Importance of The Agricultural Agreement within the WTO

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1.0 INTRODUCTION

Agriculture is normally defined as the production of food and also production of many varieties of goods through farming. In an economic context, Agriculture ensures food security, create employment, ensure foreign currency and also determine the allocation of natural resources. Agricultural products are traded globally since not all countries are endowed with natural resources to be able to produce those agricultural products.

The world has been experiencing problems related to agriculture where rich countries tend to give huge amount of subsidies to their local agri-business companies and agricultural trade become highly biased and unfair, commodities priced below their costs enter the global markets, causing prices to fall and making farmers in poor countries suffer. To bring remedy to these kinds of problems, the WTO came forward with the Agreement on Agriculture (AOA) to establish a fair and market-oriented agricultural trading system.

Since there has always been debate of whether the Agreement on Agriculture (AoA) has really contribute to the wellbeing of man or has caused man to become poorer, this piece of research will attempt to analyze the various benefits, criticisms, and some related trade dispute cases of the AoA.

2.0 WORLD TRADE ORGANISATION

The World Trade Organization (WTO) is an international organization which aims at liberalizing international trade among countries by reducing international trade Barriers. WTO started its operations as from January 1, 1995 by the talks of Uruguay Rounds (1986-1994). In fact, WTO came into existence after the amalgamation of General Agreement on Tariff and Trade (GATT) and other trade promotion groups and it actually has 153 members and represents above 97% of total world trade. WTO also participates in dispute settlement and heals many rifts, which can cause cessation of trade between nations. Besides, it is known that globalization has been accelerated by WTO.

According to the WTO, the best way to bring development to enhance the welfare of human is through free trade. With free trade, goods will be produced at cheapest, and thus the goods will be consumed at cheapest by consumers. Hence production and consumption will move to optimal points.

The WTO has created a variety of different agreements (about 60 agreements), the most important agreements are Agreement on Agriculture, Sanitary and Phyto-Sanitary (SPS) Agreement, General Agreement on Trade in Services (GATS), Agreement on Technical Barriers to Trade (TBT), and Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPs). Some of these agreements were negotiated by GATT before the formation of WTO.

3.0 AGREEMENT ON AGRICULTURE

The Agreement on Agriculture (AoA) has been established by the WTO at the beginning of 1995. It was negotiated in the 1986-1994 Uruguay Rounds and was realized on January 1, 1995. The AoA consists of three pillars namely, domestic support, market access and export subsidies. These are main elements of the Agreement on Agriculture and are briefly explained below:

3.1 Domestic support

Domestic Support has got three categories or "boxes" which are Green Box, Amber Box and Blue Box. The Green Box is subsidies that causes minimal or no trade distortions. The Amber Box is subsidies directly related to production quantities and also measures to support prices. It consists of producer payments and other subsidies that governments have to reduce but not eliminate. The Blue Box contains subsidies which can be increased without limit, if payments are related to production-limiting programs.

3.2 Market access

Market access refers to the reduction of tariff or non-tariff barriers to trade by governments of countries which are members of the WTO. Its purpose is to expand trade by preventing various non-tariff barriers and by binding and reducing tariffs.

Export Subsidies

The AoA requests developed countries to reduce their export subsidy spending by 35% over 5 years in value terms, with a reduction of at least 21 % in the volume of products. Developing nations are recommended to reduce their export subsidies by 24 % in value terms and 14 % by volume over 9 years. It is good to know that LDCs are exempt from any obligation in this field. Export Subsidies can be in form of international advertising or R&D financed by the government. We have to note also that some countries have violated the agreement in the context of export subsidies. For example, there was a case filed by Brazilian government that US violated trade agreements due to the fact that US farmers were given cotton subsidies. For more details and more cases, refer to section 6.0.

4.0 ARGUMENTS FOR AGREEMENT ON AGRICULTURE

4.1 'Agreement on Agriculture' combats unfair trade

Many countries, especially developed ones, have the habit to give huge subsidies for their products that are exported. This is done so as to encourage exports of goods and to make their prices cheaper in the world market and eventually to gain over the foreign market. However this is viewed as unfair trade, since poor countries suffer due to this. Agreement on Agriculture is here to fight against this unfair trade.

