The challenge Last week this column indicated that the fundamental problem facing global trade in agricultural commodities is that, more than any other set of commodities in world trade, agriculture embodies a host of strategic, political, cultural, and other non-commercial considerations. Government intervention in agricultural trade is more the rule than the exception. Under the GATT, and prior to the formation of the WTO and conclusion of the Uruguay Round of global negotiations on trade in 1995, this was so much the orthodoxy that the GATT permitted governments to apply import quotas on agricultural imports, provide subsidies for production and export, and practise other discriminatory measures. Indeed, as we shall come to see, today much of Caricom's agriculture reflects this framework of public policy.

The primary objective of the WTO/Uruguay Round is to "bring to an end" this approach, with the expectation of introducing "order" to global agricultural trade. This is a challenge so complex and fraught with pitfalls that it should not be underestimated. The question will remain unanswered for a long time as to whether the rich countries will permit this to happen or continue to pay lip-service to the principles of the WTO/Uruguay Round, while in practice finding every possible way to avoid compliance. To evaluate the prospect, we need to begin with a description of what the WTO/Uruguay Round has in fact created.

Agricultural trade: WTO principles In seeking to make agricultural policies more market-oriented and therefore to drive the process of agricultural production and trade through private endeavour, the rules and commitments of the WTO focus on three areas of concern. The first of these is "market access." Here the challenge is how to deal with/remove trade restrictions, which confront the import of agricultural commodities into countries. The second of these is "domestic support" for agriculture. Here the challenge is to remove government subsidies and other related practices, as these "artificially raise and/or guarantee" farm gate prices and farmers' incomes. In other words, in the absence of such government action, farmers prices and rewards would change and farmers would therefore make different, and more "efficient" decisions when allocating their resources.

The third area of concern is "export subsidies" and any other similar methods used to make exports "artificially competitive." The fear is that such subsidies confer an unfair advantage and undermine the returns to more competitive farmers. In turn this leads to global resource mis-allocation.

Two points Our next task is to look at these three areas in a bit more detail. Before that, two very important points should be noted as they have a direct bearing on all the areas identified above. The first point is that, contrary to popular belief, the WTO does not immediately rule out "all forms" of government support for the rural sector. As we shall see later, such support is permitted to the extent that the measures used do not cause much "distortion" to trade. This exception is intended to give governments some degree of flexibility and avoid locking them into rigid, unchangeable, and inflexible commitments.

The second point is that distinctions are made when applying the rules and commitments under the WTO /Uruguay Round. These distinctions take into account the special circumstances of certain classes of countries. The best examples of these are the developing countries as a group, the group of least developed countries, and those countries that are heavily dependent on imports for their food supplies. These three are afforded what is termed as "special and differential treatment" under the WTO.

Market access What does market access entail? As some readers might have anticipated market access is basically promoted through the mechanism of converting all existing barriers to agricultural trade into "tariffs-only." This process is called 'tariffication.' The rationale is that a tariff barrier is a price barrier, and is therefore compatible with market principles. Quotas and other non-tariff barriers are not price barriers. They are in fact administrative barriers, which by definition are 'arbitrary.' It is for this reason they have been targetted to be replaced with tariffs. Of course the tariffs that replace them are expected to provide roughly the same levels of protection as that which existed before, and no more. In other words, converting a quota into a tariff is not to be used as an excuse for raising the level of protection. To take an example, if quotas made imported rice or sugar double the world price in our local market, then the tariff that replaces it should be set at 100 per cent.

I would like to stress that we should not underestimate the long-run significance of this process of 'tariffication.' Converting non-tariff barriers into tariffs-only constitutes a major change in the direction of market-based trade in agriculture. The commitments under the WTO/Uruguay Round, however, extend further than this in several directions. One such extension is that countries have committed themselves to maintain at least the level of imports that existed prior to the WTO coming into force. Another extension is that additional prescribed import quantities were also agreed to, at graduated rates of duty. Although the rates of duty rise as greater levels of additional imports are reached, ultimately these are not so high as to make imports prohibitive.

Other features The Agreement on Agriculture (AOA) in the WTO covered all agricultural products when it came into force in 1995. It was also agreed then that the developed countries would cut their tariffs by an average of 36 per cent, over the next six years, in equal steps. The developing countries, however, would reduce theirs by 24 per cent, and over the longer time period of ten years. This is an example of the rule of "special and differential treatment" referred to earlier.

