THE DISAGREEMENT ON AGRICULTURE

March 2001

Like all the WTO treaties, the Agreement on Agriculture (AoA) is based on the firm ideological conviction that trade liberalisation will always bring net benefits to all participants. By removing barriers to trade, regional specialisation will increase. All over the world, regions will specialise in whatever their agriculture can produce more cheaply than others. When they exchange their products, everybody gains because the combined cost of production is less than if each region had produced its own.

In practical terms, this means promoting exports. The basic idea of the AoA is to create the conditions for agricultural exporters to increase their exports, and to limit the right of countries to follow a policy of food self-sufficiency. This makes sense in the simplistic world of trade liberalisation ideology. If more trade is always in everybody’s interest, any impediment to exports blocks the realisation of those benefits and thus harms us all.

In the real world however, cutting the cost of food production is usually not the most important policy objective for agriculture. In most developing countries, basic food security is still the first priority. Providing enough food for all is the issue, not whether local food production can fully compare in economic efficiency with producers elsewhere in the world. Experience indicates that unless there is a stable basis of local food production, food security is very difficult to achieve in a developing country. While international trade can certainly contribute, especially when local harvests fail or even more where there are constant deficits, the notion that it does not matter whether food is produced locally or not lacks credibility. To achieve food security, what most developing countries need are better means to protect and promote their own food supply, not further liberalisation of food trade.

Another first priority objective, equally important to developed and developing coun-tries, should be to return agricultural production to ecological sustainability. Sustainable agriculture involves two core requirements: to preserve the productive capacity of natural systems, and to minimise the use of non-renewable resources. Both requirements are routinely disregarded by almost all agriculture today, and neither is really possible to fulfil unless food production and consumption are kept physically very close to each other. To maintain sufficient production without current leves of chemical inputs and energy use, agriculture must be tailored to optimise use of locally available resources for local needs. In particular, crop diversity and high levels of plant nutrient and organic matter recirculation are essential. In practice, this means that ecolo-gically sustainable agriculture is impossible to reconcile with the far-reaching regional specialisation that is fundamental to trade liberalisation.

Now, the good news is that WTO member countries are increasingly aware of the fund-amental contradiction between the free trade agenda and other agricultural policy objectives. In fact, these so-called "non-trade concerns" have been a major focus of agriculture talks at the WTO since well before the Seattle min-isterial meeting in December 1999, when they hit the spotlight. Both developed and deve-loping countries are demanding the right to various exemptions from free trade disciplines to achieve other objectives. While ecological sustainability has not figured very prominently yet, food security certainly has. Developing countries also strongly emphasise their need to protect domestic agriculture because of its role as an engine of general economic development Developed countries highlight the importance of preserving rural landscapes and cultures that are no longer economically competitive in their own right.

The bad news is that few if any countries have yet realised that they must make a choice. Judging from the confusing language coming out of the WTO negotiations, officials still seem to believe that all those non-trade demands can miraculously be fulfilled while at the same time continuing further down the road of general trade liberalisation. They are simply not being realistic. In essence, what countries are saying is that they want to keep the right to protect their own agriculture, while being able to export without any restrictions to everybody else.

Before they wake up and start admitting that something has to give, not much progress should be expected. Once they do, however, there is no lack of realistic alternatives which both give reasonable conditions for trade and preserve freedom of choice in domestic agricultural policy. Toward the end of this article, a few options are presented which are essentially synthesised from the work of a number of development and environment NGOs over the last few years. But first a rapid overview of the context and content of the AoA.

The first thing that has to be clarified about global trade in agricultural products is that it is much more limited than generally believed. Most people everywhere in the world still obtain their basic foodstuffs from relatively close to where they live. Of the staple foods, it is only in wheat that global trade is consistently above 10% of total world production. Only in a few of the typical plantation crops does global trade represent more than 50% of world production.

For almost all major food products, the volumes handled on the largest domestic markets are far more important than those on the so-called ‘world market’. Even in the most heavily traded staple food, wheat, the EU domestic market is roughly the same size as the whole of world trade. In beef, the US market is more than twice the size of world trade (see table).

