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Background Note

April 2004

1. The WTO seems slowly to be edging towards a framework deal on agriculture that will set the general terms of detailed negotiations—probably in the period 2005-2006—under the Doha Work Programme mandate. Of course, a framework deal by the externally imposed deadline of end-July 2004 is no certainty—after all, the WTO has an honourable record of snatching defeat from the jaws of victory. Nonetheless, the March 22-26 “Agriculture Week” in Geneva appeared to confirm that some major participants are prepared to move in the context of a package that will broadly resemble, in structure at least, the Chairman’s text on the table when the Cancun meeting collapsed last September. However, when it comes, movement will have to be balanced and coordinated—that is the challenge facing New Zealand’s Ambassador Tim Groser, Chairman of the Committee on Agriculture.

2. For the moment, it seems very unlikely that any agreed framework will include specific numerical reduction targets or precise implementation schedules. This is perhaps the most important lesson from the failure to reach agreement on the modalities for further commitments on agriculture liberalisation by March 2003 and subsequently. Indeed the so-called Harbinson Text included target figures for reduction commitments and while it was specified these were only indicative, none of the ensuing texts discussed immediately before and during Cancun incorporated suggested figures. Nevertheless, the principles that should be agreed in the framework will be important and, to an extent, will determine the level of ambition of the entire negotiations package under the Doha mandate. 

II. The elements of an agreement are becoming clearer

3. The broad lines of a potential framework agreement this year have become increasingly evident over the past few months. In the immediate post-Cancun period, the then General Council Chairman, Ambassador Carlos Perez de Castillo, sought to secure consensus. His efforts were largely fruitless. However, in December 2003, he was able to set out a series of key pointers in the agriculture dossier:

● Focus on the reduction of the most trade-distorting, amber box, domestic support measures (“substantial reductions of total AMS”); the capping of blue box measures and possible reduction commitments thereafter; and a review of green box criteria.
● Clarification of the “blended formula approach” [Note 1] to market access commitments with particular reference to the concerns expressed by some developing countries.
● Commitment to reductions or elimination of all forms of unfair export competition with the personal view that a “commitment to the elimination of all forms of export subsidies is a must for these negotiations to be successful”.
● Acceptance of the concepts of “Special Products” and the special safeguard mechanism for developing countries.
● Identification of specific development support measures on cotton that might be implemented in a shorter timeframe than that likely for the multilateral trade negotiations as a whole.

4. In his 11 January 2004 letter to WTO trade ministers, whose aim was to give a nudge to the negotiations, the US Trade Representative Robert Zoellick validated many of the points in the Perez de Castillo assessment, but in some respects went further. He called for:

● Elimination of all export subsidies by a set (early) date. Parallel elimination of the subsidy component of export credit programmes and disciplines on state trading enterprises.
● Substantial lowering of amber box support—including a narrowing of the differences of allowed support (i.e. EU support must be reduced much more than that of the U.S.). Blue box support to be capped.
● Ambitious results on market access to include developed and advanced developing countries. A cap on high tariffs and “significant growing access”.
● Examination of both trade and development-related solutions to the cotton issue.

5. The Zoellick letter is credited with launching a major effort at the political level to secure agreement across the board on issues left unresolved in Cancun. The EU responded positively, as did many other WTO member governments. Zoellick and EU Trade Commissioner Lamy travelled widely to garner support for the initiative, meeting the G-20 [Note 2], the G-90 [Note 3] and other regional groupings in the process. The G-20 met to reconcile differences with the Cairns Group. While important signals were sent and received in these high-level political contacts, the intention was more to restore some political momentum than to reach precise agreements. In that, they were successful. However, as Ambassador Groser pointed out at the end of his first round of agricultural meetings and consultations last week, “this paper will be written in Geneva or it will not be written at all!”

6. The basis for a “grand bargain” on agriculture—in the form of a negotiating framework—is relatively clear. In the broadest terms, the EU must move on export subsidies, the US on other forms of unfair export competition and on domestic support and the advanced developing countries, together with some highly-protected, developed economies, on market access. However, to write the political equation is easier than producing consensus on a precise WTO text. The following paragraphs look at these propositions in more detail.

