Negotiations on agriculture: The challenge of updating global rules on trade

6 May 2015

Given the features of the new global context what could elements of a post-Bali work programme on agriculture be?  

 

The global agricultural trade landscape has evolved significantly since negotiations froze in 2008 – and even more so since Doha was launched in 2001. As WTO Members start crafting the contours of a possible post-Bali work programme, developing a sound understanding of this new global reality and its implications for future multilateral disciplines in agriculture is critical.

The New global context

A rapidly evolving trade landscape

Over the last 15 years, global agricultural trade, excluding intra-EU flows, has nearly tripled to reach US$ 1 trillion. While trade remains relatively concentrated among six key players – the EU, the US, Japan, India, China and Brazil – their collective importance has decreased, not least as a result of booming import markets in Africa. Emerging economies have also become more prominent with surging Chinese imports, the consolidation of Brazil as a key exporter, and the increasing participation of India with a net agricultural trade surplus of US$ 9 billion and a doubling of its share in global imports over the same period.

Over the next decades, changes in demand – as a result of growing urban population and associated changes in diet – are likely to affect further the direction and geography of trade flows. Estimates suggest that an additional 1 billion people will join the “middle class” in 2020, a rise from about 1.8 billion in 2010. According to the OECD/FAO Agricultural Outlook, the Americas will strengthen their position as the dominant export region while Western Europe will display a negative trade balance with flat exports. The rapidly growing population and rising average income in Africa will result in increasing food imports, but the largest demand will come from Asia, which is expected to exhibit a trade deficit for all commodities except rice, vegetable oils and fish in 2023.

From a “demand–constrained” to a “supply–constrained” agricultural system?

Historically, agricultural markets have been characterised by a long-term trend towards declining real prices, with abundant supplies exerting downward pressure on food prices and ultimately farm incomes. As a response, policy-makers, particularly in OECD countries, had recourse to various forms of support policies. While these measures achieved their stated objectives at the domestic level, they induced surpluses that had to be disposed of in international markets, often with the help of export subsidies whose effect contributed to further lowering world prices. In developing countries, low prices provided in turn disincentives to invest in agriculture.

Over the last eight years, however, several agricultural commodities have experienced significant price spikes. These spikes appear to reflect the immediate impact of weather-related production shortfalls in major producer regions, against a backdrop of high energy prices, steadily rising demand due to higher average incomes, and low rates of productivity growth in many world regions. The extent to which these events mark a permanent transition towards higher prices remains hotly debated, particularly in light of recent price declines for several commodities and for fossil fuel. Most experts tend to agree however that markets are likely to experience higher levels of volatility in the future

Changes in domestic policies

Responding to changes in the global food system, domestic policies have also evolved. In the EU the new CAP requires farmers to respect additional environmental requirements as a condition for receiving support. But the shift towards less trade-distorting support initiated by successive previous reforms has slowed down with more emphasis given to the integration of new EU members. In the US, the new 2014 Agriculture Act abolishes direct payments to producers – seen by many as impossible to justify politically when prices are high. In their place, Washington has introduced subsidised insurance programmes for price and revenue. Such new schemes will likely be considered as “amber” box, implying a move away from the logic of gradually decoupling support from production. These new schemes combined with expected lower prices for key commodities might trigger higher payments in the coming years, making it difficult for the US to comply with the proposed domestic support disciplines under Doha.

China’s fast-growing farm support schemes appear to be designed in part to rectify historical under-investment in the agricultural sector. Support also aims to reduce the large, growing disparities between rural and urban incomes. China’s farm support is heavily focused on green box payments for “general services” such as infrastructure, with some support also provided in the form of decoupled support payments. As the precise arrangements for providing this type of support vary across provinces, the actual degree of decoupling appears to vary. Finally, India’s agricultural domestic support has also grown dramatically in recent years with a particular emphasis on input and investment subsidies in developing countries – article 6.2 of the AoA – which shelters payments for fertilizers, irrigation, electricity and seeds. Food purchases at administered prices are also important in the country’s overall policy framework, with growing risks of breaching ceilings on trade-distorting de minimis support as illustrated by the ongoing controversy on public stockholding.

The emergence of “mega-regional” free trade negotiations

Another striking feature of recent evolutions in global trade has been the emergence of the so-called “mega-regional” free trade negotiations. The three largest “mega” initiatives – the Transatlantic Trade and Investment Partnership (TTIP), the Transpacific Partnership (TPP), and the Regional Co-operation in Asia and the Pacific (RCEP) – represent over three-quarters of global GDP and two-thirds of world trade. As such, they are effectively developing the road map for trade regulation regimes of the future, with results that involve deeper integration and “WTO plus” disciplines or liberalisation. The extent to which these initiatives might distract countries from multilateral negotiations or to the contrary help overcome the current deadlock, remains unclear.

The way forward

Market access

Since the launch of the Doha Round, applied tariffs particularly in developing countries have shown a downward trend as a result of unilateral liberalisation and regional trade agreements. Future progress made in mega-FTAs might facilitate further engagement, particularly in light of expected trends in imports resulting from the growth of the middle class in emerging economies.

