Agricultural Economics II. Popp, József Agricultural Economics II

Source: WTO (2010)

11.1. 15.11.1. Tarification

The calculation of the tariff equivalents, whether expressed as ad valorem or specific rates, shall be made using the actual difference between internal and external prices in a transparent manner.

For example:

Bound tariff is the price-gap between the internal price and external price, that is:

Internal Price        =        USD250/tonne = representative wholesale price; and

External Price        =        USD200/tonne = average c.i.f. unit value for 1986-1988

--> Price Gap        =        USD50/tonne or 25%

--> Tariff        =        USD50/tonne; or =        25%; or =        USD25/tonne + 12.5%; or etc.

11.2. 15.11.2. Bindings and reductions

Once tariffs were fixed, Members undertook to apply reductions. These reductions are based on a simple average of 36% and a minimum of 15% over six years (1995-2000) for developed countries and a simple average of 24% and a minimum of 10% over ten years (1995-2004) for developing countries. Developing countries that adopted ceiling bindings did not have to reduce their tariffs, except on an ad-hoc basis. Least-developed countries did not have to reduce tariffs whether or not they adopted ceiling-bindings.

11.3. 15.11.3. Tariff-rate quotas

It was foreseen that the conversion of non-tariff measures into tariffs using the 1986 to 1988 reference period could result in high tariff levels, as it was intended to result in a level of protection equivalent to the non-tariff measure previously in force. However, in many cases some imports were allowed in and these “current access” opportunities had to be maintained and, if necessary, increased to 3% of corresponding domestic consumption rising to 5% of domestic consumption by the end of the implementation period. In cases where no significant quantities were imported a “minimum access commitment” had to be created starting at 3% of domestic consumption and increasing to 5% over the implementation period.

Least developed countries and developing countries with ceiling bindings did not have to create market access opportunities. The current and minimum access commitments were implemented by tariff-rate quotas (TRQs), which allow imports at low tariff rates up to a certain volume. A TRQ is a two level tariff (Figure 1). A lower tariff (in-quota) rate is charged on the imports within the quota volume and a higher tariff (over-quota) rate is charged on the imports outside the quota TRQs, including the applicable tariff rates and any other conditions related to them, are specified in the Schedules of the WTO Members concerned. Over 40 WTO members currently have a combined total of 1,425 tariff quotas in their commitments.

11.4. 15.11.4. The boxes

In WTO terminology, domestic subsidies are classified in “boxes”. Originally, these were meant to have the colours of traffic lights: green (permitted), amber (slow down – i.e. be reduced), red (forbidden). The Agreement on Agriculture has no Red Box, although domestic support exceeding the reduction commitment levels in the Amber Box is prohibited; and there is a Blue Box for subsidies that are tied to programmes that limit production. There are also exemptions for developing-country Members (normally called "S&D Box"). And there is a Green Box for subsidies that cause no more than minimal trade distortion.

11.5. 15.11.5. Green box

In order to qualify for the Green Box, a subsidy programme must not have more than a minimal trade-distorting effect or effect on production. In addition, such measures have to be government-funded and must not involve price support. Green Box programmes tend to be those that are not targeted at particular products, and include general services, such as research, pest and disease control or marketing and promotion services, as well as certain direct payments to producers, such as income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include structural adjustment assistance, payments under environmental programmes and regional assistance programmes. Green Box subsidies are therefore allowed without limits.

11.6. 15.11.6. Amber box

All domestic support measures considered to distort production and trade, with the exception of some measures, fall into the Amber Box and are subject to limits. These include measures to support prices, input subsidies or subsidies directly related to production quantities. In fact, any domestic support that cannot be included in the categories exempt from reduction, has to be accommodated within the ceilings set by the Total Aggregate Measurement of Support (Total AMS) and/or the de minimis provisions of the Agreement. The Total AMS includes all support provided on either a product-specific or non-product-specific basis and is to be reduced during the implementation period. In the case of Members with no scheduled reduction commitments, any domestic support not covered by the exempt categories must be maintained within the relevant product-specific and non-product-specific de minimis levels.

11.7. 15.11.7. Blue box

This is the “amber box with conditions” — for certain supports that are part of production limiting programmes. At present, there are no limits on spending on Blue Box subsidies (Table 2).

15.2. táblázat - Table 2: Domestic support structure

Exemption from Reduction Commitments
(1) Green Box	Annex 2	No more than minimally trade or production distorting
(2) Blue Box	Article 6.5	Production-limiting Programmes
(3) Development Programmes	Article 6.2	Investment, Input, Diversification
Reduction Commitments & de minimis allowance
Amber Box	Articles 3&6	Reduction Commitments, de minimis
	Article 7	General Disciplines
	Annex 3	Aggregate Measurement of Support
	Annex 4	Equivalent Measurement of Support

Source: WTO (2010)

11.8. 15.11.8. De minimis

Support within de minimis levels is also exempt from reduction commitments. The related provisions of the Agreement on Agriculture will be taken up in conjunction with the Total AMS. De minimis is a concept in the Agreement on Agriculture that exempts relatively small amounts of Amber Box support from the Total AMS commitment.