III. Export subsidy elimination is a must

7. It has been assumed until very recently that within the agricultural dossier it is the elimination of export subsidies that will make or break a deal. It is certainly the case that such an outcome would represent an enormous achievement for the Doha negotiations. Although export subsidies are used far less than was the case at the end of the Uruguay Round, they still distort many commodity markets and represent a continuing source of unpredictability for competitive producers. The US, the Cairns Group and the G-20 group of developing countries all want export subsidies eliminated by an agreed date. In reality, they can live with a decision to eliminate, in principle, with the precise schedule for elimination agreed later on in the negotiations on modalities.

8. This is really an issue for the EU alone. Few other WTO members resort to export subsidies—as distinct from other forms of export support—on an appreciable scale and most have signalled they could relinquish such subsidies. Even for the EU the need for export subsidies as the consequence of large-scale surpluses is no longer overwhelming. In fact, according to the most recent WTO notification, the cost of EU export subsidies is currently only about $2 billion—less than one-tenth of its total CAP subsidy costs. Most goes to dairy products, beef and sugar. Spending on cereals and course grains exports is very low (less than one-tenth of that allowed by the EU’s Uruguay Round commitments), though it may grow again if the Euro stays strong against the US dollar. Other products that are, or have been, traded with export subsidies include wheat and wheat flour, pigmeat (recently restarted), poultry, eggs, wine, fruit and vegetables, alcohol and rice.

9. It is becoming ever clearer that the EU could commit to eventual elimination of export subsidies—albeit over a long period for some products. Left to itself, the Commission would like to make the commitment. It has many reasons for doing so, not least the impact of EU enlargement and budgetary pressures. The longer-term impact of the 2003 CAP reform package—notably the progressive de-linking of domestic support from production—should mean a gradually reduced need for export subsidies if excess production is curtailed, as intended. In any event, the member states in favour of further CAP reform know that abandoning the possibility of recourse to export subsidies will ultimately add to pressures for further change.

10. Thus, it was no great surprise that the EU began signalling more clearly at the recent March agriculture negotiations’ week that it could go further than merely eliminating export subsidies on products of particular interest to developing countries. This approach has always been a negotiating ploy, since all EU products benefiting from export subsidies are of interest to developing countries. However, the gambit will continue to be played out while the EU assures itself that other players will come forward with concessions of their own.

IV. Other forms of unfair export competition should be tackled too

11. In particular, that means the US makes little use of direct export subsidies but, instead, offers export credits and guarantees on non-market terms and tends to dispose of some surplus stocks through food aid programmes. The EU and other players have always said that these forms of unfair export competition must be treated in tandem with direct export subsidies. The US concedes the point with respect to export credits. In any event, the mandate to develop disciplines on export credits in agriculture is, in effect, a hangover from the Uruguay Round. Ideas for rules on repayment terms and other provisions were put forward in the “Harbinson paper” (TN/AG/W/1/Rev.1, Attachment 5) a year ago.

12. The Zoellick letter made no mention of food aid, the availability and timing of which, according to the EU, tends to correlate with over-production generated by US domestic support programmes rather than the specific needs of recipient countries. However, US officials—as well as the EU-US joint paper in August 2003—have recognised the need for disciplines that meet the needs of aid recipients while not allowing the instrument of food aid to operate as an export support. The rules proposed in the Harbinson paper, Attachment 6, seem likely to be the basis for further discussion.

13. A final condition, in the area of export competition, for EU acquiescence on a commitment to eliminate all export subsidies—and one which is supported enthusiastically by the US—is the disciplining of the possible trade distorting activities of state trading enterprises (STEs). The particular targets are Canada (wheat), Australia (wheat) and New Zealand (dairy), all of whom operate centralised purchasing and trading organisations (marketing boards). The STEs operated by developing countries are likely to be recognised as subject to special and differential treatment (see Attachment 3 of the Harbinson paper).

