According to UNCTAD, the implementation of the Marrakesh decision on measures to counter the negative effects of the Agreement on Agriculture on the LDCs and NFIDCs has been unsatisfactory. It has suggested that as part of the continuing reform process in agriculture, increasing 'flexibility' under the AoA be accorded to developing countries.

by Chakravarthi Raghavan

Geneva, 24 July 2000 -- The implementation of the Marrakesh Ministerial Decision on measures to counter the negative impacts of the Agreement on Agriculture (AoA) on the Least Developed Countries (LDCs) and Net Food-Importing Developing Countries (NFIDCs) has not been satisfactory, and even the assessment of impact of the AoA on these countries presents a somewhat controversial picture, according to the UN Conference on Trade and Development.

The UNCTAD secretariat’s assessment is in a background note for a three-day Expert Meeting on the Impact of the Reform Process in Agriculture on LDCs and NFIDCs and Ways to Address their Concerns in the Multilateral Trade Negotiations. The meeting which began Monday is chaired by Amb. Ransford Smith of Jamaica.

In terms of the negotiations under way for a continuation of the Reform Process in Agriculture, the secretariat has suggested, as negotiating issues, the possibility of increasing the “flexibility” under the AoA for developing countries and redefining that term as part of a negotiating agenda.

At present, the note points out, ‘flexibility’ provisions of the AoA in the application of domestic support has ironically resulted in policy constraints on developing countries against their domestic support, not only in current application but future needs in the sector, while benefitting the developed countries.

Among ‘flexibility’ measures for the developing countries in the new negotiations on the AoA could be a new Special and Differential (S&D) treatment through a “Development Box”, improvement of existing S&D provisions like modifying the de minimis limit available to developing countries and introducing flexibility in the calculation of the current total Aggregate Measure of Support (AMS).

The market access provisions of the AoA—“improvement of opportunities and terms of access for agricultural products of particular interest to these (developing) countries” - promised in the preamble to the AoA had not been clearly reflected in the market access commitments of developed countries, the secretariat note points out.

The current negotiations in agriculture, it suggests, should address these questions by developed countries “binding” their current autonomous tariff preferences granted to developing countries and expansion of the tariff-rate quota system, earmarking certain quantities for developing country exporters and/or reduction of within-quota tariff rates.

The concerns of the LDCs and NFIDCs, the note adds, need to be addressed through a pragmatic approach.

There are currently 48 LDCs, of whom 28 are members of the WTO and 20 are non-members. The term NFIDC has been defined in the Marrakesh Final Act as “a net importer of basic food-stuffs in any three of the most recent five years”. As of March 2000, 19 developing countries notified the WTO of their status as NFIDCs—Barbados, Botswana, Cote d’Ivoire, Cuba, Dominican Republic, Egypt, Honduras, Jamaica, Kenya, Mauritius, Morocco, Pakistan, Peru, Saint Lucia, Senegal, Sri Lanka, Trinidad and Tobago, Tunisia and Venezuela.

The NFIDCs are generally regarded as those facing a serious food-import burden, due to their diverse agriculture situations. Throughout the Uruguay Round (UR) negotiations it was expected that the reform of the agriculture trade would result in increased prices on world markets, and that such a higher food price would increase the financial burden for LDCs and NFIDCs, at least in the short-term. Assessments of the UR outcome - by the GATT secretariat and others - at that time had forecasted that while the AoA would result in a positive income gain for the world, the gains would be negligible or negative for a group of developing countries, particularly low-income countries dependent on imports of basic food stuffs. Article 16 of the AoA envisaged actions within the framework of the Marrakesh decision on negative effects of the reform process on LDCs and NFIDCs.

As a second round of WTO negotiations on agriculture is under way, the assessment of the impact of the AoA is only possible at the country level, and depends on country-specific factors, production patterns and import/export product mix, since the impact of the AoA-induced policy reforms vary according to different product categories, the UNCTAD secretariat notes.

But the impact can be felt at the macro-economic level (e.g. GDP growth, employment level, balance of payments) or at the social level (poverty alleviation, rural development, food security).

[The expert meeting is aimed at examining such country-specific impacts, on the basis of concrete examples and experiences.]

