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WTO Framework: Faulty Frame, Savage Reality
by Devinder Sharma
August 7, 2004

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I had just finished a radio discussion on the All India Radio over the World Trade Organization’s multilateral framework agreement that is being projected as a ‘historic breakthrough’, when my phone rang. A seemingly excited owner of an up-market supermarket mall in New Delhi, was curious to know: “You mean the WTO has done exactly what we have been doing for ages?”

“You will have to explain what you mean by saying that,” I asked.

“Well”, he replied “do you believe that we put up sale signs all over the shops announcing discounts of 20 to 50 per cent on every item and end up running into huge losses?” and then went on to explain: “We first increase the price of our products, and then offer discounts to lure the customers, and the smart fellows actually end up paying more.” He laughed, and added “the WTO has done exactly that, and I think the so called brilliant negotiators from the developing countries have been taken for an easy ride.”

Although the WTO director general, Dr Supachai Panitchpakdi, may not be even aware as to how the simple and universal business trick had been effectively used, the United States Trade Representative, Mr. Robert Zoellick, and the outgoing European Union’s Trade Commissioner, Pascal Lamy, have successfully managed to hoodwink the developing country negotiators. They have gone back more than satisfied with the empty promise of reducing contentious monumental agricultural subsidies, but in reality getting a legal stamp of approval from the developing countries that allows them to increase subsidies. They couldn’t have asked for anything more.

Let us first understand the political ramifications. Agricultural subsidies had been (and will remain) the bone of contention in the ongoing trade negotiations. It is because of the disagreement on the reduction of agricultural subsidies (to the tune of US $ 320 billion) in the rich countries that the developed countries had refused to budge thereby even allowing the collapse of the WTO Cancun Ministerial in September 2003. The question therefore is what made them change their stand and that too in a year when the US is going for elections?

It is accepted that any move to significantly cut agricultural subsidies will be politically suicidal for the rich countries, more so in a year of election. US President George Bush will never step into the election fray after agreeing to chop subsidies for his farmers. European nations, especially France, Germany, and the Nordic countries would have been faced with a political turmoil within a day or two of the July framework being agreed if it had meant any drastic cut in subsidies. No political reaction in any of the developed country is more than enough of an indication that the rich countries have managed to protect their subsidies.

The devil is in the detail. Paragraph 7 of the Framework for Establishing Modalities in Agriculture (July 31st final draft) says: “As the first installment of the overall cut, in the first year and throughout the implementation period, the sum of all trade-distorting support will not exceed 80 per cent of the sum of Final Bound Total AMS (Aggregate Measurement of Support) plus permitted de minimis plus the Blue Box at the level determined in paragraph 15. And in para 15, it adds: “In cases where a Member has placed an exceptionally large percentage of its trade-distorting support in the Blue Box, some flexibility will be provided on a basis to be agreed to ensure that such a Member is not called upon to make a wholly disproportionate cut.”

Reading this together means that first all the efforts made by developing countries to see that trade-distorting Blue Box is removed has not only been nullified but strengthened. This allows the developed countries to shift a large chunk of its agricultural subsidies (under the Green Box and Amber Box) to the Blue Box. In other words, the advantage that the developing countries had gained with the termination of the Peace Clause on Dec 31, 2003 (under which the developing countries could not challenge agricultural subsidies in the rich countries) has been negated. They will now be confronted by an equally detrimental Blue Box.

The framework actually provides a cushion to the US and EU to raise farm subsidies from the existing level. If you read the draft carefully, it becomes obvious that the first installment of a cut in subsidies by 20 per cent is not based on the present level of subsidies but on a much higher level that has been now authorized based on the three components -- the final bound total AMS, plus permitted de minimis, plus the Blue Box. For the EU, this should come to Euro 95.76 billion and after applying the first cut, the subsidies that can be retained will be Euro 76.63 billion.

If we were to add all the components as specified in the WTO framework, the EU subsidies at present will total around (including the under-notified coupled support) Euro 55.8 billion, which is far less than what it is supposed to reduce. In other words, EU gets enough leverage to increase its subsidies. No wonder the so-called phase out of agriculture subsidies has not snowballed into a political crisis in any of the European countries.

Furthermore, the EU has Blue Box subsidies to the tune of Euro 14.31 billion. This is a huge amount, and therefore the framework states: “In cases where a Member has placed an exceptionally large percentage of its trade-distorting support in the Blue Box, some flexibility will be provided on a basis to be agreed to ensure that such a Member is not called upon to make a wholly disproportionate cut.” EU therefore has nothing to worry about cutting the Blue Box subsidies.

United States on the other hand is wanting to shift the US $ 180 billion for ten years that it has provided to farmers under the notorious Farm Bill 2002 (70 per cent of this amount is to be spent in the first three years, before George Bush goes to elections) to the Blue Box. Since the WTO will now specify the historical period from which the Blue Box implementation will begin, it means that the US can now protect the yearly installment of its counter-cyclic payments to farmers. In the case of cotton subsidies where the US provides a daily support if US $ 10.7 million to its 25,000 cotton growers, and where the ruling of the WTO Dispute panel has gone against the US cotton subsidies, the WTO has refused to act. All that the WTO general council has done is to “instruct the Director General to consult with the relevant international organizations, including the Bretton Woods Institutions, the Food and Agriculture Organization and the International Trade Centre to direct effectively existing programmes and any additional resources towards development of the economies where cotton has vital importance.”

