Government subsidisation of agricultural production has always been a controversial subject in world trade. It is now at the core of the Doha Development Agenda negotiations in the World Trade Organization (WTO). It is also a matter for WTO dispute settlement in two important cases challenging the subsidies regimes of the US in relation to cotton and the EU in relation to sugar.

At the end of World War II, the General Agreement on Tariffs & Trade (GATT) contracting parties agreed that protectionist economic policy was justifiable to ensure that each state maintained sufficient agricultural production to feed its population. As a result, agricultural products were broadly excluded from the application of the GATT rules until the end of the Uruguay Round, when the Agreement on Agriculture introduced a mechanism for gradually bringing them under the GATT disciplines.

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Subsidies had been dealt with in only one provision of the GATT, which required that all subsidies be notified to the contracting parties and that consultations be undertaken in the event that the subsidisation caused or threatened serious prejudice to the interests of any other party.

Phasing out rules

The parties were required to cease granting export subsidies at the earliest practicable date on any product other than a primary product, and, in regard to primary products, were encouraged to avoid their use. Eventually, much more detailed rules for phasing out trade-distorting domestic support and export subsidies were formulated and embodied in the WTO Agreement on Subsidies and Countervailing Measures (SCM) and the Agreement on Agriculture.

The Agreement on Agriculture is a significant first step towards more fair competition and a less distorted agriculture sector. It provides for specific commitments by WTO member governments to improve market access and reduce trade-distorting subsidies in agriculture. The agreement distinguishes between so-called:

  • Green Box subsidies: non-actionable subsidies that are considered largely non-distorting because they are ‘decoupled’ from production;

 

  • Blue Box support: direct payments under production-limiting programmes that are subject to reduction only in certain circumstances; and

 

  • Amber Box subsidies: distortionate subsidies that are subject to reduction commitments calculated on the basis of the Aggregate Measurement of Support (AMS).

These commitments were to be implemented over a six-year period (10 years for developing countries) that began in 1995. With the expiry of the due restraint provision (the so-called ‘peace clause’), domestic support measures and export subsidies are, as of January 1, 2004, no longer protected from challenge by other WTO members. Participants also agreed to initiate negotiations for continuing the reform process one year before the end of the implementation period, which was the end of 1999. These talks have now been incorporated into the broader negotiating agenda set at the 2001 Ministerial Conference in Doha, Qatar.

The Doha agenda

After the collapse of the talks at a ministerial meeting at Cancún, Mexico, in September 2003, WTO members succeeded in producing a framework text to ensure the survival of the Doha Development Agenda. Formalised as a decision of the General Council on July 31, 2004, the new framework covers all areas under negotiation, including agriculture, industrial market access, development issues, services and trade facilitation.

With the exception of a few areas – services, trade facilitation and dispute settlement – it represents no further agreement, but purports only to ensure the continuation of the talks and to establish some bases for pursuing the precise methods or modalities to be applied in the ongoing negotiations. The deadline for completion of the Doha Development Agenda has been extended to December 2005, when the sixth session of the ministerial conference is due to be held in Hong Kong.

The current phase of the agricultural negotiations is based on the mandate set out in paragraph 13 of the Doha Ministerial Declaration of November 14, 2001, which shares the objective of the WTO Agreement on Agriculture to establish a “fair and market-oriented trading system” through fundamental reform. This is affirmed by the decision, which adds that the “balance” sought by the parties will only be reached at the end of the negotiations, within the “single undertaking”.

The decision addresses the three agricultural pillars – domestic support, export competition and market access – and sets objectives for dealing with the difficult elements in each of them. Cotton is also addressed, non-trade concerns are to be taken into account, and geographical indications are noted. The Framework for Modalities in Agriculture, attached at Annex A to the decision, is not highly specific. There is no specific tariff reduction formula for market access, nor concrete proposals for the treatment of special products or regarding free access for imports from the least-developed countries.

Domestic support

The agricultural framework requires each member to negotiate substantial reductions in its trade-distorting domestic support by applying a tiered formula for progressive reduction that will cut higher subsidies more than lower ones. Each member must reduce the overall level of its trade-distorting support from bound levels, and must ensure that cuts extend beyond the Amber Box measures (included in calculation of the AMS) to de minimis support and Blue Box payments, which were not subject to reduction under the Agreement on Agriculture. The subsidising states accepted a significant 20% cut in trade-distorting subsidies in the first year and throughout the implementation period.

In addition to direct payments under production-limiting programmes, Blue Box payments will now include any direct payments that “do not require production”. These provisions generated much criticism, especially from the Group of Twenty and the Cairns group of agricultural exporters, on the grounds that they allow the US to shelter domestic subsidies that are covered by the Amber Box.

So that the modified Blue Box does not facilitate ‘box-shifting’ and avoidance of reduction of trade-distorting domestic support, the Blue Box will be subject to disciplines, including a cap on payments. Green Box subsidies will also be subject to review and clarification under the terms of the new framework, with a view to ensuring that these measures have no, or at most minimal, trade-distorting effects or effects on production.

