The Agreement On Agriculture Of The Wto Economics Essay

Introduction

The Agricultural Agreement, who is going to better off and who is going to worse off, has been one of the most contentious issues within the World Trade Organization Framework and the purpose of this study is to investigate and discuss the matter.

Literature Review

The World Trade Organization (WTO) is an established international body promoting and enforcing global free trade. It began life on 1 January 1995, but its trading system is half a century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system. The WTO exists to administer and police the 28 free-trade agreements (dealing with goods, services and intellectual property) in its Final Act, oversee world trade practices, and adjudicate on trade disputes referred to it by member states.

It is a formally constituted entity whose rules are legally binding on its member states, but it is independent of the United Nations. It provides a framework for the rule of law in international trade, expanding the brief of GATT regulations on goods to include trade in services (GATS) and intellectual property rights (TRIPS), as well as certain provisions on trade-related investment measures. Its current work programme, known as the Doha Development Agenda, also calls for negotiations on new issues such as investment, competition policy, government procurement, and trade facilitation. In addition to administering trade agreements and providing a forum for negotiations, the WTO system features an institutionalized mechanism for settling trade disputes that specifies fixed timetables and legal procedures, with the power to authorize retaliation in case of non-compliance. Furthermore, the WTO is a member-driven organization, with decisions reached by consensus among all member governments.

While the WTO polices 28 free-trade agreements concerned with goods, services and intellectual property, we will focus mainly on Agreement on Agriculture (which deals mainly with market access, domestic support and export subsidies) for the purpose of this study.

The Agreement on Agriculture

The Agreement on Agriculture of the WTO is mainly to reform trade in the agricultural sector and to make more market-oriented policies thus improving predictability and security for the importing and exporting countries.

It allows governments to support their rural economies through policies that cause less distortion to trade. Trade is distorted if prices are higher or lower than normal, and if quantities produced, bought, and sold are also higher or lower than normal, that is, the levels that would usually exist in a competitive market. For example, import barriers and domestic subsidies can make crops more expensive on a country’s internal market. The higher prices can encourage over-production. If the surplus is to be sold on world markets, where prices are lower, then export subsidies are needed. As a result, the subsidizing countries can be producing and exporting considerably more than they normally would. Governments usually give three reasons for supporting and protecting their farmers, even if this distorts agricultural trade:

• to make sure that enough food is produced to meet the country’s needs

• to shield farmers from the effects of the weather and swings in world prices

• to preserve rural society.

But the policies have often been expensive, and they have created gluts leading to export subsidy wars. Countries with less money for subsidies have suffered.

The agreement 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 extra time to complete their obligations. Least-developed countries don’t have to do this at all. Special provisions deal with the interests of countries that rely on imports for their food supplies, and the concerns of least-developed economies.

The Agreement on Agriculture has the following central concepts:

Domestic Support

The Agreement structures domestic support into three “boxes”: a Green Box, an Amber Box and a Blue Box. The Green Box contains fixed payments to producers for environmental programs such as research, disease control, infrastructure and food security so long as the payments are “decoupled” from current production levels, that is, they have minimal impact on trade. They do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes. The Amber Box contains domestic subsidies that governments have agreed to reduce but not eliminate. Domestic policies that do have a direct effect on production and trade have to be cut back. WTO members calculated how much support of this kind they were providing per year for the agricultural sector (using calculations known as “total aggregate measurement of support” or “Total AMS”) in the base years of 1986-88. Developed countries agreed to reduce these figures by 20% over six years starting in 1995. Developing countries agreed to make 13% cuts over 10 years. Least-developed countries do not need to make any cuts. The Blue Box contains subsidies which can be increased without limit, so long as payments are linked to production-limiting programs. Certain government assistance programmes are permitted to encourage agricultural and rural development in developing countries, and other support on a small scale when compared with the total value of the product or products supported (5% or less in the case of developed countries and 10% or less for developing countries).

Market Access

Market Access aims at reducing border obstacles to imports of agricultural products, such as taxes and duties – commonly known as tariffs. Furthermore, countries had to abolish restrictions on the quantity of agricultural goods entering their markets. All other barriers that were not tariffs, known as ‘non-tariff barriers’ and including health standards or packaging requirements, had to be converted into tariffs, a process known as “tariffication.” That is, the new rule for the market access in agricultural products is “tariffs only”. With the “tariffication” process covered by this agreement, tariff related to agricultural products in develop countries should be reduced by an average of 36% and 24% for developing countries. These tariffs reduction should as per the agreement be undertaken within 6 years for develop countries, 10 years for developing countries while least developed countries are exempted from it. These are illustrated on the following table.

To provide temporary protection against sudden import surges or falls in world prices, the Special Safeguard (SSG) which is a tariff mechanism was used. However, only countries that underwent tariffication can apply the SSG. Many countries, particularly developing countries, did not undergo tariffication because they did not have a significant amount of non-tariff barriers.

The tariffication package also ensures that quantities imported before the agreement took effect could continue to be imported, and it guarantees that some new quantities were charged duty rates that were not prohibitive. This was achieved by a system of tariff-quotas – lower tariff rates for specified quantities, higher (sometimes much higher) rates for quantities that exceed the quota.

Export Subsidies

The Agreement’s approach to export subsidies is to list the export subsidies that WTO Members have to reduce, and to ban the introduction of new subsidies. For example, taking averages for 1986-90 as the base level, developed countries agreed to cut the value of export subsidies by 36% over the six years starting in 1995 (24% over 10 years for developing countries). Developed countries also agreed to reduce the quantities of subsidized exports by 21% over the six years (14% over 10 years for developing countries). During the six-year implementation period, developing countries are allowed under certain conditions to use subsidies to reduce the costs of marketing and transporting exports.

