General Agreement on Tariffs and Trade

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Introduction

The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) concluded in 1994 and led to the establishment of the WTO. The WTO officially commenced on 1 January 1995 under the Marrakech Agreement replacing the GATT and thus extending the trading system into several new areas, notably trade in services and intellectual property and further enhancing compliance with multilateral trade agreements. One of these agreements is the agreement on agriculture.

The WTO's Agreement on Agriculture is an international treaty of the WTO and covers the present rules and commitments on agriculture. It was negotiated during the Uruguay Round of the GATT and entered into force with the establishment of the WTO on January 1, 1995. The WTO's Agreement on Agriculture is said to be a major step towards fairer competition and a less distorted agricultural sector as compared to the previous provisions with respect to agricultural trade under the GATT. However it has been argued that this agreement is one of the most controversial issue of the WTO agenda in the sense that it benefits only to the developing countries.

Historical Background

Agricultural Trade prior to the WTO

Although agricultural policies were covered by the GATT, it contained many loopholes. One of the main shortcomings was the disparity in the rules that applied to agricultural primary products as opposed to industrial products. For example the GATT 1947 permitted countries to use export subsidies on agricultural products whereas export subsidies on industrial products were prohibited which led to high distortions in agricultural trade. In addition, while it allowed countries to use non-tariff measures such as import quotas under certain conditions, in practice countries were imposing barriers to trade without satisfying these conditions. This resulted in the proliferation of impediments to agricultural trade, including by means of import bans, quotas setting maximum level of imports, maximum export prices and so on. Therefore there was a surge in unfair trading practices among countries which was contrary to the objective of the WTO.

Agricultural Trade under the WTO

All this led to negotiations on agricultural trade in the Uruguay Round with a view to address the problems of the agriculture policies under the GATT strengthen the rules and commitments surrounding agricultural trade liberalisation. It was concluded that agricultural policies should not only address import access problems which was the main focus under GATT, but it should also deal with issues affecting trade in agriculture, including domestic agricultural policies and the subsidisation of exports. Clearer rules for sanitary and phytosanitary measures were also considered.

These negotiations have resulted in four main portions of the agreement; Agreement on Agriculture itself; the concessions and commitments members are to undertake on market access, domestic support and export subsidies; the Agreement on Sanitary and Phytosanitary measures; and the Ministerial Decision concerning least developed and Net-Food-Importing developing countries. Overall the results provide a framework for the long-term reform of agricultural trade and domestic policies over the years to come. Members also agreed to continue the reform through new negotiations.

The Agreement on Agriculture therefore came into force on January 1, 1995. The objective of the agreement is to reform the trade sector and to make policies more market-oriented

Provisions of the Agreement

The Preamble which refers to the Ministerial Declaration on the Uruguay Round and the Mid-Term Review of the Uruguay Round and provides for a number of issues. The long term objective of the agreement is to establish a fair and market-oriented agricultural trading system by providing for substantial progressive reductions in agricultural support and protection sustained over an agreed period of time, resulting in correcting and preventing restrictions and distortions in world agricultural markets.

The objective of the agreement is to strengthen rules to improve predictability and stability for importing and exporting countries which involves initiating a reform process through negotiations on support and protection. Also it aims at making specific commitments on market access, domestic support, export competition, and sanitary and phytosanitary issues

The Uruguay Round Agreement on Agriculture also established common rules in three broad areas of agriculture and trade policy: market access, domestic support and export subsidies. These three pillars remain central to the debate on further reform of agricultural trade policies in the ongoing Doha Round negotiations.

Market Access

It refers to the reduction and elimination of non-tariff barriers to trade by WTO member-states. It includes tariffication, tariff reduction and access opportunities. Tariffication means that all non-tariff barriers such as quotas, variable levies, voluntary export restraints minimum import prices, discretionary licensing, state trading measures, voluntary restraint agreements etc. need to be abolished and converted into an equivalent tariff. Tariffs were bound, meaning that a country cannot increase them unilaterally.