Export competition

The objective under the Doha Declaration is “reduction, with a view to phasing out, all forms of export subsidies”. At this stage in the negotiations, the parties must “establish detailed modalities ensuring the parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect by a credible end date”.

Although the end date has yet to be decided, the members have set out a list of items that will be eliminated. This includes export subsidies, the trade-distorting elements of export credits, export credit guarantees and insurance programmes, trade-distorting practices of state trading enterprises, and food aid that does not conform to disciplines (to be agreed) for the purpose of preventing commercial displacement. The negotiations will deal with the role of international organisations, humanitarian and developmental issues, and the question of providing food aid exclusively in grant form.

Members are also required to ensure that the disciplines will continue to provide for differential treatment in favour of least-developed and net food-importing developing countries. State trading enterprises in developing countries will also be considered for maintenance of monopoly status. In exceptional circumstances, members may establish ad hoc temporary financing arrangements relating to exports to developing countries. Whether the developing countries have achieved a satisfactory deal for elimination of export subsidies will turn entirely on the chosen end date for elimination.

Market access

Regarding market access, a tiered formula will be used to undertake reduction of tariffs in both developed and developing countries, taking into account their different tariff structures. The text includes principles for the further negotiation of the formula but leaves the details – including the number of bands of tariffs, the thresholds for defining the bands, as well as the type of reduction methodology – for the next stage of negotiations. Reductions would be made from bound rather than actual rates, and will be progressive, so that higher tariffs will be cut more drastically than lower ones. The issue of establishing an overall tariff cap would require “further evaluation”.

On the issue of “sensitive” products, developing countries fought for equal specificity in the language of the text. As a result, each member is entitled to designate an “appropriate” number, to be negotiated, of tariff lines that may be treated as sensitive. “Substantial improvements” would apply to each sensitive product through a combination of tariff cuts and new tariff-rate quota commitments. Taking into account their non-trade concerns, developing country members are also entitled to designate, under conditions to be agreed in the negotiations, a number of special products. They will also have access to a new Special Safeguard Mechanism (SSM), and the importance of long-standing preferences was acknowledged and flagged up for further consideration.

Cotton concerns

Since the new Doha framework, two panel decisions have found fault with specific subsidies regimes of the big economic powers. The international markets in both cotton and sugar have long been affected by the subsidisation of US and EU producers, respectively. A specific initiative in regard to cotton had been launched at the Cancún ministerial meeting and pursued in Geneva for special attention in the latest framework text.

It was concluded that cotton would not be dealt with separately, but in conjunction with the negotiations on agriculture. The issues of subsidisation of the sugar market are compounded by historic relationships and preferential arrangements between the subsidising states and developing country producers. Appeals are pending in each case.

In US – Subsidies on Upland Cotton, Brazil challenged a wide array of allegedly prohibited and actionable subsidies provided to US producers, users and/or exporters of upland cotton, as well as legislation, regulations and statutory instruments providing such subsidies (including export credit guarantees), grants and any other assistance.

Brazil claimed that the measures at issue were inconsistent with the obligations of the US under the following provisions:

  • the export subsidy provisions of articles 3.3, 8, 9.1 and 10.1 of the Agreement on Agriculture;

 

  • the prohibited subsidies provisions of articles 3.1(a) and (b) and 3.2 of the SCM Agreement;

 

  • the actionable subsidies provisions of articles 5(c) and 6.3(c) and (d) of the SCM Agreement;

 

  • the subsidies provisions of paragraphs 1 and 3 of Article XVI of the GATT 1994; and

 

  • the national treatment provision of Article III:4 of the GATT 1994.

The panel concluded that Brazil’s claims were, for the most part, substantiated. In particular, US export credit guarantee programmes in regard to upland cotton constituted export subsidies per se, prohibited by articles 3.1 and 3.2 of the SCM Agreement, and were applied in a manner that resulted in circumvention of US subsidy commitments within the meaning of article 10.1 of the Agreement on Agriculture, in contravention of article 8 of the same agreement.

US rejects findings

The US appeals the decision that the programme for each product constitutes an export subsidy and is provided by the US at premium rates that are inadequate to cover long-term operating costs and losses of the programmes within the meaning of item (j) of the illustrative list of export subsidies in annex I of the SCM Agreement. It also appeals the panel’s finding that export credit guarantees, notwithstanding article 10.2 of the Agreement on Agriculture, constitute measures subject to article 10.1 of that agreement.

The WTO panel concluded that the US measure providing for “user marketing (Step 2)” payments to exporters of upland cotton violated articles 3.3 and 8 of the Agreement on Agriculture, by constituting an export subsidy regarding an unscheduled agricultural product. The US claims that the panel is erroneous in its findings including, for example, its finding that Step 2 payments are contingent on export performance.

User marketing (Step 2) payments to domestic users of upland cotton were found to be import substitution subsidies prohibited by articles 3.1(b) and 3.2 of the SCM Agreement. The US appeals this point on grounds of erroneous findings, including the panel’s finding that domestic support payments that are consistent with a member’s domestic support reduction commitments under the Agreement on Agriculture may nonetheless be prohibited under the SCM Agreement.