Agricultural trade is by and large an affair between developed countries. They have roughly a 70% share of both exports and imports. Exports from developing countries are mainly in tropical plantation crops. Only a handful of developing countries have export grains or animal products of any importance. They are Thailand (rice and poultry), Vietnam (rice), Argentina (wheat, feed grains, soybeans, beef and milk powder), Brazil (soybeans, beef and poultry) and Uruguay (beef).

Many developing countries are buyers of grain, in particular for human consumption. Over 80% of the global trade in rice and wheat is imported by developing countries, as is a sizeable portion of feed grain and soybean exports. In contrast, few developing countries import animal products. The one exception is powdered milk, a low-value surplus product, of which 85 % of world trade goes to the South. All the high-value animal products such as beef, pork, poultry and cheese are traded either between developed countries or from South to North.

But describing world food trade patterns in terms of developed and developing countries is actually not the best way of understanding these patterns. Differences within the two groups are much more important than likenesses. If we exclude the tropical plantation crops and look mainly at the food staples, exports are dominated by a very small group of countries which can be described as "natural exporters": the USA, Canada, Argentina, Uruguay, Brazil, Australia and New Zealand. What unites them is favourable climates and soils, sparse population and late colonisation. These three factors have created the preconditions for a large scale, relatively extensive agriculture, operating within physical, social, and economic structures established not much more than 100 years ago. The result is production costs far below those of European or Asian farmers, and a production potential far beyond their own needs.

The only major food exporter on the global scene, which does not fit this description, is the EU. Western Europe is one of the most densely populated areas in the world, and has limited capacity to feed more than its own population. Historically, the EU countries have been through recurring food shortages, most recently following the Second World War. The EU was a net food importer until the 1970s. Its present role as exporter is largely artificial, created by agricultural policies (see box over page). Key factors in enabling the EU to be a food exporter are a very high use of chemical inputs, plus huge imports of feedstuffs that nearly balance out its main exports of grains and animal products.

Of the remaining developed countries several are net importers (Japan, Korea, Switzerland, Norway). In the former Soviet Union and some Central and Eastern European countries there are large areas that historically were exporters, but no longer are. Developing countries can be divided into three rather distinct groups. A few are"natural exporters" that can compete with developed countries on the global markets for wheat, feedstuffs and animal products. But a few other developing countries with higher population density and more traditional agricultural structure are also consistent net exporters, notably Thailand and Vietnam. A larger minority of the developing countries are net importers, directly dependent on the world market for their basic food supply. Many of these are also among the world’s 48 poorest, the Least Developed Countries (LDCs). But the large majority of developing countries belong to a middle group that is more or less self-sufficient in food (+/- 10 %). Although they may more often buy than sell food on the world market, they are not dependent on imports on a regular basis. Many of those can also balance a certain import of basic foodstuffs against an export of other agricultural products, typically tropical plantation crops.

Regardless of their position in the trade patterns, almost all countries favour their own agriculture over imports to some degree. There are three main methods to do this:

* Border protection against imported prod-ucts – the cheapest method, and conse-quently the most widespread

* Internal support measures for domestic producers – since these require government support, they are mainly used by developed countries. Most developing countries do have some support programmes, most often in education and technical advice

* Export subsidies – used exclusively by developed countries

The aim of the WTO Agreement on Agriculture (AoA) was to reduce the use of all three methods for favouring domestic production.

* Regarding border protection the AoA introduced a prohibition of all protection measures except fixed tariffs. Other measures (eg, variable import levies and import quotas) must be converted into fixed tariffs. This process is called tariffication. These tariffs must then be reduced by a certain percentage during the treaty period.

* The AoA requires all countries to allow a certain minimum market access for every agricultural product (5% for developed countries and 4% for developing countries). If a country is self-sufficient in a certain product and protects domestic production with a tariff, it must offer a reduced tariff for the quantity specified in the AoA, so that imports can enter. This mechanism is called tariff rate quotas (TRQ).

* The AoA also contains detailed rules for how internal support may be designed. The main principle, often referred to as ‘de-coupling’, is that support measures cannot be directly related to production volumes.

