THE INTERESTS OF DEVELOPING COUNTRIES

IN THE NEXT ROUND OF WTO AGRICULTURAL NEGOTIATIONS

By Stefan Tangermann

Institute of Agricultural Economics

University of Göttingen, Germany

and Tim Josling

Institute for International Studies

Stanford University, USA

Paper commissioned by UNCTAD for the Workshop on

Developing a Proactive and Coherent Trade Agenda for African Countries in Support of

their Participation in International Trade Negotiations

Pretoria, 29 June to 2 July 1999

ii

TABLE OF CONTENTS

1 Introduction 1

1.1 Perspective of Developing Countries 2

1.2 The Agricultural Agenda 4

2 The “Core” issues 7

2.1 Overall Approach to the Negotiations 7

2.2 Expanding Market Access 10

2.3 Curbing Export Subsidies 14

2.4 Domestic Support 17

2.5 Special and Differential Treatment for Developing Countries’ Policies 22

3 The “New” Issues 24

3.1 State Trading 24

3.2 TRQ Administration 26

3.3 Export Restrictions 28

4 The “Parallel” Issues 29

4.1 SPS Renegotiation 29

4.2 Regionalism 32

4.3 Preferential Systems and the Lomé Convention 34

4.4 Measures for Least-Developed and Food-Importing Countries 41

5 The “Related” Issues 43

5.1 Intellectual Property 43

5.2 Competition 44

5.3 Investment 45

6 Conclusions 47

Bibliography 50

1 Introduction

Developing countries make up the large majority of WTO members, and are

increasingly active in the deliberations of that body. Recent economic policy changes

in developing countries, emphasizing openness and market orientation, have given

them a much greater stake in the outcome of trade talks. This, together with the

emergence of global markets in sector after sector, has held out the prospect of

productive participation in world trade as a viable path to development. But it has also

increased the risks of exposing domestic markets and institutions to competition from

abroad, and made countries with inadequate infrastructure and inappropriate policies

vulnerable to marginalization in the global economy.

This paper attempts to define the interests of developing countries in the

agricultural part of the upcoming WTO negotiations (for convenience, the Millennium

Round). It is designed to lead to the formulation of a strategy and an approach to the

talks. Of course, other aspects of world trade will also be discussed in the

negotiations, and sometimes the agricultural interests will be subsumed in broader

strategic considerations. But agriculture is a vital part of the economy of almost all

developing countries, and the conditions in world trade in farm and food products are

of economic importance. Therefore formulating a coherent strategy for the

agricultural part of the negotiations is of significant importance for developing

countries.

The agricultural talks in the Uruguay Round were mainly concerned with

developed country agricultural policies and their impact on the trade system. The next

round of talks, starting this December, will be in large part a continuation of the same

process of liberating world markets from the distorting influence of market

interventions pursued for several decades in industrial countries. These policies

themselves are broadly acknowledged to have failed, not just by academic economists

extolling free markets but by politicians and farm leaders who realize that in the long

run agriculture succeeds where it satisfies market demand rather than relying on

government purchases or hidden consumer taxes. A competitive agricultural sector

can be a significant asset, but an uncompetitive industry is a continual drain on

government financial resources and a source of tension in trade relations. The process

of domestic policy change toward a new paradigm is well underway in industrial

countries, toward a market orientation of agricultural production along with better

targeting of assistance to rural areas (Josling, 1998a). This, with the encouragement of

the disciplines of the Uruguay Round Agreement on Agriculture (URAA), is

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increasingly being done in a way that does not impose major burdens on other

countries through interference with the trade system.

Before the Uruguay Round, developing countries had been major losers from

the unreliability of the trade in agricultural goods, both as importers of temperate zone

agricultural products and as exporters of goods which compete with them. Price

fluctuations, depressed market prices as a result of competing export subsidies, and

impenetrable import barriers for sensitive goods were pervasive. The URAA

established rules on the type of import protection allowed, the conditions of export

competition and the nature of domestic support programs. However, much remains to

be done to reform the agricultural trade system. It is therefore in the broad interest of

developing countries as a whole to see the reform of world trade rules for agricultural

goods completed, along the lines indicated by Article 20 of the URAA.

This paper begins with a brief discussion of the perspective of developing

countries on the agricultural negotiations and then considers in more detail the

elements likely to emerge as a part of the core agenda for the agricultural talks. This is

followed by a discussion of some newer items which will arise in the agricultural

negotiations, along with some issues which are important to agriculture but are likely

to be handled in other parts of the negotiations. A short concluding section pulls

together the main arguments of the paper.

1.1 Perspective of Developing Countries

From the perspective of developing countries, five types of problems arise to

cloud the enthusiasm for the continued reform of the agricultural trade system.

Resolving these issues should go far toward defining the interest of developing

countries in the agricultural talks. The first is that many developing countries have

preferential access into the highly protected markets of the industrial countries. This

degree of preference not only assures them access but also contributes to price

stability. This implies that reform and liberalization, even if in the long run interest of

all countries, can have negative impacts on the developing countries that currently

enjoy the preference. Should developing countries therefore resist further

liberalization, such as a reduction in the EU’s high MFN tariff for sugar, on the

grounds that preferential access to the EU sugar market is currently beneficial? To

pose this problem suggests that ways may well have to be found to ensure that

countries with a heavy dependence on such preferential treatment are compensated or

otherwise encouraged to relinquish their special market access.

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The second problem is that developing countries are particularly vulnerable to

fluctuations in world markets. As importers of temperate zone agricultural goods

developing countries often appear to benefit from cheaper sources of supplies when

these are “surplus” to market requirements. Food aid represents a formal distribution

of these surpluses, but the flood of subsidized exports from Europe and the US over

the years has also resulted in cheaper commercial imports of grain, oilseeds, dairy

products and meats. These low prices have kept import bills down but have also had

some negative effects in developing countries, such as encouraging importer

governments to neglect their own agricultural sectors. They have also been

responsible in many cases for destabilizing the price structure in domestic markets.

Often the subsidized imports seem to be available only when supplies on the world

market are adequate, and dry up when prices firm. But support for further reform of

agricultural trade, such as the removal of export subsidies in agricultural goods, may

require firmer assurances that food importing developing countries will not be

adversely affected by such a move. The Ministerial Declaration on this subject may

need to be strengthened and some elements incorporated into the WTO rules. Some

action may need to be taken to restrict the use of export taxes and embargoes, which

reduce the reliability of world markets as a source of food supply.

A third problem is that developing countries themselves have high tariffs on

agricultural goods. Sometimes the high tariffs are a result of protectionist policies in

the past: at other times they represent an attempt to collect tariff revenue. Moreover,

many developing countries use parastatal importing agencies to control imported

foodstuffs and agricultural raw materials. Most developing countries, however, are in

the midst of a radical transformation of their own trade and domestic agricultural

policies. This means that actual tariffs are often lower than those bound in the WTO

schedules. Regional trade agreements already allow imports from neighboring

countries at rates well below the MFN level. For these countries the prospect of

negotiations to lower the bound tariffs poses little or no threat to domestic producers.

But for those countries that have not undertaken a trade liberalization program which

extends to agriculture, the WTO negotiations on market access will directly impact

the level of protection afforded to domestic agriculture. These countries may be

tempted to withhold their agreement to improved market access. For these countries

there are special problems of coordinating the external and dimensions of agricultural

policy reform (Josling, 1998b).

Fourth, as a somewhat more technical problem, there are some issues which are

particularly relevant for the economic situation of many developing countries, and

where rules of the URAA and the way they are interpreted and implemented can

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potentially cause more problems for them than for industrialized countries. For

example, high rates of inflation in developing countries have in some cases eroded

base period external reference prices to be used in calculating current domestic

support. Coupled with low domestic support levels in the base period, which led many

developing countries to declare zero accountable domestic support in the Uruguay

Round, this can create a situation where countries appear to violate their domestic

support commitments, without actually having granted much support to their farming

sectors.

A fifth problem is more complex. The deeper integration of the world economy

has facilitated and required a fundamental change in the nature of international trade

negotiations. Whereas in the early post-war period the trade system was essentially

concerned with trade policies operated at the border in the area of manufactured

goods, the WTO and the regional pacts cover virtually all goods and services and

relate to what might be considered “domestic” policies. The complexity of

international rules and their implications for policies administered internally strain the

resources and the governmental structures of many countries, but it puts increasing

strain on small countries and on those that have under-developed domestic

administrative infrastructure. Moreover the trade system for years was mainly

concerned with the industrial countries, with developing countries as spectators. The

much expanded WTO membership gives the opportunity for much wider

involvement,. But the exponential growth of meetings and international negotiations

strains the diplomatic budgets and human resources of all but the largest nations. This

issue has considerable relevance to agriculture, as more aspects of rural and food

policies become covered by international rules and as meetings on agricultural trade

issues proliferate. The topics to be considered in relation to agriculture in the

Millenium Round therefore, also, should include approaches to helping developing

countries to cope with the growing demand for human resources and institutional

arrangements required to conduct the negotiations and to implement their results.

1.2 The Agricultural Agenda

The agricultural agenda can be conveniently broken down into four categories,

inter-related but raising separate issues for developing countries. The first category is

that of the “core” agenda, mandated by the URAA and representing a continuation of

the process started in the Uruguay Round. This category contains the familiar topics

of market access, export competition and domestic support. The second category of

issues for negotiation includes those topics sometimes referred to as “new” issues,

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though they have strong connections with the core agenda items. Among the topics

that could be grouped under this head are state trading; the administration of tariff rate

quotas (TRQs) (which has been elevated from a technical issue to a political

controversy by the WTO banana dispute); and the question of export restrictions,

which was made more urgent by the policies of some countries during the high price

period of 1995-96.

A third category of topics can be called “parallel” issues, having major

implications for agricultural trade and policy but lying somewhat outside the URAA

itself. This category includes such issues as the need for renegotiation of the SPS

Agreement, the question of regional trade agreements and their relation to the

multilateral system, and the issue of the future of commodity preferences. For many

developing countries these topics will have more impact on their agricultural trade

prospects than the core issues. A fourth category of topics one could call “related”

issues, even further from the main agricultural talks but still of potential significance

for the development of agricultural policies. These related items include the issue of

intellectual property, made more relevant to agriculture as a result of the move toward

the patenting of genetic material; competition policy, which could impinge on many

areas of agricultural trade where competition is less than “perfect” and markets are not

fully contestable; and investment policy, which touches the agricultural and food

sectors increasingly as foreign direct investment becomes an important avenue for

development in this area. Though these topics will typically be negotiated, if at all, by

diplomats unfamiliar with agricultural conditions, it is important that those

responsible for agricultural trade policy be aware of the linkages with these issues.

Taking all this together means that a complex set of issues has to be considered

when looking at developing countries' interests in the agricultural part of the

Millenium Round. In most of the four categories of negotiating topics, the five sets of

issues mentioned above that are particularly relevant for developing countries have to

be analyzed. To gain an overview of this complex structure, it may help to think of a

four-by-five matrix where the concrete issues to be considered in preparing for the

negotiations can be conveniently allocated to individual categories (see Table 1). In

this paper, only some observations and preliminary comments on major elements of

this matrix of issues can be offered.

We shall not in this paper describe in any detail the provisions of the Uruguay

Round Agreement on Agriculture and the commitments that WTO Members have

6

accepted in agriculture.1 We shall also generally not deal with the effects that the

URAA has had on international agricultural trade nor with the details of

implementation in major countries.2

Table 1: Matrix of Agricultural Issues and Perspectives of Developing Countries

AGRICULTURAL AGENDADEVELOPINGCOUNTRYPERSPECTIVE Core Issues New Issues Parallel Issues Related Issues

PreferentialAccess intoDeveloped andRegionalMarkets

Market Access TRQadministration

Preferentialsystems, regionaltrade agreementsand GSP

Reliability ofSupplies andMarketDisruption

Export subsidies Exportrestrictions

Measures forleast-developedand food-importingcountries

High ImportTariffs and StateImport Agencies

Market access State trading Reciprocalaccess

Rules in WTOwith differentialeffect onDevelopingCountries

Domesticsupportcalculations

SPS Agreement

DomesticInfrastructureandAdministrativeWeakness

Domesticsupport

State Trading SPS Agreement Intellectualproperty,competitionpolicy,investment rules

1 For a comprehensive account of the Uruguay Round negotiations on agriculture and the provisions ofthe URAA, see Josling, Tangermann and Warley (1996).