This is the main benefit of Agreement on Agriculture. We can take a simple example to illustrate this. Suppose Mauritian government provides subsidies for the exportation of sugar, then Mauritian farmers will be in a position to set a low price given that the loss in revenue will be compensated by the subsidies. As a result, many nations will be willing to buy sugar from Mauritius since the price is cheaper. However this is going to have an adverse impact on relatively poor countries that cannot afford to give similar subsidies and therefore cannot export sugar cheaper than Mauritius. This explains how export subsidies lead to an unfair trade. Due to these issues, the AoA requests developed countries to reduce their export subsidy spending by 35% over 5 years in value terms, developing nations have to reduce their export subsidies by 24 % over 9 years and LDCs are exempt from the obligation in this field. These are provided by one of the pillars of the AoA known as the 'Export Subsidies' as has been explained above.

4.2 Other important benefits of AoA

It has been found that, the AoA lead to a more disciplined agricultural trade and improved transparency and predictability. Trade rules also provide the tools needed to address the problem of agricultural dumping. Due to the AoA, there would be new members (e.g. China) and this would lead to more commitments and larger impacts. Besides, the AoA would also increase productivity and competitiveness in the long run.

According to the World Bank, full liberalization of merchandize trade including agriculture would bring $256 billion in global gains, of which $165 b would come from agricultural liberalization (with $42.6 b to Developing Countries (DCs)). It is also known that 3/4 of the gains for developing countries would result from lowering their own tariffs.

Research has shown that if developed countries remove their agricultural support policies completely, then all developing countries' agricultural export value would increase by 24% (US Dep. of Agriculture 2001) and developing countries would also gain $30 billion annually (World Bank 2002). It is also known that, if developed countries remove their agricultural support policies, rising world food prices would lead to only a 2% decline in LDC agricultural imports (DOA 2001).

Moreover, agricultural trade liberalization will provide opportunities as well as challenges. Besides, adopting suitable policies and good governance will lead to minimization in costs and maximization in benefits.

4.3 Benefits in terms of Special and Differential Treatment (SDT)

It a general knowledge that, developing countries face relatively more problems or disadvantages than developed ones. This is why it has been agreed to give greater flexibility for the developing nations or LDCs and this is called the Special and Differential Treatment. An example of SDT can be promises by developed countries to provide technical assistance to poor economies to help them implement multilateral rules. It is often said that to make SDT become a more effective instrument, it must be targeted more narrowly towards those that need it the most. The SDT can be viewed as one of the key benefit of the AoA.

4.4 The AOA benefiting some Least Developed Countries

The AoA had positive effects on some LDC countries. We can take the case of Cambodia, a Least Developed Country, where 80% of the country's labour is employed in the agricultural sector. The agreement obliged member countries to remove non-tariff barriers, transfer them into tariff barriers and continuously reduce them. Cambodia, being a LDC country, has the right to maintain import tariffs on agricultural products at higher levels through accession negotiations. As such, Cambodia has greater opportunity to extend its export agricultural product and also attract investment in this area.

4.5 Importance of the Doha round agreement

Reference can also be made to importance of the Doha round agreement. The World Bank presented a policy research working paper on the theme of why a conclusion to the Doha Round matters. The Doha Development Round is found to be vital because it aims to 'contribute to a more robust recovery from the global recession'. It helps governments to reduce fiscal expenditures by ensuring a credible pre-commitment to 'lowering agricultural subsidies'.

Of significance to the ACP-EU trade relationship, the research paper notes the increased use by the EU of export subsidies in response to the global downturn in dairy sector prices, and points out that such a policy response would be prohibited under a Doha agreement. It argues furthermore that while the current provisions on domestic agricultural support would 'not lead to significant cuts in actual subsidies'; they would "constrain industrial country subsidies, especially for products such as cotton, peanuts and sugar, which are of particular export importance for many developing countries".