* For export subsidies there are similar reduction requirements as for tariffs.

Developing countries have been allowed a lower level of reduction requirements (two thirds of those for developed countries) and a longer implementation period (10 years instead of 6).

Overall, the AoA has been considerably less effective than expected. But effectiveness has varied greatly both between its different components and between countries. The reductions of border protection have been quite effective in developing countries, but not in developed countries, who have used a number of techniques to minimise their effect. The minimum market access requirements have been quite effective across the board. Although the mandated percentages are low, the total trade volumes involved are considerable.

The rules governing internal support measures have fundamentally changed agricultural policy in most developed countries, and particularly in the EU. The cornerstone of pre-AoA EU policy was variable import levies. These levies regulated in detail the volumes of imports entering the EU, to guarantee that domestic products were always sold first. The ‘McSharry reform’ of EU agricultural policy in 1992, carried out in preparation for AoA requirements, established an entirely new system reducing this border protection and compensating farmers instead by direct (de-coupled) payments.

On export subsidies the AoA has had very limited effect. The main reason is that the agreement only regulates direct subsidies, and most of the export dumping now takes place with indirect subsidies, as will be seen below.

In sum, it is clear that the AoA has primarily favoured agricultural exporters. The agreement in effect codifies a ‘right to export’ through the rules about minimum market access, which mean that a country no longer has the right to opt for full self-sufficiency as a strategy in any category of agricultural products. No matter what the reasons might be, as long as there is an exporter anywhere willing to sell at a lower price, the AoA is on the side of that exporter. This applies to developed and developing countries alike, and even when the lower price is made possible through export subsidies.

Conversely, the AoA in many ways has limited the possibilities to support the development of domestic production. Almost all remaining WTO-legal support options require direct payments through the government budget. Obviously, this strikes hardest against developing countries, which have very limited means to offer such support. Developed countries in addition have the right to continue with several forms of support which are now illegal for any other countries to introduce.

In addition, the AoA has not led to the expected stabilisation and increase in world market prices. On the contrary, price levels have dropped to historically low levels during the last few years, and fluctuations have increased.

The most obvious weakness of the present AoA is its failure to deal with export dumping in any meaningful way. Sabotaging a market by systematically selling below cost of production is a very obvious trade distortion, and in principle there is very broad agreement that it should not be accepted. Yet in practice, the AoA has led to the expansion of new and more insidious forms of dumping.

The bulk of export dumping now occurs through the direct payments introduced on a large scale as a consequence of the AoA itself. In developed countries, the bulk of support to domestic producers is today in the form of "green box" and "blue box" payments (see box). Their effect is to artificially reduce the price level on their whole domestic markets. And because the AoA does not bother about whether the domestic market price covers the actual cost of production, it is perfectly WTO-legal to export at this artificially reduced price.

Strictly speaking, it is not the payments as such which cause the dumping. As long as the payments are made to producers selling on the domestic market only, there is no problem. What needs to be addressed is under what conditions, if any, those products should be allowed to leave the country of production.

Increased market access is the very core of the free trade agenda, and as such it is routinely supported by almost all WTO member coun-tries. In developing countries, the hope of earning desperately needed foreign exchange on developed country food markets is widespread. What is striking is how all countries appear to view market access exclusively from the exporter’s perspective. In reality, for every item exported there is an item imported. Improved market access also means that many countries will experience a reduction in agricultural production because their own export efforts fail while others succeed in competing on their domestic market.

The majority of developing countries have reason to be cautious, since they are more often food importers than food exporters. It is also a fact that in agriculture, unlike in industrial goods, developed country products are often cheaper than developing country products. This is sometimes because of export subsidies, but in other cases simply because of large scale, mechanised production. The overall net effect of increasing minimum market access require-ments and continuing general tariff reductions under a new AoA would likely be to facilitate increased developed country exports to develop-ing countries, not the opposite.