V. Market access: now the biggest stumbling block

14. There is one further area of concessions that the EU will pursue, outside the group of export competition dossiers, as its quid pro quo for export subsidy elimination. That is market access and, particularly, enhanced access to the markets of advanced developing countries. That is, again, an aim supported by the US and also by the Cairns Group. However, the interests of the developing countries are very divergent on this pillar of the agriculture negotiations, which could well be the most problematic in the coming months.

15. Discussion still focuses around the use of the “blended formula” first outlined in the EU-US joint paper and then adopted and amended in the various chair papers before and during Cancun. The challenge is now how to allocate these three approaches and how to allow for special and differential treatment. 

16. Current positions on the allocation issue are predictable. The G-10 (Bulgaria, Chinese Taipei, Iceland, Israel, Japan, Korea, Liechtenstein, Norway and Switzerland, etc.), all of whom seek to continue the protection of a variety of domestically produced agricultural products, want to maximise the use of the Uruguay Round formula. The G-20 is divided. That is understandable since two key members, India and China, initially supported the ambitious objectives of the group on export subsidies and domestic support on condition that they were provided shelter against pressure for significant tariff reductions. Recent signals from Beijing and New Delhi suggest their positions on this may be softening. However, when they met some weeks ago, it was clear that while the Cairns Group and the G-20 had an identity of interests on export competition and domestic support, there was little accommodation on market access. At end-March 2004, India (where parliamentary elections take place in April-May 2004) re-emphasised its fear that developing countries would end up taking a much larger share of the market access burden than developed nations.

17. Looking for meaningful new market access opportunities, the Cairns Group and the US want to limit use of the Uruguay Round formula to a minimum—the US says 2-3% for developed countries and 10% for developing participants. The US also wants a “cap” on tariffs—although with different maximum duties for developing and developed countries. The Cairns Group is still expressing disquiet with the entire “blended” approach, seeing it as unlikely to generate “substantial improvements in market access” as the Doha Declaration requires.

18. Clearly, the positions are polarised. However, since actual numbers are unlikely to be inserted into any framework text this year, much of the argument about the allocation of different tariff-cutting formulae is academic. At this point, it seems unlikely that a solution other than the “blended approach” can be concocted for the framework agreement.

19. For developing countries other than LDCs (which are likely to be exempt from any reduction commitments), the “Alliance for Strategic Products and Special Safeguard Mechanism”, created at the Cancun Ministerial by 22 WTO members [Note 4] (and which later became the Indonesia-led G-33), was successful in having a general acceptance of the concept of “special products” (SP), which will probably survive to allow them some comfort. Similarly, it is assumed, a special safeguard mechanism (SSM) will also be negotiated. There is a split between the G-20 and the G-33 on whether all products from all destinations would be covered by the SSM. The ACP group shares the G-33 interests regarding SP and SSM.

VI. Request and offer and regional trade initiatives

20. It should also be recalled that at a much later stage in the Doha negotiations process, a request-offer procedure will allow participants to pursue precise market access objectives with trading partners. This is especially relevant with respect to the use of expanded tariff rate quotas (TRQs) to generate real market opportunities.

21. It is worth noting, further, that for a significant and growing number of WTO members, the Doha agenda is not their sole means of securing new market access in agriculture. Many are currently engaged in regional and bilateral negotiations whose results will be partially dependent on the outcome of the Doha negotiations. One example is the EU-Mercosur negotiation where the thorniest issue is the market access for Mercosur agricultural products to the EU market. The Mercosur countries have already made an ambitious and almost comprehensive offer. Both sides will come back in mid-April with new offers—the EU is believed likely to table additional agricultural market access based on new TRQs, partially deliverable now, partially at the conclusion of the Doha negotiations. However, the EU-Mercosur and the WTO negotiations are taking place at the same time and this has put a question mark on how far each side can go without more certainty on the contents of the WTO package. Although progress is being made on the sanitary and phytosanitary front (equivalence, transparency, certification, audits, inspection fees, etc.), as far as market access is concerned, both the EU trade commissioner and the Brazilian Foreign Minister have stated that neither side is willing to pay twice. Hence a link has been established for several G-20 countries between a successful outcome of the Doha negotiations and some valuable new access to the EU market. The now rather shaky structure of the FTAA may provide a cover for the US to do something similar. ACP countries, of course, are engaged in the negotiation of Economic Partnership Agreements (EPAs) with the EU to replace the Cotonou arrangements, but progress of the different regional ACP groupings has been uneven. However, though the EPA negotiations are also taking place in parallel with the WTO negotiations, there seems to be a weaker relation between the two. It is unlikely that results in the latter will affect the former and vice versa. The ACP countries are focussing more on the overall erosion of preferences that would result from meaningful liberalisation under the Doha agenda.

