. However, they may pose a potential trade problem because a member country can at any time choose to enforce them. The countries with greatest number of TRQs are concentrated among relatively wealthy economies with historically protectionist agricultural policies. In addition, several Eastern European countries have adopted TRQs to ease the transition of their agricultural sectors.

Subsidies and Protection

For products whose non-tariff restrictions have been converted to tariffs, government are allowed to take special emergency actions (safeguards) in order to prevent swiftly falling prices or surges in imports from hurting their farmers. Four countries used these special treatment provisions to restrict imports of particularly sensitive products during the implementation period. The four are: Japan, Republic of Korea and the Philippines for rice and Israel for sheepmeat, wholemilk powder and certain cheeses.

Export Subsidies

A country to make its commodities globally competitive provides export subsidies. Export subsidies are particularly prevalent in the countries which support high internal prices above world price level. Export subsidies and domestic subsidies are considered to be the root cause of distortion in world agricultural trade.

The AoA prohibits export subsidies on agricultural products unless the subsidies are specified in a member’s list of commitments. Where they are listed, the agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive subsidies. Taking average for 1986-90 as the base level, developed countries have agreed to cut the value of export subsidies by 36 per cent over the six years starting 1995 (24 per cent over 10 years for developing countries). Developed countries have also agreed to r4educe the quantities of subsidized exports by 21 per cent over the six years (14 per cent for developing countries). LDCs do not need to make any cuts.

The US and the EU are the two largest users of export subsidies. The amount of export subsidies given by EU was $13 billion in 1988 and it decreased to $7 billion in 1997, but it still continues to dwarf that of other countries. Other major users of export subsidies were USA, South Africa, and Switzerland. Among them South Africa has terminated its export subsides in July 1997.

India’s Position in this case

Export subsidies are not present in India. In India exporters of agricultural commodities do not get direct subsidy. The only subsidy available to exporters are in the form of (a) exemption of profits from export sales in income tax (under section 80 HHC) and (b) subsidies on costs of freight on export shipments of certain agro based products like fruits, vegetables and flowers, etc. The income tax exemptions that exporters get from export profits is not covered under the list of subsidies given by WTO. And developing countries are allowed to provide three of the listed subsidies. These are reduction of export marketing costs, internal and international transport and freight rates. Therefore, for India, export subsidy reduction commitment is not going to have any significant impact.

Some other features of WTO, which are worth mentioning, are:

1)   MFN Considerations: One of the rules of high significance is that ensures non-discrimination and warrants countries to impose tariffs on imported goods in a way that it does not lead to discrimination among the countries. More clearly, a country must not charge a higher tariff on an imported good from one country and a lower tariff on the same item imported from another country. However, it is a different case if the countries are bound by regional trade agreements such as NAFTA, ASEAN Free Trade Area, among others, as they are required to accommodate the rules with such agreements. The other exception is Generalised System of Preferences (GSP) which permits developed nations to charge preferential or duty free rates to imports from developing countries, but observe MFN rule vis-à-vis imports from other nations.

2)   National treatment Rule: The rule disallows one member country from slapping higher tariffs on an imported product which has entered its territory upon payment of due customs duty, than that charged on an equivalent good manufactured domestically.

3)   Peace Clause: There could be likely pressure of re-negotiations of the "Peace Clause" i.e. Article 13 of the Agreement on Agriculture. The Agreement on Agriculture contains a "due restraint" or "peace clause" (Article 13) which regulates the application of other WTO agreements to subsidies in respect of agricultural products. The Article’s provisions provide that Green Box domestic support measures cannot be the subject of countervailing duty action or other subsidy action under the WTO Agreement on Subsidies and Countervailing measures, nor can they be subject to actions based on non-violation, nullification or impairment of tariff concessions under the GATT. Other domestic support measures which are in conformity with the provisions of the Agreement on Agriculture may be the subject of countervailing duty actions, but due restraint is to be exercised by Members in initiating such investigations. Further, in so far as the support provided to individual products does not exceed that decided in the 1992 marketing year, these measures are exempt from other subsidy action or nullification or impairment action. Export subsidies conforming to the Agreement on Agriculture are subject to countervailing duty actions, but here also due restraint is to be exercised by Members in initiating such investigations. The peace clause remains in effect for a period of nine years from the entry into force of the WTO Agreement.

By : ‘Spectrum’ – Research & Consultancy Group
(Team: Ashish, Deepak, Lalit, Mohit, Pankaj)
MBA (IB), II Year Students
Indian Institute of Foreign Trade, New Delhi
Email: spectrum_iift@yahoo.comisan Jai-Hind