With regard to the tariff reduction, the paper argues that "lowering somewhat applied average levels of protection and constraining the ability of governments to raise barriers in the future, a Doha deal also help address some of the factors that have contributed to severe volatility of food prices on world markets". This brings benefits to developing-country food importers.

The paper also points out that LDCs would benefit from the generalized granting of duty-free and quota-free access. Major reductions could be brought in domestic support in the cotton sector, to the benefit of ACP cotton exporters.

4.6 Benefits provided by the Green box of the Domestic Support

Though the Agreement on Agriculture normally aims at decreasing subsidies given by the government, it equally allows some kind of subsidies which bring some benefits. For example, we have the Green Box of the Domestic Support which allows subsidies that causes minimal or no trade distortions. It allows payments associated with environmental programs, pest and disease control, infrastructure development, and domestic food aid. Here, subsidies are also granted for environment protection and preservation, and for agricultural research and development.

5.0 Arguments against Agreement on Agriculture

The Agreement on Agriculture has highly been criticized since its formation.

5.1 Violation of WTO principles by AoA

It is believed that the agricultural agreement is the most obvious thing that has violated the principles of WTO. Normally, the AoA of the WTO was supposed to be in favour of poor countries and benefiting them enormously. According to the AoA, governments were supposed to improve market access and also to lower agricultural subsidies. However in reality it is seen that poorer countries have followed the agreement properly and thus lowered their subsidies and also removed or reduced their tariffs and quotas, so as to improve market access, but it is found that the US and the European Union did not do so. It is known that, there was pressure and manipulation when the agreement was written which means that much priority was given to rich northern countries, thus, the world market was not fair at all in agricultural goods. For instance, in 1995 OECD countries spent $182 billion subsidizing agriculture and an OECD report in 2000 put US, EU and Japan subsidy rates at $20,000 a farmer.

5.2 Martin Khor arguments

It has also been argued by Martin Khor, a professor of political economy and also director of Third World Network (TWN) that "WTO has a systematic bias toward rich countries and multinational corporations, harming smaller countries which have less negotiation power". For example, there is high protection of agriculture in developed countries while developing countries are compelled to open their markets. Rich countries also obstruct import from developing countries since they are able to keep high import duties and quotas in certain products. In addition, Martin Khor also believes that the Doha Round negotiations "have veered from their proclaimed direction oriented to a development-friendly outcome, towards a 'market access' direction in which developing countries are pressurized to open up their agricultural, industrial and services sectors".

Many important provisions in the AoA allow developed countries to circumvent their trade liberalization obligation thus ensuring that their agriculture remain protected. The Due Restraint Clause under Article 13 protects those subsidies that have been exempted from reduction from being challenged. The Special Safeguard provision, which applies only to those products which have been tariffied has benefited mostly developed countries.

5.3 AoA harmful for the economy

A study was carried out in 1999 by the UN Food and Agriculture Organization (FAO) to analyze changes in agricultural trade since the AoA started. The study has proved that food import surges have been hurting local farmers and the wider agricultural sector, which weakened the local economy's capacity to provide food security, employment, and poverty reduction.

Other studies show that the AoA has led to a surge in imports but no increase in exports thus, marginalizing small farmers and also causing rural job loss in countries, for example, onions and potatoes in Sri Lanka, meat and dairy in Pacific, rice in Malaysia, edible oil seeds in India etc.(FAO)

5.4 Reduced subsidies for local farmers

It is true that the AoA was meant to decrease subsidies given to local farmers for doing farming. However it may be argued that subsidies are needed to protect small farmers. Many farmers are highly dependent on the government subsidies which are one of their main sources of income. According to AoA, countries, especially developed ones had to decrease these subsidies and this had a negative impact on those farmers, in the sense that they have experienced a fall in their income level which has lead to a decrease in their standard of living. This has also caused many farmers around the world to cease farming.

5.5 Failure of benefits predicted to materialize

When the AoA was being implemented, many benefits were predicted especially for developing countries and for LDCs. However, we must note that many of the benefits predicted did not materialize. It was noticed that when subsidies were reduced or eliminated, production levels did not decrease.

