Agricultural Safeguard Controversy Triggers Breakdown in Doha Round Talks

7 August 2008

A seemingly technical agricultural safeguard clause led to the collapse of an end-July WTO mini-ministerial that was meant to establish a blueprint 'modalities' deal for the faltering Doha Round of trade talks. Given the progress achieved on more controversial questions, such as cuts in countries' overall trade-distorting subsidies or top-level tariffs, negotiators expressed surprise that the round had stumbled on the special safeguard mechanism (SSM), a tool intended to allow developing countries to raise tariffs temporarily when import volumes increase or prices fall suddenly.

WTO Director-General Pascal Lamy told a 30 July meeting of the entire Membership - the informal Trade Negotiations Committee - that the talks had collapsed because "we were not able to find convergence in the area of the special safeguard mechanism." Similarly, US Trade Representative Susan Schwab told reporters that "negotiations deadlocked" on this issue, as did Indian Commerce and Industry Minister Kamal Nath.

Some trade sources have suggested that other matters - or the balance of gains and losses in the package as a whole - may in fact have been to blame. However, while theories on governments' motivations abound, negotiators agree that the talks did reach a stalemate after some 15 hours of negotiations on the safeguard.

After initial negotiations among some 30 countries stalled, Lamy convened a smaller group of seven economic powerhouses, dubbed the 'G-7', in a bid to strike a deal. But even in that more intimate setting, intensive efforts to find a compromise ended when Members were unable to reach agreement. The seven countries were Australia, Brazil, China, the EU, India, Japan and the US.

Controversy: can maximum 'bound' tariff rates be exceeded?

Particularly critical in those discussions was the question of whether, and by how much, developing countries would be allowed to raise tariffs beyond current (pre-Doha) 'bound' levels - the cap agreed to in the 1986-94 Uruguay Round, or, for countries that joined the WTO more recently, in their accession commitments.

At root may be a difference of principle. Ambassador Schwab told journalists on 30 July that allowing the SSM to exceed bound rates would have amounted to rolling tariffs "back to 1979 rates" prevailing at the end of the previous Tokyo Round. Responding, developing countries argued that the mandate for the new safeguard never included a ceiling on remedial duties, which would compromise their ability to protect small farmers and rural communities effectively. They have also argued that the SSM must be no less flexible than the existing special agricultural safeguard (SSG), which has been used extensively primarily by developed countries since the end of the Uruguay Round.

Developing countries have further warned that they will need to have an effective SSM as long as WTO rules allow developed countries legally to continue providing substantial trade-distorting subsidies to farmers. Nath said that a 25 July compromise package circulated by Lamy would have allowed developed countries to make payments "which are twice those subsidies that are being given; and if developing countries want to guard themselves against a surge of subsidised products, of course they need a special safeguard mechanism."

One trade source suggested that both sides had in practice seemed to overcome these objections of principle, as negotiations did in fact take place on the extent to which bound tariffs could be exceeded, and under what conditions. However, others suggested that the 'philosophical' debate over breaching pre-Doha bound rates ultimately derailed the talks.

A series of potential compromises

Lamy's 25 July package proposed compromises on the most controversial issues in the talks, including the question of when safeguard levels could exceed bound levels. It would have allowed safeguard measures to exceed bound rates only when import volumes surged 140 percent above a three-year rolling average. Countries could then impose safeguards that are 15 percent of the bound tariff or 15 ad valorem points, whichever is higher. India however said that the trigger for the safeguard was too high.

One delegate pointed out that the special safeguard mechanism was the only element of the package that did not broadly fall within ranges set out in a 10 July draft text circulated by the chair of the agriculture negotiations, Ambassador Crawford Falconer (New Zealand).

Two days after Lamy's 'package' appeared, the G-33 coalition of developing country proponents of the SSM proposed allowing safeguard duties to exceed bound rates when volume surges were 115 percent greater than import averages over the previous three years. Under these circumstances, the safeguard 'remedies' should be 30 percent of the bound tariff, or thirty percentage points, the group said.

In subsequent negotiations, the US reportedly argued that, if developing countries were to be allowed to impose remedies of this size, the safeguard should only be triggered in the event of a much larger surge - at least 150 percent or 155 percent.