The question that invariably arises is, what happens if there is an emergency situation and countries want to alter their commitments for good reason. The AOA permits countries to take special emergency action in certain situations. One such situation would be if prices fall catastrophically. Another would be if imports flowed into the country at such a rapid rate that it spells the immediate ruin of domestic farmers. Measures taken in this regard fall under the rules pertaining to 'safeguards.'

Of course the agreement specifies precisely when these safeguards may be legally invoked and how they are to be implemented. The ability therefore, to use this device as a means of circumventing the spirit of the AOA is severely restricted.

Next week we will continue this discussion.

Dog eats dog:
The bane of agricultural trade policies

Last week we saw that the Agreement on Agriculture (AOA), which is the new agricultural regime being created under the auspices of the WTO, centres on three areas of commitment given by Member Countries. These are market access, domestic support, and export subsidies. We then described market access, which as we saw hinges on the process of "tariffication" along with related commitments to 1) maintain "current market access" at the level of imports prior to the WTO 2) provide "minimum access" for additional imports, and 3) reduce tariffs within a 6 year (for developed countries) to 10 year (for developing countries) time period.

These binding commitments are recorded in the respective Schedules of Member Countries attached to the agreement. The level of imports to be maintained for current market access with low tariffs is based on the average annual imports for the reference years 1986-88. Members would be permitted minimum access opportunities at not less than 3 percent of the average consumption for 1986-88, rising to 5 percent by the year 2000 for developed countries, and by the end of year 2004 for the developing countries.

Domestic support

The second area of commitment, domestic support, refers to a variety of government measures for providing subsidies to domestic producers. Some government measures have a direct effect on production and trade, and others an indirect effect. The main concern about domestic support is that it distorts agricultural markets, and in so doing squeezes imports, subsidises overseas sales, and more often than not leads to dumping. The WTO rules are premised on the view that only domestic policies which directly impact on production and trade need to be regulated.

To regulate this, the first requirement is to calculate the amount of domestic support. These calculations are termed "total aggregate measures of support" or "total AMS". They are called total because they are not related to specific products or specific measures but instead are given as a total for all forms of direct domestic support. The calculations are made for the base period 1986-88. Based on the "Total AMS" for this base period, developed countries have committed themselves to reduce these total figures by 20 percent over 6 years starting in 1995. The developing countries have committed a 13 percent cut over 10 years. The least developed countries are not required to make any reductions. It should be kept in mind that the commitment is based on the total level of support and not that for any particular commodity or measure. Members therefore have some flexibility in meeting their commitments in terms of both the products involved and the types of measures used.

As pointed out above, it is only domestic support that directly impacts production and trade, which is regulated by the WTO. Indirect support is permitted, and is termed "Green Box" items. Indirect support includes items such as government research, disease control, training, inspection services, extension and advisory services, and the provision of infrastructure. It also includes direct payments to farmers in situations where they are required to limit production. These are sometimes referred to as "Blue Box" measures.

As can be recognized most of this indirect support represents very significant outlays for agriculture in the developed countries. This, as we shall see, turns out to be an important bone of contention, as developing countries feel that the cards are stacked against them, since their subsidies are usually of a direct nature and these are the only ones that the WTO regulates.

The AOA exempts general government measures to encourage agriculture and rural development in developing countries and farmer support to encourage diversification from growing illegal narcotic crops. It also exempts support that is termed "small scale", that is, when compared to the total value of the product or products supported, it is less than 5 percent for developed countries and 10 percent for developing countries.

Distortion and agricultural trade

Commitments under the heading of domestic support are expected to pave the way for the eventual removal of distortion in global agriculture trade. Distortion is seen as the curse or bane of existing agricultural trade. This occurs because the price of any given product receiving domestic support is either greater or less than would obtain without this support. And, since it is price that offers the incentive to produce and consume, it therefore leads to higher or lower production and consumption of the product than would otherwise occur in a competitive market.

There are many examples of these effects. Thus import bans and domestic subsidies can raise the local price of agricultural commodities, because they shield local producers from external competition. This in turn will stimulate production. This increased production may then find its way on to world markets at lower prices than at home, because domestic production is shielded by the existence of domestic subsidies. This situation can create extreme paradoxes as in the case of the European Union, which is at the same time one of the world's largest importers and exporters of sugar!