The implications of the Uruguay Round Agreement on Agriculture for developing countries

Chapter 1: An overview of the negotiations on agriculture


What this chapter is about

This chapter introduces the background to the Agreement on Agriculture. It provides a brief overview of the history of the GATT, noting its origins in the 1947 accord, the reasons for eventually extending the remit of the negotiations to include agricultural trade, and the countries and issues which dominated the discussions leading up to the Agreement.

Aims of this chapter

  • To provide a brief review of the history of the GATT, and to provide some background information for the following chapters on the content of the Agreement on Agriculture.
  • To highlight the context of agricultural trade prior to the Uruguay Round negotiations.
  • To list the issues and countries which dominated the negotiations.
  • What you will learn

  • About the principles and objectives upon which the GATT was based.
  • That the GATT has a substantial history which has largely excluded agriculture.
  • The problems associated with the world agricultural markets prior to the Agreement which led to the inclusion of agriculture in the negotiations.
  • Who were the main players in the negotiations, their concerns and interests.
  • 1.1 The background to the Uruguay Round negotiations

    The General Agreement on Tariffs and Trade (GATT) was established in Geneva in 1947 to create a framework that would regulate international trade and stimulate international commerce. The World Bank and the IMF, that were established at Bretton Woods in 1944 in order to deal with matters of international finance, were associated initiatives. In addition to the latter two organisations, policy makers also envisaged the formation of an International Trade Organisation (ITO), that would oversee international trade and enforce a framework of rules. A charter for the ITO emerged from a 1946 conference in Havana, although this was never ratified by member governments.

    As a result, the GATT continued to be governed by "provisional" and "interim" measures, and remained an agreement without a formal organisation to enforce it. The signatories to the GATT, known formally as contracting parties (rather than members) applied the GATT according to the Protocols of Provisional Application (PPA), and the secretariat that administered the GATT kept the title of Interim Committee of the International Trade Organisation (ICITO). These "provisional" arrangements persisted up until 1994, when the Final Act of the Uruguay Round eventually brought the World Trade Organisation (WTO) into being.

    1.1.1 Objectives and Principles of the GATT The objectives of the 1947 Agreement were to establish an orderly and transparent framework within which barriers to trade could be gradually reduced, and international trade thereby expanded. In order to facilitate this, the agreement contained within its text certain underlying principles and provisions that have been built upon over consecutive rounds of negotiation. The most important elements of the Agreement included those of:

    • non-discrimination: the Most Favoured Nation (MFN) principle;

    • reciprocity;

    • transparency;

    • tariff reduction.

    Table 1.1 The Principles of the 1947 Act

    Table 1: The principles of the 1947 act

    Exceptions and waivers

    The agreement also recognised that there are circumstances in which strict adherence to these principles would be inappropriate. The GATT therefore provided for exceptions and waivers. In particular:

    • developing countries were to be given special status;

    • countries that offer each other more favourable treatment within a custom's union were allowed to waive full adherence to the MFN clause;

    • agricultural trade was given special treatment, especially with regard to non-tariff barriers.

    1.1.2 Achievements prior to the Uruguay Round

    The principal mechanism for progress on trade liberalisation within the GATT have been periodic multilateral negotiating rounds. In all, there have been eight such rounds, starting with the Geneva Round of 1947 that established the GATT, and concluding with the Uruguay Round that ended in 1994 after having established the WTO. The primary focus of the majority of rounds has been promotion of multilateral tariff reductions, and the extension of the agreed reductions to all members in accordance with the MFN clause. The achievements are summarised in Table 1.2.

    Table 1.2: The GATT negotiating rounds

    Table 2: the GATT negotiating rounds

    1.1.3 The exclusion of agriculture from the GATT

    The issue of agricultural sector trade was effectively excluded from the GATT at an early stage in the Agreement's life. The general consensus of opinion was that agriculture was a unique sector of the economy, that, for reasons of national food security, could not be treated like other sectors. With the expansion of the manufacturing economy, agriculture was in relative decline. Political and social pressures demanded, however, that the decline be halted or slowed down, and that agriculture be protected from the full rigours of the international market.