Lamy then circulated a compromise proposal on Monday night, which did not contain any numbers. The draft would have required a country to notify the WTO's committee on agriculture when imposing a safeguard, and be able to prove that the surge had caused 'demonstrable harm' to its food security, livelihood security and rural development needs. A Panel of Experts could be asked to review the necessity, level and duration of the safeguard, but decisions taken by the panel could not be appealed.

India subsequently indicated that it could accept the compromise, whereas the US reportedly rejected it. Some analysts expressed surprise that this approach had found favour with G-33 countries, warning that the requirement to prove injury may mean that domestic producers' livelihoods would already be undermined by the time that governments would be able to act.

Subsequently, a senior EU negotiator, Jean-Luc Demarty, set out another attempt at compromise, using a 'tiered' approach in which countries could impose heavier duties when larger import surges occurred. The lower tier would have covered surges of at least 115 or 120 percent, but less than 135 or 140 percent, and the higher tier would have covered larger surges of at least 135 or 140 percent. The exact numbers would have had to be agreed by negotiators.

In smaller surges, developing countries could impose safeguard duties of 33 percent of the bound tariff or 8 percentage points, whichever is higher; in larger surges, these duties could be up to 50 percent of the bound tariff or 12 percentage points - again, whichever is higher. Countries would only be allowed to impose the safeguard on 2.5 percent of tariff lines in a year, and prices would also normally have to be declining before they could do so.

Exceptionally, however, if domestic prices fell particularly steeply (a to-be-determined drop of somewhere between 7.5 to 15 percent), developing countries would be allowed to impose the higher remedies usually reserved for large surges only - but only on 1 percent of tariff lines. The US said it could not accept the Demarty proposal, however.

EU Trade Commissioner Peter Mandelson described his frustration with the US position in an online diary. "When Lamy reconvenes the Group of Seven negotiators at midday, the Indians and the Chinese express reservations and the US rejects the proposal outright, much to Lamy's understandable frustration" wrote Mandelson. "Europe, the Brazilians and Australia argue that the 'Demarty solution' offers a way out of the impasse."

The diary suggests that the US was the first to concede that talks on the issue were failing. "Although Demarty's technical group continues to refine the formula, at one point the US official simply does not show up when the group reconvenes after a break. On her way to what can only be the final Green Room, the US negotiator Susan Schwab goes via the press room to get her rebuttal in first," the Commissioner claims.

What were the US' concerns?

At a press conference after the collapse of the talks, Schwab claimed that, if the safeguard could be triggered by a 140 percent surge, it could affect trade in key products for some importers in most years. "At 140, China could have used this mechanism in eight out of ten years to raise their tariffs at above bound rates. In the case of poultry, China could have used the mechanism six out of nine years to raise their tariffs above WTO rates. India could have used the mechanism in three out of six years to raise palm oil tariffs" she claimed.

Although the US does not export palm oil, Malaysia has traditionally expressed concerns about their exports of this product to India.

Mandelson's diary also reports that "the US complains that previous proposals set the trade flow 'trigger' for safeguards too low: that the measure would effectively mean a guaranteed new tariff on US exports of soy and cotton." The Demarty draft was intended to "give the US what they are asking for in certain bulk commodities," he writes.

Other trade sources indicate that US beef exports may also have been a concern.

For both soy and cotton, recent trade statistics from the US Department of Agriculture's Economic Research Service indicate that China is by far the largest export destination. Soy exports to China in the nine months up to May 2008 totalled 11,806,339 metric tons, about three and a half times the volume exported to the next largest export destination; similarly, cotton exports to China for the same period equalled 495,631 metric tons, or nearly twice the amount exported to the next largest export destination.

China was required to slash many of its tariffs to very low rates as part of the tough requirements imposed on it by trading partners as a condition for joining the WTO. Soybean tariffs are thus only 3 percent. US exporters appear to be worried that even a relatively small tariff increase in absolute terms, such as the 15 percentage point safeguard foreseen in Lamy's proposal, would lead to a dramatic increase in relative terms - from 3 percent to 18 percent.

China had reportedly expressed willingness to explore solutions that would constrain its ability to raise tariffs by several times the bound rate, in the interests of reaching a compromise.

Other countries with relatively low bound tariffs include Côte d'Ivoire, Honduras, Peru, Panama and the Philippines; however, sources indicate that the US and other exporters were primarily concerned with market access in the larger developing countries.