2 For information on implementation of the URAA in major countries, see IATRC (1994 and 1997),Tangermann (1995,1996), Hathaway and Ingco (1995) and Ingco and Hathaway (1996). A largenumber of studies by international organizations on the implementation and impact of theAgreement on Agriculture on developing countries has been compiled in an unpublished documentprovided by the WTO Secretariat under the Analysis and Information Exchange process (AIE/S7,24 February 1998).

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2 The “Core” issues

2.1 Overall Approach to the Negotiations

The core agenda for the next round of agricultural negotiations will in all

probability follow closely in the steps of the URAA. The triad of "market access",

"export competition" and "domestic support" seems to have proved a convenient set

of labels for defining obligations. It will no doubt be used again. Indeed, some of the

"new" issues mentioned below may be squeezed into the same categories when it

comes to conducting the negotiations. State trading issues, for instance, fall neatly into

those related to market access (the impact of importing STEs on the filling of

minimum access quotas) and those that relate to export competition (the pricing

behavior of single-desk sellers). However, for the sake of this discussion they will be

treated as distinct agenda issues.

Moreover, it is likely that the nature of approaches to be applied to the core

elements of the URAA will be very similar to that used in the URAA. Indeed, one of

the major achievements of the Uruguay Round in agriculture was to establish new

rules and new types of quantitative commitments that can be used as the basis for

negotiations in coming WTO rounds. There is no need any more to debate issues such

as the conversion of non-tariff barriers into bound tariffs or whether there should be

quantitative constraints on individual countries' export subsidies and domestic

support. It is very unlikely that elements such as these will be unraveled in the

Millennium round. Hence, as far as the core elements of the URAA are concerned,

major questions in the next round of negotiations will be the rates of reduction to be

applied, and the timing (start and end) of the new implementation period. In addition,

based on the experiences made since 1995, the URAA rules on the core elements may

need refinement here and there. However, it appears unlikely that the nature of the

core provisions for agriculture that will emerge from the next round of negotiations

will be fundamentally different from those that were agreed in the Uruguay Round.3

3 It is also worth noting that if the Millennium round negotiations on agriculture should fail completelyand not come to any conclusion, the URAA will continue to apply indefinitely (though without the"peace clause" which expires in 2003). Moreover, all country-specific quantitative commitmentswill continue to remain valid as they stand at the end of the current implementation period (i.e. in2000 for developed and in 2004 for developing countries).

8

Less certain, though, is the starting point for any further reduction commitments

to be negotiated in the next round. It could either be the set of WTO commitments as

they stand at the end of the Uruguay Round implementation period, or actual policies

in a given reference period, or some mix of these two approaches. In the Uruguay

Round, actual policies in agreed base periods had to be chosen as starting points, for

the simple reason that commitments of the nature agreed under the URAA did not

exist in the past. Hence there was no choice but finding agreement on how to define

and measure the base tariff bindings from which reductions were to be made, and

where to start with the commitments regarding export subsidies and domestic support.

The agreement reached was laid down in a document called "Modalities for the

Establishment of Specific Binding Commitments under the Reform Programme".

Each individual country was then expected to suggest its own commitments on that

basis, in offer lists. Other countries could verify these offers, and if they had not

disputed them by a given date the offers were automatically turned into the

commitments that are now contained in the legally binding Schedules of all WTO

Members. It appears that not many offers were changed during the verification period

in the Uruguay Round, and criticism of the results achieved, expressed in terms such

as "dirty tariffication", was voiced mainly ex post.

As the experience made with the Modalities procedures and the verification

process in the Uruguay Round was not altogether encouraging it appears unlikely that

another attempt will be made at taking actual policies as the starting point for the

reduction commitments to be agreed in the Millennium round. Instead, the URAA

commitments as they stand at the end of the current implementation period will

probably be used, and further reductions to be made will start from there. This has

potentially important implications that are likely to be discussed in the negotiations. In

particular, where countries currently do not make full use of their commitments (by

applying, for example, tariffs at rates below those bound), some part or all of the

reductions to be agreed in the new round may not have any effect on actual policies

pursued as they will only squeeze out some of the "policy water" currently contained

in the commitments concerned. The advantage, however, of adopting this approach is

not only ease of negotiation but also that countries will in future not discouraged from

reforming their policies on a unilateral base more rapidly than required by the WTO

agreement.

An important question, to be taken into account in scheduling the preparations

for the Millennium round negotiations on agriculture and any analytical work to be

done in this context, is the likely duration of these negotiations. It is difficult to make

any forecast on this, and even during the negotiations any timetable agreed may turn

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out to be unrealistic. The Uruguay Round lasted more than three years longer than

originally envisaged, mainly because an agreement on agriculture could not be found

by the deadline that had been set (December 1990). The Millennium round overall,

and the agricultural negotiations in it, could possibly take as long as the Uruguay

Round.4 Taking some countries' suggestions as to what they want to achieve or avoid

in the next round of agricultural negotiations it appears that long negotiations may be

required in order to bridge the wide gulf that lies between their positions. On the other

hand, there is one factor suggesting that some negotiating parties may have an interest

in limiting the Millennium round negotiations on agriculture to a much shorter period

than the Uruguay Round. The URAA peace clause expires in the year 2003 unless

there is explicit agreement among the negotiating parties that it should be extended.

Such agreement is unlikely to be found (if it is reached at all) without an overall

agreement on agriculture in the next round. In other words, some countries are likely

to have an interest in concluding the agricultural negotiations before the end of the

year 2003.

In the Uruguay Round, delay in concluding the negotiations was mainly caused

by resistance of the EU to an agreement that would have been acceptable to many

other countries. Is the EU likely to protract the agricultural negotiations again in the

Millennium round? At the moment it appears that this may not necessarily be the case.

In addition to its interest in extending the peace clause beyond the year 2003, the EU

has another reason for working towards an early conclusion of the next round, clearly

spelled out by trade Commissioner Brittan (1999). The EU wants to try and fold the

WTO negotiations on EU Eastern enlargement into the Millennium round. Accession

negotiations with the countries in Central Europe will take some time, but may be

largely concluded by the end of 2003, at least with the current five accession

candidates from Central Europe. Pursuing accession talks and enlargement

negotiations in the WTO in parallel would therefore from the perspective of the EU

also speak for trying to conclude the Millennium round, including the agricultural

negotiations, in 2003.

4 The “quad” countries, the EU, US, Japan and Canada, have apparently agreed to a three year timehorizon for the talks. This would fit in well with the timetable discussed below with respect to theend of the Peace Clause and with the EU plans for enlargement. It also makes sense in terms of theUS Farm Bill, which will be up for reconsideration in 2003.

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2.2 Expanding Market Access

The major market access question for the next round is likely to be how one can

initiate a process that would lead to a removal of the discrepancy between the level of

protection in agriculture and that in the manufacturing sector in a reasonable time

period. How does one get from tariffs of 100-200 or even 300 percent to the levels of

5 - 15 percent found in most other areas of trade? This looks to be a tall order: it

implies a continued period of significant tariff cuts extending well into the next

millennium. But the next Round of talks will not be a success unless a substantial step

is taken to reduce these high levels of agricultural tariffs. Developing countries will be

expected to play their part in such a step.

It is impossible at this time to say what the outcome of the negotiations on

agricultural tariffs may be in the next round. Given that many countries know that

further tariff reductions will squeeze out that “water” that has so far allowed them to

live reasonably comfortably with the new Uruguay Round tariffs, it may not be easy

to reach another round of reductions by 36 percent as achieved in the Uruguay Round.

However, anything much less than that would only prolong the conspicuous anomaly

of high agricultural protection. One other issue that is likely to be raised in the next

round of agricultural talks is the existence of many tariff peaks in agriculture, at levels

of 100 or 200 percent (ad valorem equivalent) and even more. Hence there will be

talks about the acceptability of cutting tariffs by more the higher they are, possibly by

using a tariff cutting formula such as the Swiss formula applied to industrial tariffs in

the Tokyo Round.5 This part of the negotiations will be particularly important for

developing country exporters of agricultural products as tariff peaks exhibit the

highest frequency and the highest rates in product sectors of particular interest to

them, such as sugar, tobacco, cotton, and prepared fruits and vegetables.6

Another way to tackle the problem of the high levels of tariffs resulting from

tariffication, not mutually exclusive with tariff reductions, is to expand the minimum

market access that forms a part of the provisions of the Agreement on Agriculture. A

possible approach is to continue the process of expanding minimum access as a

proportion of consumption. A further increase in TRQs, say, of one percent of the

level of domestic consumption in each year over a five year period would remove

much of their restrictive effect. In most markets the quotas would become non-

5 For a presentation of a few more such formulae for tariff reductions, see USDA/ERS (1998).6 UNCTAD/WTO (1997).

11

binding before the five-year period was over. In effect, tariffication would have taken

place at the level of the reduced tariff applicable to the TRQ.7 The main political

objection to this could be that the “within-quota” tariffs were generally left to the

discretion of the importing country to fix at levels which they judged would attract the

guaranteed access quantity. Hence there may also be talks about limiting within-quota

tariffs to an agreed percentage of above-quota tariffs. Expansion of minimum access

TRQs, however, can have a direct impact on developing countries that have tariff

preferences. In some (though not many) cases, such tariff preferences have also been

bound in the Schedules agreed in the Uruguay Round, under the category of "current

access". In most countries' Schedules (though not in that of the EU) the minimum

access and the current access commitments were in effect combined in the same list.

Among the other market access issues, the Special Safeguard system is also in

need of some patching and more uniformity. Though subject to abuse, trade

safeguards are generally considered by governments to be a necessary concomitant to

trade liberalization and market access. The issue that is likely to arise with respect to

agricultural safeguards in the agenda for the next round is the use of the Special

Safeguard Provisions to try to maintain protection against imports. One way to avoid

the misuse of the Special Safeguard Provisions is to seek agreement on a sufficiently

low level of trigger prices. Wherever technically possible, trigger prices should be

identical (or equivalent) to the external prices used by the governments concerned in

calculating initial tariff equivalents in the UR. Governments had a tendency to use the

lowest plausible external prices for calculating tariff equivalents in their Uruguay

Round schedules. Hence, using the same prices as trigger prices for the Safeguard

Provisions would make sure that additional duties are not used too often, and are not

set too high. Attempts may (and should) also be made to phase out the use of the

Special Safeguard Provisions after the second implementation period, i.e. the one

following the Millennium round. This could be done by gradually adjusting the

percentages in both the quantity trigger provision and the price trigger provision year

by year so that the safeguards are less and less likely to cut in.

Developing countries have complex interests in the area of market access.

Exporters of agricultural products have an incentive to see trade barriers lowered. On

the other hand, many tropical products already enter duty free into the main industrial

markets. In these cases expanded market access into industrial markets may have to

come from actions other than tariff reduction, such as reducing domestic taxation. At

7 It would also be possible to devise a way to give countries the option of TRQ increases or tariffdecreases, as both lead to the same end point.

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the same time, access into the developed country markets for temperate zone products

is often significantly restricted by high and sometimes prohibitive tariffs. It is in these

areas where preferences are particularly important. Reduction of MFN tariffs may

have no positive impact on the exports from the preferred country, and could actually

reduce sales and prices. Only when MFN tariffs are reduced so much that developing

country exporters can also gain from better access at MFN rates, may the resulting

market expansion offset the preference-reduction effect and the outcome be positive

overall for the developing countries that have benefited from preferences in the past.

Thus developing countries will no doubt establish their own preferred list of

commodities where they are in favor of developed countries expanding market access

through MFN tariff reductions, and the magnitudes of such tariff cuts that would be

beneficial to them.

As far as the Special Safeguard provisions in agriculture are concerned,

developing country exporters have a clear interest in seeing them eliminated, or at

least greatly constrained so that additional duties can be less frequently imposed, and

at lower rates. The Special Safeguard provisions were introduced as a concomitant of

tariffication, to reduce fears that conversion of non-tariff barriers into tariffs could

leave markets of the importing countries concerned with too little protection in times

of low world prices or rapidly expanding imports. Developing countries generally did

not engage in tariffication at the time of the Uruguay Round, though many had

switched from non-tariff barriers to tariffs in the context of unilateral trade policy

reforms. Instead, many took the opportunity to offer ceiling bindings where they did

not have bound tariffs before the Uruguay Round. Developing countries as importers

therefore do not have access to the Special Safeguard provisions, but as exporters can

be hard hit when developed countries imposed additional duties under these

provisions. Whether the developing countries should be allowed access to the

provisions of the Special Safeguard, whenever they adopted tariffication, is a matter

for consideration in the new round.