In addition, the tropical products that are a large part of developing country exports are already relatively favoured in terms of market access. In sectors where they do not have production of their own, developed countries already keep relatively low tariffs. The effects of a further liberalisation of market access would also be very different for different sectors of agriculture in a country. While export producers may gain and there would be an increase in foreign currency earnings for the country, producers of food for the domestic market could suffer from low-price imports. Again, this effect would tend to be stronger in developing countries, where the export sector is often quite disconnected from domestic food production, or even directly competes with it for resources such as land, water or labour.

As made clear by John Madeley’s review of case studies from developing countries in the December 2000 issue of Seedling (Vol. 17, No. 4, p 13), there are many examples of how basic food production has suffered as a result of liberalised imports, and few if any where it has gained. Part of the problem is, as the example of the EU shows (see box on p 8), "liberalised" agricultural trade is never really liberalised and the playing field never becomes flat.

The internal support issue was the central axis of the whole agreement: to increase market access by forcing countries to support their agriculture, if at all, by way of their own government budgets instead of by tariffs and levies on imports.

There is a persistent myth that internal support has decreased with the AoA. On the contrary, it has increased greatly, and this was entirely by design. When border protection had to be reduced, the only way to continue supporting farmers was through various forms of direct payments with tax money. Needless to say, this is mostly done by developed countries, as developing countries simply do not have the funds. And just like for border protection systems, there are rules prohibiting countries which did not have internal support systems when they entered the agreement to introduce them later. All on the assumption, of course, that all these systems were to be progressively reduced and finally eliminated.

In reality, there are few signs that developed countries are about to reduce internal support any time soon. The USA did start a radical reform in 1997, aiming to eliminate most support systems over 7 years. But in the second year of the process, falling prices forced the US government to introduce ad hoc compensation measures, and since then farm support has increased to well above the previous level. And they have had legitimate reasons to do so. In developed countries, most farmers need additional support over world market prices if they are to survive economically, let alone perform additional services such as environ-mental maintenance and rural development. This is true for the US, and even more for the EU. Although usually better off than self-sufficiency farmers in developing countries, very few are in a position to produce food at the dumping prices of the world market. The common picture of them as a global leisure class, profiting from enormous subsidies, is false and has been created by free market ideologists to further their own agenda.

But while internal support systems may well be defended from many "non-trade" angles, their present design as indirect forms of export dumping cannot. Developed as well as developing countries have strong arguments for demanding the right to pursue agricultural policies which protect domestic production. But what no country can ever legitimately claim is the right to interfere with other countries’ markets, which is what export dumping is about.

Are there any realistic alternatives to the present AoA, which could address the concerns both of developing and developed countries? Yes, absolutely. But not as long as trade liberalisation is to remain the unquestioned top priority objective of the agreement. There is simply no way to reconcile absolute primacy of the right to export with food security, ecological sustainability or the several other non-trade concerns which have to be balanced in any serious agricultural policy. As long as more trade is always the first priority, all other objectives become impossible to achieve.

From the discussions among NGOs over the last few years, two clear principles stand out as a possible new basis for global agricultural trade policy. First, an absolute and effective prohibition of all forms of export dumping. Second, a high degree of freedom to design national agricultural policies, including the right to opt for a self-reliance strategy.

Some argue that this can only be achieved by removing agriculture from the WTO agreement altogether. Others see such a change as equally or even more possible within the WTO framework. At any rate, it is probably the mental change from a framework of simplistic free trade rhetoric to a more complex and pragmatic context which is the main hurdle. And no matter which way the argument goes, a solution requires some mechanism on the scale of the WTO to negotiate and administer the agreement.

To eliminate dumping in the broad sense of the word, ie all practices which involve exporting at a price below domestic cost of production, at least the following measures are necessary:

This is a relatively straightforward operation, as direct subsidies are quite transparent, and because the EU is now the only large scale user.

Indirect export subsidies in the form of green and blue box support are now the main mechanism of dumping, and are much more difficult to discipline. Short of totally banning all exports from supported markets, the most workable system would probably be to require the imposition of an "export tax" equivalent to the combined value of all support granted to the product in question. The effect would simply be that the government requires its support money back for any product which leaves the country.

Much of global agricultural trade is controlled by public or private monopolies and oligopolies. In particular transnational corporations, typically present in a large number of countries world-wide, play a central role in controlling price levels. As a minimum, there have to be transparency requirements which allow monitoring of compliance with dumping rules.

In order to enable countries to develop freely their national agricultural policies (including the right to opt for self-reliance), the international trade rules need to be rewritten. As a minimum, the following measures need to be enforced:

The requirements for minimum market access serve only one purpose, to force open new markets to exporters. They amount to a direct prohibition against food self-sufficiency.

* Allow all types and levels of internal support. If exports from supported markets are regulated as proposed above, there will no longer be any reason to limit forms or levels of internal support. There will be no effects on other countries’ markets, so the design of internal support can be entirely left to national govern-ments to decide.

Compared to the direct payment schemes, border protection is a more transparent method of support, because its effect is directly on the price level of the protected market. Consumers in that market get more correct information about the real cost of production than when part of the bill is picked up by support measures paid via taxes. In addition, there would be much less insecurity and complication involved in establishing a correct export price if most support was in the form of border protection rather than direct payments.

No doubt these policy proposals will immediately be denounced as protectionist by free trade fundamentalists. Measured against the extreme export focus of the present AoA, it may be understandable if they appear so. The basic idea is, however, that agricultural trade policy should provide space both for exports and for protection. An agricultural trade agreement along these lines would not stop trade, nor the continued development of free trade relations. What it would do is give countries what is being called "food sovereignty": a choice regarding to what extent and in what products they would participate in agricultural free trade.

The basis of trade is mutual economic benefit. Where countries judge that it exists, they will certainly want it. What these proposals would stop is the right of exporters to force their way into domestic agricultural markets against the will of the respective governments. They amount to a prior informed consent requirement.

These policies would be much more effective than the present AoA in guaranteeing fairness in trade relations. The requirement that all internal support must be directly reflected in export prices should virtually eliminate all distorting effects on other markets, while the present AoA may in fact have increased them by stimulating the expansion of blue and green box support systems. There is also reason to believe that these proposals could achieve the increase in world market prices which the AoA so far has failed to deliver. By requiring exports from protected and supported markets to take place at their real price levels, the cost levels of those (large) markets would have more influence on world trade pricing than today.

To be realistic, looking at the demands countries are actually putting forward in Geneva, it is quite obvious that only the exclusive little club of ‘natural exporters’, seriously advocates complete trade liberalisation To openly abandon the free trade principle amounts to little more than acceptance of the status quo. It is the free trade advocates who are, increasingly desperately, clinging to a pipe dream.

Although a renegotiation of agricultural trade rules along food sovereignty lines would address many of the food security concerns and proposals tabled by developing countries, various special and differential treatment measures need to also be included. The present AoA is extremely weak in special allowances, even in comparison to other WTO treaties. There are no exemptions for developing countries, only the extra implementation time.

In particular, what would need to be handled separately is the situation of the net food importers. When the AoA was signed in Marrakesh in 1994, it was already accompanied by a decision to offer a food security guarantee in case rising world market prices further aggravated the situation of the net food importers. This has not been followed up in action, despite increasing difficulties faced by those countries. If the measures outlined here were introduced it is likely that world prices would increase (which the present AoA has failed to effect) , and there would be a need for assistance, particularly for the LDCs.

Another area where developing countries can demand special treatment is in providing better opportunities for using agricultural exports to leverage general economic development. In addition to allowing zero tariff imports from LDCs, as reluctantly agreed very recently by the EU, various measures could be taken to favour imports from developing countries generally. While under the general terms of this proposal all countries would have the right to restrict imports, a differentiation in favour of developing countries could easily be achieved by, for example, offering them lower tariff rates,

The realism of an alternative trade scenario can and should be questioned. In practical terms it is certainly no less realistic than the present agreement. If anything it is closer to the actual intent of the majority of countries. But whether or not it will happen is entirely a political issue. Whether anything will happen in the context of the new round of WTO negotiations is an open question. Yes, there is a mandate to renegotiate the AoA regardless of whether a new round of the WTO gets underway or not. But few seem to believe that anything of importance will be changed unless there is a broader round in which to make deals involving other fields of trade policy. And the likelihood of such a round starting within the next few years is low.

