What you will learn

• The primary concerns of the Agreement.
• Types of intervention designed to provide support to domestic producers and the implications of such support.
• Types of intervention designed to place restrictions on imports and their implications.
• How such interventions may lead to domestic surpluses requiring export subsidies for their disposal.
• About the Modalities and Country Schedules.
• The provisions of the Agreement with regard to:

market access;
domestic support; and
export subsidies.

2.1 The objectives of the Agreement on Agriculture

The primary objective of the Agreement is to reform the principles of, and disciplines on, agricultural policy as well as to reduce the distortions in agricultural trade caused by agricultural protectionism and domestic support. These forces have become very strong in recent decades, as developed countries, in particular, have sought means of protecting their agricultural sectors from the implications of unfettered markets.

The purpose of the Agreement, then, is to curb the policies that have, on a global level, created distortion in agricultural production and trade. These policies can be divided into the following three categories: market access restrictions, domestic support and export subsidies. Each of these categories of policy making are dealt with in turn by different Articles and Annexes within the Agreement, and are referred to in the text as:

• Market Access (Article 4);
• Domestic Support Commitments (Article 6); and
• Export Subsidy Commitments (Article 9).

• Consequently, a domestic support policy that some observers might, for example, interpret as having a distortionary effect upon trade, may be defined in the Agreement as not having such an effect.

Before looking more closely at the Agreement's interpretations of the three main policy areas, it is worth taking a broader look at these policies, and at the rationale for subjecting them to GATT disciplines.

2.1.1 Market access restrictions: Protecting producers from international competition

The deployment of market price support policies can involve considerable cost, both to the taxpayer and to consumers, as in Europe and Japan, for example, where the agricultural support policies place a particularly heavy burden on the consumer.

• The maintenance of a positive price differential between the domestic market price and the world market price of farm commodities forces domestic consumers to pay higher prices for food commodities than they would in a more liberal marketing environment.

Restrictions on market access typically take the form of:

• tariffs;
• variable levies;
• import quotas; and
• other non-tariff-barriers.

The latter include, for example, complicated, time-consuming bureaucracy and restrictive licensing procedures, all of which can serve as an effective impediment to trade. Some non-tariff-barriers (NTBs), such as import quotas and variable levies, are particularly distortionary, in that they isolate domestic producers from the effects of world prices and therefore magnify instability on international market.

2.1.2 Domestic support policies: Their effect on production and trade

Domestic support policies include a variety of measures aimed at raising the income of producers and sustaining the profitability of domestic farming.

• Support may be provided in the form of direct payments, where there is a direct transfer of (usually) government money to producers.
• It may be given through policies that intervene in the market, in order to raise the price of farm output, or reduce the price of the inputs.
• Or it may result from public provision of services aimed specifically at agricultural producers.

The following policies frequently do have a distortionary effect.

• Market price support: this is support which raises the domestic market price above the world market price so that producers receive more for their output than they would under free-market conditions. It may be brought about through:

• government intervention in the domestic market;


• border controls that restrict the level of imports;


• a combination of the two.

Government intervention in the domestic market usually involves the government purchase of farm production in order to maintain a minimum guaranteed price. Thus, when the market price starts to fall below a certain threshold the government or its agencies step in and buy the product at the minimum guaranteed price.

On their own, border controls are only likely to be effective in providing market price support if the country is a net importer, of more than marginal quantities, of the commodity in question. In the case of an export tax, of course, governments intervene at the border in order to acquire tax revenue. If the commodity is also consumed domestically, this could depress the domestic price by reducing the volume of exports.

Agricultural policy is usually characterised by a combination of both government intervention of the type described and border controls, since to use either of these interventions in isolation would be likely to lead to a leakage of support to those for whom it was not intended.

It is important to remember that discussion of market price support in the Agreement, refers only to support prices that are administratively set by government; it does not include price support that is achieved through import barriers alone.

• Deficiency payments: These are direct payments to farmers, made in order to close the gap between a low market price and a guaranteed minimum price, as set and administered by the government.

As with market price support, these payments ensure that the producer's revenue per unit of production is higher than would be the case without government intervention. For, a given administered price, this form of support places less of a burden on domestic consumers.