Besides, most developed country spending on domestic programs was not really reduced. Therefore, world prices for agricultural commodities decreased overall, but at the same time were more volatile, making budgetary planning difficult for food importers. Public stockholding was cut, thus reducing transparency in the market. Now the largest holders of grain are private trading companies, a small number of whom dominate global grain markets. With the fall in public stockholding in developed countries, food sales at subsidized prices to developing countries decreased. In fact, in 1998, the FAO estimated that the reduction in public stockholding resulted in an average 20% price increase for net food importing developing countries.

5.6 Loss of market share by local producers due to reduced tariffs - the case of Indonesia

The AoA of the WTO require countries to reduce their tariffs. However reducing tariffs are not always good. For example countries which reduced their tariffs, found many imported agricultural goods entering the local market. If the imported goods are more competitive, that is, are cheaper than that of local goods, then local farmers lose their market share and again experience their income and standard of living falling down.

We can take the case of Indonesia. The government of Indonesia, following the WTO Agreement on Agriculture, removed tariff for rice imports, and as a consequence, there was a big flood of imported rice in its economy. Foreign rice that was being imported became cheaper than the domestic rice. This harmed local farmers by huge competition and hence farmers became reluctant to plant rice.

5.7 Decreased tariff revenues of government

It is important to note that, tariff revenues of government are also reduced through tariff reductions. As a result of this, the government has lesser money to finance social spending. In this kind of situation, it is women that are mostly affected, since women have primary responsibility for the household and are more dependent on men on government services.

5.8 Dumping

Dumping is when a company exports its products at a price lower than the price it actually charge on its own home market. Normally, below-cost import cause farmers in developing countries to lose their market. So it is quite obvious, that the AoA was introduced mostly to solve this problem. The AoA has been able to protect some countries from this kind of dumping. Various researches have been done to assess whether AoA has been able to protect countries against dumping. However, many of their results point in the opposite direction, that is, the result explain that even after the formation of AoA, widespread agricultural dumping has continued, and it is mostly the companies of the European Union and United States, which have provoked this.

5.8.1 Empirical findings showing persistent dumping

An analysis was done by the Institute for Agriculture and Trade Policy (IATP). In the analysis, dumping was measured from 1990 to 2003 for some of the plants grown in the US and normally sold on the world market like rice and cotton. The result revealed that in 2003, widespread dumping continued to prevail. Cotton was priced at 47% below its cost of production in the world market and for rice it was 26% below its cost of production.

5.8.2 Dumping harming farmers in developing countries

Dumping is causing harmful effect on farmers and is one of the most devastating of the current distortion in world trade. In developing countries, agriculture does not mean only trade, but also ensure food security, poverty reduction, and rural livelihood. When below-cost goods enter their local market, the country faces innumerable destructions and the economy becomes poorer. The low price of dumping has essentially 2 main effects on the local farmer. Firstly, the farmer is going to lose its market share in the local market, and if he is not supported by subsidies he becomes helpless, and will have to abandon his piece of land. Therefore some people will have to migrate to other countries to search for an opportunity for better trade and looking for a better livelihood. Secondly, some farmers of developing nations, whose agricultural products are sold to exporters, will find their global market share fallen down, because the global price of the same kinds of products are very low in the global market. In fact, the disastrous effect is felt around the world in places as far apart as Philippines, Burkina Faso and the Jamaica.

It is known that, the largest commodity traders, who are now dominant in financing trades, processing and shipping, are in fact, the biggest beneficiaries of agricultural dumping. These companies buy their raw material, i.e., their agricultural products at very low prices. They then control the value-added stages of production very well and so are sure of a large profit from the final sales. Most of these companies have seen their profits skyrocket in recent years. This can be illustrated by the following chart, which shows the net earnings of 3 big global grain companies namely, Archer Daniels Midland, Cargill, and Bunge Ltd, from 1995 to 2004. The trend shows an overall fall in earnings from 1995 to 1999 and an overall persistent earning rise from 1999 to 2004.

Net earnings of major global grain companies,

1995-2004 (in millions of U.S. dollars)

Source: "WTO Agreement on Agriculture: A Decade of Dumping"

http://www.tradeobservatory.org/library.cfm?refid, Date Accessed: 08.06.2010.

