The
World Trade Organization (WTO) has recently published
its latest annual report. It shows that even seven
years after the implementation of the Uruguay Round
Agreements, distortions and imbalances in world trade
are still pervasive. The report highlights that imbalances
and distortions are particularly high in sectors where
developing countries have export interest.
In developed countries, agriculture is still receiving
huge amount of subsidies despite its small and declining
share in domestic GDP. In 2002, total support to agriculture
in OECD countries was around US$ 311 billion, which
was equivalent to about 1.3 percent of total GDP of
the OECD area. The amount of agricultural subsidies
is more than six times higher than the annual development
assistance budget of OECD countries, which is about
US $50 billion. In countries like Japan, Republic
of Korea, Norway, and Switzerland total support to
agriculture is close to or exceeds the sector's contribution
to GDP (Table 1). From Figure 1 it can also be observed
that in all the Quad countries (EU, Canada, Japan
and US), support given to agriculture, when measured
as a percentage of total farm receipts, is higher
in 2001 than in 1997.
Table
1. Selected Indicators of support of agriculture
in OECD countries, 2001
|
Countries |
Agriculture's
Share of GDP (%) |
TSE (%
share of GDP) |
Percentage
PSE (%) |
MPS +
OP* (%) |
IS* (%) |
Producer
NPC |
Consumer
NPC |
Australia |
3.3 |
0.3 |
4 |
3 |
66 |
1.00 |
1.00 |
Canada |
2.2 |
0.7 |
17 |
53 |
9 |
1.11 |
1.15 |
Czech
Republic |
3.6 |
1.2 |
17 |
41 |
19 |
1.06 |
1.06 |
European
Union |
2.1 |
1.4 |
35 |
62 |
6 |
1.33 |
1.41 |
Hungry |
3.7 |
1.4 |
12 |
30 |
56 |
1.01 |
1.00 |
Iceland |
9.6 |
1.6 |
59 |
74 |
10 |
2.11 |
1.68 |
Japan |
1.1 |
1.4 |
59 |
93 |
5 |
2.36 |
2.12 |
Korea Rep.
of |
4.9 |
4.7 |
64 |
93 |
3 |
2.64 |
2.47 |
Mexico |
5.5 |
1.3 |
19 |
67 |
12 |
1.17 |
1.21 |
New Zealand |
7.2 |
0.3 |
1 |
60 |
40 |
1.00 |
1.02 |
Norway |
1.5 |
1.4 |
67 |
56 |
22 |
2.27 |
1.94 |
Poland |
4.1 |
1.0 |
10 |
70 |
27 |
1.07 |
1.07 |
Slovak
Republic |
3.6 |
0.9 |
11 |
- |
- |
1.01 |
1.01 |
Switzerland |
1.2 |
1.9 |
69 |
59 |
5 |
2.39 |
2.33 |
Turkey |
14.1 |
4.3 |
15 |
81 |
9 |
1.15 |
1.16 |
Unites
States |
1.4 |
0.9 |
21 |
55 |
15 |
1.15 |
1.13 |
OECD Average |
- |
1.3 |
31 |
69 |
8 |
1.31 |
1.37 |
- Not
Available. |
*
percentage Share of PSE |
Note
: TSE = Total Support Estimate; PSE =
Producer Support Estimate; MPS = Market
Price Support;
OP = Payment based
on Output; IS = Payment based on Input; NPC
= Nominal Protection Coefficient.
Source : OECD (2002), Agriculture Policies in OECD
Countries - Monitoring & Evaluation. |
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The Annual Report also reveals that, contrary to
popular belief, subsidies in most developed countries
are not targeted towards the poor farmers. In fact,
in most OECD countries, a very high proportion of
subsidies goes to the top 25 percent of farmers. Quoting
an OECD study, the report highlights that in EU, USA,
Canada and Japan top 25 percent of farmers receive
70 percent, 89 percent, 75 percent and 68 percent
of total agricultural subsidies respectively. Data
published in the Annual Report also contradict the
claim that OECD countries have mostly moved away from
market distorting subsidies like price support to
relatively less market distorting subsidies like Blue
and Green box subsidies. Data show that market price
support is still prevalent in these countries as prices
received by the OECD farmers continues to be much
higher than international prices. The producer Nominal
Protection Coefficient (NPC) of OECD countries shows
that the prices received by the OECD farmers were
31 percent higher than international prices in 2001.
Estimates show that in 2001, highly trade distorting
subsidies like market price support (MPS) and output
payments (OP), together accounted for 69 percent of
total support to producers in OECD countries. On this,
the WTO Annual Report 2003 comments:
"… the continued dominance of the most
distortive forms of support means that farmers in
many OECD countries remain largely insulated from
world market signals. They also constrain agricultural
growth and development opportunities in non-OECD countries".