Ordinary tariffs including those resulting from their tariffication are to be reduced by an average of 36% with minimum rate of reduction of 15% for each tariff item over a 6 year period for developed countries. Developing countries are required to reduce tariffs by 24% in 10 years. Developing countries as were maintaining

It also Maintain current access and establish minimum access tariff quotas (at reduced tariff rates) where current access is less than 3% of domestic consumption. Increase minimum access tariff quotas to 5%

Domestic support

Domestic policies that do have a direct effect on production and trade have to be cut back. The AoA structures domestic support into three categories or "boxes": a Green Box, an Amber Box and a Blue Box. In the Green Box measures with minimal impact on trade can be used freely. They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes. The Amber Box contains domestic subsidies that governments have agreed to reduce but not eliminate. The Blue Box contains subsidies which can be increased without limit, so long as payments are linked to production-limiting programs.

Special and Differential Treatment(S&D) provisions are also available for developing country members. These include purchases for and sales from food security stocks at administered prices provided that the subsidy to producers is included in calculation of AMS. Developing countries are permitted untargeted subsidised food distribution to meet requirements of the urban and rural poor. Also excluded for developing countries are investment subsidies that are generally available to agriculture and agricultural input subsidies generally available to low income and resource poor farmers in these countries.

Export Subsidies

The Agreement contains provisions regarding member's commitment to reduce Export Subsidies. Developed countries are required to reduce their export subsidy expenditure by 36% and volume by 21% in 6 years, in equal instalment (from 1986-1990 levels). For developing countries the percentage cuts are 24% and 14% respectively in equal annual instalments over 10 years. The Agreement also specifies that for products not subject to export subsidy reduction commitments, no such subsidies can be granted in the future.

Controversies around the WTO Agreement on Agriculture (AoA)

The WTO's Agreement on Agriculture (AoA) that came into effect in 1995 has sparked controversy among agro-exporting as well as agro-importing countries. Power relations among those doing the negotiating has contributed strongly to the impasse of each of the most recent the Ministerial negotiations. One of those controversies concerns developed and developing economies.

An analysis of the experience with implementation of the Agreement on Agriculture raises doubts about the effectiveness of the framework created in the Uruguay Round to address issues of protectionism in agriculture and to establish new rules to liberalize agricultural trade and production policies. From the beginning it was widely felt that only little liberalisation was actually achieved, and most heavily protected products seem to have experienced no liberalisation at all. The principal industrialized countries retained policies of support and protection with a high degree of economic distortion. In addition these developed countries in the early 1990s have been organising the way that subsidies are provided in order to avoid reduction commitments.

In the European Community (EC) the process of compulsory conversion of nontariff measures under the provision of market access has led to prohibitively high tariffs. It also led to industrialized countries to reduce the use of export subsidies and to replace them with exempted direct payments. The EU has progressively moved domestic subsidies from the Amber Box to the Blue and Green Boxes. There was little change in the overall subsidization of the export market.

In the United States the Uruguay Round failed to bring about any significant reduction in market access barriers and domestic subsidies for traditionally supported products. The new rules proved ineffectual and did not constrain the United States from considerably increasing the level of domestic support by introducing four consecutive packages of market loss assistance payments in 1998-2001 or from consolidating and entrenching these emergency packages and adding another layer of domestic support through new legislation in 2002. The US Farm Bill, 2002 provides for dramatic increases in subsidies to domestic producers.

The decision to exempt decoupled income support that is where payments are not related to production, price, or the use of factors of production, from reduction commitments on the grounds that it results in no or minimal distortion in trade and production is a major flaw in the design of the WTO Agreement on Agriculture. In the real world full decoupling is unachievable, and almost all support measures that result in payments to farmers have more than a minimal effect on trade and production.

In addition the agreement fails to recognise the fundamental differences between agricultural systems in developed and developing countries and uses a one-size-fits-all approach. For example, it overlooks the fact that agriculture is the main source of livelihood for the majority of the population in developing countries and that the sector is a major contributor to national income. The AoA fails to discriminate between the different needs of diverse developing countries and provides no guarantee of food security. In contrast, the way subsidies are classified, the provision of special safeguards (SSG) work in favour of producers in developed countries.

