Pot calling the kettle black!

A fight taking place in the WTO shows how the rules on agriculture allow rich countries to continue huge subsidies whilst penalizing developing countries’ farmers.

by Martin Khor

Food is one of the most important and emotive of all issues.  As consumers, we can’t survive without it. Agriculture also employs the most people in most developing countries. Ensuring farmers have enough income is key to development and social stability. Some countries that did not achieve this have faced first rural disgruntlement and then upheaval.  

Increasing food self-reliance is a goal in many countries. Food security became a high priority after global food prices shot up to record highs in 2008, and there was a near-scramble for supplies of some food items including rice because of potential shortages.

Also, reducing and eventually eliminating hunger worldwide is one of the key development goals adopted by governments at the United Nations.

Against this background, there is a remarkable discussion now taking place at the World Trade Organization as part of preparations for its Ministerial Conference in Bali in December.

Developing countries grouped under the G33 are asking that their governments be allowed to buy food from their farmers, stock the food and distribute it to poor households, without this being limited by the WTO’s rules on agricultural subsidies.

However, their proposal is facing resistance, mainly from some major developed countries, especially the United States, whose ambassador told the WTO earlier this year that such a move would “create a massive new loophole for potentially unlimited trade-distorting subsidies”.

This clash is an outstanding example of how the agriculture rules of the WTO favour the rich countries whilst punishing the developing countries, including their poorest people.   

Distortions

It is well known that the greatest distortions in the trading system lie in agriculture. This is because the rich countries asked for and obtained a waiver in the 1950s from the liberalization rules of the GATT, the predecessor of the WTO. They were allowed to give huge subsidies to their farm owners, some of whom do not even carry out farm activities, and to have very high tariffs.

When the WTO was set up, it had a new agriculture agreement that basically allowed this high farm protection to continue. The rich countries were obliged only to reduce their “trade-distorting subsidies” by 20% and could change the nature of their subsidies and put them into a “Green Box” containing subsidies that are termed “non-trade-distorting or minimally trade-distorting”.

There is no limit to the Green Box subsidies. So the trick played by the rich countries has been to move most of their subsidies to the Green Box, including subsidies that are not directly linked to production or that are tied to environmental protection. But studies have shown that the Green Box subsidies are in fact trade-distorting as well.

With this shifting around, the rich world’s subsidies have been maintained or actually soared. WTO data show that the total domestic support of the United States grew from $61 billion in 1995 (when the WTO started) to $130 billion in 2010. The European Union’s domestic support went down from 90 billion euros in 1995 to 75 billion euros in 2002 and then went up again to 90 billion euros in 2006 and 79 billion euros in 2009. 

A broader measure of farm protection, known as total support estimate, shows the rich OECD countries’ agriculture subsidies soared from $350 billion in 1996 to $406 billion in 2011.

The effects of continuing rich-country subsidies have been devastating to developing countries. Food products selling at below production cost are still flooding into the poorer countries, often eating into small farmers’ incomes and livelihoods.

Ironically the developing countries, already the victims of the rich world’s subsidies, are themselves not allowed to have the same huge subsidies, even if they can afford it.

The reason is that the agriculture rules say that all countries have to cut their distorting subsidies. So if a developing country has not given subsidies before, they are not allowed to give any, except for a small minimal amount (10% of total production value).

In other words, if you have given $100 billion in subsidies, you have to bring them down to $80 billion and you can transfer the rest to the Green Box, but if you haven’t given any before, you cannot give one dollar, except for the minimum allowed.   

This is where the present WTO controversy comes in. The developing countries are asking that food bought from poor farmers and given to poor consumers should be considered part of the Green Box without conditions.

The present rule sets an unfair condition: that any subsidy element in this purchase scheme should be considered a trade-distorting subsidy which, for most developing countries, is limited to the minimum amount (10% of production value). Other Green Box subsidies, which developed countries mostly use, do not carry such a condition.

The developing countries merely seek to remove the unfair condition that in effect prevents them from adequately helping their poor to get sufficient food. 

For example, India’s parliament has just passed a food bill that entitles the poor (two-thirds of the population) to obtain food from a government scheme that buys the food from small farmers. But the estimated $20 billion-plus the government will spend annually may exceed the small minimum amount of subsidy it is allowed, because India was not a big subsidizer before the WTO rules came into force.

Other developing countries that provide subsidies to their farmers and consumers, such as China, Indonesia, Thailand and Malaysia, may also one day find themselves the targets of complaints.

For rich countries which are subsidizing a total of over $400 billion a year to disallow poor countries from subsidizing their small farmers and poor consumers, is an especially bad form of discrimination and hypocrisy. An outstanding case of the pot calling the kettle black!

Whether this controversy can be settled fairly before the WTO’s Bali Ministerial Conference remains to be seen.

Martin Khor is Executive Director of the South Centre, an intergovernmental policy think-tank of developing countries, and former Director of the Third World Network.

Third World Economics, Issue No. 554, 1-15 Oct 2013, pp 5-6