At an aggregated global level, the AoA implementation’s impact can be at three levels: implementation of a country’s own commitments; the implementation of commitments, especially market access, by WTO members; and the resulting global changes in world agricultural demand, supply and prices.

At the level of a country’s own commitments, the AoA made very little impact in general on LDCs and NFIDCs. This was because their agricultural liberalization in recent years had resulted, not from their AoA commitments, but by the unilateral deregulation and liberalization that a large number of them had carried out long before, or in parallel with the Uruguay Round.

[Most of these had been forced on these countries by the IMF/World Bank policy advises and structural reform programmes, resulting in unilateral market openings by these countries without any reciprocal benefits from their trading partners.]

In sub-Saharan African LDCs, where the liberalization started as part of the structural adjustment programmes (SAPs), the focus was on deregulating markets and allowing a greater role for the private sector in product and input markets. This resulted in reductions in public agricultural services—such as input provisions, product distribution, agricultural credit and research and extension services.

Also reduced were government controls on agricultural trade, reduction or abolition of export taxes and disbanding of state trading enterprises. Import policy changes included setting maximum ceilings for tariffs, abolition or reduction of non-tariff barriers - such as non-automatic licensing, import prohibition and quotas.

Almost all NFIDCs have also carried out a substantial degree of unilateral liberalization, going beyond the commitments under AoA. The implementation of the AoA thus generated few policy changes.

The applied tariffs of LDCs and NFIDCs were substantially below their WTO bound rates, and in some countries (Egypt, Pakistan and Sri Lanka) were further reduced as part of their unilateral liberalization. Almost all NFIDCs claimed zero AMS and zero export subsidies in the base period (1986-1988) -- except Morocco, Tunisia and Venezuela for domestic support, and Venezuela for export subsidies. The LDCs themselves are exempt from AoA reduction commitments.

Did the AoA lead to sizeable market liberalization by other WTO members? Not really, the UNCTAD note brings out.

The post-UR agricultural tariff barriers in developed countries remain higher than those in other sectors. The average UR bound agricultural tariff of developed countries is estimated at 27.1 percent, compared with 3.5% for industrial products and 3.7% for all merchandised products. The gap between applied tariff rates and bound rates in developed country markets is narrower than in developing countries. The agricultural tariff reduction approach adopted in the UR also resulted in uneven tariff cuts across products, allowing countries to maintain prohibitively high tariffs on ‘sensitive’ products. There are also problems of tariff peaks and tariff escalation vis-a-vis agricultural exports of developing countries.

According to an UNCTAD/WTO joint study, tariffs on major export products of developing countries - sugar, tobacco, cotton - and those of potential export interest as processed food, are frequently levied at some of the highest peak rates - exceeding 100 percent. Tariff escalation also persists in a number of product chains of importance to developing countries - including coffee, cocoa, oilseeds, vegetables and fruits and nuts.

As for domestic policy reform, there is a large gap in AMS values as between developed and developing countries: In 1996, the total AMS of 10 developed countries accounted for 95% of the total value of US$103.7 billion, notified by 24 countries. Of these the EU accounted for 56% and Japan 28%.

As for export subsidies, the value of the legitimate (i.e. within the reduction commitment) export subsidies at the end of the implementation period (end 2000, except for the peace clause expiring end-2002) would remain at around $13.8 billion or 2.4% of the world total agricultural exports of $79.9 billion in 1997 or, to put it another way, 63.6% of total African exports in that year.

Did LDCs or NFIDCs benefit in major import markets, assuming there was some market liberalization?

Many of these countries have significant share of agricultural exports, of so-called cash crops - sugar, cotton, tropical fruits (bananas, pineapples, melons etc), coconuts and palm oil, tobacco, coffee and tea. Many of them, one way or another, have been recipients of preferences from major developed countries - by way of GSP, commodity protocol or other Lome Convention preferences and the US Caribbean Basin Initiative (US-CBI).

According to an UNCTAD study (in progress, and yet to be published), some 63% of the total agricultural exports of LDCs to developed countries went to the EU. On average 65% (96% by way of weighted average) of LDC exports in 1996 entered under the preferential Lome Convention rates or the GSP rates for LDCs.