    It was not until the Uruguay Round that agriculture, as a sector, was eventually placed firmly on the GATT negotiating table; although certain agricultural products did previously appear in the negotiations, as individual commodities. The Dillon Round succeeded, for example, in cutting tariffs on Soya beans, cotton, vegetables and canned fruit to very low levels, and the International Wheat Agreement and the International Dairy and Meat Agreement were negotiated under the auspices of the Kennedy Round. In general, though, agricultural commodities remained outside the negotiating agenda.

    As a result, agricultural trade was accorded "special treatment" and was effectively exempted from some important GATT rules:

    • Quantitative import restrictions, banned for all other commodities, could be used in the case of agricultural commodities, providing that domestic production of the commodity in question was also subject to certain restrictions, or to domestic price stabilisation or price support policies.
    • The use of agricultural export subsidies was explicitly permitted, conditional upon the observance of "equitable" market shares; but "equitable" was difficult to define and agricultural export subsidies proliferated.
    • Other mechanisms for protecting agriculture, such as variable import levies and domestic subsidies, were not explicitly covered by the GATT, and provided additional loopholes for agricultural policy makers wishing to protect the agricultural sector.

    1.1.4 Protectionism and international tension over agricultural trade

    The limited relevance of the GATT to agriculture led to increasingly high levels of protection and support for agriculture, particularly in industrialised countries, where the market share of many traditional suppliers of imports went into sharp decline. Some net exporting countries, such as the USA, sought to maintain their market share by resorting to export subsidy programmes, whilst those exporters that were unable or unwilling to do this, saw their market shares decline further. International tension and disputes over agricultural trade arose with increasing frequency, and GATT institutions were often used in an attempt to resolve these disputes. In fact, 60 percent of all trade disputes submitted to the GATT dispute settlement process between 1980 and 1990 were concerned with agriculture.

    The protectionist policies of industrialised countries created large distortions in world food markets, depressing the world price of temperate agricultural commodities to uncompetitively low levels, and generating global market instability.

    It was not until the opening of the Uruguay Round in 1986, however, that agriculture was placed finally on the negotiating agenda. The desire to reduce continual friction between the USA and the EC over agricultural trade was one of the main reasons why a consensus was eventually reached to bring agricultural trade into the regulatory framework of the GATT. Consensus over how this was to be achieved, however, was at this point still far away, and it took seven years of negotiation before an agreement was finally reached.

    1.1.5 Reasons for inclusion of agriculture within the GATT framework

    The economic rationale for bringing agriculture within the framework of the GATT revolved around:

    • comparative advantage;

    • world market instability;

    • the effects of protectionism.

    The issue of comparative advantage in agricultural production

    Government interventions in agriculture distorted agricultural production in many countries and generated high levels of inefficiency. High levels of support to farmers in developed countries generated large surpluses, which were sold on the world market through the use of export subsidies, often greatly depressing the world price of many agricultural commodities. The effect was to distort international patterns of production away from those dictated by comparative advantage.

    • Countries with a comparative advantage in the production and export of tradable agricultural commodities were therefore unable to produce and export as much as they would have under a more liberal trading regime, and been deprived of substantial export revenues. At the same time, and with the assistance of substantial levels of government support, many countries with less comparative advantage had been producing at inefficiently high levels.
    Instability in the world market for agricultural commodities

    Since domestic prices in many countries, both developing and developed, had not been linked to world prices, the responses to changing international prices in both supply and demand that might have helped to dampen the annual world price fluctuations were absent.

    • The variable import levies of the EC, that fluctuate according to movements in the world price, in order to maintain a fixed internal price, are a good example of how NTBs insulate producers from exposure to international prices, and exacerbate instability on the world market. Deficiency payments in other countries similarly isolated producers to a considerable extent from fluctuations in market prices.

    1.1.6 The effect of protectionism on producers in developing countries Agricultural protectionism also imposed implicit taxes on farmers in those countries where public sector support for farmers had been absent or negative. In developing countries, artificially low world prices created a downward pressure on domestic prices. This was frequently accentuated by domestic agricultural policies which effectively taxed producers.

    • The resulting price disincentives often compromised agricultural production, threatened the livelihoods of large sectors of the population, whose incomes were derived from agriculture, and made many developing countries increasingly dependent upon cheap food imports. This was, however, often of benefit to urban consumers in these countries, one reason why these policies often lasted for many years.

