AG CHAIR DESCRIBES 'CENTRE OF GRAVITY' FOR REALISTIC DOHA DEAL

The chair of the deadlocked Doha Round talks on cutting farm tariffs and subsidies on 30 April issued a paper outlining parameters for a plausible deal on several issues in the negotiations, in an effort to goad WTO Members into reconsidering their bargaining positions.

Using blunt language rarely heard in trade negotiations, Ambassador Crawford Falconer (New Zealand) emphasised that countries and Member groups would have to give up long-held views to make an accord possible. For instance, he said that the US would have to slash its farm subsidies more deeply than it has offered to, but that the steeper reductions sought by the G-20 were a "real stretch," too. As for the EU, Japan, and the G-33 bloc of developing countries, all would have to settle for fewer flexibilities to shield products from tariff cuts.

In the 28-page "challenge" paper aimed at "sharpening [Members'] appetite for decision," Falconer set out his personal assessment of where the "basic centre of gravity" might lie for a potential accord. He described it as a "hard-nosed view of what I think is within the realm of the possible," rather than what "is fair or right or even where the majority is." He also provided some novel ideas of his own for how to break the deadlock.

He urged Members, if dissatisfied, to provide him with "actual rationales for why things suggested or proposed in [the] document will not work and, more to the point, what might work better." Although he is New Zealand's ambassador to the WTO, Falconer's role as mediator of the farm trade talks is a neutral one.

Initial reactions to the paper have been cautious, which Geneva-based sources take to mean that Members want to cooperative with the initiative. One delegate said that it was a good sign that countries "were not loading up the cannons" in response. Nevertheless, press reports hint at grumbling in Tokyo and New Delhi.

Delegations have sent the paper to their respective capitals for further examination. Negotiators praised the chair's political courage in attempting to provoke a more honest debate about their bottom lines, at the risk of arousing different Members' wrath.

With countries now seeking to conclude the negotiations around the end of this year - which would likely necessitate a framework agreement on subsidy and tariff cuts before the WTO's August holiday - Falconer warned that "if we do not get serious momentum over the next few weeks… we will either fail or we will put this whole exercise in the freezer for some considerable time until a better generation than us can thaw it out."

Falconer will circulate a paper dealing with remaining issues in the talks next week. He will use Members' responses to both documents to put together a new draft text for a potential agreement.

For months, the EU, the US, and India have been at the forefront of a circular argument about what is necessary to break out of the impasse in the Doha Round agriculture talks: Brussels and New Delhi say that the US needs to lower the ceiling on its trade-distorting farm subsidies substantially beyond its current offer; Washington counters that it won't do so until the EU, India, and other developing countries agree to expand access to their agricultural markets. A series of meetings together with Brazil has yielded only incremental progress thus far, despite a shared commitment to finalise a deal by the end of 2007 (see BRIDGES Weekly, 18 April 2007). Senior officials from the four are meeting in London this week, mainly to discuss agriculture.

In his paper, Falconer addressed each aspect of the circular argument, pointing to where he thought Members needed to go.

US subsidies below $19bn, above 'low teens'

Falconer said that it was "frankly inconceivable" that other Members would agree to the US' current proposal to drop its ceiling limit on overall trade-distorting support by some 53 percent to USD 22 billion - still well above the USD 19 billion that it actually spends (with spending expected to drop as high prices continue). On the other hand, he said that a cap in the low teens would be "a real stretch" in negotiating terms. The neighbourhood of an agreement would be "certainly below 19 [billion USD] and somewhere above the very low teens," Falconer opined. The G-20's proposal would slash the cap on trade-distorting US farm payments by 75 percent to about USD 12 billion. A cut of roughly 68 percent would be necessary to bring this limit near USD 15 billion.

As for the EU, it would have to envision a "cut above 70 percent," with a reduction "in the vicinity of 75-80 percent" still conceivable, depending on the outcome of other aspects of the negotiations. Japan should be able to match the cuts undertaken by the US "comfortably," Falconer said.

Depending on their existing commitments, developing countries would either be exempt from cuts or be allowed to make lower reductions to their more modest subsidies over longer time periods.

According to the chair's 'working hypothesis', the US would cut the most heavily trade-distorting 'amber box' subsidies by 60 percent cut; the EU would do so by 70 percent. For the other two components of overall trade-distorting support in developed countries, Falconer suggested that the cap on 'de minimis' spending could be cut by at least 50 percent (from the current 5 percent of the value of production), and that on 'blue box' payments reduced from 5 to 2.5 percent of production. He proposed compromises for reconciling the 1995-2000 base period that most Members prefer for making these calculations and the 1999-2001 period the US wants because its spending levels were much higher.

