the WTO Agreement on Agriculture Still Up-to-Date?
© Springer International Publishing Switzerland 2015Christoph Herrmann, Bruno Simma and Rudolf Streinz (eds.)Trade Policy between Law, Diplomacy and ScholarshipEuropean Yearbook of International Economic Law10.1007/978-3-319-15690-3_10
Is the WTO Agreement on Agriculture Still Up-to-Date?
Former Deputy Director-General for Agriculture, European Commission, Avenue Napoleon 39, 1180 Bruxelles, Belgium
The Agreement on Agriculture
Already the Haberler Report of 1958 made the distinction between support measures that raise the internal market price above the level of world market prices that require border protection,1 and export subsidies and measures that make consumers benefit from lower world market prices but compensate farmers for the loss of income.2 The Agreement on Agriculture (AoA), that is one of the salient features of the Marrakesh Agreement that concluded the Uruguay Round Trade Negotiations, embraces the latter. By reducing border protection, limiting export subsidies and reducing trade-distorting support, while opening up ways of less distorting forms of support, it favours income over market price support. It broke new ground in three areas. On market access it established the principle that all import barriers had to be converted into tariffs which had to be reduced by 36 % on average (24 % for developing countries). Domestic support has been constrained. Each WTO Member had to take a commitment on the maximum level of its trade-distorting support and rules have been laid down for not or least trade-distorting support. Developing countries that had not provided trade-distorting support in the past and therefore could not bind a level of trade-distorting support (Aggregate Measurement of Support, AMS) were not allowed to exceed the de minimis threshold of 10 % of the value of their agricultural production. Export subsidies have been submitted to quantitative and budgetary limits. In accordance with GATT practice, the specific commitments by Members were included in their respective schedules that contain now their tariff bindings, as in the past, along with their bindings on domestic support and export subsidies.3
Agricultural Trade and Policy Since the Agreement on Agriculture Was Concluded
The Agreement on Agriculture (AoA), as all the other Uruguay Round agreements, came into effect on 1 January 1995. In the following five years, world trade in agricultural products either stagnated or even receded. This was mainly due to the recession caused by the currency and financial crises in Asia in 1997 followed by the monetary crisis in Brazil and in Russia in 1998. But it was also a consequence of the new rules embodied in the AoA that put limits on exports subsidies of major exporters like the US and the EU, without giving a strong push to opening up markets. Only after 2000 did agricultural exports take off again, increasing by 9 % from 2000 to 2005 and by 9 % from 2005 to 2013.4 This was again mainly due to economic factors, in particular to the spectacular growth of China that led to growing demand for agricultural products. But the new rules of agricultural trade, reining-in distortions, had their impact, too. China joined the WTO in 2001.
Unlike its impact on trade, the AoA had a major influence on agricultural policies. Although OECD data show that there has been little change in nominal support for producers (in Producer Support Estimates, PSE) over the last 25 years (EUR 205 billion in 1995–1997 and EUR 195 billion in 2011–2013; EUR 194 billion in 2013) the share of support in the total agricultural output (defined as farm gross receipts) declined from 30 % in 1995–1997 to between 18 % and 19 % in 2011–2013.5 This may in part be due to rising producer prices. However, there is a major shift in the use of policy instruments away from the most trade-distorting support, i.e. market price support, to direct payments that are in many cases less distorting.6 The OECD estimates that the most production and trade-distorting support in the OECD (defined as market price support, output based payments and payments on variable input use) fell from 22 % of gross farm receipts in 1995–1997 to 9 % in 2010–2012.7 This trend is not limited to the OECD. If major non-OECD countries in Eastern Europe (Russia, Ukraine Kazakhstan), in Asia (China, Indonesia), in Africa (South Africa) and in Latin America (Brazil, Chile) are included the decline is still from 16 % in 1995–1997 to 11 % in 2010–2012.8 On the other hand, trade-distorting support increased in emerging economies. High levels of such support remain in China, Indonesia, Russia and Turkey.9
