Export competition

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The original framers of GATT expected that many countries would maintain internal prices for farm products above world levels, so they assumed that export subsidies would be required for these countries to compete in world markets. Thus, while export subsidies were forbidden for nonagricultural products, they had been allowed for primary products since the beginning of GATT. The only restraint on such exports was the requirement that a country should not use them to achieve more than an "equitable share" of the world market for the product in question. In other words, the allowable limit was to be defined by results, not by actions.

Over the years a number of complaints filed with GATT had established that the equitable share concept had limited or no operational content and thus provided no real restraint on the use of export subsidies. In the Tokyo Round an effort was made to refine the concept and to make it operational by imposing additional requirements, namely that export subsidies should not appreciably undercut prices. This effort achieved only negligible results.

Export subsidies for agricultural products, permitted in the original GATT rules, were used by a number of countries in the 1950s and 1960s. The United States, Canada and some other countries applied them for a limited number of products during that period. Major problems arose, however, with the increased scale of their use in the 1980s when the overall growth in world trade of cereals and other agricultural products slowed down substantially. The slowdown was the result of several factors (also discussed in Section I, p. 1). First, output improved in many developing countries, allowing them to meet growing demand from internal sources. Second, many developing countries faced a severe economic crisis in the 1980s that resulted in a slowdown in the growth of demand for imparted cereals and other products. Third, the mounting economic difficulties of the former USSR and Central and Eastern European countries brought their import increases to a halt. Moreover, the EC moved from being an importer to being a real exporter of a number of agricultural commodities in the early 1980s

By the mid-1980s, the United States found itself with a declining share of a stagnant world grain market (for which they blamed the EC export restitution programme) and, starting in 1 985, once again resorted to export subsidies in an attempt to recapture that market share. This began an escalation in the use of export subsidies that was only ended by the Uruguay Round agreement.

In the mid- 1980s, the combination of stagnant markets and widespread export subsidies drove world cereal prices to extremely depressed levels. This created great distress among producers in exporting countries where production and exports were not subsidized.

On the other hand, the cerealimporting countries, both developed and developing were major beneficiaries of the low world prices that resulted from domestic support and export subsidies, primarily in the OECD countries. In particular, the former USSR gained from these subsidies, as did a number of countries in Africa and the Near East. However, farmers in these countries lost out as a result of the lower internal prices that were caused by subsidized imports.

A number of countries wanted an agreement in the Uruguay Round that would completely phase out the use of export subsidies for agricultural products. This, however, proved to be politically impossible as it would have required exporting countries either to let their internal prices for agricultural products fall to world market levels or to forego exports. The compromise position, reached after very difficult negotiations, contains some reform and some liberalization.

The final agreement does not require the elimination of export subsidies as it does for the use of non-tariff barriers. Instead it requires that over a six-year period developed c countries reduce their spending on export subsidies by 36 percent and the volume of their subsidized exports by 21 percent from average 1986 to 1990 levels. Developing countries are required to make reductions of 24 and 14 percent respectively over ten years. The measurement and the reductions are on a commodity-by-commodity basis and are spelled out in schedules filed with the WTO by each country. Countries not using export subsidies during the base period (1986 to 1990) are prohibited from using them at all. Countries that used them during the base period are required to spell out the reduced limits on their use in future years and are prohibited from using them 011 products where they were not applied during the base period. The definitions of export subsidies in the agreement are fairly rigorous.

The liberalization resulting from reductions in subsidized exports will, however, be delayed by an agreement that was reached in the closing days of the negotiations. According to the original draft agreement, the starting point for the reductions should have been the level of export subsidies in the base period 1986 to 199() and the reductions should he made in equal amounts from that base level over a six-year period. However, the volume and spending on export subsidies for several products in 1992 were, for troth the EC and the United States, well above their 1986-90 levels. This meant that an abrupt move to reduce the volume of subsidized exports to 3.5 percent (21 percent divided by six) below the 1986-90 levels would have created serious adjustment problems. Thus, the final agreement imposed the reduction of export subsidies from 1991 -92 levels or from 1986-90 levels (whichever was higher) to the final target levels in equal instalments. The practical result has been to allow the United States and the EC to export additional wheat, dairy products, vegetable oil and rice using export subsidies over the next six years.