When it comes to the other side of the market access coin, the lowering of tariffs

in developing countries, a number of conflicting issues emerge. On the one hand high

tariffs are a regressive tax on imported agricultural goods which place a particularly

high burden on low-income consumers and at the same time distort domestic

incentives and lead to wasteful resource use. On the other hand governments need to

raise revenue and often feel that they have to protect the income streams of local

producers for more or less defensible reasons. Trade policy reform, such as has been

adopted by many countries, including many developing countries, involves the

development of alternative revenue sources and the removal of the most distortive

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special interest protection. Those that have undergone this process may still have

bound tariffs at a high level, but not be using all the protection in their WTO

schedules. For them there is an opportunity to get “credit” for trade barrier reduction

without having a major impact on domestic markets.8 For those that have not reduced

tariffs unilaterally, the negotiations will provide an opportunity to build such tariff

reductions into the process of domestic reform.

An issue of particular interest to developing countries is the use of variable

tariffs in the context of fluctuating world market prices for agricultural products.

There are, again, two sides of the coin in this matter. On the one hand developing

countries have a strong interest in stable world market conditions, and therefore want

as many countries as possible to contribute to buffering world market instability. This

speaks for limiting the use of variable tariffs, because they insulate the importer

markets concerned and thereby aggravate instability on world markets. Developing

countries will, therefore, have an interest in seeing the variability of tariffs that the EU

uses in the cereals and the fruits and vegetable sectors eliminated.9 On the other hand

a number of developing countries, in particular from Latin America, themselves use

variable tariffs, in so-called price band schemes, to protect their domestic markets

against price fluctuations in international trade. One possibility in the next round

might be to treat this issue as an item under special and differential treatment, and

allow the use of such variable tariff schemes only in developing countries.

A final market access issue poses particular problems for developing countries.

This is the use in agriculture of the negotiating technique known as “Zero-for-Zero”

agreements. They have proved effective in certain sectors, such as computers or

software, in particular where the private sector has been closely involved. Such an

approach could be suggested for oilseeds, some livestock products and possibly even

for cereals. The problem that this poses for the trade system is that sectors which are

most sensitive will be left behind, leading to further market distortions. Dairy and

sugar, for instance, might (again) escape the main thrust of improved market access.

For developing countries the question arises as to whether the benefits of a tariff free

market for particular agricultural goods generally not of export interest is worthwhile

8 It is of course possible that negotiations on tariff reductions could be on the basis of applied ratherthan bound tariff levels. But the complications of such a device probably make it unworkable, asargued above with reference to the "Modalities" used in the Uruguay Round.

9 EU cereal tariffs are subject to a “maximum duty-paid” landed price, which acts much as a variablelevy, and fruits and vegetable imports are often subject to “entry” prices which trigger higher tariffswhen the offer prices are low.

14

if it implies less access improvement for other goods some of which could be

exported?10

2.3 Curbing Export Subsidies

If the high level of protection sets agriculture apart, the widespread use of

export subsidies is perhaps the most disruptive element in the operation of world

markets. Moreover, export subsidies are the element that still makes agriculture most

different from other sectors in the WTO, as export subsidies are plainly prohibited

outside agriculture. The practice of subsidizing exports of agricultural products has

been constrained by the Uruguay Round, but most of the subsidies are allowed to

continue in a reduced form. Countries that import agricultural products have been the

gainers in economic terms from the subsidies, but even among these countries the

disturbance of the domestic market has often caused problems. In the next round of

negotiations, it will be more difficult than ever to persuade countries who export

agricultural goods with little or no subsidy to allow countries such as the EU to

continue their market-distorting practices. A further push to rein in these subsidies is

therefore likely to be high on the agenda of the Cairns Group. Even the US, which

holds significant "rights" to export subsidies in the WTO, has made only very

cautious use of them recently, and therefore will be strongly interested in reducing, if

not eliminating, export subsidies in the Millennium round.

The Uruguay Round made a solid start to the process of removing export

subsidies in agricultural trade. For the first time there can no longer be any doubts as

to what (maximum) level of export subsidies a country can grant in agricultural trade.

However, several problems remain in the area of export competition. The question of

single-desk selling agencies for agricultural products is tied up with the issue of

export subsidies. Different marketing practices among exporters are inevitable, and

not in themselves undesirable. But international guidance is needed as to which

practices of parastatal export agencies are consistent with agreed conditions of

competition and which distort that competition. Now that the more clear-cut kinds of

export subsidy have been identified and constrained in the country schedules of

allowable subsidies, the next task is to clarify the definition as regards the actions of

state trading exporters. This would ensure that such actions, if deemed to be hidden

10 Complicating this issue is the fact that some of the “excluded” sectors may be those where access isat the moment preferential, such as sugar. The question of preferences is dealt with more fullybelow.

15

subsidies, could be counted against the schedule for that country. Along similar lines,

complex forms of export subsidies effectively financed by domestic consumers

(though often called producer-financed) may have to be brought under more effective

control.

The simplest way to continue the process of reducing the incidence of export

subsidies would be to extend the schedule of reductions agreed in the Uruguay Round.

As with the market access improvement, this could be done using the same base. This

would imply constraining the expenditure on such subsidies by another 36 percent,

thus removing 72 percent of the subsidy expenditure that was used in the base period.

Continuing the quantity reduction by another 20 percent would imply that 40 percent

of the volume of subsidized exports would have been removed from the market over

the two periods of reform. But since the remaining 60 percent would have to be

subsidized with only 29 percent of the expenditure, the disruption that could be

caused by such subsidies would be significantly reduced.

The continuation of the process of reduction would be constructive, but may not

be very ambitious. Elimination of export subsidies altogether would clearly have

significant advantages. But the pre-requisites for dispensing with export subsidies are

a renewed confidence in world markets, with firmer and more stable price levels for

the major products, and reduced dependence by the EU and the US on intervention

buying and storage schemes in domestic policies. The former condition depends on

the success of the Agreement in increasing trade and reducing protection. As for

domestic programs, it is possible that practice and sentiment in both the US and the

EU may have moved away from the use of market support policies to other

instruments by the turn of the century. If that were the case it could be politically

easier to get effective curbs on the use of export subsidies by the time of the

Millenium round. The new negotiations could, say, set the target to phase out export

subsidies over a five year period, by 2005.

In the Uruguay Round the use of export credits was agreed to be a form of

export subsidy, but it did not prove possible to bring it under the export subsidy

constraints. The OECD countries have negotiated a code for non-agricultural export

credits which puts limits on credit terms and the length of credit extension. It has so

far not been possible to include agriculture in this agreement, despite the URAA

undertaking to work towards internationally agreed disciplines. This leaves this topic

as one to be dealt with in the next Round. It should be possible to agree on the

allowable terms for such credit, and hence to calculate the magnitude of the subsidy

that is involved if softer credit terms are offered. The best way to deal with the

16

subsidy equivalent of such concessionary credit is to charge it against the export

subsidy constraints in the Schedule of the exporting country concerned.

Developing country interests in reducing export subsidies depend to a large

extent on whether they produce and export commodities that compete with the

dumped goods and whether the countries concerned have effective ways of

moderating the impact of fluctuations in world price due to export subsidies on the

domestic economy. Agricultural exporters among the developing countries have a

strong interest in seeing developed countries' export subsidies further reduced in the

next round of negotiations. Export subsidies in agriculture are largely a policy of

developed countries. With the exception of ten countries, developing countries have

no reduction commitments on export subsidies. This does not mean that they can

subsidize exports without limits. On the contrary it means that they must not subsidize

exports at all, except in the form of subsidies to reduce the costs of marketing exports

and internal transport and freight charges on export shipments, on which developing

countries did not have to undertake commitments. Thus by far the majority of

exporting developing countries can only gain by seeing export subsidies further

reduced in the next round, because this improves their competitive situation in

international trade, without imposing any further constraints on them.

Those few exporting developing countries that have non-zero commitments on

export subsidies would see the scope for their export assistance programmes further

constrained if the next round should result in another step towards reducing, if not

eliminating export subsidies. However, on balance even they are most likely to be

better of with further reductions of export subsidies. This is not only because their

own export subsidies are a drain on scarce government funds and distort the use of

domestic resources. It is also true because their export subsidies are small as

compared to those of some developed countries. As a result their exports are more

likely to suffer from distorted competition with exports from subsidizing developed

countries than they benefit from their own export subsidies. More than 83 percent of

all agricultural export subsidies worldwide in 1995 and 1996 were granted by the EU.

All developing countries, taken together with all but four developed countries (i.e. not

including EU, Switzerland, Norway, United States), accounted for no more than 2.4

and2.2 percent, respectively, of worldwide export subsidies in these two years.11

Interests are of course different in importing developing countries who benefit

from lower world market prices as resulting from the export subsidies provided by

11 All figures are from USDA/ERS (1998, p. 22).

17

other countries. However, these benefits are highly unreliable and therefore not

necessarily a good guide in formulating the WTO positions for the negotiations.

Indeed, when world market prices for agricultural products are high, and hence when

importing developing countries might most want to benefit from subsidized

shipments, export subsidies provided by the developed countries tend to be

particularly low and therefore of little use to the importing developing countries. On

the other hand, when world market prices are depressed, developed countries have

tended to engage in particularly large export subsidization, depressing world prices

even more and thereby potentially doing harm to domestic producers in importing

developing countries. All this was obvious in the first years of implementing the

URAA, when world market prices for cereals boomed and developed countries

greatly reduced their export subsidies, thus driving international prices even higher. In

these years (1995 and 1996) the EU, for example, granted far less export subsidies on

cereals than it could have done under its URAA commitments. However, when world

market prices for cereals collapsed after this boom, the EU turned back to large export

subsidies, in one case even using the "credit" for under-utilized commitments in the

year before in order to justify export subsidies in excess of its commitments (for rice

in 1996/97).

In other words, export subsidies granted by developed countries have been

unreliable, have tended to aggravate instability on world markets for agricultural

products, and have helped importing developing countries least when they might have

benefited most from them. Thus further reductions in export subsidies should not be

seen as being generally against the interest of importing developing countries. Rather

than opposing further reductions of export subsidies, developing country importers of

agricultural products, and in particular those heavily dependent on food imports, are

probably better off by supporting alternative approaches to improving their food

security, among others in the context of the Ministerial Decision relating to the

situation in the least-developed and net-food importing countries. This issue will be

taken up below.

2.4 Domestic Support

Although the biggest conceptual breakthrough in the URAA was the acceptance

by countries that domestic policies were a legitimate concern of trade talks, the actual

disciplines imposed on those policies through the reduction of the Aggregate Measure

18

of Support (AMS) were rather weak. The key question for the next Round is therefore

whether to strengthen or abandon the attempt to constrain domestic policies. The fact

that the AMS constraints have not been binding for the large majority of countries

does not mean that the constraints on domestic support have been ineffective. The

process of re-instrumentation of domestic support programs, away from those that

most impede trade, has begun. The AMS constraint on domestic policy puts useful

pressure on countries to continue this process.

The attraction to countries of adopting “green box” policies is both to guard

against challenge from trading partners and to avoid being counted toward the AMS.

The slow but fundamental changes that are taking place in the agricultural policies of

the major industrial countries need the encouragement and underpinning of

international agreements. The changes in these policies have generally been in the

direction of improving the climate for agricultural trade, in contrast to the policy

changes in the nineteen-sixties and nineteen-seventies which led to more trade

conflicts. The Uruguay Round was able to take advantage of these changes, such as

the 1992 Reform of the EU’s Common Agricultural Policy (CAP), and to get firm

commitments on future policy directions and support levels. But this process of

reform is still at an early stage and needs to continue in order to avoid a swing back

toward the costly and ineffective policies of earlier times.