A recent World Bank study that uses a comprehensive global economy-wide model and covers 82 countries and 75 agricultural products comes to similar results. On the basis of this study, Anderson points out that the Nominal Rates of Assistance (NRA) to farmers (expressed as a percentage by which government policies have raised gross returns to famers above what they would have been without government intervention) rose for high-income countries until the mid-1980s of the last century, but then declined until 2010 to a quarter of the peak rate. In developing countries, NRAs to farmers were negative until the mid-1990s when they turned slightly positive. This was mainly due to an increase in GDP per capita in developing countries that led to a shift in emphasis on farming.10 Anderson estimates that policy reforms from the early 1980s to the mid-2000s improved global economic welfare by USD 233 billion per year and that developing countries benefited proportionately more than high-income countries. He finds that the average real price in international markets for agricultural and food products would have been 13 % lower without policy changes, and that for developing countries as a group, net farm income was 4.9 % higher than without the reforms.11 The reforms of trade and agricultural policies cannot be attributed to the AoA alone, but it has been an essential part of the process. The impact of the AoA on agricultural policies is often played down.12 It is therefore welcome that a recent econometric analysis came to the conclusion that the AoA has been instrumental in shifting support away from market price support towards direct income support.13
The Impact of the Agreement on Agriculture on Policy in the EU, the US and Japan
The Common Agricultural Policy of the EU, the US Farm Bills, and agricultural policy in Japan provide an illustration of the policy shift as it shows up in their notifications to the WTO. The measurement of support is somewhat different from the PSE of the OECD and the NRA of the World Bank. The main difference is the handling of border protection. Trade-distorting support that has to be reduced is defined by the AoA as Aggregate Measurement of Support (AMS). It covers market price support, output- and input-based payments, as well as direct payments. However, market price support is calculated as the difference between the farm gate price and a fixed reference price, not world market prices, as in the PSE and the NRA. In addition, PSE and NRA do not exclude de minimis support. Furthermore, a range of payments listed in Annex 2 AoA (“green box”), including direct payments that do not require production, are not part of the AMS. Direct payments that are part of a production-limiting programme and meet certain criteria are not subject to a reduction commitment (“blue box”).
The reform of the EU Common Agricultural Policy (CAP) in 1992 preceded the conclusion of the Uruguay Round trade negotiations. Thus the notification on the year 1995–1996 shows the results in terms of classifications introduced by the AoA: AMS of more than EUR 50 billion, almost entirely made up of market price support, a blue box of more than EUR 20 billion housing the direct payments that compensated for the reduction of market price support, and a green box of EUR 18.8 billion.14 By 2010–2011, the last year for which a notification is available, AMS had fallen to EUR 6.501 billion, the blue box to EUR 3.141 billion and the green box had shot up to EUR 68.051 billion.15 This was the result of the CAP reform of 2003–2004. Direct payments were decoupled from production and transformed into Single Farm Payments to make them fit for paragraph 6 of the green box, which exempts decoupled income support to farmers from reduction commitments. In the 2014 budget of the EU, EUR 38.252 billion has been allocated to decoupled income support. The “Health Check” reform of 2008 extended the use of the Single Farm Payments to almost all sectors with only a few exceptions. The most recent CAP reform of 2013 has kept the basic structure of the Single Farm Payment, but has added enhanced environmental requirements for farms with at least 15 ha. 30 % of their entitlement is linked to specific agricultural practices beneficial to the climate and the environment. This will curb production. Besides decoupled income support, investment aid, environmental payments and regional assistance are important components of the green box. Environmental payments and regional assistance have doubled since 1995–1996, and reached EUR 7.237 billion and EUR 4.452 billion, respectively, in 2010–2011, whereas investment aid remained in most years above EUR 5 billion, rising to more than EUR 7 billion in 2010–2011, without showing a clear trend. Whether the newly enlarged possibilities to re-couple support to production will be used by Member States to a significant extent remains to be seen. Re-coupled support is likely to be notified as blue box support, as is already the case in the 2009–2010 and 2010–2011 notifications. Market price support will remain low, because of high world market prices. Therefore, AMS in 2015–2016 will be closer to the EUR 6.5 billion notified in 2010–2011 than to the estimate of EUR 10.9 billion made by Josling and Swinbank.16 These figures are in any case well below the final bound AMS of EUR 72.244 billion for the EU-27.17 But Josling and Swinbank are right with their estimate of slightly below EUR 60 billion in the green box, while the blue box will not exceed EUR 2 billion, much below the estimate of EUR 4.7 billion.18 The new Single Market Organisation does not provide for export subsidies any more, except in crisis situations.