22. In any event, within the Doha Work Programme, the play-off between elimination of export subsidies and the disciplining of other forms of export support and the acceptance of meaningful market access commitments by advanced developing countries is relatively clear. However, it is only two-thirds of the picture: the potential for domestic support commitments must be factored in.

VII. US domestic support outlook uncertain

23. On domestic support, the culprit for a change seems to be the US and not the EU—which, on the basis of its 2003 CAP reform package can, in theory at least, offer very large amber box reduction commitments. Instead, the G-20 countries being asked to serve up significant market access improvements are turning to Washington to establish what the US can provide in winding back its domestic support programmes. For the exporters among these countries, the US market is crucial. If domestic subsidies were not impacted through the Doha negotiations then there would be little point in countries like Brazil and Argentina offering the Washington additional market access for US goods.

24. The 2002 Farm Bill put in place new programmes and more spending on domestic farm support. Notwithstanding the ambitious proposals tabled previously by the US—which envisaged swingeing cuts and the eventual elimination of such support—the US-EU joint paper of August 2003 suggested strongly that the two big players had decided on a formula that would essentially accommodate the new US programmes and the EU’s CAP reform. It was hinted strongly that, in a presidential election year, there was no likelihood of Congress dismantling its own programmes that support politically influential farm groups. However, the argument was put forward at a time when there was still some credibility in the deadline for concluding the Doha negotiations—the end of 2004. It is now largely accepted that the frameworks that should be decided this year will guide negotiations that will take place in 2005 and 2006. That changes the picture dramatically.

25. By 2006, there will be negotiations between the US Administration and Congress on a replacement for the 2002 Bill (which expires in 2008). Further, many observers believe that the size of the US budget deficit by that time will likely make a continuation of the present generous levels of spending in the farm sector less and less justifiable. Thus, a negotiation in Geneva on disciplining domestic support in a manner that will have a material impact on US programmes may end up more politically palatable than is the case now. In addition, the US may soon have before it an unfavourable result in the dispute settlement case brought by Brazil and others on US cotton support programmes. Such a result would likely have ramifications across a broad sweep of programmes as they affect products other than cotton; another reason why the US may ultimately have to give ground. 

26. That, at least, must be the hope of the Cairns Group and the G-20. The question is how to tie down the framework of the future negotiation in a way that the US can accept it politically this year, but which signals the potential for meaningful negotiations with the US next year, after the presidential elections.

27. The answer will naturally lie in the detail of the framework text. Can the US accept product specific limits on AMS spending? Officials say they are willing to discuss this option. The US says it can live with a cap on the blue box but is unclear whether it can accept a subsequent programme of reduction. These provisions were included in the Chairman’s text in Cancun. They are also issues on which the EU is very sensitive, as it is on the proposal that green box criteria be reviewed. This latter issue will inevitably be a point of dispute at a later stage of the Doha negotiations since, in the wake of the CAP reform package, the EU expects to transfer a very large proportion of its farm spending from the amber box into the green box. It will do so on the assumption that such de-linked support will no longer be trade distorting, a view not shared by many other WTO members.

28. It will be clear from the foregoing presentation that if the nature of a deal is relatively clear, getting all the key participants to move in unison will require some skill. The chairman has not indicated that he, himself, will table a text. In some respects it would be better if, initially at least, the major players could reach an accommodation. However, at the moment, apart from a few weak signals, including some from the EU on export subsidies, nobody is likely to step out of line and volunteer substantial movement. Four negotiating sessions of the Agriculture Committee are scheduled up to mid-July—two of them in June, which is probably as good a signal as any as to when the chairman expects things to start moving seriously.   