But there are also contributing factors outside the trade arena with a potential to permanently change the politics of food production and trade. For example, genetically modified crops and BSE ("mad cow" disease) have profoundly turned public opinion away from industrial farming, and peoples’ voices are influencing policy makers. In addition, the increasing self-confidence of developing countries in the WTO will likely mean that development issues will progressively attain more weight, making another agriculture deal modelled on the Uruguay Round (between the US and EU with the rest of the world as passive onlookers) much less probable. A retreat from the principle of the Single Undertaking (the take-it-or-leave-it principle applied to trade agreements for the first time with the Uruguay Round accords) is also starting to be taken seriously.

What could change the scene quite rapidly is if the EU decides to seek a partnership with the majority of developing countries rather than with the US. From several angles, the two groups have similar interests in agricultural policy. Neither are among the ‘natural exporters’, so they have no compelling reasons to pursue the ‘right to export’ policy. Instead, both have a clear interest in regaining more control over domestic policies, albeit for partly different reasons. The main grievance between them is export dumping, which could be resolved using the measures outlined here.z

* D Van Der Steen et al (1999). L’organisation Mondiale du Commerce et l’agriculture. La souveraineté alimentaire menacée par les accords commerciaux. Novembre 1999. Collectif Stratégies Alimentaires, Bruxelles.

* A Kwa & W Bello (1998), Guide to the Agreement on Agriculture. Technicalities and Trade Tricks Explained. November 1998. Focus on the Global South, Bangkok.

* S Murphy, (1999), Trade and Food Security. An Assessment of the Uruguay Round Agreement on Agriculture. Catholic Institute for International Relations, London.

The story of how the EU became a major agricultural exporter is an overlooked but very instructive example of the power of trade agreements to change the world.

When the EU introduced its Common Agricultural Policy (CAP) in the early 1960s, a deal was struck with the USA in the framework of the General Agreement on Trade and Tariffs (GATT) negotiations. The USA agreed to accept the new border protection mechanisms put in place by the EU for food, in return for a commitment by the EU to allow unlimited import of feedstuffs from the USA at zero tariff. The EU at this point was still a net importer both of food and feedstuffs, so the deal appeared risk-free.

No more than 15 years later, however, the EU was producing large surpluses of both grains and animal products. These surpluses were the result of the greatly increased imports of feedstuffs, mainly soybeans but also large volumes of maize gluten and other grain derivatives. At first imports originated only from the USA, but over time also from Brazil, Argentina, Thailand (tapioca) and other countries. These cheap high protein feedstuffs made it possible for animal producers to rapidly expand production. The other side of the coin was that the shift to imported feed closed a major outlet for EU grain production, and created a surplus in that sector as well.

Without the zero tariff for feedstuffs, the huge surpluses of the 1970s would never have been possible, and export dumping from the EU would never have become a major global problem. In addition, feedstuff imports were without doubt the decisive factor behind the industrialisation of animal production in the EU and its concentration to the vicinity of major ports. By extension, feed imports are the root cause behind a number of serious environmental problems in European agriculture, most of which are related to intensive animal production.

The different colour boxes used in AoA discussions are based on the traffic light principle.

The red box contained those forms of support which were prohibited immediately on the entry into force of the agreement, for example variable import levies.

The green box contains support measures regarded as "minimally trade distorting" and allowed to continue without any reduction requirement. For example, support to agricultural research, rural development, and public stockholding for food security purposes.

The amber box contains forms of support which are in violation of general AoA principles and allowed only on an interim basis provided they are gradually reduced. The bulk of these measures are systems for market regulation through guaranteed prices and government intervention buying.

The blue box was an ad hoc addition in the final stage of the negotiation, and contains much of what should logically have been in the amber box. Blue box measures are also in violation of AoA principles, but not subject to reduction requirements, provided they are connected to a production-limiting scheme. The blue box was designed specifically to accommodate developed country direct payment schemes.