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NEGOTIATIONS IN AGRICULTURE AND SERVICES IN THE WTO: SUGGESTIONS FOR MODALITIES/GUIDELINES

(Bhagirath Lal Das)

INTRODUCTION

The negotiations have started in the WTO in the areas of agriculture and services, as envisaged in the Agreement on Agriculture (AOA) and the General Agreement on Trade in Services (GATS). In the initial phase, the modalities/guidelines for these negotiations will be worked out.  It is a very important phase, as the modalities/guidelines will determine the course of the negotiations and also, to a great extent, their results. Therefore it is necessary that the developing countries get fully involved in this process and place their own specific proposals on the modalities/guidelines.

It is by now well understood that both these agreements of the WTO contain significant deficiencies, imbalances and inequities. The burden of obligations on the developing countries in these areas is effectively much heavier than that on the developed countries. In order that the imbalances and inequities do not get further enhanced, a lot of care will have to be taken by the system, particularly by the developing countries. The credibility of the system will depend a lot on how far the countries will be able to reduce the imbalances and inequities. In fact, that should be the priority objective; and the modalities/guidelines should be designed to attain that objective.

In both these areas, the negotiations in the Uruguay Round (UR) centred around liberalisation. There will be a natural pressure for starting the process again from where it ended in the UR. The major developed countries are likely to suggest that the modalities/guidelines of the UR should be generally followed even in the forthcoming negotiations with appropriate modifications. As those modalities/guidelines ended in imbalances and inequities, it will not be correct to follow them. It is important for the developing countries to resist this pressure. The modalities/guidelines for the forthcoming negotiations should be totally different in order that the priority objective of reducing the imbalances and inequities is fulfilled.

Subsequent paragraphs of this paper describe the main problems in these two areas and give some suggestions for the modalities/guidelines for the forthcoming negotiations.

AGRICULTURE

COVERAGE OF NEW NEGOTIATIONS

The new negotiations will be directed towards “the long term objective of substantial progressive reduction in support and protection” in the area of agriculture. In this process, some of the factors which should be taken into account are: the “non-trade concerns”, “special and differential treatment to developing country Members”, “the objective to establish a fair and market-oriented agricultural trading system,” and “the objectives and concerns mentioned in the preamble” to the AOA. An important objective and concern mentioned in the preamble is: “correcting and preventing restrictions and distortions in world agricultural markets”. (Article 20 of AOA)

Some implications are important. For example, market orientation is not the sole guiding factor, as is often made out; the system of agriculture trade has also to be fair. Further, restrictions and distortions in world agriculture markets are recognised as factors which should be corrected and prevented. Evidently, the policies and measures resulting in severe restrictions and distortions in world trade in agriculture are to be targetted for action.

MODALITIES IN URUGUAY ROUND AND RISKS INVOLVED

In agriculture, negotiations were patterned on across the board elimination of non-tariff barriers and  reduction of tariffs, domestic support (subsidy) and export subsidy. The nature of obligations to be undertaken by all countries, except for the LDCs, was the same across the board, though the extent of reduction by the developing countries was somewhat smaller. All countries, the LDCs included, had to eliminate non-tariff barriers and bind all tariffs. All countries, except the LDCs, had to reduce the tariff, domestic support and export subsidy. The basic approach was that all countries, excluding the LDCs, should undertake obligations in these three areas.

There will be a pressure again for adopting a similar approach in the new negotiations in this area. As mentioned earlier, this approach has resulted in severe deficiencies, imbalances and inequities in this area. Some important examples to illustrate it are given later. It will be dangerous for the developing countries to allow this approach to be adopted again. They should, on the other hand, suggest an alternative approach. Before moving on to a possible alternative, it will be relevant to see where we have landed up with the old approach of negotiations.