5.9 Criticisms of the Special and Differential Treatment (SDT)

The SDT has been highly criticized in the sense that, there is discrimination to give some countries preferential access and not giving the access to others. For example, preference are given to members of reciprocal free trade agreements like the EU, NAFTA, etc then followed by LDCs. Winters (2001) also argued that most poor people live in countries that are not LDCs like China and India. Therefore we are limiting preferences to LDCs, thus ignoring the majority of the poor in the world.

6.0 Cases of Trade Disputes related to AoA

6.1 Trade Dispute between Brazil and the US

A case was filed by the Brazilian government with the WTO affirming that US violated trade agreements due to the fact that US farmers were given cotton subsidies. This dispute is known as the 'Brazil-US Trade Dispute' which started in 2002. In 2005 and 2008, the case was won by Brazil. Besides, in August 2009, Brazil got the WTO approval to put sanctions on US goods over the cotton subsidies (sanctions of about $829 millions per annum). On 6th April 2010, these two countries reached a temporary agreement over Federal subsidies to US Cotton Farmers.

Following this agreement, the US will be creating a $147.3 million fund which will give assistance to the Brazilian Cotton industry. The US opted to provide assistance to Brazilian Cotton farmers rather than eliminate the Cotton subsidies that it provides US farmers. Moreover, Brazil has planned to put a 100% tariff for cotton prices, duties on car and suspend intellectual property rights. The goal of Barack Obama of making US exports double in the next 5 years has been threatened by this dispute. US Agricultural Secretary Tom Vilsack stated, "I look forward to working with Congress and Brazil to crafting a long-term, mutually agreeable solution to this dispute that meets the needs of American farmers, workers and consumers."

6.2 Hungary

Export Subsidies in Respect of Agricultural Products, complaint by Argentina, Canada, New Zealand, Australia, United States, and Thailand in March 1996 claimed that Hungary violated the Agreement on Agriculture (Article 3.3 and Part V) by providing export subsidies in respect of agricultural products not specified in its Schedule, as well as by providing agricultural export subsidies in excess of its commitment levels. A panel was established in February 1997, but in July 1997, Australia, on behalf of all the complainants, notified the DSB that the parties to the dispute had reached a mutually agreed solution, which required Hungary to seek a waiver of certain of its WTO obligations. Pending adoption of the waiver, the complaint was not formally withdrawn.

6.3 Canada

Measures Affecting the Importation of Milk and the Exportation of Dairy Products, complaint by the United States. The US contended that export subsidies allegedly granted by Canada on dairy products and the administration by Canada of the tariff-rate quota on milk, distort markets for dairy products and adversely affect US sales of dairy products. The US alleges violations of Article II, X and X1 of GATT 1994, Articles 3, 4, 8, 9 and 10 of the Agreement on Agriculture, Article 3 of the Subsidies Agreement, and Articles 1, 2 and 3 of the Import Licensing Agreement.

A panel was established on 25 March 1998. The Panel found that the measures complained against were inconsistent with Canada's obligations under Article II:1(b) of GATT 1994, and Articles 9.1(a) and (c) of the Agreement on Agriculture. The panel report has been circulated on 17 May 1999.

7.0 Conclusion

When the agreement on agriculture was being designed, many benefits were predicted. However it is found that some of the benefits have been realized while some has not been materialized. Some maintain that the AoA has brought huge advantages for the LDCs countries through the Special and Differential Treatment, while others argue that the WTO has a bias toward Developed countries. Hence, we can conclude that the Agricultural Agreement has been one of the most controversial issues within the WTO Framework which can be analyzed by the arguments above. We have also noted that there are many cases related to the agricultural agreement that have been brought to the court. All countries can derive advantages from the agricultural trade liberalization. But this needs to be done in a fair and transparent manner with developed countries as the main "distorters" bearing the main responsibility. Nonetheless, developing countries also have a responsibility to bring down trade barriers among themselves and to realize that the most significant economic gains result from liberalization, not protection.

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