The impact of reductions in the volume of subsidized exports and of spending 011 export subsidies will vary depending on the quantity of product affected, the size of the subsidized amounts relative to total trade, the level of world commodity prices and the policy changes that have to be made by countries to accommodate the limits on subsidized exports. The size of the price gap between internal and external prices will determine the extent to which the expenditure controls constrain subsidized exports. For instance, in the EC spending constraints are unlikely to he binding for products that were affected by the recent reform of the Common Agricultural Policy, which lowered internal prices thus reducing the price gap. Instead, the binding constraint on EC exports of cereals will be the volume constraint requiring a 21 percent reduction in volumes of subsidized exports relative to the base period. If the EC were to allow its internal prices for agricultural products to fall to world levels, export subsidies would not be needed and the volume of products exported by the EC would depend entirely on domestic supply and demand conditions. However, while the EC's internal prices remain above world levels, constraints on the volume of subsidized exports may induce reductions in output or increases in stocks.

In the case of the United States the constraint on wheat export subsidies appears likely to be the spending constraints, since there is a significant difference between the world price level and the United States' internal price. However, if the United States allows the internal price to decline to the world level, export subsidies will not be needed so limits on export subsidies would not affect United States exports.

At this point it is impossible to predict how export subsidy limits will affect export volumes from individual countries or how great the impact of the changes will be on the prices of the commodities concerned. Considering the proportion of subsidized exports relative to total trade in the product, one could expect a marked improvement for wheat and wheat-flour (where the United States and EC subsidies have been used for half of the world trade), beef and veal (where subsidies have allowed the EC to become the world's largest exporter), pork, chicken-meat and processed dairy products. The international markets for coarse grains, oilseeds, vegetable oil and rice have been less affected by export subsidies and are thus expected to change little on account of the export subsidy limitations.

Relatively few countries account for most of the subsidized exports. The top five users of export subsidies for wheat accounted for 95 percent of subsidized wheat exports and subsidized over 50 million tonnes of wheat exports per year in the period 1986 to 1990. Even when all of the cutbacks are in place these five exporters will still be able to channel about 40 million tonnes of subsidized wheat into world markets, i.e. about 40 percent of current world trade in wheat. The equivalent figure for pigmeat is 53 percent, for coarse grains 22 percent, for poultry 25 percent and for beef and veal 34 percent.

While the export subsidy arrangement is not a tidy one and will be difficult to monitor, it is far more precise than the old GATT rules, under which the permissible limits to the use of export subsidies were very loosely defined. Moreover, the future trade expansion will occur without the distortions of direct export subsidies. This means that future market growth should increasingly benefit low-cost producers, including those in countries that cannot afford to subsidize their agricultural exports.

However, the export subsidy arrangement can enable only partial trade liberalization, as subsidies are rolled back by small amounts and large quantities of subsidized exports can still enter world markets. The separate treatment of agriculture in the GATT rules continues and the use of export subsidies now is explicitly approved as a trade policy.

Domestic policies

At the beginning of the Uruguay Round there was widespread recognition that to remove trade distortions in the world agricultural markets it was necessary to phase out the domestic policies at the basis of such distortions.

For a substantial period of the negotiations there was agreement on a balanced approach that would have reduced trade-distorting domestic policies by amounts commensurate with the reduction in import protection and export subsidies. As the negotiations progressed, however, a number of the developed countries with the highest level of trade-distorting domestic programmes began to back away from the idea of uniform commodity-by-commodity cuts in domestic policies, import protection and export subsidies.