The current trade-negotiation round of the World Trade Organization (WTO) is the Doha Development Round or Doha Development Agenda (DDA) which commenced in November 2001. The main objective of this round was to straighten out some of the kinks in agricultural trade. This activity which accounts for only 8% of the world merchandise trade is the most heavily distorted by unlawful policies. The ministers declared in Doha that the needs and interests of developing countries lay at the heart of the work program they approved. This is because in many poor countries, agriculture not only accounts for a large share of gross domestic product (GDP), but is also the primary source of employment, food and livelihood for the majority of the population. This is in contrast to the situation in the world's two biggest agricultural exporters, the European Union (EU) and the United States (US), where agriculture employs a tiny percentage of the population and makes only a small contribution to the economy.

Yet it is the EU and US that give most protection to agriculture, using high tariffs and huge subsidies to shield their producers from competition. The farm subsidies doled out by the industrialized countries, coupled with tariff barriers maintained at unconscionable levels, have historically depressed the world prices of temperate zone agricultural products and severely affected the economies of many developing countries.

The Doha round stalled on July 29 2008, after failing to reach a compromise on agricultural import rules. While the United States was asked by the European Union (EU) and the developing countries, led by Brazil and India, to make a more generous offer for reducing trade-distorting domestic support for agriculture, the US continued to argue for big cuts in farm import tariffs to open up markets for its farmers. It asked the developing countries to make-up a more generous offer for decreasing trade-distorting domestic support. This demand was rejected by EU, Japan and India.

In the case of Brazil - US Farm subsidies, Brazil alleged that since 1999, the US has often exceeded its WTO spending limits for heavily trade distorting agricultural subsidies. Brazil further claimed that Washington surpassed its $19.1 billion entitlement for such ‘amber box' spending in 2000 to 2002 and 2004-2005 as well as the prior $19.8 billion ceiling in 1999. The dispute resolving panel of the WTO ruled that the US remained in violation of world trade rules even after it repealed its ‘Step 2' payment to cotton mills and exporters in 2006.

Hence the WTO AoA has led to a reduction in tariff protections for small farmers - a key source of income for developing countries. At the same time, the AoA has allowed rich countries to continue paying their farmers massive subsidies which developing countries cannot afford. A deadlock has been reached on agricultural tariffs and subsidies in the Doha Round due to the intransigent positions of some developed country members.

Another problem faced by developing countries under the current agreement is dumping. It is argued that the AoA's domestic support system currently allows Europe and the USA to spend $380 billion every year on agricultural subsidies alone. It is often still argued that subsidies are needed to protect small farmers but, according to the World Bank, more than half of EU support goes to 1% of producers while in the US 70% of subsidies go to 10% of producers, mainly agri-businesses. The effect of these subsidies is to flood global markets with below-cost commodities, depressing prices and undercutting producers in poor countries, a practice known as dumping. In the US, it is calculated that over the past ten years, maize has been sold in third markets at some 5-35% less than its cost of production, cotton 20-55% less than the cost of production, wheat 20-35%, rice 15-20% and soybeans 8-30%. This situation also prevailed in the EU. The effect of dumping can be devastating on developing countries since it ha the effect of depressing world prices, displacing developing country exports in third markets and undermining domestic production.

For example dumped EU confectionary has had serious consequences on sugar factories in Swaziland. Swaziland produces sugar at less than half the cost of the EU and yet it is unable to compete with EU confectionary imports. Sugar production plays an important role in the Swaziland economy. In 1995-6, sugarcane accounted for 53% of agricultural output and 34% of agricultural wage labour, while sugar milling constituted 37% of manufacturing output and 22% of manufacturing wage labour. However export subsidies given to EU confectionary manufacturers to encourage global sales have enabled them to undercut prices and reduce the export market for confectionary manufactured in Swaziland. As southern African outlets have switched to buying cheaper, dumped EU confectionary Swaziland's confectionary factory has gone out of business. Already the dumping of EU sugar products has led to the loss of some 16,000 jobs in the Swazi sugar industry and 20,000 jobs indirectly linked to the industry, such as packaging and transport.