Falconer explored various options for limiting subsidy spending on specific commodities, or for preventing payments from being concentrated on a handful of products, as some countries have demanded. However, before anything could be decided, Falconer said that Members would have to determine whether such limits were a "non-starter." "Is there a genuine willingness to take a ceiling limit one way or the other or not?"

In response to an appeal from West African cotton producers suffering from the effects of heavy US subsidies, WTO Members have already agreed that cotton payments should be reduced "more ambitiously" than others. Falconer said that cotton subsidy cuts should be ambitious "in relation to the general formula." He said that the "rough zone" was between the 53 percent cut to overall trade-domestic support proposed by the US and a West African proposal that would cut cotton subsidies by over 80 percent even if the standard cut is relatively modest.

Tariff cuts "squarely between" US and EU

A deal on slashing farm tariffs will lie "squarely between the US and the EU positions," Falconer said. Washington's proposal amounts to an average cut of about 66 percent by developed countries. Brussels originally offered 39 percent, but has subsequently hinted that it could cut tariffs in a way that the average would approach 50 percent, although it has never formally explained how it proposes to do this.

"It is a reasonable presumption that neither of those positions will in the end actually prevail," he wrote. "The centre of gravity is actually somewhere inside those parameters or not at all." The G-20 bloc of developing countries, which includes competitive exporters such as Brazil and Argentina as well as defensive China and India, has proposed an average cut of about 54 percent for developed countries.

An scenario that would deliver an overall cut above 50 percent is nonetheless "still in play," Falconer said.

Developing countries would cut tariffs by two-thirds as much as developed countries.

Falconer assumed that the structure of the tariff reduction formula would be based on the G-20's proposal. Under this, developed countries would classify their tariff lines into four bands, with duties on the most heavily-protected products in the highest band - above 75 percent - to be cut most steeply.

"The most crucial issue from which everything else will follow is what the cut would be in the top band," Falconer said. Here, the range is between the EU's preferred 60 percent and the 85 percent cut sought by the US. "I am only too well aware that the Members concerned are utterly adamant that they will never move from their positions on this," he noted. "Well, I can't help but observe - and this requires no special insight - that this will eventually happen… one will have to move up and the other will have to move down or we will simply not have a deal."

Once the figure for the reduction in the top band is settled, the cuts for lower bands will follow, Falconer suggested. He acknowledged that this would not happen in isolation: some Members' would only agree to a relatively high cut for the top band if they know the extent to which they will be able to shield 'sensitive products' from the full force of tariff cuts. Furthermore, some sort of arrangement would have to be made to account for countries with a particularly high proportion of tariff lines in the top band, which would stand to be disproportionately affected by the formula. One option might be to let them designate an extra number of sensitive products.

Sensitive products: 1-5 percent

With regard to the number of 'sensitive products', on which developed and developing countries will be allowed to make gentler tariff cuts in exchange for creating new import quotas - Falconer suggests that the 'centre of gravity' is "higher than 1 percent certainly but not above 5 percent." The US, G-20, and Cairns Group of farm exporters had been pushing for 1 percent. At the opposite end of the spectrum, the G-10 group of countries with highly-protected farm sectors wanted 15 percent. The EU, for its part, had proposed 8 percent.

Falconer speculated that tariff cuts on sensitive products would be somewhere between one- to two-thirds of the standard reduction. He foresaw "an emerging consensus" that greater deviations from the formula should be compensated for by higher quota increases. He considered several different approaches for calculating the size of tariff rate quota (TRQ) expansion, to try to strike a balance between the priorities of would-be exporters and reluctant importers. One such approach would allow countries to make smaller increases to TRQs for a sensitive product if significant amounts were already entering their markets at the over-quota duty rate.

Number of special products: 5-8 percent

As for the 'special products' that developing countries alone will be allowed to shield from the full force of tariff reduction on the grounds of food security, livelihood security, and rural development needs, Falconer said that Members were "a long way apart on existing positions" (see related story, this issue). He said that even though other areas in the talks were "objectively far more important," the issue of special products had the potential to sink the Doha Round.

The chair said that he did not think that the G-33 bloc's demand for "at least 20 percent" of agricultural tariff lines to be eligible for special product status was tenable. Nor, however, were demands for this to be limited to as few as "three or four" tariff lines - the US had formally sought five, insufficient to cover milk and cream.

