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Agriculture, Subsidies and the WTO

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Agriculture, Subsidies and the WTO | Trade In Services | TRIPS and Public Health

Agriculture, Subsidies and the WTO

A typical cow in the European Union receives a government subsidy of US$2.20 a day. The cow earns more than 1.2 billion of the world’s poorest people.

The Hon. Mark Vaile, Deputy Prime Minister and Minister for Trade, Australia
Speech at the Sydney Institute, Sydney, 24 October 2005

This shocking comparison is a useful tool to make us realise how important trade talks on agriculture are. Agriculture issues in the World Trade Organisation (WTO) concern almost everyone. However, discussions between WTO members seem quite opaque and complex. This paper, which focuses on agriculture subsidies, is an attempt to explain what subsidies are and how the issue is tackled within the WTO.

Subsidies can be of various kinds; they can be directly linked to the level of production or indirectly such as a subsides for water irrigation. They can provide minimal earning guarantees to farmers. Subsides can also be used to promote exports of agricultural products (export subsidies). Whatever their kind, subsidies have the same effect: they encourage farmers to produce. The surplus production is put on the world market. This may cause a decrease in the commodity price because there is too much of this commodity available. When huge quantities of a product are available, it forces prices down, whereas when a product is rare, it is more expensive. The process of flooding the world market with excess production and inducing a price decrease is called dumping.

This is what has been happening for years in the agriculture sector. Indeed, developed countries, led by the European Union (EU) and the USA highly subsidise their agriculture which allows their farmers and agri-businesses to sell their products at a lower price than the cost of production. Farmers of the developing world may have difficulty in competing with these prices since their own costs of production may be higher than the price of the commodity on the world market. According to the World Bank, agriculture subsidies in OECD¹ countries result in an estimated loss of USD 30 billion a year for developing countries’ farmers. If these subsidies were to be eliminated the agriculture sector would gain USD 250 billion per year, USD150 billion of which would go to developing and least developed countries.². To get a better idea of the situation, let’s look at the impact on the cotton industry in Mali.

Impact on the cotton industry in Mali

In the mid-nineties, the World Bank encouraged the Malian government to cultivate cotton, since the country had a comparative advantage³ in this field. The country followed this advice with success, becoming the second largest cotton producer in Africa behind Egypt. Nevertheless in this period cotton prices fell regularly. Despite this, in 2001, American cotton farmers produced a record crop.⁴ This can be explained by the subsidies American producers receive. Between 1999 and 2003, the 25,000 American cotton producers received USD 13.9 billion, which represents a subsidy rate of 89.5%.⁵ Annually, this represents about USD 3.2 billion of subsidies for American cotton producers, plus USD 1.6 billion in export aid.⁶ This is clearly an example of dumping, which has disastrous effects on the Malian economy. Indeed, Mali lost the equivalent of 1.7% of GDP and 8% of export earnings. These losses (USD 43 million) are bigger than the sum Malireceived from USAID in 2001 (USD 37.7 million).⁷ The Malian Finance Minister of the time made this relevant remark: “The money that those countries put into agricultural subsidies is five times what they give as development assistance. And we've always said to those rich countries, "you're hypocrites". You tell us to play the rules of the open market at the same time as you subsidise your farmers”.⁸

There are numerous similar situations in the sugar, chicken, dairy and other agricultural product markets due to EU or USA subsidies.

Now that we have a better idea of what subsidies and their effects are, lets look closer at how the WTO deals with the question.

WTO terminology on subsidies

Domestic support, i.e. subsidies not linked to exports, are classified in “boxes” according to WTO terminology. These boxes are of 3 different colours: amber, blue and green, ranging from the most trade distorting to the least trade distorting subsidies. Usually, the WTO uses colour boxes like traffic lights: red is forbidden, amber is to be reduced and green is permitted. But in agriculture, things are more complicated; there is no red box, but there is a blue box.⁹

The amber box contains all domestic support measures considered to distort trade and production, such as measures to support prices, or subsidies directly related to production quantities.
The blue box contains all support that would normally be in the amber box but because they require farmers to limit their production are tolerated.
The greenbox contains subsidies that don’t distort trade or at most cause minimal distortion. These subsidies must be government funded and must not involve price support.