In the Agreement on Agriculture the principal industrialized countries retained beneficial treatment for themselves in many ways, while giving a lower level of flexibility to the developing countries by way of special and differential (S&D) treatment. Although it enabled the developing countries to fend off pressures for liberalization, S&D treatment proved to be a more powerful negotiating tool for the industrialized countries by helping them influence the developing countries to demand fewer real reforms.

Key Reforms Implications

With all these difficulties faced by developing countries, it is important to bring about key reforms in the agreement. Developing countries have to devise new strategies to address their problems in the ongoing Doha Round negotiations. They have to focus their attention on obtaining equal and fair treatment with respects to developed economies.

One important issue that must be addressed is the trade-distorting policies used by developed economies. Domestic support which is contrary to fair trade practices must be reduced. It has been also suggested that decoupled income support and other direct payments, which have been exempted under the Green Box be limited only to small farmers. Such a criterion would eliminate an important shortcoming of the agreement.

This implies that much reforms must be brought to the agreement in order to achieve the above objectives and to allow uniform application of the rules to the entire WTO membership. The problem of dumping also must be addressed by the agreement so as to prohibit dumping of agricultural products in developing countries.

The agreement should also take into account the differences in the agricultural systems in developed and developing economies. The dependence on agricultural sector for developed and developing economies differ significantly and hence different provisions have to be made. Also different level of protection has to be afforded to developed and developing economies.

Conclusion

While the WTO Agreement on Agriculture was introduced with a view to promote fairer competition and to improve market access and reduce trade-distorting subsidies in agriculture, it still has many shortcomings especially vis-à-vis developing countries. It fails to differentiate between the agricultural systems in developed and developing countries, it offers developed countries an advantage in the sense that they are able to offer high amount of subsidies to local agricultural industries which developing countries cannot afford to do, it forces developed countries to reduce tariffs protection for small farmers. All this coupled with the unwillingness of developing countries to conform to the provisions of the agreement and having resorting to trade-distorting practices in agriculture has made it important to review the agreement and further strengthen the rules and provisions and to bring deep reforms in the agreement.

Also the recent negotiations have not concluded in did not result in any progress. Therefore developing countries have to find new ways to obtain fairer treatment in the sector of international agricultural trade. In the absence of agreement on deep reform of world agriculture countries would have continue to operate within the framework of the WTO where powerful economic interests can influence outcomes.

References

* World Trade Organisation Legal texts: the WTO agreements [Online] Available from: http://www.wto.org/english/docs_e/legal_e/ursum_e.htm#aAgreement, (Last Modified March 2009), Accessed April 11, 2010

* World Trade Organisation Agricultural Trade: Introduction [Online] Available from: http://www.wto.org/english/tratop_e/agric_e/ag_intro01_intro_e.htm#ag_trade, (Last Modified June 2003), Accessed April 11, 2010

* World Trade Organisation Agriculture: fairer markets for farmers [Online] Available from: http://www.wto.org/english/theWTO_e/whatis_e/tif_e/agrm3_e.htm, (Last Modified :September 2008), Accessed April 11, 2010

* ActionAid and Azione Aiuto(2003) The WTO Agreement on Agriculture[Online]ActionAid, Available from: http://www.actionaid.org.uk/_content/documents/agreement_3132004_122214.pdf, Accessed April 12, 2010

* Anwarul Hoda and Ashok Gulati, (2008) WTO Negotiations on Agriculture and Developing Countries, IFPRI Issue Brief 48

* World Trade Organisation The Doha Declaration explained[Online] Available from: http://www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htmv (Last modified: October 2005), Last accesses: April 10, 2010

· Trinity College of Dublin, The Uruguay Round Agreement on Agriculture [Online], Available from: http://www.tcd.ie/iiis/policycoherence/index.php/iiis/wto_agriculture_rules/uruguay_round_agreement_on_agriculture, (Last modified: June 2005), Accessed April 11, 2010

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