Export subsidies are harmful because they directly support exporters, most commonly agribusinesses or transnational commodity traders, enabling them to displace local producers – most commonly small-scale farmers in the countries to which they sell their goods – with artificially cheap products.

Analysis

The aims of the WTO are to raise living standards, ensure full employment and increase incomes. And the agricultural agreement is meant to further these aims. But there are several reasons why the agreement may not do so.

The agreement clearly contains several types of imbalances that are favourable to developed countries and unfavourable to developing countries.

To start with, the Agreement on Agriculture has permitted the developed countries to increase their domestic subsidies (instead of reducing them), substantially continue with their export subsidies and provide special protection to their farmers in times of increased imports and diminished domestic prices. On the other hand, the developing countries cannot use domestic subsidies beyond a certain level, export subsidies and the special protection measures for their farmers. In essence, developed countries are allowed to continue with the distortion of agriculture trade to a substantial extent and even to enhance the distortion; whereas developing countries that had not been engaging in such distortion are not allowed the use of subsidies and special protection”.

Furthermore, developed countries with high levels of domestic subsidies are allowed to continue these up to 80 per cent after the six-year period. In contrast, most developing countries (with a very few exceptions) have had little or no subsidies due to their lack of resources. They are now prohibited from having subsidies beyond the de minimis level (10 per cent of total agriculture value), except in a limited way. In addition, many types of domestic subsidy have been exempted from reduction, most of which are used by the developed countries. While these countries reduced their reducible subsidies to 80 per cent, they at the same time raised the exempted subsidies substantially. The result is that total domestic subsidies in developed countries are now much higher compared to the base level in 1986-88. Thus, in the EEC, the subsidy in the base period 1986-88 was US$83 billion, and it was increased to US$95 billion in 1996. In the United States, the corresponding levels are US$50 billion and US$58 billion. The professed reason for exempting these subsidies in the developed countries from reduction is that they do not distort trade. However, such subsidies clearly enable the farmers to sell their products at lower prices than would have been possible without the subsidy. They are therefore trade-distorting in effect.

Another inequity is in the operation of the “special safeguard” provision. Countries that had been using non-tariff measures or quantitative limits on imports were obliged to remove them and convert them into equivalent tariffs. Countries that undertook such tariffication for a product have been given the benefit of the “special safeguard” provision, which enables them to protect their farmers when imports rise above some specified limits or prices fall below some specified levels. Countries that did not undertake tariffication did not get this special facility. This has been clearly unfair to developing countries, which, with few exceptions, did not have any non-tariff measures and thus did not have to tariffy them. The result is that developed countries, which were engaging in trade-distorting methods, have been allowed to protect their farmers, whereas developing countries, which were not engaging in such practices, cannot provide special protection to their farmers.

With regard to export subsidies, the developed countries get to retain 64 per cent of their budget allocations and 79 per cent of their subsidy coverage after six years. The developing countries, on the other hand, had generally not been using export subsidies, except in a very few cases. Those that have not used them are now prohibited from using them, whilst those that have subsidies of little value have also to reduce the level.

The Agreement is based on the assumption that production and trade in the agricultural sector should be conducted on a commercial basis. But agriculture in most of the developing countries is not a commercial operation, but instead is carried out largely on small farms and household farms. Most farmers take to agriculture not because it is commercially viable, but because the land has been in possession of the family for generations and there is no other source of livelihood. If such farmers are asked to face international competition, they will almost certainly lose out. This will result in large-scale unemployment and collapse of the rural economy, which is almost entirely based on agriculture in a large number of developing countries.

Futhermore, small-scale farmers who do not have easy access to land, water, technology, infrastructure and capital find themselves disadvantaged as compared to transnational commodity traders and processors who enjoy the facilities of developed countries. Moreover, the gap that exists between local farmers of developing countries and agribusiness of rich countries also prevent them from competing on an equal basis (Kevin Watkins, 1995).

There is also a lack of transparency during negotiation and decision making, create inequality between the participants, even though the developing countries make up two-third of the membership, they do not have much influence over the decision making because their economies are more at stake and need help from the developed countries through the International Monetary Fund to finance their development and growth.

Finally, there are certain human rights that are affected by the Agreement, these are the right to an adequate standard of living, the right to work, the right to food, the right to health and the right to life (unavailability of food can lead to illness and death). In Asia, the majority of people depend on the agricultural sector for employment and a source of income, guaranteeing the right to an adequate standard of living and the right to work. In India alone, 72% of the population lives in rural areas and the agricultural sector provides employment to about 60% of the country’s total labour force. The Agricultural Agreement threatens the strong base of farmer-oriented agriculture in favour of industrialized and mechanized agriculture largely carried out and controlled by transnational commodity producers and traders from developed countries. The consequence is often a de facto discrimination against the poorest and most vulnerable sectors of society, contrary to human rights.

Conclusion and Recommendation

Even if the aims of the WTO to raise living standards, ensure full employment and increase incomes and the agricultural agreement is meant to further these aims, the outcomes are totally biased in favour of the developed countries leaving the developing countries behind. The rich with their power take all the benefits of the Agricultural Agreement. And there are certainly loopholes in the agreement.

As recommendations in favour of the developing countries, the following actions can be carried out by the developing countries:

negotiate for a strong Special Safeguard Mechanism that will protect farmers from dumping;

negotiate for the right of developing countries to self-select Special Products on the basis of food security, rural development and livelihoods; and

remind the trade negotiators of their obligation, under human rights law, to ensure that any new agricultural trade commitments promotes the human rights of the poorest and most vulnerable sectors of the population.