When commitments were established in the Uruguay Round, Members were not required to include in their Total AMS the value of support during the base period 1986-88 that was within the following de minimis levels (Figure 1).

• 
  product-specific support that did not exceed 5% of the total value of production of the basic agricultural product in question; and
  
• 
  non-product-specific support that did not exceed 5% of the value of total agricultural production.
  

15.3. ábra - Figure 1: Amber Box and de minimis: Current Total Aggregate Measurement of Support

Source: WTO (2010)

11.9. 15.11.9. Export competition

The proliferation of export subsidies in the years leading to the Uruguay Round was one of the key issues addressed in the agriculture negotiations. The rules on agricultural subsidies are found in both the Agreement on Agriculture and the Agreement on Subsidies and Countervailing measures (SCM Agreement). The negative effects of export subsidies on agriculture have been analyzed by international organizations, many WTO Members, as well as independent economists and academic institutions. Exporters that receive export subsidies enjoy an advantage, since they can for example, sell below the cost of production. In most cases the subsidy depends on the difference between the world and domestic prices, which means that the exporter can always match or undercut exporters in other countries. This in turn increases competition for other exporters or for domestic producers in the importing country.

In addition to reducing prices and undercutting unsubsidised exporters in other countries, export subsidies also amplify world market price variations. As the level of subsidy usually depends on the difference between domestic and world market prices, if world market prices fall the subsidy increases and supply from the subsidised exporter can remain the same, or even increase. In addition, supply from the subsidising country is not affected by market prices as the subsidy increases or decreases as prices fall or rise. This exaggerates the swings in world prices by reducing supply in times of high prices and increasing it in times of low prices.

On average export subsidies lead to declining food prices. This hurts vulnerable producers in developing countries. However, most of the export subsidies are granted to temperate products like dairy and cereals. Therefore, it could be argued that consumers in net-food-importing developing countries benefit from the lower food prices although producers in these countries will suffer from the increase in subsidised. The Agreement on Agriculture provides that the level of export subsidies cannot be increased and that the existing level of subsidies could continue subject to conditions and the commitments to reduce (1) subsidized export quantities, and (2) the amount of money spent subsidizing exports.

The SCM Agreement is also applicable to agricultural products. However, Members also agreed that the provisions of the SCM Agreement on export subsidies would apply “except as provided in the Agreement on Agriculture”. In addition, provided a Member’s use of export subsidies was within its commitments, the “Due Restraint” clause of the Agreement on Agriculture restricted other Members rights to challenge these subsidies until the end of 2003. At the 6th Ministerial Conference held in Hong Kong in 2005, WTO Members agreed to eliminate agricultural export subsidies by 2013, as part of the single undertaking and subject to the parallel elimination of all forms of such subsidies.

SCM Agreement prohibits subsidies contingent in law or fact on export performance, except as provided for in the Agreement on Agriculture. The SCM Agreement¹ added precision to the rules, for example, it defined subsidies for the first time and further elaborated on subsidy disciplines, classifying subsidies into three categories (prohibited, actionable and non-actionable). It also developed definitions, concepts and methodologies relating to adverse effects, and established procedural rules for multilateral remedies. The SCM Agreement also expanded and developed existing procedural and substantive rules on the use of countervailing measures.

The Agreement on Agriculture permits export subsidies on agriculture subject to the limits set out in Members’ Schedules of Commitments and the rules of the Agreement. Export subsidies can still be used by WTO Members, but only where they used them during the base period (1986-1988). However, although a subsidy is legal it may cause or threaten to cause harm to another Member. In these cases it may be possible to seek some of the remedies set out in the SCM Agreement. The Agriculture Agreement does not contain any definition of the term “subsidy”.

Under the SCM Agreement, a subsidy exists if:

• 
  there is a financial contribution by a government or any public body within the territory of a Member;
  
• 
  there is any form of income or price support in the sense of the GATT 1994;  a benefit is thereby conferred.
  

• 
  “financed” or a “financial contribution” do not necessarily mean a direct payment of monies, they can also cover cases where someone gets a benefit as a result of a government programme.
  
• 
  A subsidy can exist even where the benefit is granted not directly by the government but by virtue of government action.
  

It must also be noted that exports can be supported in many different ways and that direct aid by governments is only one of these methods. Governments can also provide support to exports through export credits which offer the purchasing government or enterprise lower interest rates or easier terms than commercial banks. A state trading enterprise may also have access to government-guaranteed loans or government investments which enable it to undercut the competition. Food aid can also be used as a way to dispose of surplus stocks. In some cases, food aid could displace commercial trade in the receiving country rather than contributing to alleviation of hunger.

