Column: Beware the peace clause

Written by Ashok Gulati and Anwar ul Hoda | Updated: Nov 11 2013, 07:29am hrs
A peace clause proposal on agricultural subsidies by developing countries is on the agenda of the Bali Ministerial Meeting of the WTO being held from December 3-6. The G33, which is a coalition of 46 developing countries including India, China, and Indonesia, had submitted a proposal asking for exemption of purchases from low-income and resource-poor farmers for public stockholding of grains for food security needs, even when these purchases were at a price higher than the fixed external reference price (ERP) committed by members in the WTO Agreement on Agriculture (AoA).

AoA envisages a reduction in the levels of domestic subsidies (the aggregate measurement of support or AMS) of the members from the levels notified by them for the period 1986-88. For those members whose subsidies level was less than the de minimis level of 10% of the value of agricultural production, on both product-specific and non-product-specific basis, there is a requirement not to exceed this limit. The G33 proposal implies, in effect, that these purchases are not to be counted for determining whether the 10% limit on product-specific subsidies is being adhered to.

The developed countries response to the proposal was initially negative, but they softened when the G33 made it known that without a movement on the public-stockholding-for-food-security proposal, no progress could be expected on the key proposal on trade facilitation, being given high priority by the developed countries. The developed countries are now willing to engage in negotiations on the proposal, and in the meantime they have offered a peace clause, whereby they will not raise any dispute if any developing countries appear to be in breach of the commitment on domestic subsidies.

Why is the G33 asking for an exemption of support for public-stockholding of grains Perhaps there is a fear that very soon individual developing countries will breach the de minimis level of 10% of the AMS because of annual increases in the minimum support price (MSP). What is the reality in this regard, and what could be the alternative and, perhaps, better options that India could pursue to deal with this problem

In the case of product-specific support, the AoA stipulates that the subsidy in a particular year is to be estimated on the basis of the difference between the administered price (MSP) and the fixed external reference price (ERP, 1986-88) notified by each member at the outset and incorporated in the original schedule. The fixed external reference price was the unit price of actual imports in an importing country and of actual exports in an exporting country. Price support in India exists primarily for wheat and rice, as it is only in these commodities that there are procurement operations on a regular basis. In the original schedule, India had notified its ERP in rupee, while in subsequent notifications it changed the currency to dollar. The WTO Agreement mandates that for determining whether the member concerned is abiding by its commitments, the constituent data and methodology of the original notification must be used. This implies that for the estimation of the current level of subsidies (current AMS), the same currency must be used as in the original notification.

Separately, another article (Article 18.4) of the Agreement provides that in the review of the implementation of the commitments members shall give due consideration to the influence of excessive rates of inflation on the ability of any member to abide by its domestic support commitments.

In a recent paper on Indias Agricultural Trade Policies and Sustainable Development Goals, (ICTSD, September, 2013), we estimated that in 2010-11, the MSP of rice and wheat was below the inflation-adjusted ERP and the cushion of 10% provided by the WTO Agreement was not used at all. It is true that the rules require members to give due consideration and there may be questions on what is excessive rates of inflation. But the important point that is raised is whether, for India at least, there is any basis for taking a prima facie view that the country may have breached the WTO commitments. And if that is not the case, then where is the need of a peace clause

There is a structural flaw in the AoA in as much as it gives the freedom to those members who have notified high levels of subsidies in agriculture to continue to subsidise up to the notified level. On the other hand, countries like India, which had lower level of subsidies, are constrained by the 10% limit. Considering the unprecedented increase in international food prices, it is unimaginable that a WTO member can be put under an obligation to offer price support at the nominal prices prevailing in 1986-88. Also, in interpreting due consideration envisaged in Article 18.4, we see no reason to allow less than full adjustment for the high rates of inflation. Considering all these aspects, one cannot conclude that any member is already or is likely to be in breach of its obligations, and for this reason the talk of a peace clause is premature.

In the discussions on the subject, the developed countries have taken the view that the developing countries must first notify their product-specific support and then the Committee on Agriculture will take a view on whether the inflation is excessive and what is due consideration. There cannot be two opinions that developing countries must fulfil their transparency obligation by making notifications in time. However, to say that the Committee will take a decision on a case-by-case basis is the antithesis of the rule-based trading system embodied in the WTO Agreement.

The Committee must decide in advance what should be considered as excessive rates of inflation and how much allowance should be given for it while taking a view on the notifications of current levels of subsidy. This is the crux of the issue and it is on this that G33 must concentrate.

For India, irrespective of these negotiations, there is also a need to think about policy instruments that can serve the cause of food security for the poor with minimal trade distortions. And the best way to do that is through income support to the poor; say, conditional cash transfers, which are discussed in detail in our paper mentioned above. That would make the discussions on peace clause irrelevant.

Gulati is chairman, CACP, and Hoda is the chair professor of ICRIERs Trade Policy and WTO Research Programme. Views are personal