The constraints on domestic support through the Aggregate Measure of Support

(AMS) are acknowledged to have so far been the least effective of the Uruguay

Round bindings as far as quantitative reduction commitments are concerned. But this

does not mean either that they will not be useful in the future or that a continued

reduction would not be appropriate. A continuation, in the next round, from the same

base with the same rate of reduction would be a relatively modest move, and yet even

that will eventually result in 40 percent of the “coupled” domestic support having

been removed or converted into less trade-distorting types of program. But it would

be even more effective to “catch up” with the reductions in import barriers and export

subsidies. Thus one could envisage an agreed reduction of (say) 52 percent in the

expenditure on price-related policies.

The ‘blue box’ containing the US and EU direct payments which were granted

exemption from challenges under the Blair House Agreement was a creature of its

time, necessary to get agreement to go ahead with the broader Uruguay Round

package. It is, however, still a somewhat awkward bilateral deal not appreciated in

other parts of the world. Such an anomaly can surely be removed in the next round.

The policies of the US and the EU themselves are changing for internal reasons. The

US Fair Act goes further than ever before to make the payments to farmers decoupled

19

from output and therefore compatible with the green-box. The EU may soon consider

a similar move as a continuation of the reform started in 1992, in order to make the

CAP consistent with Eastern enlargement. The task for the Millennium round will be

made much easier if the EU and US have both modified their payments such that they

meet the conditions laid down in the green box. The “blue-box” can essentially be

emptied and locked.

The green box presently contains a number of policy instruments that, while

probably less trade distorting than price or income supports still encourage an

expansion of output. Sometimes they are related to such otherwise sensible programs

as crop insurance, but incidentally increase the incentive to produce by reducing risk.

Other programs may be indirectly linked with production even though the main

reason for payment is not output. This might be true of certain environmental

payments, which could lead to an increase in output. But to re-open the definition of

the green box might allow some developed countries to argue that it be expanded, to

include food security policies and barely-decoupled support schemes designed to keep

farming in certain areas. It is unlikely that it is in the interests of developing countries

to make it easier for developed countries to continue agricultural support programs

under different guises.

One constructive change in the constraints on domestic support could be a

decision to make the AMS specific to individual commodities. This was the original

intention in the Uruguay Round: it was at the Blair House negotiations between the

US and the EU that the notion of aggregating the AMS over all commodities was

introduced – essentially to weaken its impact. The AMS could thus be made more

binding at a stroke by defining commodity-specific amounts of “coupled” price

support expenditure that could then be reduced over time.

Most of the constraints on domestic support impinge on developed countries. It

is tempting to think of this item on the agenda as having little relation to developing

countries' interests. This would be misleading. Developed country domestic polices

for agriculture and rural areas represent the largest programs for transfers of funds to

agriculture. They help to shape the pattern of global agricultural production.

Reforming these policies is bound to be of significance in the future of world

agriculture. In addition, developing countries are vitally interested in a well

functioning international trade order where world market conditions are not distorted

by policies. With continued reductions in tariffs and export subsidies for agricultural

products, these most obvious and directly distorting policies are increasingly brought

under control on a world-wide level. However, if domestic agricultural policies in the

20

developed countries were to remain only loosely controlled, then they could take over

the role that border protection and export subsidies played in the past.

The agricultural policy debate in some developed countries seems to point in

this direction. Talk about issues such as "non-trade concerns" (already mentioned in

the URAA), the "multifunctionality" of agriculture, or the "European Model of

Agriculture" is prevalent in some developed countries, and it appears to gain more

strength the more there is pressure to reduce traditional trade policy instruments.

Though meant by some politicians to justify avoidance of further reduction

commitments on tariffs and export subsidies, in the end the issue will be resolved as

one of acceptable domestic support measures as the international drive towards

continued reductions of tariffs and export subsidies is likely to be simply too strong.

The "non-trade concerns" may then well be used to justify more generous domestic

support, and if that support is given in a non-decoupled way, it can do as much harm

to international trade as the traditional trade policy instruments did in the past. Hence

developing countries should have the same interest in seeing developed countries

reduce and re-instrument (towards decoupling) their domestic support as they have in

seeing them cut their tariffs and export subsidies.

With regard to the other side of this coin, i.e. constraints on domestic support

policies in developing countries, it should be noted that no more than 12 developing

countries have reduction commitments on domestic support. Again this does not mean

that all other developing countries can provide unlimited support. On the contrary

they cannot grant any domestic support at all, with some important exceptions. One

exception is the de minimis provision under which developing countries can provide

product-specific support up to 10 percent of the production value and non-product-

specific support up to 10 percent of the value of total agricultural production. Another

exception relates to certain investment and input subsidies that developing countries

can grant outside any WTO constraint. These exceptions are likely to remain

untouched by any agreement on continued reduction commitments (though they may

or should be changed for other reasons, see below).

In other words, domestic support policies in a large majority of developing

countries would not be affected by any further general reduction commitments on

domestic support that may be agreed in the next round of agricultural negotiations.

Hence the interest of the majority of developing countries regarding domestic support

is rather clear – they should argue for large reductions and tight rules, as this will

primarily limit the distortions that developed countries can cause.

21

This position should not be affected by the difficulties some developing

countries have with particular "technical" elements of the way domestic support is

measured. All WTO members have to notify their agricultural policies to the WTO

Secretariat in regular intervals, irrespective of whether they have reduction

commitments or not. This provision makes sense because only in this way is it

possible to see whether countries have honored what are effectively their zero or, in

the case of domestic support, their de minimis commitments. In calculating their

current domestic support, all countries have to follow the URAA rules. For market

price support, i.e. where some form of an administered support price applies, the

calculation is to be based on the gap between the current administered price and the

fixed external reference price from the 1986-88 base period. This provision was

thought to help some developed countries that feared declining world market prices

might force them to reduce their domestic support prices in parallel. However, it turns

out to cause difficulties for countries with high rates of inflation as current support

prices increase in nominal terms while fixed reference prices remain constant. Such

difficulties were anticipated during the Uruguay Round negotiations, and the URAA

contains a provision stipulating that "due consideration" should be given to the

influence of "excessive rates of inflation" on the ability of the countries concerned to

honor their domestic support commitments. In the next round of negotiations, there

may be a point in finding a solution that goes beyond these vague terms. One

possibility would be to allow all countries with rates of inflation above an agreed

threshold to convert their external reference prices (and current administered prices)

into a less inflationary currency, or into Special Drawing Rights, or to specify their

commitments in real terms.

Another "technical" difficulty that some developing countries have in the area

of domestic support is that the presence of zero commitments (because they claimed

zero or de minimis support in the base period of the Uruguay Round) requires them to

keep support below the 10 percent threshold for each individual product. As a result,

these countries have less flexibility regarding policies for individual products than

countries with non-zero commitments. In the latter case, only the total AMS for all

products is relevant, and even if that is low it may well suffice to provide scope for

support of more than 10 percent for one or a few products. If, on the other hand, a

country has a zero commitment it cannot trade off higher support for one product

against lower support for another. This is because the de minimis provision applies at

the individual product level rather than at the aggregate level (except for non-product-

specific support). To some extent this makes economic sense, as significant

distortions of resource use could arise if individual products were supported at a level

much higher than other agricultural commodities. However, the same constraint on

22

the shifting of support across products does not apply in the developed countries that

have non-zero commitments on domestic support. If the next round of negotiations

should make the AMS commitments product-specific, then this asymmetry would

disappear. If on the other hand the developed countries cannot agree to break AMS

commitments down to the product level, then the developing countries with zero

domestic support commitments may have a reason to argue for some more flexibility

regarding application of the de minimis provision. For example, a 5% aggregate de

minimis could replace the current 10% product-specific de minimis.

2.5 Special and Differential Treatment for Developing Countries’ Policies

Most governments, if they could chose, would like to see other countries’

policies constrained by rigid disciplines while maintaining as much freedom as

possible for their own policies. Developing countries, though, have specific reasons

for aiming at more flexibility for their policies. These reasons do not have to be

spelled out here in any detail.12 Though some of them are increasingly questioned, not

the least by some developing countries themselves, special and differential treatment

(S&D) in the sense of allowing developing countries more flexibility in applying

WTO rules to their own policies will continue to be an element of WTO provisions,

and is most likely to remain a part of the agricultural rules after the next round of

negotiations. Developing countries know that one price they pay for having more

flexibility through S&D is a weakening of their influence on the rules from which

they want exemptions. Their governments also know that in their domestic policy

debates it can often be extremely useful to rely on well specified and reasonably

strong multilateral disciplines. However, they also often have an interest in somewhat

wider scope for their domestic and trade policies.

The URAA and the rules governing its implementation contain a number of

S&D provisions for developing countries’ policies. Under the procedures outlined in

the “Modalities” paper, developing countries were allowed to offer ceiling bindings of

tariffs (rather than binding the tariff equivalents of their previous non-tariff barriers)

and to apply lower rates of reduction in the areas of market access, domestic support

and export subsidies (but not less than two thirds of those to be applied by developed

countries). The least developed countries were exempted from reduction

commitments. The possibility to delay tariffication (the “rice clause”) also came in a

12 For a discussion of special and differential treatment see for example Hindley (1987).

23

special form for developing countries. The implementation period for making

reductions under the URAA was ten years (i.e. until 2004) for developing countries,

rather than the six years (until 2000) for developed countries. With regard to the

URAA disciplines for domestic support, developing countries can use a higher

percentage for de minimis support that does not have to be reduced (ten rather than

five percent). They can exempt certain subsidies from reduction commitments

(investment subsidies generally available to agriculture; input subsidies generally

available to low-income or resource poor producers; support to producers to

encourage diversification from growing illicit narcotic crops). The “green box” rules

on public stockholding for food security purposes and domestic food aid allow for the

provision of foodstuffs at subsidized prices to urban and rural poor in developing

countries. Developing countries are not required to undertake commitments for two

types of export subsidies (subsidies to reduce the costs of marketing exports of

agricultural products; internal transport and freight charges on export shipments on

terms more favorable than for domestic shipments). The URAA provisions on export

prohibitions and restrictions do not apply to developing countries unless they are net-

exporters of the foodstuff concerned.

As far as the general S&D provisions for developing countries’ policies in the

URAA are concerned, they may well survive the next round of negotiations

unchanged. There is also not much reason for developing countries to try and change

them (except possibly the de minimis rules, as discussed above). Whether both lower

rates of reduction and a longer period for making them in developing countries should

also be agreed in the next round is a different issue. These two provisions taken

together mean that the process of policy reform in developing countries, which

eventually is in their own interest, gets increasingly out of line with that in the rest of

the world. In particular, the longer implementation period for reductions in developing

countries means that they will still be engaged in reductions while the next round of

negotiations is already being conducted. If this approach is continued for a few more

rounds of WTO negotiations, then the rhythm of policy reform in developing

countries will become more and more asynchronous with the rhythm of WTO rounds,

unless it happened that the extra time developing countries have for reductions is no

longer than the time used for conducting WTO negotiations on the following round of

reductions. Lower rates of reduction in developing countries, on the other hand, do

not create that type of problem.

24

3 The “New” Issues

Three “new” issues have arisen in the years since the Uruguay Round that are

primarily problems that have become noticeable as a result of the changes brought

about by the Round. They include the issue of state trading, exposed by the

tariffication of non-tariff import barriers, the administration of tariff-rate quotas

(TRQs) which were designed to allow minimum access in previously-closed markets,

and the question of export restrictions, which was not considered in depth in the

Round. Each of these is of considerable significance to developing countries.

3.1 State Trading

There are three separable issues surrounding state trading. One is the question of

whether state trading importers can reduce market access below the levels agreed in

the Schedules. The second question is whether exporter state traders can use “hidden”

export subsidies to increase market share. The third issue is a concern that exporters

with exclusive or special privileges can exploit consumers by using their monopoly

power.13 The first two of these are largely agricultural issues, and will probably be

subsumed in the agricultural talks. The third issue is more general, and should rightly

be dealt with in the broader discussions on competition policy (Josling, 1996).

The issue of state trading enterprises that have special or exclusive rights in

import markets can be thought of as an extension of the problem of market access.

Under WTO articles, state trading importers are not supposed to grant more protection

than that given by the bound tariff (Article II:4, GATT 47). Countries could however

go further than just ensuring that state trading importers do not give more protection

than the bound tariff. It would be possible for instance to link implementation of the

TRQs with the import operations of state traders, perhaps converting the TRQ into an

obligation to import rather than an opportunity. This could reduce the suspicion that

STEs might be responsible for the under-fill of the quotas. At the other extreme one

could mandate that all (or a share) of the TRQ be marketed through private channels,

thus providing some competition for the STE and allowing price and markup

comparisons to be made.