At the end, the effective international controls over trade-distorting domestic policies were limited, as it was agreed that there would be no commodity-by-commodity roll-back of domestic support levels. Thus, the agreement requires that only the aggregate level of support provided via trade-distorting policies be reduced by 20 percent, while no individual commodity policy comes under control. The list of non-trade-distorting policies defined in the agreement would encompass the deficiency payments received by United States producers and the compensation payments received by producers in the EC under the reformed Common Agricultural Policy.

Several exempt policies are significant to developing countries. These include certain input and investment subsidies to agriculture, as well as stocks held for food security purposes. In addition the de minimis rule exempts programmes in developing countries that account for less than 10 percent of producers' total revenues - the limit for developed countries is only 5 percent.

This does not mean that there have been no significant changes in domestic policies during recent years or that further changes are unlikely. During the 1 980s a number of developing countries drastically revised their agricultural policies to remove many of their trade-distorting aspects. In some cases these changes occurred in response to pressures from international financial institutions for structural adjustment programmes. In other cases countries responded to pressures from trading partners or acted unilaterally in anticipation of the results of the trade negotiations.

Many developed countries also made major policy changes. In the United States the rising costs of agricultural subsidies, combined with pressures to reduce federal budget deficits, resulted in policy changes leading to reductions in subsidies, and more, in 1990. To offset reduced support levels, however, a 1985 Act also introduced targeted export subsidies through the Export Enhancement Programme (EEP). In the EC a combination of external pressures and internal budget constraints brought about the most extensive reform of the Common Agricultural Policy since its inception.

BOX 11

The Uruguay Round added another term to the language of agricultural policy. Early in the negotiations there were discussions to set up two categories of policies, those that were to get the green light and those that would get the red light. The references then shifted to policies that fitted into the "green box", i.e. policies that were classified as not being trade-distorting. The concept of a red box was dropped, so now the only reference is to the "good" policies which fit into the green box.

The Uruguay Round agreement does not require any country to give up its state trading organizations for agricultural products. Thus, states can retain their existing importing and exporting entities and those organizations that control internal markets. For example, under the agreement Japan is now required to import rice, hut it can do so using its own existing food agency, which can determine the resale price of imported rice, thereby maintaining the desired level of internal prices. No requirements for transparency by state trading entities were added in the Uruguay Round.

Thus, what started as a bold attempt to bring major internal policy reform, especially within the OECD countries, ended up with somewhat more modest achievements in this regard. The agreement will bring about little or no reduction in the level of support for agriculture in developed countries. It has, however, resulted in some gains. For the first time in GATT history there is now official recognition and definition (by exclusion) of policies that are trade-distorting (see Box 11). This, together with the requirement for an overall reduction in the aggregate spending on trade-distorting policies, will lead countries to provide any additional future assistance to the agricultural sector through policies that are less trade-distorting.

The peace clause

Another unique feature of the agricultural agreement is a section designed to reduce trade conflicts over agricultural issues by limiting the scope of GATT complaints that involve non-trade-distorting agricultural policies included in the green box; domestic support policies subject to and consistent with reduction commitments in the agreement; and export subsidies that conform to the reduction commitments. These provisions are to prevent a recurrence of the volume of complaints over agricultural trade issues taken to GATT during the 1980s.

The existence of a peace clause, however, is unlikely to guarantee an absence of complaints and trade conflicts. trade conflicts are driven more by world market conditions than by trade rules and, as always, the future state of world markets is highly uncertain. It should he noted that there were virtually no trade conflicts on agriculture during the 1970s, when world markets were expanding and buoyant, whereas under the same trade rules ha the 1980s there was a rash of trade disputes. Furthermore, when market conditions are highly competitive, countries may face domestic political pressures to take actions that are inconsistent with their Uruguay Round commitments. If this should occur, there are likely to be a number of disputes on the issue of whether obligations are being observed. In addition, some of the new rules added in the Uruguay Round may open up new areas of trade disputes, as countries test the limits and attempt to build interpretations of the rules.