    1.2 Agriculture in the Uruguay Round negotiations

    The Uruguay Round was launched in 1986 by the Punta del Este Declaration, in which the negotiating objectives of the Round were laid out. The objectives with regard to agriculture were described as follows:

        "to achieve greater liberalisation of trade in agriculture and bring all measures affecting import access and export competition under strengthened and more operationally effective GATT rules and disciplines"

    An important element of the declaration was its explicit recognition of the effects that domestic agricultural policies have on trade. The Round would concentrate not only on the issue of border controls and export subsidies, but also on a broad range of domestic agricultural policy issues. Policies that subsidised producers would be subject to close scrutiny and negotiation.

    1.2.1 The major actors and interests in the agricultural negotiations

    The main actors in the agricultural negotiating group set up for the Uruguay Round were the USA, the EC and, to a lesser extent, the Cairns Group.

    • The USA was enthusiastic about promoting greater liberalisation in agricultural trade, and was keen to reduce the protection and support enjoyed by producers in the EC under the CAP.
    • The EC was much less amenable to far reaching liberalisation, but was keen to reach a workable compromise, that could be enshrined in the GATT, in order to minimise future trade friction between itself and the USA.
    • The Cairns Group consisted of 14 countries, from both the developing and developed world, whose membership comprised Canada, Australia, New Zealand, Thailand, Indonesia, Malaysia, the Philippines, Argentina, Brazil, Colombia, Chile, Uruguay, Fiji and Hungary. As net exporters of agricultural commodities they generally shared a common interest in desiring greater liberalisation in farm trade; the Cairns contingent argued strongly for a reduction in the protectionism and domestic support measures enjoyed by farmers in developed countries.

    Developing countries outside of the Cairns group also had a strong interest in the negotiations, although their influence over the proceedings was relatively minor.

    • For the large group of developing countries which were net importers of food, the main concern was over the impact of the Round on the cost of food imports.
    • Two other countries with a major interest in the outcome of the round were Japan and the Republic of Korea. These countries had highly protected domestic rice markets, and a strong domestic opposition to reform of the sector.

    However, despite the importance of these other interest groups, discussions in the Uruguay Round were dominated by the differences between USA and the EC, the resolution of which determined the rate of progress towards an agreement.

    1.2.2 The opening negotiating positions

    When the negotiations on agriculture began, the positions of the EC and the USA were still very far apart. To emphasise its commitment to liberalisation the USA opened the negotiations with an unrealistic demand for the "zero-zero" option. Introduced in July 1987, this proposed that:

    • All agricultural subsidies and all quantitative restrictions on agricultural imports be phased out over a period of ten years, and that world health and safety measures be harmonised.

    This position found support amongst members of the Cairns Group, which was itself proposing an immediate freeze on price support followed by the phased reduction of such support. The EC was, however, totally opposed to across-the-board reforms, and wanted instead to negotiate concessions on a commodity by commodity basis.

    • The EC's demands focused primarily on the concept of "rebalancing", whereby access to the EC cereals market would only be negotiated in exchange for a concession that would allow it to reintroduce tariffs on non-cereal animal feeds. Tariffs for the latter had been bound at zero in an earlier round, and had since caused imported animal feeds to displace EC-grown cereals in the feeds used by EC livestock producers.

    Japan, like the EC was keen to protect its farmers from international competition, particularly in the rice sector, for which it sought special treatment. This demand was made on the grounds that rice played a unique role in the diet, culture and environment of the country, and should therefore be treated differently from other agricultural commodities. Japan was, however, strongly in favour of measures to reduce export subsidies; as a net importer of agricultural commodities Japan would not find commitments in this area particularly demanding.

    Meanwhile, the demands of developing countries were focused on their need for special and differential treatment within the negotiations. They emphasised the fact that agriculture plays a major role in the development of their respective countries, and that new GATT rules and disciplines should not inhibit agricultural growth by placing excessive constraints on government support policies.

    The concern over the Uruguay Round's impact on those developing countries that were net importers of food, lay in the prospect that reduced surpluses in the North, resulting from a cut in permitted levels of agricultural support and export subsidies, would raise the international price of food, and, hence, the cost of importing it.