Pp. 22.
Recent domestic policies undertaken in most OECD countries
suggest that high subsidization of agriculture is
going to continue. The proposed reform of Common Agricultural
Policy (CAP) of EU has already run into problems in
countries like France and it is not yet certain whether
and when the CAP reforms will be eventually implemented.
But even if the CAP reforms are implemented, the WTO
Annual Report suggests that the total EU farm budget
will be around €40 billon. However, the report
also mentions that this figure does not include subsidies
given to farmers via price support and tax concessions.
As has been already mentioned, farmers in all the
OECD countries, including the EU countries, continue
to receive generous price support from their respective
governments. Once these subsidies are added to the
figure of €40 billon, it is not clear how much
actual reduction in subsidies is going to take place
even after the CAP reforms are implemented.
Secondly, USA, through its Farm Security and Rural
Investment Act of 2002, has proposed to increase its
agricultural subsidies significantly. Under this law,
federal spending on US agriculture is slated to increase
by US$ 82.6 billion over the next ten years. This
will be in addition to US$ 100 billion which the US
Government was already set to give farmers. The WTO
Annual Report indicates that this huge increase in
subsidies primarily will be in production enhancing
subsidies. It says: "several of the subsidies
contained in the bill would provide incentives to
boost production. This is particularly true of "counter-cyclical
payments", under which growers of wheat, corn,
rice, soyabeans, and cotton will be guaranteed a certain
price irrespective of market conditions, thereby distorting
both production and trade; in the event that prices
fall further, such subsidies will rise accordingly,
although a "circuit breaker" built into
the legislation is designed to keep spending within
the WTO ceiling". Pp. 22.
This large increase in production enhancing subsidies
in the US is likely to exacerbate the distortions
present in global agricultural trade by artificially
inducing overproduction of agricultural commodities
and thereby further depressing international agricultural
prices. After the Uruguay Round, most developed countries
increased their farm subsidies but they did so by
shifting some of their more production distorting
subsidies (or the Amber Box subsidies) to Blue and
Green box subsidies, which are supposedly less trade
distorting. But, as USA is now planning to increase
their production enhancing subsidies by a huge amount,
it is almost certain that distortions and imbalances
of the international agricultural trade are going
to go up in near future.
The new US farm bill also marks a crucial shift in
the negotiating position of USA in the current round
of agricultural negotiations. During the earlier stages
of negotiations, USA was arguing for sharp reduction
in domestic subsidies while the EU was arguing for
a more conservative approach. But, given the new US
farm bill, it is almost certain that USA will no longer
push for a large reduction in domestic subsidies in
the current round of negotiations. This has changed
the balance of negotiations completely and there is
currently an apprehension among developing countries
that reluctance of these two major players to reduce
domestic subsidies will practically preempt any move
by other WTO Member countries to achieve higher reduction
in domestic subsidies in the next agreement on agriculture.
A recent joint draft proposal submitted by USA and
EU about the ongoing agricultural negotiations strengthens
this apprehension[1].
The WTO Annual Report also points out that apart from
high subsidies, existence of tariff peaks[2]
and high specific duties in developed countries continue
to restrict market access of agricultural exports
from developing countries. According to the WTO Annual
Report, incidences of tariff peaks are particularly
high in the agriculture sector of these countries.
Estimates suggest that roughly 60 percent of the imports
of the QUAD countries, which face tariff peaks, come
from developing countries. Most developed countries
also use specific duties for agricultural imports
(see Box 1 for an explanation of specific duty). Specific
duties are inherently more problematic than ad valorem
rates because they are more opaque than Ad Valorem
tariffs and often conceal a very high level of Ad
Valorem Equivalent (AVE)[3]. The
WTO Annual Report reveals that "between 94 and
98 of the top 100 tariffs (in AVE terms) in Canada,
the EU and Japan involve specific duties; they range
from 61% to nearly 210% in the EU, from 47% to roughly
1,739% in Japan, and from 56% to 314% in Canada. In
the United States, 84 of the top 100 tariffs involved
specific duties whose AVEs ranged from 34 to nearly
253%". Pp 17.
Box
1. Specific Duty
Specific
duty is defined as an import tax
set at a fixed amount per unit
or per unit of measure regardless
of the value of the item imported.
This is different from ad valorem
duty which is fixed percentage
of the value of an imported product.
The major difference between advalorem
duties and specific duties is
that specific duties do not depend
on the prices of imported products
and therefore can be used more
as a price stabilization and protection
mechanism.