• Input subsidies: These may be implemented in a variety of ways, all of which have the essential effect of reducing the unit cost faced by producers in their use of farm inputs. They allow farmers to produce more with a given amount of financial resources than would be the case without such subsidies.

2.1.3 Export Subsidies: Disposing of Surpluses on the World Market

As has already been suggested, policies that provide substantial support to domestic producers frequently result in the production of large domestic surpluses. For example, in many developed countries where the response in demand as a result of price and income changes is small, i.e. demand is price or income inelastic, the volume of a commodity produced by domestic farmers in response to price support, quickly outweighs the volume purchased by domestic consumers. The problem then is how to dispose of such surpluses.

• Where the domestic price of the commodity is higher than the world price of the commodity, the sale of surpluses on the world market can only occur at a loss unless the exporter is provided with a subsidy.

Such export subsidies have been typical of the path chosen by governments in their efforts to dispose of domestic surpluses. It is these subsidies that have facilitated the sale of large EC and US surpluses on the world market, causing the international prices of many agricultural commodities to be depressed and accentuating world price instability.

2.2 The main elements of the Agreement

2.2.1 The country schedules

Most focus and interest obviously falls on the three categories of policy making outlined, especially since these are addressed explicitly by different sections in the text of the Agreement. However, it should be remembered that the Agreement was not the only legal document to come out of the Uruguay Round negotiations on agriculture. Although, the Agreement lays out the basic rules and definitions regarding policy making, it does not include within it specific quantitative commitments on a country by country and commodity by commodity basis.

• These quantitative commitments were a major objective of the Uruguay Round negotiations, and are stipulated in the Country Schedules, that each signatory to the Agreement has been required to submit.

The country schedules comprise a statement by each member government, on a commodity by commodity basis, of their position on each of the issues concerned (tariffs and NTBs, domestic support and export subsidies) prior to the implementation of the provisions of the Agreement, together with an outline of how the provisions will be achieved. The rules governing how the Country Schedules should be created were laid out in a document entitled the Modalities for the Establishment of Specific Binding Commitments Under the Reform Programme, generally referred to as the Modalities.

Having presented the Country Schedules, a period of time was demarcated during which any member could question and seek to change the content of any other member's schedules. This period was described as the verification process. The period that commenced in December 1993, following the adoption of the Uruguay Round Agreement, and ended in April 1994, shortly before the Marrakech Ministerial Meeting, was allotted to this process, i.e. for countries to have the opportunity to examine, and negotiate amendments to, each others' proposed Schedules. However, it would seem that only very few such amendments were actually made to the Schedules during this time.

• Once the verification process was complete the Schedules were submitted to the GATT (Least-developed countries were given an additional year to do this, their dead-line being extended to April 1995), and from that time on they became legally binding. At the same point in time the Modalities ceased to be legally binding, and any irregularities concerning the manner in which the Country Schedules were drawn up could no longer be challenged with reference to the Modalities.

The Country Schedules are an essential part of the Agreement, and the text makes frequent reference to the commitments made within them: for example to reduce tariffs on particular commodities by a given amount over the required time period. Once the commitments have been made, there is a legal obligation on the part of member governments to implement them.

• The commitments made in the country schedules are to be made over what is known as the implementation period. For most, though not all, commitments this is defined in the Agreement as a six year period beginning in 1995, for developed countries, and a ten year period, commencing at the same time, for developing countries.

We will now consider the main elements of the three categories of policy described above, in terms of the technical requirements placed on governments. A more detailed appraisal of the policy implications of these provisions is left to the following chapter.

2.2.2 Market access

The provisions and commitments defined by the Agreement and the Country Schedules with regard to Market Access include a number of important elements. These can be roughly divided into the following four areas:

Tariffication and tariff reduction

Tariffication, or the replacement of NTBs by tariffs, is an important part of agriculture's inclusion within the framework of the GATT, in that it brings agricultural trade policy into line with the GATT principle of transparency, and potentially eliminates some of the distortionary effects that NTBs have on trade. The Agreement has the following provisions:

• It requires countries to convert their existing NTBs into tariff equivalents. These tariff equivalents are established for the base period (1986-1988) and are entered in the Country Schedules as the base rate of tariff.
• Developing countries have the choice of offering tariff bindings instead of establishing tariff equivalents. In practice, a small number of developing countries opted for this procedure.
• It discourages future use of NTBs, subject to certain exemptions. These exemptions are defined under the Special Treatment provision that allows countries to claim exemption from tariffication commitments for certain sensitive products.

In cases where there were no NTBs at the start of the Uruguay Round, the value of the baseline tariff was taken to be either the customs duty that was prevailing at the beginning of September 1986 (the start of the Uruguay Round), or where this was lower than an existing tariff binding/commitment, the value of the latter.

• The importance of the starting point or base-period tariff cannot be overemphasised, since, having established the value of the base period tariff through the tariffication of NTBs, countries are committed to reducing these as follows:

• There are some exemptions to this rule, however, and these are allowed under the Special Safeguards provisions, that enable a country to apply additional tariffs to certain specified commodities, where import prices are particularly low, or where there is a sudden surge in imports.

Market access commitments

Market access provisions are an important element of the Agreement. These are designed to encourage the development of trade, and to ensure existing export markets are maintained. Thus, where there is little existing trade (taking the base period average as the benchmark), or where existing levels of imports are not maintained, importing countries are required to allow stipulated quantities of imports at a reduced rate of tariff. Thus, the market access provisions allow for the following:

• Countries are, in the first instance, required to maintain current levels of access, for each individual product, where the current level is based upon the volume of imports during the base period (1986-88).

• Where the current level of imports is negligible, a minimum access should be established at not less than 3 percent of domestic consumption during the base period. This minimum level is to rise to 5 percent by the year 2000 in the case of developed countries, and by 2004 in the case of developing countries.

These market access provisions do not apply when the commodity in question is a traditional staple of a developing country. Provided that certain conditions are met, a different set of provisions apply which give governments greater flexibility with regard to what are described as sensitive commodities. These arrangements are discussed in the next chapter. Also reviewed are the mechanisms for providing the opportunity for market access, particularly the implementation of import quotas at reduced tariff levels.

2.2.3 Domestic support commitments

As suggested in Chapter 1, in order to limit the trade distortions caused by domestic agricultural support policies the Agreement introduces commitments intended to curb these policies. These commitments on domestic support are aimed largely at developed countries, where levels of domestic agricultural support have risen to extremely high levels in recent decades. This constraint on policy design is to be achieved by:

• quantifying all domestic support deemed by the Agreement to have a distortionary effect on trade, i.e. the creation of what is known as the Aggregate Measure of Support (AMS); and then;
• progressively reducing these quantitative measures.

For developing countries, where agricultural support policies are deemed to be an essential part of a country's overall development, the obligations are generally less demanding.

The aggregate measure of support

This concept is a measure that quantifies, in monetary terms, certain aspects of the support provided by agricultural policies. The AMS calculation includes all domestic support policies that are considered to have a significant effect on the volume of production, both at the product level, and at the level of the agricultural sector as a whole. Market price support, except that which is achieved through border controls alone, is a major component of the AMS calculation.

The AMS is calculated by first deriving the levels of support for each commodity, plus a similar calculation for non commodity-specific support. Each of these is then summed to provide the aggregate measure. Apart from those polices which are included in the calculation, there are a large number which are excluded. Whether or not these have, in reality, a significant effect on production is, in some cases open to interpretation. Policies are categorised as follows:

• those policies which do have a substantial impact on the patterns and flow of trade, and therefore are included in the AMS calculation, are classified in what is called the 'amber box';
• policies that are not deemed to have a major effect on production and trade are placed in the 'green box';
• policies that fall into neither of these categories, but are, perhaps, somewhere in between, are known as 'blue box' policies; these are also exempted from the AMS calculation.

The 'green box'

'Green box' policies include a variety of direct payment schemes, that subsidise farmers incomes in a manner that is deemed not to influence production decisions. They also include assistance provided through:

• producer retirement programmes;
• resource (e.g. land) retirement programmes;
• environmental protection programmes;
• regional assistance programmes;
• certain types of investment aid;
• general services that provide for example:

==> research, training and extension;
==> marketing information;
==> certain types of rural infrastructure.