13 This problem also is highlighted by the probable entry of China into the WTO. China’s state ownedcorporations could have considerable market power in agricultural markets.

25

The quantification of export subsidies and their reduction has left more visible

the distinction between those countries where exports are privately sold from those

where a parastatal controls such exports. There is widespread concern in those

countries where trade is by private firms that the state trading enterprises can obtain

cheap credit from their governments, offer better terms to buyers, and generally

compete unfairly with the private trade. To the extent that these practices could be

labeled as export subsidies, the issue is one of monitoring and transparency. But some

commonly used devices such as price pooling (giving the producer an average price

over several destinations or time periods) are also seen as giving the producer an

unfair advantage. It might therefore be a matter for negotiation as to whether any

constraints need be placed upon STEs with regard to their producer pricing policies.

Many developing countries use state trading agencies to control domestic

markets and to regulate trade. Any change in the WTO rules on state trading will thus

have a direct impact on these countries. However, it is questionable whether it is in

the longer run interest of developing countries to obtain exemptions from, or more

flexibility in, applying the stricter rules on STE activities that may be negotiated in the

next round. There is now widespread agreement that STEs have in many cases

hampered economic development in developing countries, and added to distortions of

incentives that reduce the efficiency of resource use. Many developing countries have

therefore found it beneficial to leave trading activities increasingly to private

enterprises, while influencing market conditions through conventional measures of

trade and market policies such as tariffs and subsidies. If developing countries were to

receive special treatment regarding the operations of their STEs, this could send the

wrong signals regarding the longer run desirability of relying on state controlled

monopolies in agricultural trade.

On the other hand, as was indicated earlier, this “intrusion” into the internal

structure of markets in developing economies could pose problems for those for

whom the infrastructure is still unable to support a competitive private sector fulfilling

the many roles of importing and distributing agricultural and food products. In these

cases it would be undesirable to compel privatization and other changes in the market

system before it was able to support such a move. For some time to come, parastatals

may therefore still have a place in developing country food trade and marketing in

order to provide stability, administer nutritional programs and prevent the abuse of

market power by private firms. This is another case where “special and differential

treatment” may play an important role.

26

3.2 TRQ Administration

The TRQ system has become a major concern for the health of the agricultural

trade system. A total of 1366 tariff rate quotas were notified to the WTO Secretariat

under the reporting requirements of the Uruguay Round. Such arrangements are

particularly common in the markets for fruits and vegetables (350), meat products

(249), cereals (215), dairy products (183) and oilseed products (124). Thirty-six

countries undertook such commitments in their Uruguay Round schedules. Among

those administering the greatest number of such quotas are Norway (232), Poland

(109), Iceland (90) and the European Union (85). One worrying feature of the TRQ

system is the degree of “underfill” of the quotas. The simple average quota “fill” for

the years 1995 and 1996 was 64 percent and 63 percent, respectively, suggesting that

the allocation mechanism is not yet adequate, that parastatals are effectively keeping

imports out or that within-quota tariffs are too high to allow imports to compete.

Though one can still argue that the TRQs are in most cases an improvement on the

non-tariff barriers that were in place before the Round, they pose a potential threat to

the further liberalization of trade.14

The negotiations on agriculture will have to address the issue of developing a

more uniform system for the administration of the TRQs. The issue of disparity of

methods of allocation of TRQs is one of the most urgent tasks for the new agricultural

round. TRQs for agricultural imports have created a new wave of governmental

interference with trade through licensing procedures and provided a playground for

rent-seeking traders - who will in turn have an incentive to lobby for the continuation

of the high above-quota tariffs. The question is how to prevent the TRQs from

interfering any more than necessary with the competitive development of trade.

Developing countries have a direct interest in the method of allocation. To

allocate the TRQs to the exporting country government, as is done for instance in the

case of US sugar imports, implies a deliberate attempt to influence the pattern of trade

in favor of the recipient countries. This has in the past been done to target

development aid or reward political friendship. Such non-market allocation schemes

may have had their purpose. They do not, however, promote the competitive trade

system that is the fundamental goal of the WTO.15 Efficient producers can make no

14 Data from WTO Secretariat based on the first two years notification to the Committee onAgriculture.

15 The US sugar import regime, involving the establishment of TRQs for traditional suppliers, wasintroduced in 1982, and thus predates the Uruguay Round. However, the quotas are now included in

27

headway against the assured market shares of the quota holders. Even allocating

TRQs by country based on historical market shares does not ensure that the sourcing

of supplies for the importer bears any necessary relation to the competitiveness of the

supplier. Hence, even if developing countries on aggregate may have an interest in

receiving specific allocations under TRQs, competition among them and hence

benefits to those developing countries that have particular comparative advantages

will continue to be denied if country-specific allocations of TRQs remain a

widespread practice.

The simple solution to the efficiency problem is allow quotas to be auctioned, as

has been suggested in some academic circles.16 This would seem an economically

sensible solution to the problem of the capture of rents and to counteract the

incentives to keep the system in place. But this is also a reason why exporters in

particular are likely to resist such a move. If the TRQs were auctioned to the exporter

the impact would be much like a tariff. The exporter would bid up to the height of the

tariff concession for the right to sell in the import market. The capture by the

government of the rent through the auction process in effect turns the TRQ into a

quasi-tariff, with the height discovered through the auction process. Where the TRQs

replace previous access agreements in which the quota was allocated to the exporter,

the result of the auction would be to reduce the return from selling into this market.

Thus there could be considerable resistance to the auctioning of TRQs, at least in

those cases.

The best solution may in the end be to steadily increase the TRQs, until the

issue of how to allocate them is rendered moot. But this will have major implications

for the developing countries that consider their current market access “guaranteed” by

TRQs. The TRQs which embody preferential access agreements for certain

commodities are in place to ensure that the access quantity will not be reduced. This is

not the same as guaranteeing preferential access relative to other suppliers. The TRQs

the WTO Schedule for the US as part of its commitments made in the Uruguay Round. Anargument might be made that the quota allocations were in any case likely to be distorting trade, asthey took no account of changes in costs among suppliers. They were also of dubious consistencywith GATT Article XIII, which endorses the use of market shares for the initial allocation of quotasbut argues that they should be revised when changed circumstances render that allocation distorting.The recent WTO panel report in favor of Ecuador’s claim that it should have received a larger shareof the EU banana market has confirmed the interpretation of Article XIII that quotas should changeto reflect cost and competitiveness among suppliers.

16 Tangermann (1997a) explores the arguments in favor of auctioning the TRQs. The issue ofauctioning quotas was addressed some years ago by Bergsten and colleagues (Bergsten et al, 1987)in the context of US import policy. Auctioning quotas has not so far caught on with politicians andpolicy makers.

28

emerging from the Uruguay Round are designed to open previously closed markets.

They will tend over time to dilute the advantages of preferential access. Thus there

could be a conflict of interest between the desire to use TRQs to expand market access

and the fact that such an expansion will eventually remove the benefits of preferential

access.

3.3 Export Restrictions

The practice of export taxes and export restraints through quantitative controls

also urgently needs to be addressed in the Millenium round, and could conveniently

be included under the heading of export competition. Within the GATT export

controls are generally disallowed, though export taxes are deemed innocuous. Article

XI of GATT 1947 prohibits quantitative export restrictions but makes an explicit

exception for “export prohibitions or restrictions temporarily applied to prevent or

relieve critical shortages of foodstuffs or other products essential to the exporting

contracting party”. There is a clear conflict between the ability of exporters to

withhold supplies to relieve domestic shortages and the reliability of the world market

as a source of supplies for importers.

In the next round of WTO negotiations, developing country importers have the

opportunity to lead a movement to constrain the ability of exporters to restrict

supplies. After all, restraints on exports are no less inconsistent with an open trade

system than restraints on imports. Export taxes could be included under the same

qualifications as quantitative restrictions. The argument has already surfaced in

connection with the Food Security Declaration appended to the Uruguay Round

Agreement (the Ministerial Decision on Measures Concerning the Possible Negative

Effects of the Reform Program on Least-Developed and Net Food-Importing

Developing Countries). It seems inconsistent to leave in place the possibility of export

taxes and quantitative restrictions that have an immediate and harmful impact on

developing country food importers. Hence developing countries have a strong interest

in banning export taxes on agricultural products in the next round of negotiations.

29

4 The “Parallel” Issues

In addition to the specifically agricultural issue are a set of topics which have a

direct impact on agricultural trade policy, and need to be factored in to any strategy.

These include the question of the SPS Agreement and the related issue of the

licensing of the products from biotechnology, the issue of regional trade agreements,

including whether they should include agricultural trade, and the controversial topic

of preferences, which mainly affect a small number of agricultural commodities. Once

again, the developing countries have a major stake in the outcome of discussions in

these areas.

4.1 SPS Renegotiation

Conflicts arising from different sanitary and phytosanitary (SPS) standards have

posed problems in the GATT for many years. Under the GATT 1947, sanitary and

phytosanitary measures which impinged on trade were covered by Article XX(b),

which allows countries to employ trade barriers “necessary to protect human, animal

or plant life or health” which would otherwise be illegal so long as “such measures

are not applied in a manner which would constitute a means of arbitrary or

unjustifiable discrimination between countries where the same conditions prevail, or

as a disguised restriction on international trade” (Josling, Tangermann and Warley,

1996, p.209). But Article XX had no teeth: there was no definition of the criteria by

which to judge “necessity”, and there was no specific procedure for settling disputes

on such matters. The attempt in the Tokyo Round to improve on this situation through

the Agreement on Technical Barriers to Trade (1979), known as the Standards Code,

also failed. Though a dispute settlement mechanism was introduced and countries

were encouraged to adopt international standards, relatively few countries signed the

Code, and a number of basic issues were still unresolved.

Intensive negotiations in the Uruguay Round led eventually to a new SPS

Agreement that tried to repair the faults of the existing code. This Agreement defined

new criteria that had to be met when imposing regulations on imports more onerous

than those agreed in international standards. These included scientific evidence that

the measure was needed; assessment of the risks involved; and recognition of the

equivalence of different ways of testing and sampling. In addition, the dispute

settlement mechanism was considerably strengthened under the WTO to make it

30

easier to obtain an outcome that could not be avoided by the losing party.17 The force

of the SPS Agreement comes in part from the more precise conditions under which

standards stricter than international norms can be justified and partly from the

strengthened dispute settlement process within the WTO. In this regard, much was

expected of the panel report in the beef-hormone dispute between the EU on the one

hand and Canada and the US on the other. This was widely seen as a test case for the

new SPS Agreement. The SPS Agreement has been usefully clarified by the beef-

hormone dispute settlement Panel and the subsequent Appellate Body report, as well

as by the outcome of other disputes in this area.18The SPS Agreement was reviewed

earlier this year. The SPS Committee which conducted the review found few places

where the Agreement was not working. Moreover, the US and the Cairns Group are

not likely to wish to tamper with a hard-won agreement that has “science” at its core.

But the EU has let it be known that a few amendments would not be out of place. The

adverse ruling in the beef-hormone case could perhaps be rendered moot by a well-

crafted clause written into a revised SPS Agreement. The main issue of contention is

that of the role of “consumer concerns” in setting SPS standards. European consumers

are often taken to be more cautious when it comes to health issues than those in other

industrial regions, and this caution plays itself out in the media and the activities of

pressure groups. Governments feel an obligation to respond to this, and to enact

regulations such as the ban on the use of hormones in beef production even though

scientific advisory panels have concluded that there is no risk to human health from

hormones if properly used. The question as to whether the trade system can tolerate

regulations that take into account subjective or “irrational” consumer demand fears is

one of the most contentious issues in trade policy between the US and the EU.

Developing countries also have an interest in the application of science-based

SPS rules. As those countries that rely heavily on tourism know, consumer confidence

can be fickle and requires constant attention. Many developing countries have

achieved a sound reputation as suppliers of quality foods and agricultural raw

materials. Any attempt by developing countries to weaken or request exemption from

the rules that instill confidence in high income consumers could be disastrous. So long

17 The Decision on the Application and Review of the Understanding on Rules and ProceduresGoverning the Settlement of Disputes (the Dispute Settlement Understanding) provides aframework for the better enforcement of panel rulings. To block the adoption of a Report from aPanel now requires consensus. Any party may appeal the ruling (on issues of law), but theAppellate Body Report is final.