VIII.  Limited prospects for the cotton initiative in the Doha negotiations

29. Where does all this leave the cotton initiative by West and Central African countries? It is well known that the EU has proposed reforms in the cotton sector independently of the Doha negotiations. [Note 5] However, it is US domestic support programmes that are the true target of the initiative. If these are to change, it will be as a result of the dispute settlement case on cotton or through pressure exerted within the Doha agricultural negotiations, or a combination of both. The US—and a good many other participants—will not accept meaningful negotiations on the trade aspects of cotton outside the main agriculture dossier of the Doha agenda, even if a particular emphasis on this commodity may be possible in a final outcome.

30. One technical aspect of the Doha negotiations will be crucial to the final package having some meaningful impact on cotton. This is the issue of product-specific trade-distorting domestic support reductions. The “Derbez” framework text on agriculture (Annex 1 of Rev 2 of the Cancun Draft Ministerial text) [Note 6], in Para 1.1 refers only to product-specific AMS being capped at levels during a reference period to be negotiated. Otherwise, the range of AMS reductions would be based on a “Final Bound Total AMS”. Such an approach would mean that the US (and the EU) would retain the right to target new Doha negotiations domestic reduction cuts on products where reduced support would be most politically comfortable. In other words, in the absence of product-specific AMS cuts (at least some minimum reduction) cotton support could be virtually untouched by Doha negotiations’ commitments.

31. However, it was clear from the WTO-organised workshop on cotton that took place last in March 2004, in Cotonou, Benin, that the major trading nations, including China, as well as the international economic institutions have scope and some political will to begin to tackle the cotton problem in the context of development assistance. The EU and US have both announced initiatives, while additional financial and technical assistance from donors seems likely to be available. Thus, the “solution” provided by this workshop was closer to that envisaged under the rejected paragraph 27 of the Draft Ministerial (“Derbez”) Text than the trade-related alternative proposed at Cancun by the four countries behind the cotton initiative [Note 7] which aimed at the complete elimination of export subsidies over a period of three years, and the elimination of domestic support, over a period of four years as of the beginning of 2005. In consequence, although the development side of the cotton problem has moved forward, it would seem that the trade solution is still tied to progress on the mired Doha negotiations.

Note 1: The “blended formula approach” was proposed by the EC and the US in their joint text of 13 August 2003 (and was included in the draft ministerial text circulated in Cancun by the Chairman of the Ministerial Conference). The blended formula approach divides tariffs into three categories subject to different cuts: The first, known as the Uruguay Round “formula” ,involves a weak cut on a select number of high tariffs for sensitive products with an average and minimum reduction, but would involve quota increases for these products. The second set of tariff cuts involves a more ambitious approach with reductions based on the “Swiss formula” that would mean deeper cuts on a broader category of less-sensitive products. The third part of the blended formula approach is trimming down some tariff lines to zero. (return to text)

Note 2: Known as “G-21” up to Cancun, this group proposed effective special and differential treatment for developing countries in the negotiations in agriculture, focussing on substantially reducing domestic support and eliminating the blue box; supporting the blended formula for tariff reductions with lower reductions and longer implementation periods for developing countries; and the elimination of export subsidies to be divided into two types of products, one for products of export interest to developing countries, and one for the rest of the products. (return to text)

Note 3: Composed of the African Group, the ACP Group and the LDCs. (return to text)

Note 4: The members of the SP and the SSM alliance are: Barbados, Botswana, Cuba, Dominican Republic, Honduras, Indonesia, Jamaica, Kenya, Mauritius, Mongolia, Nicaragua, Nigeria, Pakistan, Panama, Peru, the Philippines, Tanzania, Trinidad and Tobago, Turkey, Uganda, Venezuela, Zambia and Zimbabwe. (return to text)

Note 5: For the Commission’s reform proposals for Europe’s cotton sector see COM(2003) 698 final, 18 November 2003. (return to text)

Note 6: JOB(03)/150/Rev.2, 13 September 2003. (return to text)

Note 7: Benin, Burkina Faso, Chad and Mali. (return to text)