Special and Differential Treatment was a measure that was originally carved out for the developing countries given the varying levels of development and therefore these countries needed to be given some concessions in implementation. However, in reality these S & D measures were actually used only by the developed countries. Instead of dispensing with these measures, the framework legitimizes its application for the rich countries. The only redeeming feature being that the developing countries have been promised that a special safeguard mechanism will be established. This is where the developing countries need to exert pressure, and see that they have the right to re-impose tariffs to block cheaper imports.

As if the massive subsidies are not enough, developed countries have used high tariffs to successfully block imports from developing countries. They have used special safeguards measures (SSG), used only by 38 rich countries so far, to restrict imports from developing countries. Developed countries took advantage of this flexibility by reserving the right to use the SSG for a large number of products: Canada reserves the right to use SSG for 150 tariff lines, the EU for 539 tariff lines, Japan for 121 tariff lines, the US for 189 tariff lines, and Switzerland for 961 tariff lines. On the other hand, only 22 developing countries can use SSG. These SSG measures remain under negotiations, which means, these will continue for quite some time.

The question of market access assumes importance in the light of the special and differential treatment, special safeguard measures and the domestic support (including Green Box subsidies) remaining intact in the developed countries. Using a tiered formula, the developed countries have managed to seek an overall tariff reductions from bound rates and aims at “substantial improvements in market access will be achieved for all products.” The only defense that the developing countries have been allowed is to brand some of their important agricultural products as ‘sensitive’ and bring some other under ‘special product’ category. But the fact is that the developing countries have already opened up their markets by phasing out or removing the quantitative restriction s or lowering the tariffs. It is the developed world which has failed to reduce subsidies as per the rules of the game.

This ‘benevolence’ is no justification for the developing countries to rejoice. The fact is that the developed countries have also been allowed the same provisions, which means that they can term some crucial commodities as sensitive and thereby deny market access. For instance, the US, EU, Japan and Canada maintain tariff peaks of 350 to 900 per cent on food products such as sugar, rice, dairy products, meat, fruits, vegetables and fish, which can be easily brought under the category of ‘sensitive’ and some 25-40 of the sensitive tariff lines under the tariff rate quota can be easily protected under this category.

In any case, let us not forget that a country like India cultivates some 250 different crops a year whereas Europe does not grow more than 25. For India, therefore to say that areca nut is not a sensitive product would mean destroying the livelihood of thousands of farmers cultivating areca nut, from cheaper imports. For Europe getting a score of crops protected under ‘sensitive’ and ‘special products’ will be justified. But to expect WTO to accord ‘special product’ status to over 200 crops from India would be asking for the impossible.

If you are wondering as to why the developing countries still agreed to reach an agreement and that too within five days of intense negotiations, let us take a peep at what transpired behind the scenes through arm-twisting, coercion and allurement (read bribery). The leader of the G-20 group of developing countries, Brazil, was among a number of developing countries that were thrown a sugar-coated bait just a week before the negotiations had entered the decisive phase. On 23 July, US announced its sugar quota allocation for 40 countries. This system allows these countries to export a fixed quota to the US at a lower tariff rate. The largest recipients were the Dominican Republic (185,335 metric tons) followed by Brazil (152,691 metric tons), Philippines (142,160), Australia (87,402), Guatemala (50,546), Argentina (45,281).

International NGOs have said that the EU had withdrawn aid to Kenya, the most vocal of the African countries. It may be recalled that Kenya was the country that had staged a walkout at Cancun thereby leading to the collapse of the WTO Ministerial. This time EU withdrew US $ 60.2 million aid to Kenya on July 21 under the pretext of ‘bad governance’. UK Trade Minister Patricia Hewitt has already gone on record stating that

Britain was using its influence to persuade developing countries. Moreover if ‘bad governance’ is the EU ‘s legitimate concern there seems to be no justification in joining hands with the United States at such international negotiations after the US illegal war in Iraq. The terror of trade however does not operate on ethics and morality.

While the negotiations and the debate over the outcome of the ongoing parleys continue unabated, agricultural exports from the OECD countries (the richest trading block) continue to rise. Between 1970 and 2000, EU share in agricultural exports increased from 28.1 per cent to 42.7 per cent. France increased its share from 5.7 per cent to 8.1 per cent, Germany from 2.6 per cent to 5.9 per cent and United Kingdom from 2.7 per cent to 4.1 per cent. In India, agricultural imports have multiplied four times, and more than 63 per cent of edible oils worth US $ 3.2 billion a year are now imported. Ten years back, India was almost self-sufficient in oilseeds production.

Despite the World Bank repeatedly painting a faulty picture of the gains that would result from the implementation of the WTO trade agenda, the fact remains that surging food imports have hit farm incomes and had severe employment effects in many developing countries. Unable to compete with cheap food imports, and in the absence of any adequate protection measures, income and livelihood losses have hurt women and poor farmers the most. The resulting loss in livelihood security and the accelerated march towards hunger and destitution will only lead to large scale displacement of farming populations all over the developing world.

Devinder Sharma is a New Delhi-based food and trade policy analyst. Responses can be emailed to: