WTO FARM SUBSIDIES ISSUE

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Context

• Statement from the Finance Ministry: The World Trade Organisation (WTO) should look at the issue of farm subsidies with an open mind as it impacts the food security needs of emerging economies in the backdrop of COVID-19 pandemic and the Russia-Ukraine war.

Background

• Formed in 1948, The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs or quotas.
• But the General Agreement on Trade and Tariffs provided many loopholes in the agriculture trade sector.
• The non-tariff measures like import quotas and subsidies were still prevalent in the agriculture trade.
• Now, in 1995, World Trade Organization was established through the Marrakesh Agreement, as the successor to the General Agreement on Tariffs and Trade (GATT).

With the aim to provide fairer markets to the farmers the World Trade Organisation came up with an Agriculture Agreement. India is a member of the World Trade Organization and has to comply with the Agreement on Agriculture.

WTO Agreement on Agriculture

• The WTO Agreement on Agriculture was one of the many agreements which were negotiated during the Uruguay Round.
• The Uruguay Round multilateral trade negotiations were concluded on December 15, 1993 and were formally ratified in April 1994 at Marrakesh, Morocco.

Uruguay Round The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted within the framework of the General Agreement on Tariffs and Trade (GATT), spanning from 1986 to 1993 and embracing 123 countries as "contracting parties". The Round led to the creation of the World Trade Organization, with GATT remaining as an integral part of the WTO agreements. The Round came into effect in 1995 under the administrative direction of the newly created World Trade Organization (WTO). Goals The main objectives of the Uruguay Round were: To reduce agricultural subsidies. To lift restrictions on foreign investment. To begin the process of opening trade in services like banking and insurance. To include the protection of intellectual property. They also wanted to draft a code to deal with copyright violation and other forms of intellectual property rights. The Doha Development Round was the next trade round, beginning in 2001 and still unresolved after missing its official deadline of 2005.

• The WTO Agreement on Agriculture comprises specific commitments to reduce support and protection in the areas of domestic support, export subsidies and market access.
• The Agreement also takes into account non-trade concerns, including food security and the need to protect the environment, and provides special and differential treatment for developing countries.

Provisions under the WTO Agreement on Agriculture

The three provisions that the agriculture agreement focuses on are –

• Market access
• Domestic support
• Export subsidies

The agreement provided for a reduction on provisions of the agreement by –

• Developed countries within 6 years, that is by 2000.
• Developing countries within 10 years, that is by 2004.
• The least developed countries need not comply with this requirement.

Market access commitment 

• Market-access commitments are mentioned under Article 4 of the agreement on agriculture.
• It imposes restrictions on the non-tariff barriers by abolishing them and also asking the states to not impose them in the future.
• The agreement focuses on tariffication, a process where the non-tariff barriers such as quotas, variable levies, minimum import prices, discretionary licensing, state trading measures, voluntary restraint agreements, etc are converted into tariffs.
• The process has to be implemented by the different countries in the following way – 

• • Developed countries – to reduce the total tariff including the results of tariffication by 36% with minimum cut per product By 15% within six years of implementation of the agreement. 
  • Developing countries – To reduce the tariff including the result of tariffication by 24% with a minimum cut per product by 10% within 10 years of implementation of the agreement.
  • The least developed countries did not have to make any commitment. 
• Some developing countries who are maintaining quantitative restrictions due to balance of payment problems were allowed to offer ceiling instead of tariffication. 
• Japan, the Republic of Korea, the Philippines (for rice), and Israel (for sheep meat, Whole milk powder, and certain kinds of cheese) asked for special treatment until the implementation period of developing and developed countries.

Domestic support commitment 

• Domestic support commitment has been covered in Article 6 of the Agriculture Agreement.

• • Developed countries – to reduce the domestic support by 20% within six years from the implementation of the agreement.
  • Developing countries – to reduce the domestic support by 13% within 10 years of the implementation of the agreement.
  • Least developed countries do not have to comply with this cut.

• This commitment refers to the reduction in total support and not just the individual commodities.

