The AOA: an imbalanced, inequitable agreement

The Agreement on Agriculture (AOA), which was negotiated under the aegis of GATT (the predecessor of the WTO), became operative in January 1995. Four years on, it is evident that the Agreement is imbalanced and has many deficiencies. In the following appraisal of the AOA, a leading specialist on the WTO highlights the inequities and deficiencies.

by Bhagirath Lal Das

Main positive features

THE most important positive feature of the Agriculture Agreement of the World Trade Organisation (WTO) is that a serious beginning has been made to bring agriculture into the normal discipline of the international trading rules. Some major developed countries had been subsidising their agricultural products for a long time with the result that other agricultural exporters were put to great disadvantage. Now there is a commitment to cut down subsidies both on production and on exports.

A unique positive feature of the Agreement is that even such measures as subsidies have been covered by the specific commitment of reduction from year to year. In other areas generally, only the tariffs are given such coverage of reduction commitment.

Main deficiencies and imbalances

(I) Unfair obligation

The general scheme of the commitment in the Agreement is that those countries which have been using measures for import restraint and domestic subsidy, were required to reduce the levels respectively by 36% and 20%.

The budgetary outlay and the quantity of export covered by the export subsidy were expected to be reduced respectively by 36% and 21%. The levels for the developing countries were two-thirds of these percentages. It means that those countries which were using these measures would be able to retain quite a big portion of them even up to the end of the implementation period. However, those countries which had not been using these measures earlier, are prohibited from using these in future, beyond the de minimis limits. This is patently unfair in the sense that countries distorting the market in the past are allowed to continue distorting it up to a substantial extent, whereas those that had refrained from doing so in the past are totally prohibited from using these measures in the future.

(II) Need for domestic food production

The Agreement is based on the rationale of open international trade in the agriculture sector. It thus presupposes the supremacy of the price system and the comparative advantage operating in this sector. The implication is that a country must import its agricultural products from those countries that produce them more cheaply than its own production. In theory it may be alright; in practice it can be disastrous for the food products of developing countries.

Countries that have enough foreign exchange can depend on the import of cheap food products, but those that are short of foreign exchange will be in serious difficulty if they have always to depend on imports for their essential and staple food items. Most of the developing countries have a persistent shortage of foreign exchange. In such a situation, if they depend mainly on food imports, their population may sometimes face starvation, as they may not have enough foreign exchange to buy food abroad. A country can delay the import of industrial products for a while, but it cannot delay providing essential food items to its people.

In this context, it may be wiser for these countries to have as much domestic production of necessary food items as their land resources permit. It is desirable, even if the domestic production is more costly compared to the import of the food articles.

(III) Non-commercial farming

In a large number of developing countries with agricultural land, agriculture is generally not taken up as a commercial venture, though there may be some small pockets of commercial farming. Many farmers take to cultivation as they got the land in the form of ancestral property and they have no other profession. This is in the nature of subsistence cultivation at the household level. Similarly, there are large numbers of small farmers in most of the developing countries.

It is extremely difficult to harmonise these special characteristics in many developing countries with the operation of the price mechanism and the commercial nature of agricul-ture,which are the basic underlying principles in the Agreement on Agriculture. The livelihood of the farming households may be threatened on a colossal scale in developing countries, if these farmers are exposed to international competition in agricultural products.

(IV) High tariffs in developed countries

In the process of tariffication, several developed countries have kept the tariffs in their schedules very high. It makes import prospects really dim.

(V) Net food-importing countries

The problems of the net food-importing developing countries have been recognised in a WTO Ministerial Decision, but no concrete action is mentioned in the Decision. The result is that no concrete action on this problem has been taken so far, even though sympathies have been expressed time and again.

(VI) Correctness of schedules

The modality paper (which formed the basis for the calculation of the commitments of countries) has not been made a part of the Agreement; as such the provisions included therein are not enforceable. One relied on the countries themselves to prepare their schedules based on the relevant facts. However, some studies have indicated that some of these calculations might not have been totally accurate. All this was done in a hurry; and it is likely that the countries did not have enough resources to prepare accurate schedules in such a short time. The time for verification was also short. Hence one cannot be sure that the provisions of the modality paper have been fully implemented.

(VII) Tariff quotas

When ordinary tariffs are high, sometimes countries allow imports up to some quantity at comparatively low tariff levels. These quantities are called tariff quotas. Beyond the tariff quota, the imports are subject to the ordinary rates of tariff.

In the Agreement on Agriculture, tariff quotas are to be allocated for three purposes, viz., (i) current access opportunity, i.e., providing the opportunity for annual imports equal to the average annual imports for the years 1986-1988, as well as protecting the import opportunities in bilateral or plurilateral agreements, (ii) general minimum access opportunity, i.e., providing opportunity for imports up to a minimum percentage of domestic consumption in the years 1986-1988, and (iii) minimum access opportunity as a result of special treatment. Only four countries have availed themselves of the special treatment mentioned in point (iii) and that also for only one or two products. Hence one need not deliberate much on it for the current discussion. The access opportunity as described in points (i) and (ii) above has to be provided by low tariffs up to a certain quantity of imports. The tariff quotas to protect the access as a result of bilateral or plurilateral agreements will naturally be country-specific. But for other cases of access opportunities, the tariff quota should be global and not specific to countries, so that all countries have the opportunity of utilising the quotas.

