BUSINESS

Tables turn in agriculture

THIS WEEK, government officials will begin a last ditch effort in Geneva to reach a broad agreement on how to facilitate greater global trade in agriculture. Agriculture was in many ways the driving force behind the launch of the World Trade Organisation's Doha round of negotiations. Now two years later, the same sector has emerged as the "make or break" issue ahead of the fifth ministerial meeting of the WTO in Cancun, Mexico. Failure to draw up an agreement at Cancun will almost definitely mean that the Doha round will not be completed by January 2005. It could even mean the collapse of the whole round because the stakes are so high and the country positions so strong in agriculture.

There are three broad issues in the WTO talks on agriculture. Called "the three pillars" in WTO-speak they cover (i) market access, or a lowering of customs duties on agricultural commodities (ii) domestic support, or a reduction of subsidies that are said to distort world trade and (iii) export subsidies for farm products.

The main players in agriculture are the developed countries which protect agriculture with various subsidies and trade barriers and the countries which are anxious to push farm exports. In the former category are the European Union, Japan, Switzerland and Norway. The farm exporters are represented by the Cairns group of 17 developed and developing countries, whose main spokesmen are Canada, Australia and New Zealand. However, the cause of the farm exporters is espoused most strongly by the U.S. which also offers large subsidies to its corporate and family farms.

The developing countries are relatively minor players in this tussle, more anxious to protect their markets and their small farmers although they do call on the developed countries to reduce subsidies. India now shares this broadly defensive approach. At the same time there are some developing countries which focus on particular products where they feel they are competitive. West Africa has demanded that the U.S. cut its huge subsidies on cotton and Mauritius wants the E.U. to reduce its support for sugar.

The developed countries provide more than $300 billion of subsidies every year to their agriculture. The domestic support which qualifies in WTO terms as "trade-distorting" ("Amber Box" subsidies) and is therefore the subject of negotiation, is about half this amount. The problem until a couple of months ago in the Doha round was that the E.U., which doles out $42 billion a year in the Amber Box (as against $19 billion by the U.S.), was unwilling to seriously discuss how far it would go in the agriculture talks at the WTO. That changed when it decided in June to bring about a moderate reduction in domestic support. It did not, however, address the equally contentious issue of market access, where the E.U. imposes large customs duties on most agricultural products.

The irony is that now that the E.U. is willing to discuss a reduction in domestic support, the U.S. finds itself on the defensive. The tables seem to have turned in agriculture. This is because the U.S. is more anxious on greater market access so that its exports can be increased substantially. And it wants a different approach to reducing subsidies. Under existing WTO rules, the maximum the E.U. and the U.S. can give as Amber Box subsidies is $60 billion and $20 billion, respectively. If a WTO proposal made earlier this year is accepted then both would have to cut support by 60 per cent — to $24 billion and $8 billion, respectively. Since this would give the U.S. less headroom, it would like the subsidy cuts to be based on a uniform percentage of the value of agricultural production. Such a "harmonisation" approach, as the U.S. calls it, would "equalise" both the majors. A subsidy equivalent to 5 per cent of agriculture production would bring the Amber Box support down to about $10 billion a year in both the U.S. and the E.U.

What can India and other developing countries expect in agriculture from Cancun? It should first be remembered that even if years of a deadlock end next month at the ministerial meeting, the details of the agreement have to be worked out and full implementation will have to await the conclusion of the Doha round of WTO talks in early 2005. The second "if" is about the outcome of the cuts in domestic support and customs duties that may be agreed upon.

It has been suggested in recent years that if the E.U. (and to a lesser extent the U.S.) reduce farm subsidies and import duties, then the developing countries can see their agricultural exports rise substantially. The benefits if any are likely to be unequally distributed.

The better endowed and more efficient producers like Argentina, Brazil, South Africa, Malaysia and Thailand (all members of the Cairns group) will gain. Most of the smaller developing countries and even larger ones like China and India are not going to benefit because they will not be able to compete with the first group of countries. On the contrary, if they are expected to cut customs duties, they could even see their markets swamped by imports. This also explains why most of them have now joined up with the E.U. in asking for only a moderate reduction in agricultural tariffs. They hope this way to shield their agriculture from imports.

C. Rammanohar Reddy

(Next week: Issues in tariffs on industrial products)