Exemptions

• Some of the policies that are categorized under the Green Box in the agreement have been excluded from the reduction commitments, this category involves the policies which do not distort trade or have any kind of effect on production, policies that provide benefits to rural communities, agriculture, domestic food aid, etc.
• The investment subsidies that are generally available to low-income and resource-poor farmers in developing countries are also excluded from the reduction commitments under this provision. 

WTO GREEN, AMBER AND BLUE BOXES EXPLAINED: https://www.iasgyan.in/blogs/wto-boxes-explained

 Export subsidies commitment 

• Export subsidies commitment has been covered under Article 8 of the agricultural agreement.
• This provision requires that the member states reduce the money spent on export subsidies and the quantity of export that are eligible for subsidies.

• • Developing countries – to reduce the value of export subsidies by 36% and quantity of subsidized Exports by 21% within 6 years of the implementation of the agreement.
  • Developed countries – to reduce the value of export subsidies by 24% of and the quantity of subsidized Exports by 14% within 10 years of the implementation of the agreement.
  • Least developed countries do not have to comply with this provision. 
• The agreement also mentions that the products that do not come under the subsidized export goods category cannot be included in the list in the future.

India’s commitment towards the Agreement on Agriculture

Market access

• India did not have to comply with the tariffication rule as India was maintaining quantitative restrictions due to balance of payment problems.

Export subsidies

• According to the agreement the subsidies can be provided till 2023 and after that, the export subsidies will be illuminated according to the Nairobi package that was agreed in the Nairobi ministerial decision on export competition, 2015.

Domestic support

• The World Trade Organisation introduced the concept of de minimis which set a limit for developing and developed countries to a certain percentage.
• If these countries exceed their domestic support beyond a certain percentage then the countries have to comply with reduction commitments.
• The percentage set for developing countries for both product services and non-product services is 10% and for developed countries is set at 5%.

Are Indian MSPs ultra vires the agreement?

• Minimum support price comes under the pillar of domestic support under the agreement of agriculture.
• Since the MSP is not covered under the green box (the support which does not distort trade) they have to comply with the reduction commitments.
• The World Trade Organization also laid down in the agreement that the countries do not have to comply with the reduction commitments if the total aggregated measure of support (AMS) is below or up to 10% for developing nations.
• India’s AMS is way less than the minimum levels of domestic support agreed by the World Trade Organization.
• Therefore, India contended that it did not have to comply with the reduction commitments under the agreement. Thus, MSP guaranteed by the government is not ultra vires to the agreement.

India’s Defense of MSPs at the WTO

• In 2018, the United States took the issue to the World Trade Organization that India provides for domestic support to rice and wheat that is 60-70% higher than the de minimis level of 10% stipulated by the World Trade Organization.
• To justify the Indian stand on the issue raised by the United States we need to consider the following rules that bind India under the domestic support provision of agreement on agriculture.
  • Firstly, the de minimis rule says that the product service and non-product service AMS cannot exceed 10% of the value in production in any annual period.
  • Secondly, the international prices that need to be considered for the calculation of AMS were fixed during the base year that is 1986-88.
  • Furthermore, Article 18.4 of the agreement provides that the WTO members should give due credit to inflation and its influence on the ability of other member states to comply with the domestic support commitments.
• Therefore, India argued that the reasoning of the USA, that India has exceeded the domestic support by a large amount is flawed and it should have considered the inflation effects on the prices as provided by including Article 18.4 of the agreement.

Peace Clause

• The Agreement in Agriculture contains a Temporary “due restraint” or “peace clause”.
• The Temporary ‘peace clause’ said that no country would be legally barred from Food Security Programmes even if the subsidy breached the limits specified in the WTO agreement on agriculture.
• Thus, the breach of the de minimis limits (10 percent) is covered by the peace clause set out in the WTO Bali conference in 2013. Bali ministerial Peace Clause decision on public stockholding was taken for food security purposes.
• The WTO members at the Bali Summit had agreed to put the ‘Peace Clause’ mechanism in place as an interim measure. Members further committed to negotiating an agreement for a permanent solution.
• Members clarified that the “peace clause” would remain in force until a permanent solution was agreed, even if that meant going beyond the 2017 deadline.