The committee on agriculture

The agreement calls for the establishment of a Committee on Agriculture to oversee its implementation. The exact duties and powers of the committee were not spelled out but were left to the new WTO. Inter alia, this new committee would keep track of the changes made by countries to bring their policies into compliance with their obligations. However, the committee is not a substitute for the formal dispute settlement mechanism, which is where major disputes over implementation will have to be settled.

This committee is also likely to lead the way in establishing the mandate for countries to enter negotiations for further reform at the end of the implementation period for the Uruguay Round. The committee would have the record of the implementation period and is therefore likely to have some judgements as to whether further reforms would be useful. Indeed, it was a special Committee on Agriculture of GATT that, by laying out the issues and investigating various ways to modify the rules, laid the groundwork for the agricultural negotiations of the Uruguay Round.

The sanitary and phytosanitary agreement

Countries have developed a series of measures and import restrictions against products that come from certain areas or against products that might be carrying human, plant or animal diseases. These import controls have been justified under Article XX of GATT, which states, inter alia, that countries may adopt measures to protect the life of humans, plants or animals.

Of course, many of these import regulations have been legitimate protection against the spread of plant and animal diseases and against the imports of products that might threaten consumer health. Over time, however, a number of these import controls have been used as disguised trade barriers.

Restrictions were often directed against the exports of developing countries. The Uruguay Round has included an international agreement on sanitary and phytosanitary (SPS) measures, which allows countries to challenge these sanitary and phytosanitary regulations and will require member countries to make such regulations transparent.

Certain new trends in international trade will make the new SPS agreement even more important. Increasingly, environmental groups and food safety advocates have demanded that import controls be used to enforce the desired methods used to produce, process and market food. Such groups may call for import bans on goods produced in certain areas or produced using undesirable methods.

The SPS agreement includes the following key elements:

The SPS agreement is likely to be interpreted and clarified over the years ahead. Some countries may lag in the revision of their SPS measures until it becomes clear that the new rules will be enforced. In addition, there are a host of new issues on the horizon and these may raise trade tensions.

The general nature of the SPS agreement means that interpretation of the rules will depend on the case law accumulated as a result of dispute proceedings. Initially this may mean a number of formal complaints as countries attempt to test and clarify the meaning of the agreement.

The new issues are in part the result of new technology in agricultural production or marketing. For instance, for nearly a decade the United States and the EC have been involved in a trade dispute over the use of growth hormones in beef production. Many groups are protesting the use of bovine somatotropin (BST) in the production of milk and want to ban imports of dairy products containing milk produced with BST. Groups in some countries want to ban trade in all products for which biotechnological methods are used. All of these proposals for trade restrictions fall under the purview of the new SPS agreement if they are claimed to be made in the interest of human, animal or plant life or health. Initially, as such proposals arise they are likely to go to dispute settlement until precedents are established. If the dispute is brought on another basis it would normally be considered, under the Agreement on Technical Barriers to Trade (1994), according to different decision-making criteria.

The agreement also calls for the establishment of a Committee on Sanitary and Phytosanitary Measures. This committee is to provide a regular forum for consultations, to oversee the implementation of the SPS agreement and, especially, to further the harmonization of countries' SPS systems. The committee is also charged with coordinating with the relevant international organizations in the field of sanitary and phytosanitary protection to ensure the best scientific and technical advice and to avoid unnecessary duplication.

The committee is to develop a procedure to monitor the process of international harmonization and the use of international standards and guidelines that it considers to have a major trade impact. Members are to be asked to indicate which of these international standards they use and, where they do not use them, to indicate reasons for non-use.

This means there will be a strong move towards establishing a set of common standards worldwide at the very time that some countries are under a great deal of domestic pressure to apply stricter standards. Indeed, environmental and food safety groups have been major forces of opposition to the ratification of the Uruguay Round results. These groups object to the idea of challenges to national SPS measures and to the harmonization of world standards.

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