The effect of the mandatory price-contingent US subsidy measures [marketing loan programme payments, user marketing (Step 2) payments, market loss assistance payments and counter-cyclical programme payments] was found to be “significant price suppression in the same world market” within the meaning of article 6.3(c) of the SCM Agreement, constituting serious prejudice to the interests of Brazil under article 5(c) of that agreement.

In other instances (production flexibility contract payments, direct payments and crop insurance payments), Brazil failed to establish that the effect of the measure was significant price suppression or an increase in the US’s world market share within the meaning of article 6.3.(c) and (d), and constituting serious prejudice. The US challenges, on appeal, several issues related to the finding of significant price suppression and the finding of serious prejudice.

A tough task

The reduction of trade-distorting subsidies, with a view to levelling the playing field between the subsidising states and those that are unable to subsidise their agricultural industries, has proven to be a difficult nut for the WTO to crack. It is being attacked on at least two fronts in the WTO: in the Doha round of negotiations and in the Dispute Settlement Mechanism. The new framework for agricultural negotiations, annexed to the General Council Decision of July 2004, was an important affirmation of the desire of WTO members to continue to pursue a consensus on modalities and, ultimately, agreement.

The timely decisions of the panels on cotton and sugar have underscored the need for major adjustments to the agricultural subsidies regimes of the developed world in order to facilitate other WTO members’ participation in international commodities markets. Although they are each still subject to appeal to the WTO appellate body, it is unlikely that either of these cases will be reversed in its entirety. If the US and the EU fully implement the recommendations of the panel and appellate body, a major step toward liberalisation of agricultural markets will be taken and groundwork laid for further consensus-building.

Carol George is an associate in Baker & McKenzie’s international trade & WTO group

Sorting out sugar: as easy as abc?

The EU’s common market organisation for sugar sets out rules to promote and protect its sugar industry. One main feature of the regime is the establishment of price support for domestic sugar, including intervention prices, supply controls by way of quotas, domestic market supply management, import restrictions and export subsidisation. The regime also sets out the basic price and the minimum price for beet, import and export licences, levies and export refunds; quotas and import restrictions; and preferential import arrangements.

The EU regulation provides rules for three categories of sugar: A and B quota sugar and C sugar, which is essentially excess sugar. A, B and C sugar are produced, respectively, from A, B and C beet, the latter being used exclusively to produce C sugar.

Sugar producers are required to pay growers at least the minimum price for the A and B beet that they process into sugar. The price they pay for C beet is generally lower than for A and B beet. There is no regulated minimum price for C beet. However, because growers of C beet also grow A and B beet and because C beet can only be used in C sugar (which belongs to the same production line as A and B quota sugar), the EU sugar regime ensures that the sale of under-priced C beet to C sugar producers is an integral part of governmental market regulation. The production of C beet will depend on the needs of C sugar producers.

To be competitive, C sugar must be exported at world prices. Because of the low world price relative to its cost of production, C sugar producers exercise pressure on C beet growers to sell to C sugar producers at reduced prices.

Various aspects of the regime provide the beet growers with an incentive to produce beet beyond their A and B quota levels, as C beet. Therefore, the discounted prices for C beet and the incentive for beet growers to produce it serve as an advantage for the export production of C sugar.

The main issues in the case of EC – Export Subsidies on Sugar, were therefore:

  • whether, under the EU sugar regime, C sugar was, in effect, being subsidised for export to the international market; and

 

  • whether the EU had exceeded the level of export subsidies under its commitment since 1995, and in particular since the marketing year 2000/01.

The panel found that:

  • Cross-subsidisation taking place through the cumulative effect of measures under the EU sugar regime – including high prices charged to domestic consumers – enabled C sugar producers to produce and sell C sugar. In the panel’s view, there was a payment in the form of transfers of financial resources from the high revenues resulting from sales of A and B sugar, for the export production of C sugar, within the meaning of article 9.1(c) of the Agreement on Agriculture.

 

  • The complainants had provided prima facie evidence that producers/exporters of C sugar received payments on export by virtue of governmental action:

(i) through sales of C beet to C sugar producers below their total costs of production; and

(ii) in the form of transfers of financial resources, through cross-subsidisation resulting from the operation of the EU sugar regime, within the meaning of article 9.1(c) of the Agreement on Agriculture.

  • The EU had not demonstrated that its exports of C sugar and ACP/India (equivalent) sugar, which had exceeded its commitment level since 1995 and in particular since the marketing year 2000/01, was not subsidised.

 

  • Therefore, through its sugar regime, the EU had acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture by providing export subsidies within the meaning of article 9.1(a) and (c) of the Agreement on Agriculture in excess of:

(i) its quantity commitment level specified in section II, part IV of its schedule, which since the marketing year 2000/01 was for 1,273,500 tonnes of sugar; and

(ii) its budgetary outlay commitment level specified in section II, part IV of its schedule, which since the marketing year 2000/01 was E499.1m a year.