In the USA, the impact of the AoA is less obvious but nevertheless significant, too. The 1996 Farm Bill replaced deficiency payments available to main crops by direct payments that were granted on the basis of 7-year production flexibility contracts. Payments were based on historical yields and acreage, not current production. Farmers were free to plant the crops they wanted with the exception of fruit and vegetables. As there was no obligation to produce, the US has notified these payments as decoupled income support of the green box (paragraph 6).19 These payments were kept in the 2002 Farm Bill and in the 2008 Farm Bill. Unfortunately, they have not been extended by the 2014 Farm Bill. The payments started with USD 5.2 billion in 1996, increased to USD 6.5 billion in 2003 and, with the exception of 2004, were then slightly above USD 6 billon until 2009, but fell below 6 billion dollars in 2010 and 2011.20 Support under the green box has more than doubled between 1995 and 2011, rising from USD 46 billion to USD 125,117 billion.21 This is mainly due to the increase of domestic food aid that grew from USD 37.5 billion to USD 103,151 billion during this period.22 Environmental payments including the Conservation Reserve Program (CRP) come third in the US green box. Being insignificant until 2001, they jumped to USD 2.5 billion in 2002 and increased to USD 4.914 billion in 2011.23 New environmental programmes like the Environmental Quality Incentive Program and the Conservation Security Program have complemented the CRP that has been the primary environmental programme since 1985.24 AMS in the US started with USD 6.213 billion in 1995–1996 jumping to USD 16.826 billion in 1999 and then decreasing to USD 4.653 billion in 2011, with peaks of USD 11.595 billion and USD 12.943 billion in 2004 and 2005, respectively. With market price support rather stable over the years, hovering at around USD 6 billion per year until 2008, the variations are due to non-exempt direct payments—mainly for corn, cotton and soybeans—when prices were low.25 With the 2008 Farm Bill, market price support for dairy fell because of a new method to calculate support.26 The 2008 Farm Bill also introduced the Average Crop Revenue Election Program (ACRE) that sought to stabilise farmers’ revenues for a particular crop against short-term variations in price and volume of production. The programme had the potential to increase AMS,27 but farmers did not take it up in sufficient numbers. Total support is much higher than the figures on AMS suggest, as they do not include non-products’ specific de minimis support (i.e. support below 5 % of the value of production of US agriculture). This form of support started at USD 1.5 billion in 1995, rose to USD 7.4 billion in 1999, and then fell gradually to USD 2.2 billion in 2007, only to increase again from 2008 to 2011, when it stood at USD 9.232 billion.28 Non-product-specific support consists mainly of crop and income insurance subsidies, which tend to increase with higher prices, as the value of production is higher. Thus in 2011, more than 95 % of non-product-specific de minimis support was crop and income insurance payments.29 Blandford and Orden have made estimates on the development of support under the 2008 Farm Bill from 2009 to 2016. They estimate that green box support will climb to USD 117.5 billion, AMS will slightly increase to USD 5 billion and non-product-specific de minimis support will rise before falling gradually to USD 4.8 billion in 2016. Thus, the difference between notified current total AMS and the Bound Total AMS would be USD 14.1 billion in 2016.30 With the 2014 Farm Bill, this may overstate green box support, as decoupled income support is abolished and food aid, as well as conservation programmes, are being curbed, while AMS is likely to be higher although traditional market support instruments (countercyclical payments, ACRE and dairy support programmes) have been scrapped. AMS could increase because the new support programmes provide the potential to increase support for wheat, corn and soybeans if prices decline.31 Non-product-specific support could be significantly higher if the new crop and income insurance programmes (Supplementary Coverage Option, Stacked Income Protection Plan for Cotton) come under this category. The re-established livestock-oriented new disaster relief programme seems to be green box compatible.32
Japan, which imports more than 50 % of its food, has a highly protected agricultural sector, of which rice is the predominant product. Nevertheless, overall support levels sharply decreased since the AoA came into force. In the early years of implementation of the AoA (1995 to 1997), notifications of support showed a high level of AMS (between JPY 3,507 billion and JPY 3,170 billion). In 1998, the Japanese government abolished the administered price for rice which led to the disappearance of market price support for rice. AMS fell to JPY 766.3 billion in 1998.33 The Japanese government still purchases rice on the market, but asserts that this is for food security reasons only and does not support market prices. Godo and Takahashi believe that at least in some years, purchases for food security purposes also served to support prices.34 If this were the case, the purchases could not be counted under the green box, but come under the AMS. As the sums spent are negligible, this would not change the overall picture. Market price support for milk was abolished in 2001. After market price support for wheat and barley was also dropped, market price support remained for sugar, starch, beef and veal and silk-worm cocoons.35 Until 2007, it was mandatory for Japanese farmers to divert part of the rice fields to production of wheat, barley, potatoes, soybeans and sugar beets. Income support was provided to farmers who participated in the rice diversion programme and was notified as blue