Trade sources familiar with the talks also suggested that the US had focused on establishing a high trigger for breaching pre-Doha bound rates, as the proposed structure for safeguard remedies meant that this was its only remaining line of defence.

More technical work on the SSM in the weeks and months leading up to the mini-ministerial could have decreased the odds of the talks breaking down on this issue, said delegates: "technically, they'd not done their homework." Another concurred, pointing out that in the run-up to July negotiators had focused heavily on market access for 'sensitive' agricultural products instead.

Cotton controversy lurking on the sidelines

At 40 percent, Chinese out-of-quota cotton tariffs are higher than those on soybeans; however, its in-quota tariffs are as low as 1 percent. In a 22 July press conference, US Undersecretary for Agriculture Mark Keenum seemingly made cuts to US cotton subsidies conditional on lower cotton tariffs in China. "That will be a big factor on what we're able to negotiate as far as the specifics on cotton," Keenum said. African countries have long insisted that the US must respect a Doha Round mandate to address cotton "ambitiously, expeditiously and specifically" by cutting its subsidies on the product.

Chinese Ambassador Sun Zhenyu subsequently told informal Trade Negotiations Committee that it was surprising that the US had "started this finger pointing. I am surprised because they are now talking about cotton, sugar, rice of China." Sun argued that China's import quotas for wheat, corn and rice would dramatically exceed those offered by developed countries in the Doha Round. Another senior official, Zhang Xiangchen, stated in separate comments that "the US is not in a position to discuss with developing Members on cotton tariff until they eliminate their cotton subsidies as requested by African Cotton Four."

G-7 ministers were not able to begin actually discussing figures for cotton subsidy cuts before the talks broke down, however.

Importers' concerns: the problem of rice in India

A second problem was that faced by importers such as India, one negotiator suggested. In India, both the maximum permitted 'bound' rates and the actual applied rates on rice are at around 70 percent, leaving no room to manoeuvre unless bound rates are breached. In this case, importers warn that the relatively small increase of 15 percentage points allowed by Lamy's 25 July proposal could be of only limited use if import volumes increased dramatically.

Other Indian products have a greater gap between bound and applied rates, providing a cushion that could protect farmers from surges. For example, tariff lines for palm oil are bound at 300 percent, but applied rates are at only 70 and 80 percent. Some observers therefore suggest that India may be more concerned by proposed restrictions on the size of safeguard remedies than it is with the disciplines on safeguards that exceed pre-Doha bindings.

Raul Montemayor, President of the Federation of Free Farmers of the Philippines, notes that historical data from six developing countries suggests that volume surges exceed 3-year import averages about twenty percent of the time. Ten percent of the time, the volume surge is more than 140 percent. This means that, under the 25 July Lamy proposal, half of the time when there is a volume surge the SSM cannot be invoked. Montemayor suggests however that a more serious problem for developing countries is the fact that, by the time a surge has reached 140 percent, the harm inflicted on domestic producers may already be so serious that imposing additional safeguard duties may no longer be an adequate or meaningful response.

Price trigger: negotiators admit little discussion took place

While officials negotiated intensively on duties that could be imposed to protect against volume surges, little discussion took place on safeguards that could be used when prices fell suddenly. Negotiators have agreed that both systems will function in parallel.

Ironically, many developing countries may find the volume-based SSM harder to use in practice than the price-based mechanism. Monitoring real time monthly import volumes is a major challenge for many developing countries, as most do not collect systematic data for many products: prices, however, can be more easily tracked by officials.

Price depressions also affect domestic markets more seriously than volume surges do, noted one observer.

While the SSM could indeed restrict market access in the event of volume surges, as exporting countries have argued, the price-based SSM currently under review is not likely to have the same effect. Falconer's 10 July draft text states that additional duties must cover no more than 85 percent of the difference between domestic and international prices, meaning that imports would always be cheaper - although the G-33 have since proposed that safeguards should bridge the full price gap.

As the 25 July Lamy package makes no mention of the price trigger, some delegates assume that the Falconer text will be the basis for any future deal. Others point out that Falconer's earlier text did not explicitly indicate whether pre-Doha bindings would also constrain the price-based mechanism.

ICTSD reporting.

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