Although Falconer recognised that "strictly speaking there is no connection in numerical terms" between sensitive and special products, he said he sensed that the number of special products would have to be higher. Given the 1 to 5 percent range he envisioned for the number of sensitive products, he thought that 5 to 8 percent of tariff lines might be the corresponding figures for special products. There had been some informal suggestions that developing countries might be rewarded with an additional entitlement of special products for not designating sensitive products, the chair noted.

Members were "perfectly entitled" to disagree with his assessment, Falconer stressed, though he said he would want an explanation for how an agreement different from those broad parameters could be reached. He said that "discernible movement on numbers" was necessary within months, if not weeks. "If even this does not start to get people moving then we at least have to be honest with ourselves: either we are NOT in fact going to ever negotiate a specific number for specials (because, in effect ANY number is either "too high" for one side of the debate or "too low" for the other side of the debate, which is in fact exactly the situation we are in right now), or we are never going to have an agreement on this at all."

More controversially, the chair argued that the mandate on special products implies that all should be subject to some degree of tariff reduction - he suggests "somewhere around 10-20 percent." In contrast, G-33 countries have argued for exempting half of all special products from tariff cuts altogether.

A "radical thought"

The ongoing difficulties at striking an agreement within the framework of the tiered tariff reduction formula accompanied with various flexibilities to shield products from liberalisation led Falconer to conclude his paper with a "radical thought": developing countries could jettison the formula and its bands of different tariff cuts, forget special product flexibilities, and instead "just go for a straight overall average cut" along with a minimum specified reduction on each tariff line. This would allow countries to make only the minimum cut on their more sensitive products, and make steeper reductions on other commodities in order to reach the average.

Falconer said that "most developing countries could probably reasonably manage" this "simple and straightforward" approach. And the methodology was hardly new to WTO negotiations, since both developed and developing countries used it in the Uruguay Round. At that time, developed countries made an average cut of 36 percent with a minimum reduction of 15 percent; for developing countries the figures were 24 percent and 10 percent, respectively. Falconer said that this Uruguay Round formulation - presumably the former -- didn't seem "like a bad candidate to actually use this time for developing" countries.

Incidentally, the G-20's initial position on market access (WT/MIN(03)/W/6), tabled at the Cancun Ministerial Conference in September 2003, called for developing countries to make an overall average reduction along with a minimum cut. However, that proposal also special product flexibilities in addition to this.

Falconer's paper addressed several other issues in the negotiations. These included ideas for compromise in the export competition talks. He noted that the delay in concluding the Round could complicate the 2013 deadline for ending agricultural export subsidies. Positing the start of 2009 as a possible date for the entry into force of a Doha agreement, he suggested that countries could frontload export subsidy cuts by eliminating half of them by the end of 2010, and phase out the remaining 50 percent over the next three years. A decision on food aid was within reach, he said, although a shift to cash-only assistance in non-emergency situations was not likely to happen. Also unlikely to win support, Falconer noted, was eliminating the monetisation of food aid. However, he said that appropriate disciplines could minimise commercial displacement.

Initial reactions

The sharpest reaction to Falconer's text came from Japanese Agriculture Minister Katsutoshi Matsuoka, who told journalists in Geneva that a 5 percent limit on the number of sensitive products was unacceptably low. Kyodo News reports that Japan's agriculture ministry has said that this would require Tokyo to substantially cut tariffs on over half of its most heavily protected tariff lines, which currently cover rice, wheat, sugar, and dairy products.

According to the Economic Times, an Indian daily, commerce ministry officials in New Delhi have complained about the notion of restricting the number of special products to 5 to 8 percent of tariff lines. They also suggested that Falconer ought to have pressured the US to make even deeper cuts to its trade-distorting subsidies.

In preliminary reactions to the text, Geneva-based negotiators praised the risks the chair had taken in making provocative statements in the paper. One lauded him for having "the courage to say some things we the Members refrain from saying." However, two delegates noted that the language on special products was unlikely to find favour among all developing countries. One suggested that the paper seemed somewhat less sensitive to developing countries' political constraints than to those of developed countries.

The agriculture negotiating committee is set to meet on 7 May. Falconer's revised draft agreement text is expected by late May or early June.

The paper is available online at http://www.wto.org/english/tratop_e/agric_e/chair_texts07_e.htm.

ICTSD reporting; "Japan Cannot Accept 5% Limit To No. Of 'Sensitive' Products: Matsuoka," KYODO NEWS, 30 April 2007; "WTO draft paper harvests discontent in Delhi fields," ECONOMIC TIMES, 2 May 2007.