From the perspective of commercial trade there are two types of food aid:

• 
  one that displaces commercial exports; and
  
• 
  the other that increases consumption by providing food that would not have been consumed if the aid had not been granted.
  

12. 15.12. WTO negotiations after 2000

Negotiations on agriculture started in 2000 s were incorporated in the comprehensive round of negotiations under the Doha Development Agenda in 2001. Various deadlines for modalities were missed. First in March 2003 and then at the Cancún Ministerial Conference in September (2003). Agriculture negotiations were updated in the General Council Decision of 1st August 2004 (and advances were made in the Hong Kong Ministerial Conference in December 2005. In July 2006, negotiations were suspended. However, they restarted fully in January 2007 (WTO, 2010).

In December 2005, the Hong Kong Declaration reaffirmed Members' commitment to the development of internationally-agreed disciplines for export credits.² Despite the lack of clear rules, any subsidy element that might exist in government-supported export credit, guarantee and insurance programmes is subject to the commitments in Members’ Schedules and the rules in the Agreement on Agriculture. In other words, no subsidy can be used to export products not listed in a Member’s Schedule nor, if there are commitments for a particular product, can it be used in a way that threatens to lead circumvention of commitments.

The draft modalities call on the developed world to provide duty- and quota-free access to LDCs, but whether this should be mandatory or voluntary is still to be negotiated. LDCs will continue to be exempt from tariff reduction commitments but the modalities paper says, LDCs are encouraged to consider making commitments commensurate with their development needs on a voluntary basis, including in response to requests from their trading partners. This sentence is still to be negotiated but is a clear indication that developed countries will put pressure on individual LDCs to lower tariffs. For all other WTO members, the tariff reductions proposed represent a compromise between the more radical Swiss formula proposed by the Cairns group and the US, and the Uruguay Round formula proposed by the EU and others.

The extent of these reductions is dependent on the current tariff levels. For example, for high tariffs of over 90% in developed countries, there would an average reduction of 60% with a minimum 45% reduction for each tariff line from the final bound level of the Uruguay Round. For tariffs between 15-90%, the respective figures would be 50% and 35% (Table 3). The proposal would mean sharp cuts in tariffs for developing as well as developed countries. Unfortunately, the modalities do not include any concrete steps to deal with non ad valorem tariffs, that is, tariffs which are not expressed as a percentage of the value of goods. These make up 42% of EU and US tariffs and 90% of Swiss tariffs.

15.4. ábra - Table 3: Reduction formula for ad valorem tariffs

Source: WTO (2010)

It is possible for prices to be high but show little variability, or to be low but variable, but in practice, price levels and volatilities tend to be positively associated. This is largely owing to low carryover, which reduces current availability, exerting upward price pressure, limiting the possibility of using inventories to respond to positive demand or negative supply shocks, and thereby increasing volatility. Regular price fluctuations – “day-to-day” or “normal” volatility – are both a typical attribute and a requisite for the functioning of competitive markets.

The essence of market functioning is that when a commodity becomes scarce its price rises, which induces a fall in consumption and signals more investment in the production of that commodity. Importantly, there is a need to know why prices have risen to counteract the scarcity in an efficient way. But the efficiency of the price system begins to break down when economic shocks give rise to price movements that are increasingly uncertain and precipitous, and in the limit the system becomes largely redundant when prices undergo “extreme volatility” – or “crisis” to use popular terminology. Since when shocks surpass a certain critical size or threshold and persist at those levels, traditional policy prescriptions and coping mechanisms are likely to fail.

Historically, bouts of extreme volatility in global food markets have been rare. To draw the analogy with natural disasters, they typically have a low probability of occurrence but bring with them extremely high risks and potential costs to society. Being global events, they pose extreme covariate risks, and present the greatest challenge to policy-makers.

Many experts have reverted to public sector storage as a possible response to apparently inadequate private storage. However, public storage crowds out private storage so the mere introduction of a public storage programme increases the problem that it was designed to solve. Public storage is therefore costly; moreover, it is unlikely to be very effective in countering price spikes as the storage authority can only sell what it has previously bought. The knowledge that it cannot counter price spikes will leave it vulnerable to speculative attack.

13. Questions

1. GATT-WTO: comparison?

2. WTO main principles?

3. How are decisions taken at WTO?

4. Structure of the Agreement on Agriculture (AoA)?

5. Uruguay Round reduction commitments?

6. Doha Agriculture Negotiations?

14. References

ActionAid and Azione Aiuto (2012): Foodrights. The WTO Agreement on Agriculture. www.actionaid.org

Duponcel, M. (2000): Workshop on Uruguay Round Follow-up and Multilateral Trade Negotiations on Agriculture. Prague, 10-14 January 2000. Food and Agriculture Organization of the United Nations. http://www.fao.org/ur

Wikipedia (2012): Agreement on Agriculture. http://hu.wikipedia.org/wiki/Kezd

WTO (2010): WTO E-Learning. Agriculture in the WTO. World Trade Organization. p. 286.