Doha Trade Negotiations at Critical Point

The current Doha Round of World Trade Organization negotiations on trade liberalization have reached yet another critical point heading into the Ministerial meeting in Hong Kong the second week of December. The previous round of trade negotiations, the Uruguay Round (1986 through 1994), was the first to begin the liberalization of agricultural trade, but tariffs remain much higher and subsidies more prevalent in agriculture than in other industries. Developing nations also complain that the Uruguay Round provided much more benefit for developed nations, the United States (US) and the European Union (EU) in particular.

Already underway for five years and well past the original deadline for completion, the Doha Round, dubbed the Development Round in recognition of the increased political presence and involvement of the large bloc of developing nations who are determined not to be marginalized again, hinges on liberalization discussions in agriculture concentrating on three main objectives:

a) increased market access through reductions in tariffs: high agricultural tariffs are most prevalent in East Asian countries intent on keeping them while increased market access is sought by the major ag exporters such as the US, Australia, Brazil, and Canada.

b) reductions in trade-distorting domestic subsides: the EU provides the largest amount of the most trade-distorting category of domestic support (amber box support) followed by the US and Japan.

c) elimination of export subsidies: the EU is by far the dominant user of export subsidies providing between 85% - 90% of the world's total.

Talks have stagnated, but enthusiasts hoped that the Hong Kong meetings could have wrapped up the Round. That might be overly optimistic and many observers suggest the best hope now is that negotiators agree on a framework for which details would be clarified over the next 12 - 18 months. That time period is essentially the deadline anyway because President Bush's special trade negotiating authority granted by Congress expires July 1, 2007.

Market Access and Tariffs

The Uruguay Round converted all non-tariff barriers to imports into tariff-rate quotas (a low tariff on imports up to a given quota level and a higher tariff on imports above that level), placed upper limits (called "bindings") on all agricultural tariffs, and required reductions in agricultural tariffs. However, tariffs actually applied to agricultural products are substantially lower for most countries, especially for developing countries, than the tariff bindings agreed to in the Uruguay Round. This means the Doha Round tariff-reduction negotiations, which are based on bound tariff levels, will have to achieve substantial reductions to have even a small effect on actual applied tariffs.

In early October, in a belated attempt to get talks moving again, the US proposed a formula for cutting tariffs. Current tariffs would be divided into four tiers with higher reductions required in the higher tariff tiers:

" 0% - 20% tariff, a 55% cut rising to 65% cut over five years
" 20% - 40% tariff, a 65% cut rising to 75% cut
" 40% - 60% tariff, a 75% cut rising to 85% cut
" 60% - 80% tariff, a 85% cut rising to 90% cut
" All tariffs would be capped at 75%
" After a 5-year break, all tariffs would be pushed to zero over the next 5 years.

The EU liked the 4 tier approach, but insisted on retaining tariff protections for 8% of its total production (such as beef and poultry) where it considers its farmers most vulnerable to foreign competition. The US was demanding this "sensitive" products category constitute no more than 1% of total production. The US proposed that "sensitive" products such as sugar be protected by safeguards and longer implementation periods for tariff reductions.

Domestic Subsidies

Domestic subsidies for agriculture around the world are substantial totaling more than $200 billion annually according to the US Congressional Budget Office. Value added in the agricultural sector worldwide is roughly $1.2 trillion, so domestic subsidies are equivalent to roughly one-sixth of value added. 64 of 76 countries reported subsidies of some description during the period 1998 - 2004; but the US and the EU each accounted for about 1/3 of the total with Japan reporting about 15%. According to the CBO, Japan, the EU, and the US each had subsidies averaging 37% of their agricultural outputs since 1998, Canada 13% and Mexico 11%.

The Uruguay Round divided domestic agricultural subsidies into five categories, or "boxes":
" Green - deemed (by negotiators) to have little or no effect on the prices and quantities of goods exported or imported or produced, "since increased production affects the prices and quantities of traded goods".
" Blue - certain direct payments to producers under production-limiting programs with payments based on historic acreages and yields, not on current production
" Special and differential - development subsidies used by developing nations
" De minimis - subsidies below a specified percentage (5%) of the value of production deemed low enough not to be a cause for concern
" Amber - all support that does not fall within one of the other four boxes

Under the Uruguay Round, the first four boxes are exempt from reduction requirements; amber support is limited and reduction is required. Each nation reports and classifies its own domestic agricultural subsidies, which means, as the CBO says, "the accuracy and timeliness of the resulting data depend on the effort, judgment, and care taken by the various reporting countries." What this really means is that a country can self-declare its programs "green" and "green" they remain, exempt from reductions unless challenged by another country. Not surprisingly, the US claims about 70% of its support as "green" versus about 50% for the world as a whole. Moreover, as the CBO said in its August 2005 study Policies That Distort World Agricultural Trade, "as was the case with tariffs, actual amber-box subsidies are substantially lower than amber-box bounds for most countries, so only substantial reductions in those bounds negotiated in the Doha Round would have much effect on actual subsidies. The EU's most recent reported amber-box subsidies totaled less than half their final bound value. The most recent US total was almost 25% below its final bound value. Japan's was 84% below its final bound value." Canada's amber-box support was 80% below its permissible limit.