India’s Concerns

• India’s worry is that if the Peace clause expires before a permanent solution is in place, food security programmes and policies to protect farmers, such as Minimum Support Prices, would come under siege.
• The limited window offered by the Western powers for the peace clause was seen by India as insufficient assurance.
• The clause also requires full disclosure of MSPs and annual procurement for food security programmes, which the Government fears would leave India open to questioning by other countries on domestic matters.

Need for a permanent solution

• The right to food is a basic human right. Therefore, Western misgivings about a country like India − where a third of the 1.3 billion population lives beneath the poverty line − providing food subsidies seems hypocritical.
• The developed nations see India as a huge market for foodgrains and other products, but their produce is rendered uncompetitive when the government is willing to subsidise farmers, purchase their produce for a minimum support price and then sell it at a loss through the public distribution system and other channels.
• Accepting a temporary peace clause would be tantamount to admitting that the subsidy programmes in India and other developing nations violate global trade norms.

Concerns raised by India in the recent Asian Development Bank (ADB) Governor’s seminar on ‘Policies to support Asia’s rebound

• Since WTO was founded, there has been a grievance with respect to the export of agricultural products and generally in trade. The voice of the Global South and emerging markets has not been heard at par with that of the developed countries.

Note: The ‘Global South’ largely refers to countries in Asia, Africa and South America.

• Subsidies for agriculture and poor farmers in developing countries were not counted at all and were frozen in the context of COVID and Russia-Ukraine war, food and fertiliser security had become important.
• There is better food security in the developed world compared to developing countries. Trade agreements have come about in a lopsided way, for which solutions have to be found.
• Under global trade norms, a WTO member country’s food subsidy bill should not breach the limit of 10% of the value of production based on the reference price of 1986-88.
• As part of permanent solution, India has asked for measures like amendments in the formula to calculate the food subsidy cap and inclusion of programmes implemented after 2013 under the ambit of ‘Peace Clause’.
• Under Peace Clause, WTO members agreed to refrain from challenging any breach in prescribed ceiling by a developing nation at the dispute settlement forum of the WTO. This clause will stay till a permanent solution is found to the food stockpiling issue.

Options proposed by India for a permanent solution on food security at WTO

• One of the proposals recommends adjusting for excessive inflation the 'external reference price' to arrive at the minimum support price ceiling of 10% of the total value of production of the crop currently allowed under WTO rules. This support is currently calculated at 1986-88 prices.
• The other option proposes taking the three-year average price of a crop based on the preceding five-year period excluding the highest and the lowest entry for that product. This proposal allows an updating of the outdated 1986-88 external reference price based on current global prices or inflation rates.
• It also demands that subsidy calculations should be based on actual procurement and not all eligible production. This will be of great use to India and other developing countries that rely on price support for the benefit of its farmers.
• The public stockholding programmes for food security purposes should be allowed and considered to be in compliance with the WTO rules if a set of conditions are met. The conditions include, the stocks acquired under public stockholding programme should not distort trade or adversely affect food security of other members.
• Members shall endeavour not to export from acquired stocks, except for the purposes of international food aid, or for non-commercial humanitarian purposes, or when requested by Net Food-Importing Developing Countries and least developed countries in the same geographic region or in any other region, or any member facing food shortages and higher food inflation during international food crisis.

India is facing pressure from other countries to reduce the subsidy given to its farmers. But the subsidy we give is far less than what the US and EU give. Indian government subsidy to farmers comes in at $300 per farmer, compared to $40,000 per farmer in the US.

MUST READ:

WTO: https://www.iasgyan.in/daily-current-affairs/wto

MULTILATERAL INSTITUTIONS, NEED FOR REFORMS: https://iasgyan.in/rstv/multilateral-institutions-need-for-reforms

PRACTICE QUESTION Q. An interim Peace Clause was put in place in 2013 under the Bali Agreement to protect developing countries from being challenged for breach of WTO subsidy levels, but the limited window offered by the Western powers for the peace clause is seen by India as an insufficient assurance. What are the options for a permanent solution to food security at WTO? Examine.

https://www.thehindu.com/business/wto-needs-to-look-at-farm-subsidy-issue-with-open-mind-sitharaman/article66808478.ece