UNBALANCED AND INIQUITOUS RESULTS OF URUGUAY ROUND

Protection and subsidies in developed countries

High tariffs

The major developed countries have very high tariffs on some of their important agriculture products, some times even up to nearly 300-400 per cent. It amounts to practically prohibiting the import, except for the quantities covered by the tariff quotas which can be imported at low tariffs.

High domestic subsidy

The domestic support is very high in the major developed countries. and in fact it has risen over the past few years. It is frustrating to find that though the major developed countries have technically fulfilled their obligation of reduction of domestic subsidy, they have in reality increased the quantum of the subsidy. And it has been done by a very clever use of the provisions of the agreement, which shows that the provisions themselves are faulty. It also perhaps shows that their pronouncements in the WTO about liberalisation and reduction of subsidies in agriculture is not backed by political will. The method employed by them is briefly explained below.

The Agreement on Agriculture requires that as a measure of domestic support, a country should calculate what has been called Aggregate Measurement of Support (AMS) for the base period (annual average rate during 1986-88) and then reduce it from year to year. But two categories of subsidies are exempted from being included in the AMS, and thereby from being reduced. One set is given in Annex II (annex II subsidy) and the other set in Article 6 (Article 6 subsidy) of the AOA. For the sake of convenience, let these two sets together be called “exempted subsidy”.

The base level for the AMS was taken as the average annual rate during 1986-88. Reduction (24 per cent) of the AMS was to be effected on this base during 1995-2000 by the developed countries. The major developed countries have reduced the AMS and increased the level of exempted subsidy by huge amounts, resulting in very high rise in the total domestic support, i.e., including both the AMS and the exempted subsidy. In the EC, the base level of the total subsidy was nearly US$ 83 billion and it increased to US$ 95 billion in 1996. In the US, the corresponding level went up from US$ 50 billion to US$ 58 billion. There is another measure of total domestic support, which is called Producer Subsidy Equivalent (PSE). In the EC, it  increased from US$ 100 billion in the base period to US$130 billion in 1998. In the US, the corresponding  increase has been from US$ 41 billion to US$ 47 billion. For the developed countries as a whole, the corresponding increase has been from US$ 247 billion to US$ 274 billion. Thus very huge domestic subsidy has continued in the developed countries and it has been increasing over the years. (figures are based on the calculations made at the South Centre, Geneva)

Export subsidy

In respect of the export subsidy, the commitment of the developed countries is to reduce the budget outlay by 36 per cent and the total quantity of export covered by the subsidy by 21 per cent. In this case, the base level is the average annual level for 1986-90 and  reduction is to be done over the period 1995-2000. Some countries, which had increased the level of export subsidy during 1991-92, were allowed to start with that higher level in 1995 and reduce at a fast rate so as to achieve the target of reduction of 36/21 on the base level of 1986-90. Thus even in the year 2000, the amount of subsidy will continue to be as high as 64 per cent of the base level.

Situation of developing countries

Tariffs and subsidies

Most of the developing countries did not have non-tariff barriers of the type which would have been converted to equivalent tariffs. (Their import control measures had been mostly taken under the Balance of Payment Provisions which were not required to be tarrified.) Thus unlike the major developed countries that had been earlier distorting the market by non-tariff barriers, most of the developing countries did not have the benefit of introducing high tariffs through the process of tariffication.

Most of the developing countries also did not have much domestic subsidy and export subsidy. Hence they have been denied the flexibility of using these instruments beyond the de minimis limits in case of the domestic support. Except for a very few developing countries, e.g., Brazil, Cuba, Colombia, Venezuela, Korea, Thailand and India which use some exempted subsidy, though comparatively at small levels, others have either no such subsidy or negligible levels of such subsidy, compared to the total exempted subsidy of the developed countries.

