The pot calling the kettle black

Updated: Oct 5 2013, 10:08am hrs
A fight taking place in the WTO negotiations towards the Bali Ministerial shows how the rules on agriculture allow developed countries to continue huge subsidies whilst penalising developing countries farmers. Food security is one of the key issues now being negotiated at the WTO as part of its preparation for the Ministerial meeting in Bali in December. For developing countries, food security and the livelihood and incomes of small farmers are important priorities. Especially for the poor, food is the main item in the household budget. Agriculture also employs the most people in most developing countries. Ensuring farmers have enough income is key to development and social stability.

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 Millenium Development Goals adopted by governments at the United Nations. In the present negotiations on formulating Sustainable Development Goals in the UN in New York, food security, nutrition and agriculture are one of the key clusters of issues.

Against this background, there is a remarkable discussion now taking place at the World Trade Organisation, 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 WTOs 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 outstanding example of the how the agriculture rules of the WTO favour the rich countries whist punishing the developing countries, including their poorest people.

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 liberalisation rules of the GATT, the predecessor of the WTO. They were allowed to give huge subsidies to their farm owners, some of who 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 strategy of major developed 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 many of the Green Box subsidies are in fact trade-distorting as well.

With this shifting around, the rich worlds 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 Unions domestic support went down from 90 billion euro in 1995 to 75 billion euro in 2002 and then went up again to 90 billion in 2006 and 79 billion in 2009. A broader measure of farm protection, known as total support estimate, which is used by the OECD in its reports on agricultural subsidies, shows the OECD countries agriculture subsidies soared from $350 billion in 1996 to $406 billion in 2011.

The effects of continuing developed-country subsidies have been devastating to developing countries. Food products selling at below production costs are still flooding into the poorer countries, often eating into the small farmers from incomes and livelihoods. Ironically the developing countries, already the victims of the rich worlds 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, it is not allowed to give any, except for a small minimal amount (10% of total production value) known as de minimis support. In other words, if a country has given $100 billion subsidy in the trade-distorting categories, it has to bring it down to $80 billion and it can also transfer the remainder (or more) to the Green Box. But if a country has been too poor in the past to provide subsidies, or its subsidies are low, it cannot increase the level, except for the minimum allowed.

This is where the present WTO controversy comes in. The developing countries under the G33 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. Although governmental stockholding programmes for food security purposes in developing countries are placed under the Green Box, there is however a provision that the subsidy element in any such national purchase scheme should be accounted for in the countrys AMS (aggregate measure of support), which is the main category of subsidies considered to be trade-distorting, and which for most developing countries is limited to the de minimis amount (10% of production value). Other Green Box subsidies, including those that developed countries mostly use, do not carry such a condition. The developing countries seek to remove this unfair condition that in effect prevents them from adequately helping their poor to get sufficient food.

The unfairness of this condition is worsened by the way the subsidy element is calculated in the Agriculture Agreement. It is defined as the difference between the acquisition price and the external reference price. The problem is that the acquisition price (i.e. the price which the government pays for the farm produce) is the current price level, whilst the external reference price is defined as the average world price level in 1986-88 (during a period when the Uruguay Round that led to the WTO was being negotiated).

Since 1986-88, global and local prices of food items have increased tremendously. The 1986-88 price is thus obsolete and much too low to be used to determine if a developing-country government is subsidising its farmers. Using this, rather than a more rational yardstick, such as the global price level of the food item most recent year or three years, grossly exaggerates the extent of subsidy the government is providing. It thus unfairly adds to the amount of subsidy that presently has to be counted towards the countrys AMS.

At such unfair rates mandated by the WTO rules, a developing country will have its AMS maximum level exceeded fairly easily even if it pays the farmer the present world price (since the reference price is the 1986-88 world price and not the present price).

Countries that are in danger of exceeding its AMS or de minimis maximum level include India. Its 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 allowed AMS and de minimis levels, because India was not a big subsidiser 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 who are subsidising a total of $407 billion a year (in the OECDs broad measure of agricultural support) to disallow poor countries from subsidising their small farmers and poor consumers, is really a specially 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 WTOs Bali Ministerial remains to be seen.

Martin Khor

The author is executive director, South Centre (Geneva)