Global Trends by Martin Khor

Monday 28 June 2004

Agriculture setback in WTO

Blurb:  Last week’s meeting on agriculture was supposed to advance the World Trade Organisation’s progress towards a July framework agreement.  But the optimism turned into a slight depression as there was a setback, with key countries further apart than they seemed to be just two weeks ago.  This may also sour the mood for negotiations on other issues.

Last week the World Trade Organisation suffered quite a setback in its quest to conclude a “framework agreement” on some critical issues by the end of July.

Almost everyone believes that for that to happen, the key issue to resolve is agriculture.   If there is no agreement on agriculture, there can be no agreement on other issues, such as industrial tariffs and the Singapore issues.

From Wednesday to Friday last week, there was a flurry of informal meetings on agriculture at the WTO headquarters in Geneva. 

At the concluding meeting on Friday afternoon, the mood was downbeat, as it became clear that the different groupings of countries were further away from a deal than just two weeks ago, when positions among the largest countries seemed to be coming closer together.

The chairman of the agriculture negotiations, Tim Groser of New Zealand, told the meeting he remains “frustrated” at the slow pace of progress, but assured that the intensity of the negotiation is accelerating, and that “progress is definitely being made.”

This half-reassurance could not hide the disappointment felt by most that there had been a “step backwards”, as one diplomat put it.

On 13 June, at a meeting in Sao Paulo, the Trade Ministers of five big WTO members (United States, European Union, Brazil, India, Australia) on the agriculture issue had met and signaled that they were close to reaching an understanding.

It was expected that from the meeting of political leaders would come more progress when the diplomats thrashed out the technical details in Geneva last week. But it was not to be.

The main sticking point is the approach to be taken on reducing import tariffs of agricultural products.

The US wants to preserve high tariffs on a few farm products of its own, but is very keen that there be a formula to bring everyone’s high tariffs down drastically, so that it can sell its own farm products abroad.

It devised a system jointly with the EU, known as a “blended formula”, with three parts:   in category 1 for a few products, there would be a mild tariff reduction (with a cut by an overall average rate);  in category 2 for most products, there would be a drastic reduction using a “Swiss formula”, in which the higher the tariff level, the greater would be the cut;  and in category 3 for some products, the tariffs would be cut to zero.

This approach was strongly opposed by most developing countries, including India and Brazil.  They said that it was designed to suit the tariff profiles of the US and EU, which could continue to protect their few high tariffs in the first category, and this would block the developing countries’ access to their markets.

But as most of the two giants’ farm tariffs are not so high, they did not mind having the formulae in categories 2 and 3, as these would not affect them much. In fact, because the US and EU give out so much subsidies, their big farmers do not even need much tariff protection as they can make profits on many products even if prices are low.

However, most developing countries are too poor to give out farm subsidies.  They can only protect their farmers through tariffs, and most of these countries have rather high bound tariffs.

If the US-EU “blended approach” is adopted, the developing countries would have to slash their own tariffs drastically, thus opening themselves to cheap (and often subsidized) imports swamping their markets and displacing their farmers.

The Group of 20 developing countries countered the US-EU plan with a proposal of their own at the end of May.  It did not contain a formula, but had a set of principles that would have the developed countries cutting their own higher tariffs, whilst the developing countries would have “special and differential treatment” with lower tariff reductions on average.

In any case, the G20 rejected outright the US-EU blended approach, and especially the use of the “Swiss formula.”

At the Sao Paulo meeting, the US Trade Representative Bob Zoellick and the European Trade Commissioner Pascal Lamy, reportedly showed sympathy for the G20 developing countries’ views.

According to Brazilian and Indian sources, the US and EU indicated they could do away with their “blended formula” and instead use the G20’s paper on essential principles as the basis for future negotiations.

The developing countries were thus optimistic that their point had been made and accepted and that the agriculture negotiations would be quite cordial when they resumed in Geneva.

To the surprise of many, however, the US brought along a new proposal last week, in which they insisted that the much-opposed “Swiss formula” be at the center of the tariff reduction exercise.

Under this formula, the higher the tariffs, the deeper would be the tariff cut. For example, under one scenario, if there is a 40% tariff on a product, that tariff would now be brought down to 7%.   If there is a 4% tariff on another product, it would be only be brought down to 1.4%.   

The countries with high tariffs on many products to protect their farmers would have to open up their markets much more.  The rich countries, with about US$350 billion in subsidies, can still keep their farms afloat even if they face import competition.

But the developing countries cannot afford those high levels of subsidies.  If they lower their tariffs steeply, many farmers will lose their livelihoods.  There would be social and political problems, especially since farmers form  the majority of the population in many developing countries.   

When the US came up with its new proposal last week, India was very surprised, as the US Trade Representative during the Sao Paulo meeting had already given the impression that the US had given up its “blended approach” with the Swiss formula in the middle of it.

“India can never accept any kind of a Swiss formula in agriculture,” said India’s Ambassador Chandrasekhar last Thursday at the WTO to journalists.

The group of five big members held their own meetings last week, but they were unable to report progress to the larger WTO membership.

Indeed, a surprising and depressing phenomenon at last Friday’s WTO meeting was that none of these five (US, EU, Brazil, India and Australia) made any statement or report.

With the big five keeping mum, the other members could only state their own concerns.  And one of their biggest complaints was that the negotiations in agriculture were not “transparent” and that most of the WTO members were being kept in the dark, and were not able to participate.

Some of them suggested that the talks be held in the open, and that every country be allowed to take part.

The next agriculture meeting will be in mid-July, and the General Council meeting will start on 28 July.

With only a few weeks left, and agriculture not yet settled, observers and diplomats alike are more worried that the end-July deadline will be missed again, and that there will thus be no recovery from the debacle of the failed WTO Ministerial conference in Cancun last September.

The next two weeks will thus be crucial, as the WTO Doha programme hangs in the balance.