Special Safeguard (SSG)

And there is the possibility of emergence of a serious problem for the developing countries. With the removal of non-tariff barriers, the developing countries are exposed to the risk of import surges which will harm their domestic production capacity. A normal safety course would have been through the safeguard mechanism of the GATT 1994; but injury may be technically difficult to be demonstrated in such dispersed production as agriculture. Hence this course may not be practical. Keeping this problem in view, the mechanism of special safeguard (SSG) has been evolved in this area, but it can be used only by the countries which converted their non-tariff barriers to equivalent tariffs (i.e., took to tariffication). As mentioned earlier, most of the developing countries did not have such barriers and thus they did not resort to tariffication, and as such they are not allowed to use SSG at present. It appears patently unfair.

With the strength infused by the huge subsidies to the agriculture production in the developed countries, the developing countries may be flooded by imports from developed countries. It is necessary for them at least to have the possibility of using SSG to safeguard their domestic production.

Desirable corrections

The high tariffs of the developed countries on some important traded products and their high domestic subsidy as well as export subsidy are the major causes of protection and distortion in the world trade in agriculture. According to the objectives of the negotiations mentioned above, these must be corrected. 

Besides, all these have particularly adverse impact on the production and trade of the developing countries. The farmers of the developing countries are economically very weak, compared to the farmers of the developed countries; and then they are faced with such unfair and unbalanced situation in trade and production because of the high import barriers in the developed countries and such colossal subsidies to their farmers.

Any further negotiation for liberalisation in agriculture should start with bringing about correctives to the current situation mentioned above. The major developed countries must eliminate or at least substantially reduce their domestic subsidy and totally eliminate their export subsidy. They have already got the huge concession and benefit of retaining them to a substantial extent for the first five years of the working of the AOA. This was almost totally one sided concession and benefit, as a very large number of the developing countries got practically nothing in return. It is time that they undertake the commitment of giving up these concessions and benefits. These are distorting the world trade and production in agriculture in a big way; and the objective of the AOA is to end such distortion.

SOME IMPORTANT FEATURES IN DEVELOPING COUNTRIES

There is another severe problem in the AOA which has been pointed out by the developing countries repeatedly. The agreement is based purely on the considerations of commerce; hence two special matters which are of grave concern to the developing countries have not been attended to. These are: production of food in the developing countries for domestic consumption and protection of small and household farmers. These two factors have been emphasised by the developing countries repeatedly during the preparation for the Seattle Ministerial Meeting. It is important that there is an agreement that the policies and measures of the developing countries in respect of these two factors is not constrained by the AOA.

NET FOOD IMPORTING DEVELOPING COUNTRIES

Yet another serious concern is the cost of agricultural liberalisation to net food importing developing countries. The Agreement gives only lip service to this issue. There is a recognition of the problem, but there is no effective solution. There is an urgent need for having an effective mechanism for assisting the net food importing developing countries.

The issues mentioned above should have absolute priority in the forthcoming agriculture negotiations. In order to restore some balance in the Agreement, the initial guidelines or modalities for the negotiations should contain only the issues mentioned above. Only after these problems have been successfully tackled in the initial phases of the negotiations, any further guidelines or modalities for liberalisation should be worked out.

SUGGESTIONS FOR INITIAL GUIDELINES/MODALITIES

The initial guidelines or modalities should consist of the following issues.

·      The tariff peaks in agriculture in the developed countries should be reduced substantially. The extent of reduction and the period over which the target of reduction is to be fulfilled should be finalised.

·      The domestic subsidy in agriculture in the developed countries should be eliminated/substantially reduced over a short course of time. Similarly, the  export subsidy in agriculture in the developed countries should be eliminated over a short course of time. The period within which it is to be done should be finalised.

·      There should be a decision that food production in the developing countries for domestic consumption as well as the protection of small farmers and household farmers will be excluded from the disciplines of the AOA on market access and domestic subsidy. Negotiation should take place to determine the method of implementing the decision.

·      There should be a decision that the Special Safeguard (SSG) mechanism can be utilised by the developing countries, whether or not they have taken to tariffication.

·      There should be an agreement on effectively and directly assisting the net food importing developing countries. The mechanism and method should be finalised.

