The other side of the Coin: Blame Game and Agriculture Sector

 

The World Trade Organization (WTO) was established on 1^st of January 1995 as a result of completion of Uruguay Round of multilateral trade negotiations spanning from 1986 to 1994. India, United States of America, Japan and European Communities were amongst 128 member nations of the world who signed the treaty of Marrakesh Agreement establishing WTO and the predecessor of WTO which was created to balance out the world order in the aftermath of World War II i.e. the General Agreement on Tariffs and Trade (GATT); got evolved into full-fledged international organization with dispute settlement body for all the member governments and countries committing to the reduced and liberalized levels of tariffs with win-win situation for all. Today WTO regulates 98% of the world trade. Looking at the growth figures of world commodity trade as well as service trade one can definitely come to the conclusion that WTO has been proved itself to be the most successful example of international cooperation with countries binding themselves to commitments which cannot be unilaterally revoked.

It is important to note that amongst all the agreements countries entered into related to goods trade i.e. GATT, services trade i.e. GATS, trade in intellectual property i.e. TRIPS and some agreements on reduction in technical barriers to trade (TBT) and sanitary standards (SPS) for the products, the ‘Agriculture Products’ has been given special importance and relevance in the world trading mechanism. The ‘Agreement on Agriculture’ (AoA)[1] was an attempt by all WTO members to initiate negotiations for continuing the agricultural trade reform process on the lines of committed levels of subsidies, domestic support and market access.

Why all the fuss?

Agricultural trade remains in many countries an important part of overall economic activity and it plays a major role in domestic agricultural production and employment creation. Most of the developing countries and Least Developed Countries have primary export products as agriculture products. Similarly, these countries have large chunk of their work force involved in agriculture and allied sectors. Due to reasons such as these only ‘Agriculture Products’ were recognized distinctively in the general framework of WTO.

It is also imperative to note that given the nature of the agriculture industry and stake holders involved in it make it politically sensitive. This sector is highly subsidized and domestic support by the governments to this sector has always been subject of debate for advocates of free trade and less government intervention. The Agreement on Agriculture in its preamble also notes that members take cognizance of the commitment regards “to establish a fair and market-oriented agricultural trading system” through AoA.

Let’s get the Facts straight[2]:

Chart 1: Share of Agriculture in GDP

Country	1995	2000	2005	2010	2015
China	19.6	14.7	11.6	9.5	8.8
European Union	3.0	2.4	1.8	1.6	1.6
India	26.3	23.0	18.8	18.9	17.5
United States	--	1.2	1.2	1.2	--

Chart 2: No. of persons economically active in Agriculture (in Millions)

Country	1995	2000	2005	2010
United States	3.4	3.0	2.8	2.5
India	224.3	240.2	252.1	265.6

Chart 3: No. of persons economically active in Agriculture/ 1000 hectare

Country	1995	2000	2005	2010
United States	8	7.3	6.8	6.1
India	1241	1331.9	1402.2	1478.1

The Agreement on Agriculture as an outcome of Uruguay Round has an objective of Fair & market oriented trading system in agriculture as well as creates obligation on members to increase market access & reduce trade-distorting agricultural subsidies. The Agreement fairly deals with the following areas: 

1. Market Access: To reduce various trade restrictions confronting imports. Here main concern is tariff and non-tariff measures countries take to protect domestic industry form foreign competition, which distorts trade.
2. Domestic Support: Relates to subsidies & other programs. Here main concern domestic support measures which countries take to promote domestic goods and make them more competitive for foreign market which distorts trade.
3. Export Subsidies: Relates to other methods used to make exports artificially competitive.

There is a flexibility provisions which fairly allows Developing countries did not have to cut their subsidies or lower their tariffs as much as developed countries, & they were given extra time to complete their obligations. Developed countries were to reduce tariffs for all agricultural products on average by 36% from the base tariff rate with a minimum reduction of 15% per tariff line over a 6-year period and Developing countries to reduce by two-thirds i.e. 24% of the cut to be made by developed countries over a 10-year implementation period. There was no per se tariff reduction commitments made by LDCs, instead they committed to not raise their tariffs beyond decided level.

Chart 4: Uruguay Round Formula

	Developed Countries 6 years 1995-2000	Developing Countries 10 years 1995-2004
Tariffs (average cut for all agriculture products)	- 36%	- 24%
Minimum cut per product	- 15%	- 10%

Quota or No Quota ?

A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries. So; WTO members in general prefer tariffs (which are imposed as percentage to the value of the good) than that of Quotas which directly prohibits or regulates the commodity trade in terms of Quantity coming in or going out. This is very generalized explanation of how WTO deals with tariffs and quotas as market access tools, but for this blog the ‘Subsidy’ is the real elephant in the room which needs close consideration.

But again, here it is imperative to note that AoA allows countries to maintain Trade Related Quantitative Restrictions (TRQs) i.e. Quotas for agriculture products in given framework of WTO. All the developed countries around the world hold around 60% of the quotas wherein countries like United States have listed 54 products upon which they hold quotas, as comparing to India which effectively operates TRQs on just five products. Meaning there by, that, the developed countries like USA operates quotas to favor domestic producers and make their market less competitive for foreign products, which goes against the spirit of WTO which mandates the fair market for all.

