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5 December 2013, Gateway House

Food Security at stake in Bali

At the World Trade Organisation (WTO)’s ongoing ninth Ministerial Conference, the focus of several countries is on food security. What does the proposed ‘Peace Clause,’ mean for developing nations? What are the complex factors at play in the decision-making process, in the ongoing meeting?

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Agriculture is one of the key areas of negotiation at the Ninth WTO Ministerial currently on in Bali, Indonesia. Of particular significance in the conference is a proposal tabled by the G-33 for furthering the objectives of food security and rural livelihoods for undernourished populations in a large number of developing and least developed countries.

The Bali Ministerial is taking place at a time when many doubt the efficacy of the WTO as a multilateral trade negotiating forum.  The Doha Round which was launched in 2001 with the most ambitious trade agenda, is virtually dead. Only in a few areas such as Trade Facilitation and Agriculture is there any possibility of some agreement.  At the same time, the Doha Round presents perhaps the last opportunity for developing countries seeking to rectify the imbalances in the existing agreements, to press their demands. Another failure could trigger an irreversible shift towards highly trade-deflecting and lopsided preferential trade agreements. The stakes are high for developing countries including India, and a failure could hurt the world trading system on the whole.

Many trade policy experts describe agriculture as the engine of the Doha talks.  At the core of the Bali talks is the G-33 proposal to carry out public stockholding for food security purposes. At present, the Agreement on Agriculture (AoA) categorises domestic support into three categories based on the extent of trade distortion: Green Box, Blue Box and the Amber Box. The Green Box includes permitted subsidies with no reduction commitments; it can even be increased without limitations. It also includes a provision for accumulation and holding of public stocks for food security purposes, but is subject to the condition that procurement should be at market prices. Blue box includes subsidy programmes with production limiting features.

The Amber box, on the other hand, is considered as trade-distorting and is regulated through a concept known as “Aggregate Measurement of Support” (AMS). The AMS is defined and worked out as the gap between the intervention (procurement) price of the current notified year and the world reference price of the base period 1986-88 multiplied by the ‘eligible production’ volume. Eligible production is considered as the total marketable production eligible for the market price support in the concerned WTO member. The AMS includes both product-specific and non-product specific support.

For instance, if India has established a minimum support price (MSP) for the purchase of wheat, the difference between the MSP and the fixed external reference price multiplied by the total quantity of eligible production of wheat in India, will be treated as a product-specific support for the concerned year.  During the Uruguay Round (starting 1986), India’s total product specific support was negative, which meant that Indian farmers were getting much less than then prevailing international prices. The non-product specific support includes input subsidies such as fertilizer and irrigation subsidies. The total non-product specific support for India at the conclusion of the Uruguay Round (in 1994) was roughly Rs. 5,000 crores.  According to the AoA, for countries with no scheduled reduction commitments, AMS in any particular year was expected to be maintained only within the de minimis levels. In the case of a developing country such as India, this was determined as 10% of the value of agricultural production. For developed countries, the de minimis was 5%.  Since India’s total AMS was negative, India’s AMS limit was bound at zero.  This meant that in the absence of specific AMS reduction commitments, India’s trade-distorting domestic support has to be kept within the de minimis levels of 10% of the value of the agricultural production.

Agricultural subsidies in India did not call for a careful consideration until recently. First of all, the extent of domestic support in the agriculture sector in India is still not known. Some agriculture experts argue that India’s domestic support for specific agricultural commodities and inputs (such as fertilizers, electricity, irrigation and seeds) had risen significantly since its last notification to the WTO in 2002. Importantly, the 2002 notifications pertained to the 1996-97 and 1997-98 marketing periods. However, no one seriously thought that India would have difficulty in meeting its commitments under the AoA. On the other hand, India consistently argued that the AoA was highly imbalanced, especially in the matter of addressing the food security concerns of resource-poor and marginal farmers. To an extent, agriculture was the driving force behind the formation of groupings such as G-20 at the time of the Cancun Ministerial. But the focus of the G-20 was agricultural subsidy reforms in developed countries – and did not adequately address the concerns of developing countries.