Ten out of the 19 NFIDCs (Barbados, Botswana, Cote d’Ivoire, the Dominican Republic, Jamaica, Kenya, Mauritius, Saint Lucia, Senegal and Trinidad and Tobago) are signatories to the Lome Convention. Among these, the export earnings of Barbados, Dominican Republic, Jamaica, Mauritius and Saint Lucia are largely dependent on the Lome preferences for sugar and bananas. Sugar exports from these to the US also benefits under the US-CBI. The UR changed by very little the import regimes for these in the EU or US. But the recent challenge to the EC banana regime at the WTO, under the dispute settlement process, has led the EU to make some proposals for a new regime; and this suggests a gradual shift to a tariff-only regime as of 1 January 2006 at the latest.

Agricultural exports of the three Mediterranean NFIDCs (Egypt, Morocco and Tunisia) have also benefited from EC preferences. In 1993, more than 40% of Egypt’s agricultural exports (mainly vegetables and cotton) to the EU were under preferences. The preferential coverage for the other two was much higher - 73.5% for Morocco (fresh fruit and vegetables) and 93.7% (fats and oil) for Tunisia.

Most of the agricultural exports from Sri Lanka and Pakistan to the Quad countries (Canada, EC, Japan and USA) enter under MFN tariffs, whose rates are generally 0-5 percent.

As for the impact of AoA reforms on agricultural prices, a source of possible negative effects, the UNCTAD note says an estimation of the precise impact of the AoA, which is subject to a mixture of exogenous variables, would not be feasible after only a few years of implementation.

However, available statistical data do indicate that the LDCs and NFIDCs experienced increased food import bills and reductions in food aid availability in the period 1995-1999.

·        Agricultural prices as a whole were higher between 1995 and 1997 than the projected level, and then declined sharply following a demand shock triggered by the Asian financial crisis. According to FAO, the higher prices, especially of cereals, in the first two years were partly due to lower stocks - resulting from policy changes, such as reduced government intervention before 1995 in anticipation of the implementation of the AoA. The price rises of cereals and meat during this period could be explained by the extremely low level of export subsidies actually provided—only 6% and 0% of the total committed level of export subsidies on wheat were actually utilized in 1995 and 1996 respectively. The opening of tariff quotas may also be one of the factors that temporarily increased world demand for cereals, and pushed prices up.

The massive price falls in the subsequent period suggest that policy changes would have had only secondary effects on prices; the use of export subsidies during 1998-1999 was considerably greater than in the previous period - in some cases above the bound level, thus amplifying downward pressure on prices.

·        The cereal import bills of LDCs and NFIDCs increased from $4.9 billion in 1993/94 to over $7.9 billion in 1996/97, $8.39 billion in 1997/98 and over $7.0 billion in 1998/99. Despite a massive fall in agricultural prices between 1997 and 1998, food import bills did not fall to the same extent, partly owing to increased import volume and to a fall in food aid, and the decrease in price concessions and discounts that LDCs and NFIDCs used to receive from developed countries.

·        Globally, food aid deliveries have been steadily falling since 1993: from 5.8 million tonnes (MT) in 1993/94, it declined to 3.3 MT in 1996/97, 3.5 MT in 1997/98 and 4.3 MT in 1998/99.

According to UNCTAD analysis (presented to the 1998 WTO Committee on Agriculture’s annual monitoring exercise of the Marrakesh decision), the financing ability of these countries, measured by their export earnings and net flow of foreign exchange available to them, is also bleak. Almost one-third of LDCs experienced in 1996 an actual fall of export earnings from 1990 value; the rest had a very low growth. And while for NFIDCs the annual average export growth volume was positive, due to deteriorating terms of trade, the purchasing power of their export earnings declined significantly since 1990.

The net financial flows, both official and private, to the majority of LDCs suffered a significant decline in real and nominal terms. In addition, most LDCs and NFIDCs are heavily indebted. Since all debt has to be paid and serviced in foreign exchange, debt burden further constrains their ability to finance food imports.