Elephant in the Room i.e. The Agriculture Subsidies

A dictionary definition of a Subsidy would be, a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low. A key objective of the agricultural package of the Uruguay Round has been to discipline and reduce domestic support while at the same time leaving great scope for governments to design domestic agricultural policies while using subsidies, but in a manner agreed by all.

The AoA has defined or bifurcated the subsidies in three boxes plus a category of Development Programs as follows:

Box 1: Green Box Subsidies: 

These subsidies according to WTO members have less or minimum trade distorting effect and therefore can be given from public funded money. These support measures also help capacity and infrastructure building for the nation.

 The Green Box support includes the measures related to:

1. general services such as research, pest and disease control, training, extension/advisory services, inspection, marketing and promotion, and infrastructural services;
2. public stockholding for food security purposes;
3. domestic food aid; and
4. direct payments to farmers
5. Loan Waivers or crop insurance premium payments

Box 2: Blue Box Subsidies: 

Payments under the Blue Box can be directly related to current production but with a condition of production limitation. These subsidies according to WTO members are less trade distortive than that of amber box.

Development Programs: 

Development Programs of Developing countries are exempted from reduction commitments including

1. Investment Subsidies generally available to agricultur
2. Agricultural Input Subsidies available to low-income or resource- poor farmers
3. Domestic support to producers to encourage diversification from growing illicit narcotic crops.

Box 3: Amber Box Subsidies:  

These are the most trade distortive subsidies as per AoA. Amber Box Subsidy or Aggregate Measurement of Support is defined as the annual level of support in monetary terms extended to the agriculture sector. These subsidies are subjected to ‘Reduction Commitments’; meaning thereby upon calculation of Aggregate Measure of Support (AMS) i.e. formula to count impact of subsidy as per AOA, the countries will reduce these subsidies as they are regarded as most trade distortive. Some examples of Amber Box would be:

1.  Reduced Input Cost (eg. Subsidized Urea ( a fertilizer) i.e. cheap inputs for farmers)
2. Maintain output prices (eg. Fixed Purchasing Prices promised by the government to buy farm outputs, which India does with Wheat and Rice)
3. Reduced Marketing Costs

Chart 5: Green Box support in selected countries[3]

Country	Year	Currency	Green Box	Green Box Component (%)
				General Services	Public Stockholding for Food Security Purpose	Domestic Food Aid	Direct Payments
India	2010	Million US $	19,479	5.8	70.9	0.0	23.3
United States of America	2012	Million US $	127,441	8.0	0.0	83.8	8.2
EU	2011	Million Euro	70,977	12.9	0.0	1.4	85.7

 North-South Debate

The eye-opening figures mentioned in Chart 5 shows that it is not only developing countries but also developed countries indulge in supporting their domestic agriculture producers as well as operating quota restriction to save domestic industry from foreign competition. Then there is also a much-debated topic of ‘Public Stockholding’ for food security where everyone corners India at WTO.

In my personal opinion; when a country has extreme poverty that major chunk of the people barely have purchasing power to buy daily staple food and 60% of the population is involved in agriculture and allied sectors, within which 90% of the farmers have less than one hectare of land holding, it does need real and serious consideration to even comment on reduction of subsidies or stopping loan waivers in any way.

If we compare the figures of people involved in agriculture in USA (Chart 2 & 3) and the value of subsidies they provide (Chart 5) then one would feel disheartened thinking that why countries like India are being cornered at WTO for its public stock-holding for food security program. When it is the fact that issue of public stock-holding for food security is very important for millions of low-income or resource-poor farmers and incremental to the food security of people in developing countries.

There has been a selective elitism on part of developed countries pack lead by USA at WTO who have highest possible levels of protection for their agriculture markets and blaming countries like India who are feeders of the world for protecting our domestic industry in a way where our main objective is to feed our own mouths unlike USA and EU who have export oriented strategy for their agriculture products.

As Mint[4] reported in September 2017 that The US and the European Union annually provide more than $200 billion for Green Box programs following the rules they finalized during the previous Uruguay Round. But, for inexplicable reasons, the public distribution programs of developing countries were included under the so-called Amber Box measures based on 1986 prices. The only solution on this dilemma can be to consider the reforms in the subsidies regime through negotiations considering that there has been a substantial difference in the size of the population of developing countries as well as demand for affordable food prices, where both has been changed considerably since 1995 when the formula has been finalized at the time of inception of WTO.

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[1] AGREEMENT ON AGRICULTURE, Annexd to GATT 1994. https://www.wto.org/english/docs_e/legal_e/14-ag.pdf [emphasis  added on preamble]

[2] All the figures in Chart 1, 2, 3 & 4 are taken from presentation made by Ms. Anu P. Mathai at 5^th WTI Bern-CWS joint academy on International Trade and Investment Law at IIFT, New Delhi. Ms. Mathai is from Indian Economic Services (IES) and currently serving as an Economic Advisor to Ministry Commerce, Government of India on WTO matters.

[3] Sachin Kumar Sharma, The WTO and Food Security, Implications for Developing Countries, Springer 2016.  Page 16  [see table 2.1] A WTO Best Seller Book

[4] Public stockholding of food priority issue for WTO meet, Live Mint (politics) online, Last Published: Fri, Sep 08 2017. 07 53 AM IST Check online at: https://www.livemint.com/Politics/aKtC6WOHJsHYr3SBZLIduJ/Public-stockholding-of-food-priority-issue-for-WTO-meet.html