The Doha Declaration adopted in 2001 has set ambitious goals in this area. Nevertheless, the same level of ambition has made the negotiations more difficult than initially expected. The need to find a politically acceptable deal for domestic stakeholders has led negotiators to soften the disciplines by introducing flexibilities that have rendered the negotiations more opaque and eroded the appetite to conclude the Round. In this context, the political costs of an agreement could be reduced substantially by exploring alternative formula cuts as recently envisaged in the talks. Such an option was already contained in footnote 2 of the Chair's text of August 2007, suggesting an overall 36 per cent reduction for developing countries with a minimum cut of 15 per cent on each line, following the Uruguay Round model. Another critical issue relates to the special safeguard mechanism (SSM). Here, the trend towards more volatile prices highlighted above seems to lend weight to calls for keeping a simple and effective instrument as part of an eventual Doha deal. Furthermore, keeping such an “insurance mechanism” might be important for many developing countries if prices continue to fall.

Domestic support

Domestic support payments in the EU, US and Japan have gone down to levels between 5 and 8 per cent of the value of production. In some cases such declines in non-green-box support are explained by a shift to the green box (e.g. the EU). In others, payments shrank as market prices went up (e.g. the US). In contrast, Brazil, China, India and Indonesia show a pattern of increasing long-term trends and today, supports expressed as a percentage of value of production overlap significantly for large developed and large developing countries.

As highlighted above, the more trade-distorting nature of the recent 2014 Farm Bill may mean that the US risks providing a higher level of support than previously discussed in the negotiations. Some agricultural exporting countries are nonetheless reluctant to water down the draft disciplines and would like to see tighter requirements established for domestic support in China and India. At the same time, these and other developing countries oppose further changes that would reduce the domestic policy options available to them under the current draft text. In this respect, negotiators could explore whether consensus could be found around current AMS and OTDS disciplines with a model that would retain current de minimis levels for all members, so long as a threshold level, defined in absolute terms, is not breached. With respect to the use of administered prices for the purchase of food for public stockholding purposes, options for a permanent solution might have to reassess the concepts of a fixed external reference price and eligible production.  

Export competition

The overall trend for export subsidies is declining, even though almost USD 500 million of export subsidies were still in place in 2011–12. The existing draft modalities in this area are not really questioned, though some fine-tuning may be required. Export competition should therefore be brought centre stage. This will provide a major impetus towards creating greater engagement, trust and confidence in a system where these are presently missing.

Export restrictions and taxes

Agricultural export restrictions are a policy area that is “under-regulated” in the WTO and where achieving political consensus remains particularly challenging. In cases of food shortages, export restrictions can significantly contribute to exacerbating the negative effects of price spikes on food security, by reducing the ability of poor consumers to access food at affordable prices. In the medium term, those restrictions also undermine confidence in international markets and their competing effects partially offset each other. There might nonetheless be a merit in exploring initial improvements in the disciplines by enhancing transparency or clarifying the conditions under which such instruments could legitimately be used. An agreement at the WTO to exempt humanitarian food aid from these measures could be a first small step in this direction.

Cotton

Cotton remains a symbol of the development dimension of the DDA, even if cotton policies have evolved drastically over the last few years. Recent EU policy changes provide more flexibility to its Member States to reintroduce production-related payments and the new US Farm Bill might result in higher cotton subsidies if prices go down. China has become a large subsidizer of cotton in absolute terms. While it is unclear what share of those subsidies are “green box”, China’s cotton production remains largely isolated from international prices. This new reality would call for consolidating envisaged cuts for the EU and US support, reducing them further, and seeking commitment to refrain from introducing new ones. Negotiators could explore whether China could agree to limit its subsidies independent of their classification within the WTO to the average amount granted in the period 2000–05 (a period of relatively low prices). Similarly, they could explore whether India would agree to limit its cotton subsidies to the amount given to other competing crops and refrain from imposing export restrictions. Finally, all countries could grant duty-free and quota-free market access to LDC cotton producers.

Conclusion

The instruction that trade ministers gave to negotiators at Bali – to prepare “a clearly defined work programme on the remaining Doha Development Agenda issues” –is an important opportunity. Agricultural markets are set to be placed under growing pressure in the years ahead, as a larger and increasingly wealthy global population requires more –and more varied – food at a time when climate change is increasing the prevalence of extreme weather events affecting farming. In this context, post-Bali talks could allow governments to take the first much-needed step towards ensuring the global trading system is better equipped to deal with the challenges of tomorrow's world, by building a more efficient, equitable and sustainable framework of rules on agriculture.

This note is based on an ICTSD E-BOOK, Tackling Agriculture in the Post-Bali Context: A collection of short essays, October 2013.

Authors:

Christophe BELLMANN is Senior Resident Research Associate at the International Centre for Trade and Sustainable Development.

Jonathan HEPBURN is Agriculture Programme Manager at the International Centre for Trade and Sustainable Development.

 

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