18 The Dispute Settlement process has fared less well, as both the beef-hormone and banana cases haveyet to lead to WTO-compliant policy changes. For a discussion of the way in which the SPSAgreement has worked see Roberts (1998).

31

as best practices are adopted in growing and handling food, the market will continue

to welcome goods from all countries. But some developing countries may need

assistance in meeting these standards. In that case the developing country support for

the SPS Agreement will be premised on mechanisms that allow those countries to

upgrade their own SPS regulations internally to meet the high levels required by the

global market.

One new issue in the area of food safety and environmental impacts is that of

the issue of licensing of transgenic plants, usually called Genetically Modified

Organisms (GMOs). This issue could be the “ghost at the banquet” at the start of the

new Round Though not yet the subject of a trade conflict, the slow pace of licensing

GMOs in Europe and the reluctance of European consumers to accept food products

containing GMOs is about to clash with the rapid adoption of the new seeds

containing the biotechnology in the US, Argentina, Canada, Brazil and Mexico. The

prospect of a segmented market for corn, soybeans and their derivatives (including

livestock feed and meat from animals which have consumed such feed), with

countries choosing between "American" and "European" food standards is real. The

resulting trade conflict could significantly impact on the climate of the agricultural

talks.

Developing countries have in many cases already shown a concern for the issue

of GMOs, in particular at Cartagena at the time of the debate on the Biosafety

Protocol which would have come under the Biodiversity Convention. This Protocol

aimed to ensure for each country the right to ban imports of GMOs and products that

contain modified plant material. This would have provided a direct challenge to WTO

procedures, in particular the SPS Agreement. The fate of the Protocol will be decided

sometime next year: the controversy will undoubtedly spill over into the agricultural

talks.

The issue of biotechnology is however more complex that the licensing of

imports or domestic use of GMO products. It also relates to the concerns about market

structure and intellectual property, as discussed below, as well as to the whole issue of

new agricultural technologies and their role in agricultural development. Many of the

proponents of the adoption of GMOs argue that this is the best way to increase yield

and reduce the use of chemicals in agricultural production. In the absence of new land

for agriculture, biotechnology offers the possibility of designing plants to make better

use of the current farm resources. Opponents are wary about the structural

implications of the adoption of the technology and its effect on small farmers and low

income countries. The question of how the major protagonists choose to deal with

GMOs, as a “narrow” SPS issue or as a sui generis topic requiring a whole new

32

agreement, may have considerable bearing on the progress of the agricultural

negotiations as well as on the future spread of the technology.

4.2 Regionalism

The most significant challenge to the WTO comes from the success of a parallel

means of trade liberalization, that within regional trade pacts.19 The recent growth of

regionalism, unlike many of the earlier regional trade pacts has significant

implications for agriculture. Many regional trade agreements have in the past left

agriculture out of the free-trade provisions, in deference to the political sensitivity of

the sector and the potential conflict with domestic policy objectives. The situation is

rapidly changing. NAFTA, MERCOSUR, the Andean Pact, CARICOM and the CER

between Australia and New Zealand all include agriculture in their free trade

provisions (Josling, 1997). The countries of Central Europe have included agriculture

fully in the Baltic Free Trade Area (BFTA) and in a more limited way in the Central

European Free Trade Area (CEFTA)(Josling, Tangermann and Twesten, 1998). The

Europe Agreements which aim for free trade between the Central and Eastern

European countries on the one hand and the EU on the other hand also include

agriculture albeit with some temporary quantitative limits. In Asia the process has

gone less far: the countries of ASEAN have been unwilling to incorporate agriculture

as an integral part of their free trade area (AFTA), though some commodities are

included. To the extent that these agreements do include agriculture, this gives them a

new significance in the process of liberalizing agricultural trade and necessitates some

coordination with the multilateral process.

The fact that the new brand of regional trade agreement includes agricultural

trade within the bloc is clearly a mixed blessing. It carries with it the danger that high

cost production will be sheltered and supported in these trade blocs, as Europe’s

regime of free trade within the EU has done. But this “trade diversion” arose because

of the high level of support and protection at the border. 20 Today’s new regional blocs

seem to have learned the lesson. In other blocs trade creation seems to have been the

dominant effect, helped in large part by the domestic policy reforms which have gone

19 Regional trade agreements include free trade area, in which each country keeps its own tariffautonomy, and customs unions, where a common external; tariff is agreed. Preferential tradeagreements, which do not require reciprocity, are discussed in the next section.

20 Trade diversion occurs when a country imports goods from a high-cost source as a result of apreferential or free trade arrangement. The importing country pays too much for the product, andmore competitive suppliers in other countries are denied sales.

33

hand in hand with the regional trade pacts. Freer regional trade in agricultural

products seems therefore in most cases to be consistent with, and hence a step

towards, global trade liberalization. The only major qualification is that each member

of a Regional Trade Agreement (RTA) should reduce tariffs on third-country

agricultural trade so as not to increase regional preferences and hence generate trade

diversion. This could either be done jointly through agreement with other members on

external protection, in the case of a customs union, or independently through

unilateral liberalization in the case of a free trade area. Multilateral negotiations

become the best way to keep down the level of protection against non-partner imports

so as to avoid trade diversion. If both internal and external protection is progressively

removed the regional and the multilateral paths in effect go hand-in-hand toward the

same goal (IPC, 1998).

The potential conflicts between regional and multilateral trade agreements

urgently need to be resolved. In the case of agriculture the next WTO round should

integrate global and regional liberalization processes. This could be done by

establishing targets for multilateral agricultural trade liberalization that are consistent

with those already announced within the regional and supra-regional groups.

Negotiations could even be facilitated by the adoption of collective positions by

regional blocs, though one would need to avoid the proliferation of different states in

the negotiations themselves. The multilateral talks could incorporate these supra-

regional negotiations as ways of achieving the global targets and focus on the

relationship among such groups and between those groups and outside countries.

From the perspective of developing countries, one of the issues that needs

clarification is the relationship between the 1979 Enabling Clause21 and the general

GATT rules governing regional trade arrangements (GATT Art. XXIV). It is often

said that the Enabling Clause relaxes the general GATT conditions for creating free

trade areas or customs unions that include only developing countries.22 In particular, it

is thought that for RTAs among only developing countries the Enabling Clause drops

the condition that “substantially all the trade” is covered; relaxes the requirement that

trade among the members of such RTAs is completely free; and supplements the

condition that RTAs must not raise the average level of protection against excluded

countries by requiring that the RTA among developing countries not constitute an

impediment to MFN tariff reductions or create undue difficulties for trade of other

21 Decision of 28 November 1979 on “Differential and More Favourable Treatment, Reciprocity andFuller Participation of Developing Countries” (GATT BISD 26S, p. 203 ff.).

22 See Finger and Winters (1998).

34

countries. However, the legal status of the Enabling Clause in relation to GATT Art.

XXIV is not clear. The Enabling clause does not mention Art. XXIV. It therefore is

“unclear whether the Enabling Clause applies in situations where that Article does

not, or affects the terms of application of that Article, or represents, for developing

countries, a complete alternative to the Article. Indeed, views differ as to whether the

Enabling Clause provides an appropriate basis for all regional arrangements among

developing countries or, as some governments maintain, was not intended to cover

arrangements of major significance that, up to 1979, would have been handled under

Article XXIV.” (WTO Secretariat, 1995, p. 18).

The Uruguay Round has not changed the legal provisions in this regard.

However, it is not really clear whether it is in the interest of developing countries to

have the applicability of the Enabling Clause to RTAs among themselves confirmed

in the next round of WTO negotiations. If regional arrangements are seen, as argued

above, as one road towards global trade liberalization, then it does not help to have the

requirements to be met by RTAs relaxed for developing countries. Moreover, as a

growing number of RTAs include both developing and developed countries, and as

several RTAs begin to overlap through simultaneous membership of individual

countries in more than one RTA, special rules for RTAs among developing countries

become less and less.

4.3 Preferential Systems and the Lomé Convention

Preferences have been a part of the trade system for several decades, with little

discussion. This changed with the recent elevation of the EU's preference system to

the highest level of trade diplomacy. The overall role of development-oriented

preferences for agricultural products is likely to be considered in the Millennium

round. For a long time, preferential treatment of imports from developing countries,

allowed in the GATT as an important exception to the two fundamental principles of

most-favored nation treatment and reciprocity. Institutionalized in the form of the

Generalized System of Preferences (GSP), it played an important role in commercial

diplomacy between developing and developed countries. However, the situation has

changed markedly. Near-elimination of industrial tariffs in developed countries has

greatly reduced the role that trade preferences can play as an instrument to overcome

cost disadvantages of countries that are still at an early stage of industrial

development. Moreover, the benefits of trade preferences have tended to be

35

concentrated on a small number of strongly export-oriented developing countries

whose economic growth allowed them to graduate from the ranks of GSP

beneficiaries. In addition, as preferences under the GSP are unilaterally determined by

the developed countries, they can and do attach strings to them, such as the adoption

of given labor standards, cooperation in drug control, and other policy conditions.23

Not all participants in the international trading systems, though, see the role of trade

preferences declining in the same way. It has been observed that “trade preferences

are fading away as part of multilateral trade liberalization, but they remain as part of

development folklore” (Robertson, 1999, p. 59). Quite apart from the economic

effects of trade preferences, many commentators argue that insistence on non-

reciprocity may not be in the long-run interest of developing countries as it tends to

undermine their influence in the multilateral trade regime.

Contrary to the situation in industrial products, in agriculture many tariffs are

still extremely high in the developed countries, not the least on products of particular

export interest to developing countries. Hence there are still potential economic

benefits that can be derived from preferential access to developed countries’

agricultural markets. However, the same protectionist sentiments that lead developed

countries to erect the high trade barriers also get in the way of them granting generous

preferences for agricultural imports from developing countries. As a result,

agricultural products have not been important elements of preferential treatments

under the GSP schemes of most industrialized countries. In particular, temperate zone

agricultural products have been largely excluded from preferential treatment, or

received preferential treatment only within tight quotas. For tropical products, on the

other hand, developed countries’ MFN tariffs are zero or relatively low anyhow, and

therefore preferences do not help very much.

Under these conditions, a strategic question for developing countries is whether

the “negotiating capital” they have is better used in WTO negotiations on further

reductions of MFN tariffs in agriculture or in attempts at deepening and expanding

tariff preferences under GSP schemes. Though the appropriate response to this

question may differ from case to case, overall the MFN route is probably the more

promising approach. GSP schemes will probably continue to be unilateral policies,

extended on a “voluntary” basis by the developed countries concerned, and differing

among the importing countries. Negotiating better agricultural preferences in these

schemes is bound to run directly against the agricultural lobbies in the individual

developed countries, who can always argue that their respective country should not do

23 See Roessler (1998).

36

what other developed countries fail to provide. In WTO negotiations on MFN tariff

reductions, on the other hand, all countries are in the same boat, and developing

country exporters can join forces with agricultural exporters from developed

countries, as has happened in the Cairns Group. Tariff reductions are therefore more

likely to be achieved in multilateral WTO negotiations, rather than in country-to-

country negotiations on GSP schemes.24

Moreover, the international trading regime for agricultural products is gradually

moving towards a situation of lower tariffs. To reach relatively free trade in this area

will still take some time. But assuming that the Millennium round can agree on

another 36 percent reduction of agricultural tariffs (from their pre-UR level), then

only 28 percent of the original tariffs will be left after the next implementation period,

and one more round of WTO could suffice to eliminate many agricultural tariffs

altogether. If and when that happens, agricultural preferences will largely have lost

their value, as most industrial preferences have lost their value already. Hence, efforts

to improve agricultural preferences should be seen as investing limited negotiating

capital in a business that will not be very profitable in the long run. Making use of any

significant agricultural preferences that could potentially be obtained in the short run

requires adjustments in domestic production and market structures in the developing

exporter countries concerned, and these adjustments may well turn out to have been in

sub-optimal directions in the long run when preference margins evaporate because of

MFN tariff reductions. From this perspective the more promising approach probably

is to work towards larger MFN tariff reductions in the next round of WTO

negotiations on agriculture. This is not to say that existing agricultural preferences

under GSP schemes should be eliminated. As a matter of fact, it may be worthwhile to

explore in the Millennium round the possibility of binding these so far unilateral

preferences in the WTO.25

Perhaps the most dramatic action of the WTO dispute settlement panels to date

has been a result of the dispute over banana exports to Europe. A panel found that

several of the mechanisms used to allocate banana imports under the EU’s regime of

quantitative restrictions violated international trade rules. The dispute has put banana

exporting countries at odds with each other and led to the (mistaken) view in some

countries that the WTO itself is a threat to the economies of small, low income

nations which are heavily dependent on the crop for export earnings. The banana issue

24 There may be an attempt to harmonize and multilateralize the current GSP schemes, though it is notclear whether they would be more generous in the area of sensitive agricultural goods.