    • Consequently, developing countries argued that the magnitude of cuts in support and protectionism affecting them, should be smaller than for developed countries, and that they be given a longer period of time in which to fully implement any policy changes.

    1.2.3 Slow initial progress in the negotiations

    At the mid-term review in Montreal at the end of 1988, the negotiating parties in the agricultural group were as far apart as ever, and they had failed to produce an interim text for discussion by the group at the Montreal meeting. Meanwhile the Cairns Group refused to approve the draft texts of any of the other 14 negotiating groups until there was a text on agriculture. Following this failure, the main participants continued to search for a compromise:

    • A breakthrough eventually came with the resumption of the mid-term review in April 1989. This culminated in the Geneva Accord, that saw the United States negotiators drop their demand for the zero-zero option, and led to the adoption of a series of short-term measures that involved a freeze in the current levels of domestic support, export subsidies and border protection.

    The negotiating parties committed themselves once again to the long term objective of reducing government intervention in the above three areas of agricultural policy, and it was proposed that negotiations should proceed by seeking separate commitments in each of these three policy areas.

    The EC and some other countries were reluctant, however, to adopt such an approach. The EC was particularly opposed to making substantial cuts in its export subsidies. Talks continued in the hope that an agreement could be achieved by December 1990, the original deadline for the conclusion of the Uruguay Round; but, the text presented there was rejected by the EC, and the deadline came and went without any agreement being reached. It was not until 1991 that the negotiators finally arrived at a consensus, whereby countries would agree to make concessions in each of the following three areas:

    • import access;

    • domestic support;

    • export subsidies.

    These areas eventually became the three main pillars of the final agricultural agreement. But, before that could happen the negotiators would have to establish the level of concessions that would be made, and that took two more years of tough negotiating.

    1.2.4 The Dunkel Draft and CAP Reform: Paving the way to an agreement

    At the end of 1991 the director-general of the GATT presented a comprehensive Draft Final Act, known as the Dunkel Draft, in the hope of bringing the Round closer to a conclusion. The Draft covered agriculture, as well as all of the other areas under negotiation in the Round. It included the first complete text on agriculture, in which quantitative proposals were presented with respect to concessions in each of the three major disciplines.

    It was internal pressure within the EC to reform the Common Agricultural Policy, that gave the GATT negotiations the momentum that they needed. The MacSharry plan for CAP reform, that was eventually adopted in May 1992, included proposals that would bring the EC's agricultural policy much closer to meeting the targets outlined in the Dunkel proposals.

    • The most important element of the MacSharry plan with regards to the GATT was the proposal to substitute a certain amount of domestic price support with direct payments to agricultural producers, as compensation for lower farm prices. These direct payments were to be contingent upon the adoption by EC producers of production limiting measures that would reduce the area of land under agricultural production.

    However, although the EC formally agreed to implement the MacSharry plan in May 1992, some obstacles to a GATT agreement still remained. The EC was still reluctant to make substantial cuts in export subsidies, and a question hung over whether the compensation payments of the CAP reform should be subject to domestic support reduction commitments.

    1.2.5 The Blair House Accord

    It was against this background that the American and EC negotiators undertook a series of bilateral discussions, that eventually led to an agreement, known as the Blair House Accord. The meeting that achieved this took place at Blair House in Washington in November 1992, and focused on making suitable amendments to the Dunkel Text. These amendments included the following:

    • the 24 percent cut in the volume of exports that was originally proposed, was reduced to 21 percent;
    • the base period used for establishing the baseline from which export subsidies would be cut, was made more flexible, and had the effect of initially raising the level of permitted export subsidies;
    • direct payments made under production limiting programmes, such as those made under the EC's CAP reform, and the USA's policy of deficiency payments and land set-aside, were made exempt from domestic support reduction commitments;
    • commitments to reduce domestic support on a product by product basis were replaced by a commitment to reduce overall support to the agricultural sector.
    The Blair House Accord broke the impasse in the agricultural negotiating group, and as the Uruguay Round drew to a close in December 1993. A consensus, on how to include agriculture within the framework of the GATT, and on the commitments that this would entail, was finally reached. The Agreement on Agriculture was included in the "Final Act Embodying the Results of the Uruguay Round Multilateral Trade Negotiations". Thus, agriculture became subject to GATT disciplines.

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