The Marrakesh decision itself is in the form of a policy recommendation, and the basic understanding of the WTO Committee on AoA is that this is a bilateral matter between donors and recipients. The same situation also applies to the IFIs and support from them to meet short-term financing difficulties. The IMF and World Bank have said they would continue to support financing needs of these countries, within their existing financing framework and programmes. And the World Bank reported in 1997 to the AoA committee that given the wide range of facilities available for additional financing needs, and “the small price impacts expected to arise as a consequence of the UR, and the difficulty involved in distinguishing the UR impact from other shocks, it did not seem appropriate to establish a special UR adjustment facility.”

As for the provision in Art 10.2 of the AoA for appropriate provision for differential treatment in favour of LDCs and NFIDCs on agricultural export credits, and the Marrakesh decision committing WTO members to work towards internationally agreed disciplines on export credits, as of May 2000 WTO members have not been engaged in any substantive negotiations on this. The issue has been passed to the OECD, where inclusion of the agriculture sector into the guidelines has made only limited progress - due to major disagreement among OECD members on whether export credits are considered to be trade-distorting as export subsidies are.

In terms of the AoA negotiations, the UNCTAD note refers to the ‘greater flexibility’ sought by the developing countries in the application of AMS commitments. In the five years of the AoA implementation, developing countries have pointed out that the way the AMS commitments has been implemented has resulted in a situation where the developing countries that claimed zero AMS face the de minimis ceiling on future use of AMS-type support. But countries that provided AMS-type domestic support have been given a legal right to continue doing so.

The result has been ironic. It was the developing countries that were policy-constrained by the ceiling - the de minimis limit - not only against current application of domestic support, but also future needs of such measures that may arise given the dynamics of the agriculture sector development.

In the developed countries on the other hand, the development of the agriculture sector has reached a level where there is little prospect of future growth in production and employment. The high level of support in developed countries has reached the budgetary maximum, and it appears to be in the interest of these governments to reschedule their expenditure planning on domestic support, however politically difficult this may be.

The proposed increase in flexibility has originated from the systemic question whether countries with dissimilar agricultural circumstances and development level could meet the same rules and obligations on use of domestic support.

UNCTAD suggests that in the first phase of the current AoA negotiations, the term ‘flexibility’ may have to be defined clearly to take the issue on to the negotiating agenda. The flexibility could imply a new S&D for developing countries - including creating a Development Box, in addition to the Green Box. Flexibility may be gained from an improvement of existing S&D provisions - e.g. modifying the de minimis limit for developing countries, and in the method for calculation of the current total AMS.

Development Box: The green box in the AoA was drawn up in terms of agricultural policy measures used in developed countries, and these are of less relevance to the developing countries. The objective of a Development Box should be to distinguish domestic support measures relevant to developing countries’ efforts to enhance agricultural production of products for domestic dietary supply, in addition to input and investment subsidies that are currently exempted from AMS calculation for developing countries. The application of such measures could be linked to indicators such as food-import capacity, agricultural production trend versus population growth and share of domestic production of basic foodstuffs to total domestic demand.

Modifying de minimis limit: The values under product-specific de minimis limit are now allowed to be aggregated, unlike the flexibility given to AMS reduction commitments. The de minimis for developing countries could be increased to 15-20 percent or a higher level accorded to production of basic food stuffs compared to non-food crops.

AMS calculation method: Several developing countries have faced problems with treatment of ‘negative’ AMS and ‘excessive’ inflation in current total of AMS. So far the negative AMS has been treated as zero input to the current total AMS. But if AMS is to be considered a composition of subsidies and taxes to domestic production, a negative AMS is an implicit tax on farmers and should be deducted from the current total AMS.

Market access: The current AoA has a provision in its preamble on market access “improvement” for developing countries. But this is not clearly reflected in the market access commitments of developed countries.

In this regard, UNCTAD has suggested possible definition of “improvements” by examining the type of barriers faced - tariff peaks, tariff escalation, non-tariff barriers such as sanitary and phytosanitary measures and technical barriers to trade—for selected commodities of export interest to developing countries, and how improvements could be effected.

Among these could be measures by developed countries to bind their current autonomous tariff preferences granted to developing countries, like GSP schemes; and expansion of tariff rate quota quantities by earmarking certain quantities for developing country exporters and/or reduction of within-quota tariff rates vis-a-vis exports of developing countries.-SUNS4716

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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