After the Uruguay Round (1986-1994), the WTO agriculture negotiations continued, as mandated by article 20 of the Agriculture Agreement, which says that members must continue negotiations with the aim to substantial progressive reductions in support and protection.¹⁰ In 2001, the Doha Ministerial Declaration emphasised this goal by setting out in article 13 that “we (WTO members) commit ourselves to comprehensive negotiations aiming at: substantial improvements in market access; reduction of, with a view of phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support …”.¹¹ No further progress was made in agriculture negotiations during the 2003 Cancun Ministerial meeting, considered as a failure.

It is only in 2004, with the August 2004 Decisions¹² that an agreement was reached to eliminate all forms of export subsidies by a “credible” date, as well as export measures whose effects are equivalent to subsidises. As to domestic supports, developed countries will have to make substantial reduction in those that distort trade. 'Amber box' supports will be cut using a tiered formula (higher supports will have bigger cuts), 'blue box' supports are to be reduced to no more than 5% of the value of a country’s agricultural production, and criteria for defining 'green box' subsidies will be reviewed and clarified. However, the July 2005 General Council meeting¹³ did not see much progress in agriculture negotiations. At that time, according to Tim Groser, Chairperson of the Agriculture Negotiations,¹⁴ “the agriculture negotiations are stalled”.

To better understand what are the dynamics of these negotiations, here is an overview of country groups’ positions:

The Cairns group¹⁵ is made of countries that are net exporters of agricultural products but do not subsidise them. They want better market access and would like the EU and the USA to reduce subsidies they give to their farmers.
The G10¹⁶ is a group of countries that subsidise their agriculture sector but export only marginally. They tend to import agricultural products but are very protectionist. These countries don’t want to open their markets nor cut their subsidies.
The G20¹⁷ composed of more advanced developing countries ask for the elimination of agriculture subsidies of rich countries and more market access.
The G33¹⁸ countries focus on their “special products” that would be of strategic importance for the country.
The G90, composed of African, Caribbean and Pacific countries (ACP) members and Least Developed Countries (LDCs), insist on being entitled to a special and differential treatment in these negotiations and would like the USA to stop subsidising its cotton farmers.
The EU and the USA are considered as the big players. They subsidise their agriculture a lot and are in competition for new markets. They are reluctant to reduce the subsidies they pay to their farmers and are interested in gaining more market access.

Agriculture is a vital issue for most developing countries but developed countries are generally more interested in NAMA (non-agriculture market access) and in liberalisation of trade in services and are very reluctant to reduce subsidies to their farmers. Even if they eventually do so, we must expect that the EU and the USA will still find a way to subsidise their farming industry in a way that does not directly violate WTO rules. Nevertheless, developing countries do have the possibility to use the WTO Dispute Settlement process regarding unlawful subsidies from developed countries. Lately, Brazil did so successfully in regard to the US cotton subsidies. However, it is still difficult for developing or small economies to confront the most powerful countries.

October 2005

Esther Bares / Peter N. Prove
The Lutheran World Federation
Office for International Affairs and Human Rights
Ecumenical Centre, 150 Route de Ferney
P.O. Box 2100
1211 Geneva 2, Switzerland
Tel: +41-22 791 61 11; direct line: +41-22 791 6365
Fax: +41-22 791 6630
e-mail: eba@lutheranworld.org / pnp@lutheranworld.org

1 The Organisation for Economic Cooperation and Development (OECD) is an international organisation that grew out of the Organisation for European Economic Co-operation (OEEC), which was set up in 1947 with support from the United States and Canada to co-ordinate the Marshall Plan for the reconstruction of Europe after World War II. The OECD is a group of like-minded countries. Essentially, membership is limited only by a country’s commitment to a market economy and a pluralistic democracy. It is rich, in that its 30 members produce 60% of the world’s goods and services, but it is by no means exclusive. With active relationships with some 70 other countries, NGOs and civil society, it has a global reach. For more than 40 years, the OECD has been one of the world’s largest and most reliable sources of comparable statistical, economic and social data. OECD databases span areas as diverse as national accounts, economic indicators, the labour force, trade, employment, migration, education, energy, health, industry, taxation and the environment. Much of the research and analysis is published.
For more information, please consult: www.oecd.org