After these initial modalities/guidelines are fully acted upon, further modalities/guidelines should be prepared.

SERVICES

           

SCOPE OF NEW NEGOTIATIONS

The negotiations in the area of services will be undertaken “with a view to achieving a progressively higher level of liberalization”. The negotiations will be about obligations “as a means of providing effective market access”. Further, the process must promote “the interests of all participants on a mutually advantageous basis” and must secure “an overall balance of rights and obligations”. (Article XIX of GATS)

In the area of services, much more than in the area of goods, following the path of mutual advantage and achieving the objective of the balance of rights and obligations is extremely difficult. The vast differential between the supply capacity of the developing countries and the developed countries in this area makes the achievement of reciprocal benefits nearly impossible with the pattern of negotiations adopted in the UR.

PATTERN OF NEGOTIATIONS IN THE URUGUAY ROUND

In the Uruguay Round, general obligations were worked out covering all services sectors. Then there were bilateral/plurilateral negotiations for commitments on liberalisation  in specific sectors, which were entered in the respective schedules of the countries and were thus multilateralised. After the GATS came into force, intense and speedy negotiations followed in the financial services and telecommunication sectors, and agreements on liberalisation in these sectors were reached.

The sectoral negotiations were held on the basis of what is popularly called the positive list method, i.e., a country preparing a “positive” list of service sectors in which it takes obligations to liberalise. All other sectors are free from liberalisation obligations in respect of this country. A negative list approach, on the other hand, would have subjected a country to liberalisation obligations in all sectors, except those it would put in its “negative” list of exclusion.

RESULTING IMBALANCES AND INEQUITIES

General implications of imbalance

In course of the negotiations for sectoral commitments, various countries undertook obligations to liberalise the import in that particular sector by easing the market entry conditions and provision of national treatment, i.e., treatment not less favourable than that accorded to the similar domestic service or service provider. The implication of this exercise should be viewed in the context of the vast differential in the supply capacity of the developed countries on the one hand and that of the developing countries on the other. Most of the developing countries have hardly got any supply capacity in the services sector for export to the developed countries. Hence the opportunities have been really opened mainly for the developed countries by the liberalisation of services import in the developing countries. There is no effective commensurate benefit to the developing countries by the liberalisation commitments of the developed countries in the services sectors.

The result has been that the developing countries have given concessions without effectively getting concessions in return. The outcome has naturally been severely unbalanced. The advantages have not been mutual and thus there is no overall balance in the rights and obligations.

Further Aggravation of imbalance and inequity

The imbalance and inequity have been aggravated by special and accelerated negotiations in the financial sector and telecommunication sector. These were the areas of special interest to the developed countries, and were taken up with priority for special attention. These are particularly the areas in which the developing countries have practically no supply capacity for export to the developed countries. Even if a major developed country allows entry to the banks of the developing countries, there will hardly be any benefit to the latter, as their banks will not have much business there in competition with the local banks. On the other hand, even if much smaller number of bank branches of the developed countries are allowed to be opened in a developing country, the business can be brisk, as there will practically be no competition from the local banks. In such a situation the concessions, for example, in terms of the permission to open a specified number of bank branches becomes very much one sided.

Similar is the case with the insurance sector in the financial service. Likewise, liberalisation in the telecommunication sector will give much more opportunities to the firms of the developed countries compared to those of the developing countries, because the latter do not have the comparative strength in this area.

Bringing the agenda of liberalisation of services in to the WTO has itself caused imbalance, and pushing for developing countries’ obligations on liberalisation in financial services and telecommunication services has brought in further imbalance and inequity.