25 See the proposal for a WTO Preference Scheme by Oyejide (1997).

37

is the most contentious trade policy issue in the area of preferences and will go some

way to influencing future trade relations between the ACP and Europe, the US, and

Central America. Whatever emerges from the resolution of this conflict will certainly

change markedly the assumptions on which the preference systems such as the Lomé

Convention are based.

The same fundamental considerations, of course, also apply to preferential

schemes for selected groups of developing countries, such as trade preferences

granted under the Lomé Convention, as to general preference schemes. However,

there is an extra reason for skepticism regarding the longer run usefulness of trade

preferences granted by developed countries under such closed-shop schemes, because

they are likely to change markedly in the next decade. The Lomé Convention itself

has been declared to be in contravention of international trade rules. The first banana

panel raised the issue of the legality of the Convention under the GATT. The

Convention could hardly be justified as a part of a Free Trade Area, under Article

XXIV of the GATT as it was non-reciprocal. ACP countries did not have to grant

duty-free access to the products of Europe. Non-reciprocal preferences are allowed

under the Enabling Clause for giving advantages to developing countries. But the

justification of the Lomé Convention as a manifestation of “special and differential

treatment” in favor of developing countries, encouraged by the GATT, was rendered

doubtful by the fact that many developing countries (in Asia, mostly) did not qualify

for ACP assistance and trade benefits. In the days before the WTO this conflict

between the global trade rules and the trade and development policy of the major

players was largely ignored. The reports of panels were merely put on one side if the

country whose policy was criticized chose to block adoption. Now, with a clearer set

of rules and a stronger procedure to enforce them, the conflict can not so easily be

ignored. The Lomé Convention has been granted a waiver until the year 2000 from

the obligation to conform with the WTO rules. If such a waiver is still required after

that year it will have to be renewed annually. This will increase the pressure to bring

the relationship between the EU and the ACP into conformity with global trade rules.

The approach considered as the longer run alternative to non-reciprocal

preferences under the Lomé Convention is a free trade arrangement between the EU

and the ACP countries, or a set of such arrangements between the EU on the one hand

and individual groups of ACP countries on the other. As discussed in the previous

section, agriculture can no longer be excluded from such regional arrangements, and

hence it is likely that one day in the not too distant future the agricultural preferences

that in the past were granted under the Lomé Convention will be replaced by

reciprocal regional preferences negotiated under free trade arrangements. This does

38

not guarantee, though, that access to EU agricultural markets for the ACP countries

will be wide open. The history of recent RTA negotiations conducted by the EU,

including those with the countries in the Mediterranean basin, South Africa and

MERCOSUR, has provided ample evidence of the EU’s resistance to opening up its

borders for agricultural imports from its RTA partners.26 However, it is difficult to

imagine that any successor arrangement(s) to the Lomé Convention could include

conditions for access to EU markets less beneficial than those provided under the

Lomé Convention. In that sense, even if the result of the ongoing negotiations

between the ACP states and the EU is some form of extended Lomé IV-type

arrangements for an interim period should be, anything agreed on agriculture in these

negotiations is likely to be a stepping stone for future RTA negotiations between the

ACP countries and the EU.

The same considerations that were suggested above for agricultural preferences

under GSP schemes apply to the specific agricultural preferences granted by the EU to

the ACP countries. In the longer run any such preferences will lose value as

preference margins will inevitably be eroded by MFN tariff reductions to be agreed in

the next rounds of WTO negotiations. However, in the case of preferences agreed

under RTAs, such as those that will one day replace Lomé Convention type

preferences, one other distinction between preferential and MFN tariff reductions

should also be kept in mind. Given that more and more of agricultural trade will have

to be included under rules as disciplines on free trade arrangements are tightened , the

EU will find it increasingly difficult to exempt significant parts of agriculture from

trade liberalization within its various RTAs. Free trade within the RTAs, however,

tends to undermine the sustainability of high levels of protection as traditionally

provided by the CAP. Hence, negotiations on reducing agricultural trade conditions

barriers within RTAs may well trigger further reductions in the EU’s MFN tariffs on

agricultural products. Indeed, the growing importance of RTAs and the need to

include agriculture more fully in them is now often cited as a reason to engage in

further reforms of the CAP. Thus the ACP countries would indirectly contribute to the

process of liberalizing the EU’s overall agricultural regime by pushing hard for

further EU concessions on agricultural imports from ACP countries in the context of

post-Lomé RTAs.

Which particular agricultural products are the most interesting candidates for

further preferential treatment by the EU vis-à-vis the ACP countries is a matter of

26 For an analysis of agricultural preferences provided by the EU in the framework of the Euro-Mediterranean Agreements, see Tangermann (1997b) and Grethe and Tangermann (1999).

39

quantitative analysis, which will be provided in a future report following-up on this

paper. At this time, comments can only be offered at a more general level, relating to

two sets of issues, the implementation of preferential TRQs, and the treatment of the

Lomé provisions for sugar and beef in the context of CAP reform.

Where preferences for ACP agricultural exports to the EU are constrained by

quotas, and where these quotas are fully utilized, the licenses used to allocated such

quotas carry an economic value, known as the quota rent. The economic benefit

represented by the quota rent in most cases flows to the trader who receives the

license to conduct trade under the preferential quota. In the EU it has generally been

the practice to have such licenses issued by EU authorities, to traders based in the EU.

This is not specific to trade with the ACP countries but is the case in EU trade with all

third countries, wherever TRQs are used. As a result of this EU practice, quota rents

and hence much of the benefit resulting from the trade preference generally accrue to

EU citizens, even though the beneficiaries of the preferential trade arrangement

concerned are supposed to be the exporting country.27 ACP countries have good

reason to argue that this is not appropriate, and hence that the regime should be

changed such that these economic benefits flow to them.28 One way to achieve this is

to agree with the EU that licenses for trade under preferential quotas are in future

issued by the exporting ACP countries concerned, to ACP traders, rather than by the

EU. Where preferential TRQs are not country-specific but apply to the ACP countries

as a group, allocation should be done by a joint ACP institution, through an

auctioning process.29 The auctioning fees would then accrue to the ACP community

and could be used to finance joint development- or trade-related activities.

Sugar and beef are the two products under the core CAP regimes for which

given ACP countries have received the most financially valuable preferences.30 The

value of these preferences, though, depends directly on the level of price support

granted to EU farmers. The EU is in the process of reforming the CAP, and has

decided, under the Agenda 2000 program, to reduce the level of price support for beef

by 20 percent in the near future. The EU sugar regime was not included in the Agenda

2000 decisions, but will undergo increasing pressure for reform as well in the years to

come. As a minimum, some of the parameters of the EU sugar regime, possibly

including the level of price support, will have to be adjusted very soon because an

27 See Tangermann (1997b) and Grethe and Tangermann (1999).28 See McQueen et al. (1998).29 ibid.30 Bananas also fall under a common domestic regime, though this is one that was put together in the

context of ensuring market access for overseas countries.

40

unchanged policy will not be consistent with the EU’s export subsidy commitments

under the URAA. Any reduction of EU domestic price support in these two markets

will directly reduce the economic benefits that currently accrue to the ACP exporters

concerned.

In the EU the position has been adopted that farmers’ income losses resulting

from price cuts under the CAP should be compensated, more or less fully, through

direct payments. Hence such payments were introduced when cereal support prices

were cut under the 1992 MacSharry reform of the CAP, and price cuts under Agenda

2000 will also be accompanied by direct payments to EU farmers. For the ACP

countries currently benefiting from sugar and beef preferences, it is tempting to

suggest that they should also be compensated through payments from Brussels. There

is no reason why this option should not be explored in negotiations with the EU.

However, the sugar case appears more promising in this regard than that of beef. This

is because the Sugar Protocol under the Lomé Convention provides for guaranteed

prices on ACP shipments to the EU, while in the case of beef there is only an indirect

and informal relationship between EU price support and export revenue of ACP

exporters, working through the market price mechanism.

As mentioned above, the banana issue is likely to exert a major influence both

on the attitudes of countries toward preferences and on the mechanisms which will be

suggested for modifications to those aspects of trade policy. There will be an attempt

to resolve the issue, at least on a bilateral basis between the US and the EU, before the

Seattle Ministerial. One solution under consideration would entail moving to a simple

tariff for all bananas entering the EU, at a higher level than that currently charged on

imports from Central America but with free entry of ACP bananas unconstrained by

quotas. This solution would be defensible under the WTO and consistent with the

trend in agricultural policies towards bound tariffs rather than quantitative restrictions.

But it may not be possible to move quickly to such a system. In the meantime quotas

are likely to continue and the focus will be put on the way in which the licenses (and

hence the quota rents) are allocated. In this connection, it could be advantageous for

ACP countries to push for country quotas which can be distributed (or sold) by the

exporting country government rather than the current allocation of licenses to firms

based on past sales.

41

4.4 Measures for Least-Developed and Food-Importing Countries

During the Uruguay Round negotiations, concerns were voiced that the

agricultural trade reforms to be agreed might result in higher world market prices for

food, lower surpluses on developed countries’ domestic markets and reduced stocks

and that these developments might threaten food security in a number of developing

countries. Such concerns were recognized in the Ministerial Decision on Measures

Concerning the Possible Negative Effects of the Reform Programme on Least-

Developed and Net Food-Importing Developing Countries adopted at Marrakesh. The

Ministerial Decision was intended to establish mechanisms to ensure that the effects

of the URAA did “not adversely affect the availability of food aid at a level which is

sufficient to continue to provide assistance in meeting the food needs of developing

countries”. However, rather than adopting any quantitatively defined commitments on

food aid, the Ministerial Decision essentially provided encouragement to the activities

pursued under the Food Aid Convention. It also called for technical and financial

assistance to the developing countries concerned; for differential treatment in favor of

least-developed and net food-importing developing countries in any agreement on

agricultural export credits; and for improved access by these countries to financing

facilities provided by the international financial institutions, in order to help them to

finance normal levels of commercial imports.

Discussions about implementation of the Ministerial Decision have kept the

WTO Committee on Agriculture busy in many of its meetings. However, it is less

clear whether the Ministerial Decision has had any noticeable effect on actual

assistance provided to the developing countries concerned, through food aid or in

other forms. The minimum annual contributions of food aid under the Food Aid

Convention, which stood at 7.517 million tonnes of grains (wheat equivalent) under

the 1986 Convention, were reduced to 5.35 million tons under the 1995 Convention.

Actual shipments of food aid, which amounted to 9.66 million tonnes per year on

average in the period 1990/91 to 1994/95, declined to 6.13 million tonnes per year on

average in the period 1995/96 to 1997/98.31 The most recent Food Aid Convention,

entering into force on 1 July, 1999, has further reduced the minimum annual

contributions of cereals, to 4,9 million tonnes, though other foods have now also been

included, with a value of shipments equivalent to � 130 million. Under the new

Convention, contributions can also be expressed in value, rather than in quantity

31 Data are from an unpublished document on actions taken within the framework of the MinisterialDecision provided by the WTO Secretariat.

42

terms. This could add to the tendency for shipments to be the smaller the higher world

market prices are.

This is not the place for a discussion of the merits and drawbacks of food aid.

However, as long as food aid is requested by developing countries and provided by

developed countries, one consideration should be that it is reliable, and in particular

that the quantities provided are not inversely related to world market prices for food.