Current Status

In early October, the US proposed to cut its "amber" support by 60% from an upper limit of $19.1 billion to $7.6 billion and required the EU to cut its "amber" support by 83% to $15 billion. The EU said it was willing to cut its upper limit on "amber" support by 65%, an offer which quickly got EU Trade Commissioner Peter Mandelson into hot water with EU member states who called him home for an emergency meeting to explain. The EU continued to insist that if it is to end its export subsidies as the US demands, the US must cut food aid and Australia, New Zealand and Canada must end their monopoly state trading enterprises (ie. the Canadian Wheat Board). Japan responded by saying that it could not accept the US offer as a basis for discussion and could not accept any restrictions on its tariffs. The G-20 group of developing nations led by Brazil and India said that the US offer was "smoke and mirrors" because of an exemption under which Washington could repackage some subsidies and continue to pay them to avoid opening the American market to imports.

Critics and analysts were quick to say that the US proposal would result in only small reductions in actual payments. Oxfam summed up the US offer by saying "if this offer goes ahead, trade-distorting domestic subsidies will remain untouched, and dumping will continue." For example, although the US proposal to reduce its "amber" support upper limit from $19.1 billion to $7.6 billion looks drastic, the reduction affects only the marketing loan and loan deficiency payment program which actually pays US crop farmers about $9 billion. The direct payment program ($5 billion annually) and the counter-cyclical program ($7.6 billion annual cap) would be exempt in the US proposal because the US classifies them as "green" and "blue" respectively (WTO courts don't agree and have found against these programs in the Brazilian upland cotton case, a finding the US has ignored). Of course, the US proposal also includes language to limit "blue" box subsidies to 2.5% of agricultural production which would mean a US limit of about $6 billion annually.

If one reads carefully, the actual reductions proposed by the US amount to about $3 billion (actual "amber" LDP reduction from $9 b down to $7.6 b = $1.4 b; plus, actual "blue" counter-cyclical payment reduction from $7.6 b down to $6 b = $1.6 b; $1.4 + $1.6 = $3b total). This $3 billion reduction also happens to be the same amount proposed to be cut from USDA spending over 5 years under the current budget reconciliation legislation in Congress anyway. In other words, no additional cuts to US subsidies beyond current Congressional proposals would result from this US WTO proposal. Senator Charles Grassley, Rep.-Iowa admitted as much when he said "there should be no reason for concern. Don't forget this doesn't mean an elimination of the safety net. It means there will be a move from payments based on production to those based on conservation and other programs."

Of course, the major hurdle remains Congress, where reaction to the US proposal was swift and unequivocal. Senate Agriculture Committee Chairman Saxby Chambliss, Rep-Ga., said "let me reiterate that Congress will be writing the next farm bill in 2007 and US agriculture will not disarm unilaterally."

House Agriculture Committee Chairman Bob Goodlatte, Rep-Va., said much the same when he said that the EU must act before the US will agree to any reduction or elimination of tariffs or domestic support. "We will not unilaterally disarm. The negotiations and modalities should not preempt the responsibilities and prerogatives of Congress. The agriculture negotiations can set the broad parameters of spending limits, but they should not write the next farm bill."

Congress, where the full House and 1/3 of the Senate are up for election in November 2006, will be paying close attention. Comments by Dr. Daryll Ray of the Agricultural Policy Analysis Center, University of Tennessee, will carry weight. "Getting rid of subsidies certainly will not result in the levels of agricultural prosperity internationally that is claimed by its advocates. In the US, agriculture would be thrown into a depression. Total US net farm income would decline by one-third, and crop farm net income would drop by well over one-half. Land prices would collapse and rural communities would deteriorate at an even faster pace than during recent decades." That should be enough to convince Congress to re-classify subsidies rather than make meaningful reductions in support. In other words, "smoke and mirrors".

The real risk in the Doha Round negotiations, as we reach the critical stage in Hong Kong, is that meaningful elimination of trade-distorting subsidies is not in reality achieved despite political rhetoric claiming success. As the US proposal makes clear, and Congressional reaction confirms, the US is not really prepared to actually reduce support, merely reclassify program spending. If true, this means artificial depression of price would continue especially for corn. It means corn producers in Ontario would continue to be faced with the decision to produce corn at less than cost of production or not at all. Canadian and Ontario governments have already "unilaterally disarmed" far in excess of either Uruguay or Doha Round spending reduction requirements. They now no longer provide meaningful help to crop producers to offset the injurious impact of US subsidies. The decision by Ontario corn producers of whether to produce or not may become redundant; grain corn may no longer be grown in Ontario.