box support.36 Through the reform of 2007, it became voluntary. The subsidies farmers received for the diversion was replaced by a new scheme that was in part decoupled income support, and therefore eligible to the green box, in part non-exempt direct payments.37 These reforms reduced AMS further to JPY 564.8 billion in 2009, the last year for which a notification to the WTO is available.38 Green box support is the predominant form of support to Japanese agriculture. Although it fell by around 40 % since 1995, in 2006 it was more than three times higher than AMS, but less than double in 2009.39 The main component of the green box is support for rural infrastructure. The shrinking of expenditure for this purpose is the main explanation for the fall in green box support. Payments for producer retirement and environmental payments are two other significant components of the green box, although they pale in comparison to infrastructure payments. Decoupled income support for grains, potatoes, soybeans and sugar came only with the 2007 reform. After the 2009 elections, which were won by the Democratic Party of Japan, agricultural policy shifted to greater self-sufficiency in food. Rice production was encouraged by new Income Support Payments (ISP) for producers of rice, made up of a predetermined and a price contingent component.40 The ISP for upland crops were a combination of payments on areas cultivated in the past, and output payments. This could have increased AMS to double the level reached in 2008, although Godo and Takahashi claim that the payments for rice fit the blue box, because farmers had to divert land to other production, but not for upland crops.41 With the Liberal Democratic Party (LDP) again in power, agricultural policy seems to have shifted to making Japanese farms more competitive by increasing their size and to support multifunctional agriculture. ISP will be halved in 2014 and phased out in 2018. This should further reduce AMS, whereas support for rural development may be mainly green box support. Godo and Takahashi estimate that current AMS will be JPY 900 billion in 2015, which compares to bound AMS of almost JPY 4,000 billion.42
Notifications of domestic support by the EU, the US and Japan confirm the trend of shifting domestic support from its most trade-distorting form to less distorting ways of providing support. This is obvious for the EU, where since 2003–2004, the bulk of support shifted to decoupled income payments in terms of paragraph 6 of the green box. In Japan, the shift is no less dramatic, triggered by the elimination of market price support for rice, dairy, wheat and barley. In the US, too, green box support has shot up. Although the record on AMS is not satisfactory the US is broadly on track with decreasing AMS, unless the 2014 Agricultural Act reverses this trend.
The Impact of the Agreement on Agriculture on Major Emerging Economies
The data available on emerging economies that are major agricultural exporters or importers, i.e. Brazil, China and India, shows that the impact of the AoA follows a pattern somewhat different from those in major developed countries.
Before the 1990s, Brazil’s agricultural policy was based on guaranteed minimum prices for major crops, rural credit support and debt rescheduling.43 Whereas market price and debt support still persist, Brazil has since developed an agrarian reform policy promoting land reform and resettlement that benefits mainly so-called family farmers. These policy measures are notified under “general services” in the green box.44 USD 438.5 million was spent on this reform programme in 2010, the last year for which a notification is available. In 2010, other major components of general services were extension and advisory services (USD 799.8 million) and infrastructural services (USD 622.1 million). General services are the biggest component of the green box, followed by public stockholding for food security and domestic food aid. In the early years after 1995, overall green box support was high, only to fall off in subsequent years. Since 2005, it has increased again, and reached USD 4,906 million in 2010. Support for crop insurance and disaster relief account only for a small part of green box support. Expenditure on development programmes under Art. 6.2 AoA, which exempts investment subsidies generally available to farmers and agricultural input subsidies to low income or resource poor farmers in developing countries from the reduction commitment, have strongly increased since 2004–2005, when they stood at USD 626 million, to USD 1,651 million in 2009–2010.45 The most important component is investment credit, on which USD 1,443.9 million were spent in 2009–2010, more than doubling from the year before.46 Major AMS programmes are price support and equalisation premiums for maize, rice, wheat, cotton and soybeans, although in most years, support falls under the de minimis rule, but for one or two products. In 2008–2009, it was wheat, in 2009–2010, it was cotton.47 Nassar wonders whether, in calculating market price support, the government should not have taken as “eligible production” the whole production instead of the volume purchased.48 But if Nassar is right that there was a minimum price but no guarantee that the government would purchase at this price, there was no price support and the sums spent should have been notified as other non-exempt support. It is unlikely that it had changed the picture significantly. Non-product-specific support has been continuously de minimis. Its main component is expenditure for debt rescheduling. Overall, de minimis support is substantial, taking second place after green box support with USD 3,210 million in 2009–2010.49 Nassar does not make any projections on the size of the green box in 2016, but estimates that product-specific and non-product-specific support will remain de minimis.50