Unfortunately this cannot be said about food aid flows in the past. There was a clear

tendency for food aid to be the lower the higher were world prices. As it happened,

world market prices for cereals increased sharply shortly after the conclusion of the

URAA. This had probably little to do with the results of the Uruguay Round.32 In any

case, in that period food aid would have been more useful to food-deficit countries

than in earlier periods of lower world market prices for cereals. However, rather than

increasing, food aid shipments declined after the Uruguay Round.

It is difficult to see what could be done about the tendency of food aid

shipments to be lower the higher world market prices are for cereals, as long as donor

countries are unwilling to commit to larger minimum shipments under the Food Aid

Convention. However, there may be a close relationship between willingness of food-

deficit developing countries to support further liberalization of international

agricultural trade on the one hand, and guaranteed access to food aid at time of

particularly high world market prices on the other hand. Thus firmer commitments of

the developed countries not to reduce food aid shipments in periods of high world

market prices could be an item on the agenda for the next round of WTO negotiations

on agriculture.

32 The price rise after the Uruguay Round may have echoed policy responses that had anticipated theoutcome of the Round. In particular, some countries (not the least the EU) appear to have run downtheir surplus stocks through subsidized exports before the end of the Uruguay Round, so as to havemore breathing space to deal with new surpluses after the export subsidy commitments entered intoforce. As a result, cereal stocks were at a historical low when the implementation period of theURAA began. This may well have contributed to the price peaks on world cereal marketsimmediately after the conclusion of the Uruguay Round, though fundamentally the price rise wascaused by production shortfalls in several parts of the world at that time.

43

5 The “Related” Issues

The globalization of the food and agricultural sectors that has taken place over

the past two decades has changed the policy environment in crucial ways.

Globalization brings new challenges and requires new policy approaches, both

domestically and internationally. Moreover the old policies often get in the way of

those that are needed for the new food system. Nowhere is that more clearly seen than

in the area of trade policies.

The main focus of international trade policy has traditionally been the

conditions of access into markets. As globalization has progressed so the scope of

trade rules has expanded. The new trade policy environment has a number of different

elements. These include the health, safety and environmental rules that ensure quality

and acceptability in discriminating markets; codes for the treatment of foreign direct

investment; and the codification of the rights granted to the owners of intellectual

property. To flag the relevance of these issues for the next round of agricultural

negotiations, some "new" facets of agricultural trade policy arising from globalization

are very briefly discussed below.

5.1 Intellectual Property

Among the newer aspects of international trade policy is the setting up of rules

regarding intellectual property. The emergence of international rules predates the

GATT Uruguay Round, with the establishment of the World Intellectual Property

Organization (WIPO), but there was insufficient incentive for countries without

intellectual property protection to join. But the breakthrough came in the Uruguay

Round when the negotiating countries signed the Trade Related Intellectual Property

(TRIPS) agreement. TRIPS brought a degree of harmonization to the disparate

treatment of patents, copyrights and trade-marks in various trading countries.

One important area of the food and agricultural sector where the rules on

intellectual property are significant is in the input industries. The seed sector, in

particular, has already made use of such international facilities to try to reclaim some

revenue from farmers. The ability to patent plant varieties has been a controversial

topic for some years. Now one has the possibility to patent particular manipulations of

genetic material that are the fruits of biotechnology. This would give a much greater

chance for companies to license new varieties to others to plant. Though plant

breeders rights have been recognized since the 1930s in the US, it has proved

44

impossible to patent improvements that come through selection in the field (landrace

crosses) and not easy to see the justification for doing so. But when the improvement

comes in the laboratory, as a result of using particular genetic material in a biotech

process, the pressure for and the feasibility of restricting unlicensed use increases.

This is of concern to those who fear that the highly concentrated seed industry

could extract considerable profits from farmers world wide, as they would have to pay

from season to season for planting even their own retained seed. Many developing

countries have already expressed their worries on this score, and farmers have not

been slow to voice their own fears. For continued progress in this important area of

agricultural technology it is imperative that some agreement is reached which would

allow research to continue and at the same time avoid the possibility of excessive

rents from the ownership of intellectual property vested in natural materials.

5.2 Competition

It seems plausible that a global trade system needs global competition laws.

This conclusion has had little effect so far on trade policy discussions. Whilst some

countries are calling for full scale negotiations on international competition policy,

others maintain that the most you can do is to make sure that each trading country has

its own anti-trust policy in place. The minimalist approach is unlikely to be

satisfactory in the long run. Trade itself is a stimulus to competition: the best policy

for curbing misuse of market power in any one country is an open trade system. But

the very openness of the trade system allows large firms to develop market power in

the world market. Global competition policy will eventually be more about market

power in world markets than about enforcing competition policy in each national

market.

The issue of competition also is at the heart of another potential problem facing

the agri-food system. State trading can lead to the lack of contestable markets,

denying consumers of the benefits from competitive prices and levels of service.

Importing parastatals have no need to keep margins down, and may not purchase the

qualities that consumers would demand. Without the threat of failure the incentive to

innovate is missing. Export agencies have often lagged in selling techniques, failing to

develop new markets and new uses for products. In some cases they pay farmers less

that competitive prices for their products and impose higher than necessary

distribution costs on the sector. The question which such agencies pose is whether

private or cooperative enterprises could perform the functions of the parastatal in a

45

more efficient manner? If so, the problem remains how to devise international

competition rules which would encourage such private activities without losing sight

of social responsibilities?

Concentration of economic power is not confined to public agencies given

monopoly rights in importing or exporting. Private firms can also have significant

market power to influence prices. Privatization itself can lead to market dominance by

a few private firms. Should there be any rules relating to the use of market power in

international markets? What are the dangers that the rules are trying to prevent? Is the

problem the withholding of supplies to raise the price of commodities? This seems

relatively unlikely in the case of basic foods, but could happen with vital agricultural

inputs. . Or is the problem one of dumping and market disruption? The incorporation

of anti-dumping rules in a set of more comprehensive competition regulations has

been suggested by many trade economists.

Whatever is agreed in the area of competition policies in the next round of WTO

negotiations will have significant implications for global agriculture. Developing

countries may have to play the role of watchdog in the area of competition policy. The

majority of large firms, in agriculture and food as in other areas, are still based in the

developed world. Concentrations of market power will therefore always have a

tendency to be of benefit more to industrial countries. But domestic markets are often

less than competitive in developed countries. A framework for competition policy

thus could help developing countries in two respects: improving market structure at

home and avoiding abuse of market position by others in world markets. Without such

a framework, many of the benefits of an open trade system may be elusive.

5.3 Investment

The global system, whether in agri-food products or in automobiles or

computers, depends on investment. Capital accumulated in one country is invested in

others, to the mutual advantage of both economies. But global investment also

requires rules, and these are not yet fully developed. Several issues are at stake in the

area of investment. Among these are the assurance by the investor that the assets

owned by foreigners will not be expropriated; that earnings from investments can be

taken out of the country; and that there will not be undue restrictions (such as

requirements to use domestic inputs or to export a share of outputs) on the foreign

operation. To some extent markets already send signals about the requirements for a

favorable investment climate. Firms have alternatives, and countries that maintain

46

policies that are not investment-friendly may lose the opportunity to participate in the

global division of labor regardless of international rules.

The development of a global food and agricultural sector has been largely

stimulated by foreign direct investment (FDI). This has enabled developing as well as

developed countries to establish modern food processing and retailing sectors. Supply

chains, reaching from the raw material producer to the ultimate consumer, have been

set up which cross borders and continents. If developing countries are to participate

fully in this international food market the conditions have to be attractive for

investment. The global reach of food retailing and processing requires the assurance

that facilities abroad will not be expropriated and that undue restrictions are not

placed on the repatriation of earnings. Supply chains also need the environment of

predictability that comes from an open investment policy.

Some start to the forging of an investment policy was made in the Uruguay

Round, with a limited agreement on Trade Related Investment Measures (TRIMS).

More recently, the OECD countries have been trying to work out a Multilateral

Agreement on Investment (MAI). At present the MAI is moribund, a victim of both

bad publicity and unfavorable reactions from the non-OECD countries. It was widely

characterized as a charter for the multinational corporations. But the EU has promised

to raise the issue again for inclusion in the next Round of trade talks. Developing

countries have an interest in seeing an investment regime which balances the interests

of the investor in guarding against undue interference in commercial decisions with

the concerns of the host country that the investment is beneficial in economic and

social terms. The continued growth of the global food industry depends to an extent

on the satisfactory resolution of this issue.

47

6 Conclusions

In assessing the interests of developing countries in the specific agenda for the

new agricultural trade negotiations there are two kinds of questions to ask. The first is

whether the measure contemplated, if implemented by others, has acceptable or

beneficial consequences for developing countries or whether it tends to harm their

interests? The second question, the other side of the coin, is whether developing

countries themselves can accept the same measure applied in their own economies?

Obviously the answer to these two questions may differ. This points up the key

strategic issue for the developing countries as they approach the next round of

agricultural negotiations. How can one support the continuation of desirable reforms

in agricultural trade without at the same time paying a high price in terms of domestic

policy autonomy and the structure of preferential access currently enjoyed.

One traditional way out of this dilemma is through “special and differential

treatment” (S&D). If changes that are implied by a particular measure would be

appropriate for developed countries but less applicable, or difficult to implement, for

developing countries then S&D could be invoked. But there has always been an

implicit cost to S&D, which inevitably shows up in terms of less influence over the

agenda for those countries that choose to opt out of, or delay, certain disciplines. It

may well be the time to redefine S&D to identify a small set of trade policy areas

where developing countries have particular difficulties, and to forego the broader use

of the concept as a way of delaying adjustment. Developing countries are the

emerging markets that developed countries require for continued trade expansion, in

food as in many other goods. Developing countries generally stand to gain from this

process of trade expansion. It may be more advantageous to participate fully in the

trade liberalization, ensuring that the products and markets of interest to developing

countries are included, rather that take advantage of “opt out” provisions which

essentially allow others to set the agenda.

It is apparent that the interests of all developing countries are not alike. The

premise of this paper is that there are enough similarities of interest to define a

"developing country" position on the major issues, even though the importance of

individual issues may differ among countries and regions. The success of any strategy

which is developed will depend on whether such a coincidence of interest exists.

Developing countries will generally benefit from a continued liberalization in

agricultural markets, involving further reduction of tariffs, an elimination of export

subsidies and the tightening of constraints on domestic support in the industrial

countries. Many of the problems of world trade in agricultural products stem from the

48

policies pursued in industrial countries to support commodity prices. Developing

countries have borne the brunt of the instability and unreliability of agricultural

markets. Support for further efforts at reform would be in the general interest of

developing countries.

Developing countries that have not yet completed the reform of their domestic

and trade policies to take advantage of global markets and the decline of preferences

will face a challenge from the continuation of reform. In these cases countries should

seek time to coordinate this reform with WTO commitments. The benefits to the

individual country from the continued improvement of market access and the curbing

of disruptive subsidies are proportional to the extent of involvement in world markets.

Domestic reforms thus play an essential role in the trade negotiation strategy of

developing countries.

Current preferential systems should be reviewed both with a view to deriving

lasting benefit from the access opportunities and with the prospect of inevitably

declining levels of preference. Some erosion of preferences is inevitable, but this will

be offset by the fact that such preferences are most valuable on products where

protection is high (for example, sugar). In such cases the pace of liberalization is

likely to be slow. As the value of such preferences will decline over time it is not

worth expending a large amount of negotiating “capital” in preserving them at current

levels. Settling the issue of the role of preferences in the trade system is essential to

regain the stability needed for investment and growth.

Regional trade agreements offer a parallel trade policy path that should

eventually lead to more open world markets. Developing countries should encourage

the inclusion of agriculture in these agreements and should ensure that external

protection is low enough that significant trade diversion does not occur. The

conversion of current preferential agreements to reciprocal FTAs could be both a way

to resolve the issue of preferences within the multilateral system and of strengthening

regional cooperation and market integration.

Developing countries in the same region (and in particular when members of the

same trade bloc) should consider pooling resources and negotiating positions in

matters relating to agriculture, so as to avoid duplication of effort and under-

representation at meetings. Developing countries should consider how to make use of

established groups of countries, such as the Cairns Group, to maximize their

effectiveness in the negotiations. If a parallel group of “food importing” countries

were to be formed, it could be useful to agree on a strategy with the Cairns Group.

49

Two or more competing groups of developing countries would effectively limit the

impact on the agricultural negotiations.

50

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