The passage of the National Food Security Act (NFSA, 2013) has brought agriculture subsidies and AoA back to centrestage. Undoubtedly, compliance with the subsidy disciplines of AoA in its existing format will be a major challenge for India in the absence of modifications of existing provisions or incorporation of safe harbor provisions in the AoA. India is expected to spend $22 billion annually as a food subsidy. The bulk of this subsidy will be targeted at providing low cost food to end consumers, which is acceptable under the current WTO framework. Under the various covered agreements of the WTO, consumption-related subsidies are not generally discouraged provided that they do not discriminate between goods based on their origin. Under the GATT 1994 or, the more specific Subsidies and Countervailing Measures Agreement (ASCM), producer subsidies are generally considered non-distorting – unless such subsidies are conferred for export promotion or import substitution purposes. But the calculation of AMS under the existing provisions of the AoA, targets a number of minimum price support or administered price programmes run by developing countries.

Minimum price supports and inputs subsidies are examples of production subsidies which are currently regulated through the concept of AMS under the Amber box.  The gist of the G-33 proposal is that developing countries need greater flexibility in setting prices they can pay to the poor and marginal farmers in the process of procurement, and about what governments can do with the surplus grains.

G-33 countries – and especially India – have been demanding a greater recognition of agriculture support programmes. India, one of the leaders of the G-33 grouping, has initiated a proposal even in the early phase of the Doha Round negotiations for modifying the concept of the “external reference price” especially in relation to the public stockholding for food security purposes. More recently, the G-33 proposal has sought reforms of three key elements used to calculate the AMS, namely:

(a) revision of external reference price which is based on 1986-88 levels, to current global prices;

(b) the volume of eligible production, and

(c) the level of administered prices.

The developed countries have no interest in reviewing the base period for the external reference price, since they have already shifted their agricultural support to non-product specific support or the Green Box category.

A permanent solution to these demands will not be easy and could take several years of negotiation. In view of the difficulty involved in amending the AoA and the delay this process could take, G-33 has proposed three options to ensure that the developing countries’ need for food security is adequately responded to by the WTO:

Option A: Understanding on “Governmental Stockholding Programmes for Food Security Purposes” as Defined in Footnote 5 of Paragraph 3 of Annex 2 (“Green Box”) of the AoA.

Option B: Decision Pursuant to Article 18.4 of the AoA

Option C: the Peace Clause

The run-up to the Bali Ministerial has seen a resurgent claim on behalf of the G-33 countries to include a decision in the nature of a “Peace Clause” (Option C above) which would have allowed these countries to acquire foodstuffs to meet food security requirements without facing WTO disputes. The peace clause will not entail any revision in the language of the AoA, but will only ensure that other WTO members cannot bring disputes to the WTO for breaching the bound AMS levels under the AoA.

At present, India’s MSP programmes on a number of agricultural products do not fall within the category of Green Box subsidies and, based on some calculations, are in excess of the de minimis requirement. India can conform to its WTO obligations by reforming the MSP system or by directing aid to farmers through Green Box measures such as de-coupled income support measures or direct payments to farmers not linked to production decisions. A number of developed countries have reclassified their subsidies to avoid the breach of AMS reduction commitments. In the place of MSP programmes, India can also consider making direct aid to farmers. However, administering such direct aid programmes in India will be too difficult and administratively cumbersome.

The peace clause appears to be a temporary solution.  It is proposed for a period of four years until the 11th ministerial meeting of the WTO proposed in 2017. In other words, the demand of the G-33 is only to incorporate a peace clause until a permanent solution is found under a work programme. India’s commerce minister Anand Sharma, in his address at the WTO plenary at Bali, noted that India was opposed to any decision that did not ensure a permanent solution at the expiry of the peace clause. According to India, the peace clause should remain in force until a negotiated settlement is found against all types of challenges.

The peace clause currently discussed at the WTO does not include relaxations under Article XVI of GATT 1994 (subsidies) as well as Agreement on Subsidies and Countervailing Measures (ASCM). In other words, the grant of such subsidies can lead to countervailing duty actions or safeguard duty actions in other countries subject to meeting the standards laid out by the concerned agreements. They can also lead to challenges under the ASCM if it results in ‘serious prejudice,’ i.e., price depression or price suppression on account of such subsidy in domestic, importing or third-country markets.

It appears from the initial discussions at Bali that there may be an agreement on the peace clause.  However, the finer details of the peace clause will be yet another area of contention.

Suhail Nathani is a partner with Economic Laws Practice (ELP), a multi-practice law firm in Mumbai. He has been involved in several of the Indian trade remedial measure cases, and has advised clients on various aspects of GATT, GATS and FTAs, including rules of origin, non-tariff barriers, trade remedial measures and market access.

James Nedumpara is Associate Professor and Assistant Dean (Project and Institutional Development) and Executive Director, Centre for International Trade and Economic Laws; and Co-Counsel, Economic Laws Practice (ELP), a multi-practice law firm in Mumbai.

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