Imbalance in the treatment of capital and labour

Then there is an imbalance between the treatment of capital and labour in the GATS. It contains disciplines for unrestricted movement of capital related to the supply of services,  but the same treatment has not been given to the movement of labour. Articles XI and XVI of the GATS have included the movement of capital in the obligations. These Articles say that        (i) restrictions must not be applied on transfers and payments for current transactions relating to specific sectoral commitments, (ii) there must not be any restrictions on the capital transactions inconsistent with the specific sectoral commitments, and (iii) a country is obliged to allow a cross border movement of capital if it is an essential part of the movement of service covered by specific sectoral commitments. As it would appear, these obligations on the movement of capital are very clear, specific and detailed. There is nothing like it in respect of the movement of labour.

Possible benefits of services import to developing countries

Some times it is argued that the developing countries benefit by importing services, as it improves their production of goods and services. If it is so, a developing country can undertake liberalisation on its own, without making a binding commitment in the WTO. The developing countries have lost the flexibility of modifying their policy in the light of future experience as a result of the GATS commitment, even if it is assumed that they benefit by importing services.

POSSIBLE CORRECTIVES

In this background, if the new negotiations start either on the basis of request-offer or on the basis of a formula approach, the imbalance is bound to be further aggravated if all countries, both developed and developing, are to be covered by the obligations. In that case the old scene will be repeated, and the developing countries will be put into more disadvantaged position. As mentioned earlier, the basis of the negotiations has to be “mutually advantageous” and the results must have “an overall balance of rights and obligations”. All this will be totally negatived if the past process of both developed and developing countries undertaking obligations for liberalisation is followed again.

It is rational to expect that the new negotiations must start with reducing the imbalance and inequity significantly. It calls for a totally new type of approach. Article XIX of the GATS provides some guidance to achieve this objective. It says that in course of the negotiations for sectoral liberalisation, the developing countries may take commitments for liberalising fewer sectors and fewer transaction. Developing countries have already liberalised a number of sectors and they have not got effective market access in developed countries. In this background, one effective way of reducing the current imbalance  is to have an initial modality/ guideline which will not require them to undertake further commitment on liberalisation and will require only the developed countries to liberalise their service imports in the sectors of export interest to the developing countries. Developing countries may select the sectors of their interest and the  type of restrictions in the developed countries which they would propose to be removed or relaxed. This process is fully supported by Article IV of the GATS, which says that increasing participation of the developing countries in the world trade in services must be facilitated through, inter alia, the “liberalisation of market access in sectors and modes of supply of export interest to (the developing countries)”.

One obvious example of the sector/mode of export interest to the developing countries is the movement of labour. There should be relaxation in the developed countries on the entry of the service providers from the developing countries. The developing countries may select some other sectors for liberalisation in the developed countries.

Sincere and faithful implementation of these provisions by the developed countries would have resulted in less imbalance of benefits; but it was not done. In fact the major developed countries have some times done exactly the opposite. They have insisted on the developing countries giving high level of concessions, particularly in the financial services. These special provisions in the interest of the developing countries should be at least followed now with full sincerity in the new negotiations.

Simultaneously, the developed countries should agree to take measures for encouraging the import of services from the developing countries into their own countries. Various types of measures can be thought of. For example, they may provide incentives to their importers for importing the service from the developing countries. They may also reserve a specified portion of the services import for government use for being imported from the developing countries.

POSSIBLE GUIDELINES

The appropriate initial modalities/guidelines for the new negotiations in services may be the following.

·      The developing countries should not be expected to undertake further obligations for liberalisation in services.

·      The developing countries should select the services sectors and transactions which are of export interest to them. Negotiations should aim at liberalisation in those sectors/transactions by the developed countries.

·      The developed countries should take concrete steps to encourage the import of services from the developing countries. Some examples of such steps are: providing incentives to their domestic firms for importing services from the developing countries and reserving a portion of their import of services for the government use for import from the developing countries. Negotiations should aim at identifying more such measures and to work out the modalities of their operation in the developed countries.

·      Negotiations should be undertaken and completed within a specified time frame for liberalising the movement of labour from the developing countries to the developed countries.

After these initial modalities/guidelines are fully acted upon, further modalities/guidelines should be prepared.

 


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