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As far as market access for non agricultural goods
are concerned, the WTO Annual report shows that among
manufactured products, tariff peaks are concentrated
in textiles, clothing and footwear sectors. For both
developed and developing countries, bound rates are
highest in textiles and clothing, leather, rubber,
footwear and leather products. Tariff rates are higher
than average in fish and fish products and transport
equipments also. It is not a coincidence that sectors
where the developing countries have export interest
are attracting much higher tariff rates.
Widespread existence of tariff escalations also hinders
exports from developing countries. In most developed
countries for both agricultural and industrial goods,
tariffs tend to increase with the level of processing.
This is called 'tariff escalation'. Tariff escalation
discourages exports of value added commodities and
locks developing countries in the cycle of producing
and exporting primary products and restricts them
from diversifying towards more value added exports.
It also acts as a major obstacle to local processing
of domestic primary products (stage 1) as well as
of semi-finished goods (stage 2). The WTO Annual report
shows that, among industrial products, incidence of
tariff escalation is particularly high in textiles
and clothing, leather and footwear products. The WTO
Annual Report also points out that in the textiles
and clothing sector there is evidence of escalation
in non-tariff protection (greater protection given
to higher value-added products through non-tariff
barriers). Quoting the report of WTO Textile Monitoring
Body, the report shows that in the textiles sector,
most developed countries have removed quota restrictions
mainly on products which belong to the lower value-added
range. As the Annual Report comments, such protection
impedes developing countries in their efforts to move
their production into higher value-added products.
To further restrict market access in their countries,
developed countries are increasingly using trade defense
mechanisms as Non Tariff Measures. The Annual Report
shows that protectionist measures taken by WTO Member
countries have gone up in the recent years. The steady
increase in trade defense mechanisms like anti-dumping
duties, countervailing measures and safeguards leads
to the suspicion that these measures are increasingly
used as Non-Tariff Measures (NTMs) by the member countries.
For example, the number of cases of initiation of
Anti-dumping measures increased steadily from 157
in 1995 to 347 in 2001. More than half of the anti-dumping
measures imposed by WTO member countries are directed
towards two categories of products, namely 'base metals
and articles thereof' and 'chemicals and articles'.
Secondly, the use of SPS (Sanitary and Phytosanitary
Measures) and TBT (Technical Barriers to Trade) have
also increased steadily over the years. There is a
growing concern among developing countries that these
measures are used by developed countries to restrict
market access. The report also points out that instances
of WTO members resorting to other trade defense mechanisms
like safeguards and countervailing measures are also
on the rise in the recent years.
These findings are particularly disconcerting for
developing countries because implementation experiences
show that the Uruguay Round did not bring any fundamental
changes in the global trading system. As the WTO Annual
Report points out, continued presence of high level
of subsidies in agriculture, backloading of quotas
in textiles and lack of meaningful liberalization
in the services sector have ensured that the benefits
accruing to the developing countries are much less
than anticipated. Given this backdrop, this new trend
of increased use of trade defense mechanisms is going
to be a serious cause for concern for developing countries.
Continued deadlocks in the current round of negotiations
are not helping the matter either.
Given these problems, it is not surprising that the
optimism about the multilateral trading system is
gradually fading in most developing countries. As
an alternative, most countries are trying to improve
their trade relations on bilateral or regional basis.
Consequently, there has been a proliferation of Regional
Trading Agreements (RTAs) among developing countries
in the recent years. According to the WTO Annual Report,
currently more than 240 RTAs are operational and as
the last years' Annual Report pointed out, more than
50 percent of global trade now takes place through
the regional trading groups. It is to be noted here
that trading within RTAs does not come under the purview
of WTO and, therefore, these regional alternatives
are posing a significant challenge to the multilateral
trading system. The WTO Annual Report 2003 expresses
deep concern about this latest development and comments:
"RTAs can complement the multilateral trading
system, help to build and strengthen it. But by their
very nature RTAs are discriminatory; they are a departure
from the MFN principle, a cornerstone of the multilateral
trading system. Their effects on global trade liberalization
and economic growth are not clear given that the regional
economic impact of RTAs is ex ante inherently ambiguous".
However, unless the Cancun Ministerial manages to
address the concerns of the developing countries,
it is unlikely that the growth and proliferation of
RTAs are going to subside. In fact, failure of the
Cancun ministerial may even drive countries more towards
alternative forms of international trading systems.
The Complete Report can be Downloaded/Viewed
at:
http://www.wto.org/english/res_e/booksp_e/anrep_e/anrep03_e.pdf
August 28, 2003.
[1] View
the draft text here . For
an analysis of the EU-US text, see Martin Khor's article
here
[2] Tariff peaks are defined as tariffs
which are three times or more the average MFN tariff
rates of a country
[3] Ad Valorem Equivalent is the ad
valorem tariff that would be equivalent, in terms
of its effects on price, to a specific duty.
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