In China, accession to the WTO precedes agricultural policy reform. Taxation of agricultural production was only abolished around 2006 and support for agriculture took off.51 But the bulk of this support is provided as general services, i.e. support to infrastructure, training and extension services. It is therefore no surprise that almost all support is notified under the green box. From 2005 to 2008, the last year for which notifications are available, green box payments almost doubled to CNY 593 billion.52 Although the bulk of China’s support in the green box comes under general services, it includes also public stockholding for food security purposes, environmental and regional assistance programmes, as well as decoupled income support since 2004.53 The latter increased from CNY 11.6 billion in 2004 to CNY 23.6 billion in 2008. However, it is not clear whether direct payments to grain producers are decoupled income support in conformity with paragraph 6 of the green box. Ni fails to mention that the payments are also made when no production takes place, as is essential for this provision to apply.54 However, if these payments are counted as non-product-specific support, they remain below 8.5 % of agricultural production, the de minimis level that has been fixed in the accession negotiations with China. One may also doubt whether the temporary storage programmes for rice, maize, soybeans, rapeseed sugar and pork come under the public stockholding for food security purposes as laid down in paragraph 3 of the green box.55 If not, although being substantial (CNY 57.9 billion in 2008), they would remain below the de minimis threshold of non-product-specific support of CNY 360.5 billion.56 Product-specific AMS measures are subsidies for improved crop varieties and market price support for rice and wheat.57 In 2008, as in the years before, product specific support was far below the de minimis thresholds for the products concerned.58 Market price support was negative in 2008, as in the years before. However, China uses as eligible production in calculating market price support only the production purchased by its official agencies, not overall production as required by the AoA. As long as market price support is negative, this does not matter. But if the administered prices increased above the external reference price, AMS could shoot up if total production had to be multiplied by the price difference. Cheng suggests that in countries like China with a high self-consumption, a solution could be to use the marketable surplus instead of overall production.59 The comprehensive subsidies for agricultural inputs make up for the bulk of China’s AMS. They increased from CNY 2.1 billion in 2005 to CNY 78.7 billion in 2008. They are notified as non-product specific de minimis support.60 In the accession negotiations to the WTO, China has foregone the possibility to have recourse to development programmes in conformity with Article 6.2 AoA. China does not make use of the blue box. In his estimates of domestic support in China up to 2016, Cheng expects green box support to arrive at CNY 522 billion in that year, an amount already exceeded in 2008.61 Non-product-specific support would come to CNY 91 billion, an amount close to the figure for 2008, but comfortably below the de minimis threshold of CNY 444.1 billion. But he fears China may breach the commitment to comply with the de minimis threshold for product-specific support if China raises the administered price above the external reference price, or extends price support to products other than wheat and rice, e.g. to cotton and soybeans. The choice of purchased instead of total production could be crucial in this context.
In India, agriculture is of major economic importance in terms of its contribution to GDP and to rural employment. Self-sufficiency in food is the main goal of agricultural policy, which is primarily pursued by high border protection. But domestic support is important, too. It is provided in two ways, through green box support, and development support in accordance with Article 6.2 AoA. Support under the green box is substantial and made up 40 % of total support in 2010–2011.62 It more than tripled from USD 6.183 billion in 2004–2005 to USD 19.479 billion in 2010–2011, the last year for which notifications are available.63 The most important component is stockholding for food security purposes, which takes about 70 % of the green box, followed by structural adjustment aid (through provision of interest subsidies and debt restructuring) and general services.64 Payments for measures protecting the environment are minor in comparison. Support under Article 6.2 AoA is substantial. Payments almost tripled between 2004–2005 and 2010–2011 from USD 10.689 billion to USD 31.610 billion, the lion’s share going to input subsidies.65 Like China, India provides these input subsidies mainly by way of subsidising provision of fertilisers, electricity and irrigation.66 India provides market price support for some agricultural commodities, too, in particular for rice and wheat. However, in most years support was negative, as the external reference price was higher than the administered price. But this has changed recently as a result of price inflation. Already in 2007–2008, market price support for rice has turned positive while being de minimis. 67 Gopinath estimates that by 2015–2016 price support for wheat will also have turned positive.68 Like Brazil and China, India has calculated market price support on the basis of purchased quantities. Gopinath estimates that on this basis market price support for rice and wheat in 2015 will be still de minimis, but not if total production is taken into account. Although since 1998–1999, no non-product-specific support has been notified, Gopinath believes that this form of support could amount to USD 1.654 billion in 2015/2016. But it would still be de minimis. 69