In the tariff quotas in agriculture, however, some developed countries have mixed up various elements of access opportunities and have liberally provided for country-specific tariff quotas. Thus other countries do not have the possibility of utilising these access opportunities.

(VIII) Uncertainty about specific domestic support

As mentioned above, the commitment on domestic support is to limit it within the ceiling mentioned in the schedule. A country can modulate the choice of the product and the rate of subsidy, depending on its own need. This keeps the exporters in other countries in uncertainty; thus they have some handicap in planning their own exports.

(IX) Subsidised food stock of developing countries

The subsidy provided by developing countries in purchase of food for stocking and public distribution is exempt from the reduction commitment; but the difference between the purchase price and the external reference price has to be included in the calculation of the Aggregate Measurement of Support (AMS). The Annual Bound Commitment Level of the AMS is mentioned in the schedule of the country and it signifies that the support cannot exceed that level in that year. As mentioned earlier, it means that a country choosing to subsidise the food purchase for stocking will have to reduce subsidies on some other items so as to limit the subsidy to the bound level of the AMS in that year. This would be possible anyway even without this special dispensation; hence this provision which appears to be a special favour for developing countries is actually not so.

(X) Discrimination in due-restraint provision

The Agreement on Agriculture provides for due restraint on action against subsidies. There are two categories of subsidies which are covered by it. One set is covered by Article 6 of the Agreement. This includes items like investment subsidy and input subsidy of developing countries. Another set is covered by Annex 2 of the Agreement which includes items like government services programmes, direct payment to producers, income insurance programmes, crop insurance programmes, structural adjustment assistance, etc.

The second set is generally prevalent in developed countries. In the provisions for due restraint, these two categories are treated differently. The second set of subsidies, generally prevalent in developed countries, has been exempt from countervailing duty and countermeasures. The first set, which contains some important subsidies of developing countries, has not got such an exemption. In fact, in this case, it is just mentioned that due restraint should be shown in initiating countervailing duty investigations. It is in the nature of a suggestion and not an obligation.

Required improvements

(i) In order to bring in some measure of fairness in the system of commitments for reduction of import restraint, domestic support and export subsidy, it may be desirable to remove the prohibition on those countries that have not included these measures in their schedules. So far the exemption is up to the de minimis level. But considering that the countries having these measures are able to retain the restraints and subsidisation almost up to 65 to 80%, it is desirable to permit the others also to take new measures up to levels substantially higher than the de minimis levels.

(ii) For developing countries which do not have foreign exchange on a stable basis for purchase of imported food for their population, it should be permissible to encourage and develop their domestic food production; and to that extent they should be permitted to protect their production against cheap imports and provide domestic support to the production. This proposition is very much different from the WTO balance-of-payments (BOP) provisions, which are meant to tackle BOP problems and are necessarily of a temporary nature.

(iii) Similarly, there should be flexibility regarding import restraint and domestic subsidy for the protection of and support to household subsistence farming and small-scale farming in countries where such farming is very much prevalent.

(iv) There should be a provision for ceilings on the peaks of tariffs in developed countries. Side by side, there should be tariff quotas with lower tariffs.

(v) The modalities which guided the commitments should be given some formal recognition, so that the conformity of the commitments with the modalities can be improved. Countries could be requested to check their schedules in this light once again. This process can be more effective, if there is also a provision for verification of schedules once again by other countries.

(vi) For the net food-importing developing countries, there should be specific and concrete decisions regarding food aid and soft loans to buy food in the international market. Countries which are consistent net exporters of food products should be able to shoulder this burden.

(vii) Tariff quotas should be made global, except in some very exceptional cases. If country quotas follow bilateral agreements, the global tariff quotas should be an additionality over these country quotas, to be shared by those that are not covered by the country quotas.

(viii) There should be some predictability about the specific products and rates in the case of domestic support. One way it could be effected is to ask the countries to make their plans of distribution of the domestic support within the ceilings a few years in advance. Perhaps an announcement of the subsidy plans could be made, for example, for three years at a time.

(ix) The subsidy provided by developing countries for the purchase of food products for public stocking should be excluded from the calculation of the AMS, as in the case of other exempted subsidies.

(x) The subsidies covered by Article 6 of the Agreement, particularly the investment subsidy and input subsidy of developing countries, should have the benefit of exemption from countervailing duty and countermeasures as in the case of the subsidies listed in Annex 2 to the Agreement.

(Third World Resurgence No. 100/101, Dec 98/Jan 99)

Bhagirath Lal Das was formerly India's Ambassador and Permanent Representative to the General Agreement on Tariffs and Trade (GATT). Later, he was Director of International Trade Programmes in the United Nations Conference on Trade and Development (UNCTAD).The above article first appeared in the South-North Development Monitor (SUNS).