From the point of view of developing countries exemptions relating to food security, domestic food aid and the environment are of particular interest.

The 'blue box'

Most of the exemptions to AMS commitments are policies placed in the 'green box'. Some additional polices also gain exemption, however, as a result of the accord reached at Blair House. These are the so-called 'blue-box' polices. The most notable of these are the compensatory payments and land set-aside programme of the EU's Common Agricultural Policy, and the United States' deficiency payments scheme. Such direct payments under production-limiting programmes are exempted from AMS reduction if:

• such payments are based on fixed area and yields; or


• such payments are made on 85 percent or less of the base level of production; or


• livestock payments are made on a fixed number of head.

'De minimis' exemptions

As noted above, AMS calculations are carried out for each commodity and for no-specific support. The 'de minimis' exemption allows any support for a particular commodity (or non-specific support) to be excluded from the total AMS calculation if that support is not greater than a given threshold level. Thus, an additional exemption is contained in the provisions of the Agreement, in the following circumstances:

• Where the value of total domestic support for a particular commodity is not greater than 5 percent (10 percent for developing countries) of the total value of production of that product, then that support need not be included in the calculation of the Current Total AMS, which means that it will not have to be reduced.

• The same arrangement applies for non-product specific support. That is, provided that its value does not exceed 5 percent (10 percent for developing countries) of the value of total agricultural production, then, it too may be excluded from the AMS commitments.

For evaluating the level of support that is provided to the agricultural sector, the Agreement refers to four different measures of support. These can be summarised as:

• Product-specific AMS: the total level of support provided for each individual agricultural commodity.
• Non-product-specific AMS: the total level of support provided by policies that are directed at the agricultural sector as a whole, excluding product-specific support.
• Equivalent Measure of Support: product specific support for which it is impractical to use the AMS methodology and for which an alternative method of calculation is used.
• Total AMS: this is the total value of all non-exempt domestic support provided to agricultural producers, and is the sum of the product-specific AMS for each commodity, the non-product-specific AMS and the Equivalent Measure of Support.

The domestic support commitments are defined in the Modalities as requiring a 20 percent (13.3 percent for developing countries) reduction in the Base Total AMS, to take place in equal annual instalments over the implementation period.

• The Base Total AMS is defined as the value of Total AMS during the base period (1986-1988).
• The implementation period starts in 1995 and lasts six years for developed countries and 10 years for developing countries.

The resulting domestic support reduction commitments are included in the Country Schedules. To ensure that annual reduction commitments are being complied with, Current Total AMS values are established in each year of the implementation period.

2.2.4 Export Subsidy Commitments

As we discussed in the opening chapter, the subsidised export of agricultural surpluses has been a major source of international trade disputes, and the distortions that it has created on world markets, in terms of price and general market instability have been substantial. It is partly for this reason that the Agreement reached on export subsidies is seen by many to be the most important element of the Agreement, and likely to have the most immediate and direct impact on world markets.

Although agriculture does still receive special treatment in the area of export subsidies, in that, unlike in the trade of other commodities, export subsidies are still permitted, the Agreement did introduce constraints on such policies, where previously there were none. The essence of the Agreement with regard to export subsidies is as follows:

• Export subsidies, measured in terms of both the volume of subsidised exports, and in terms of the budgetary expenditure on subsidies, have been capped at base period levels.

• Countries are now committed to reducing export subsidies for a large number of different agricultural commodities, defined originally by a list of 22 products.

Reduction commitments

The schedule for implementing cuts appear in the Country Schedules. These specify:

• the base period level of subsidy for each affected commodity;
• the bound level for 1995;
• the level to which the subsidy will be reduced to by the end of the implementation period.

These commitments are given for both the value of subsidy expenditures, (expressed in US$) and in the volume of subsidised exports (in tons).

• Developed countries are committed to reducing the volume of subsidised exports by 21 percent and the expenditure on subsidies by 36 percent, both over a six-year implementation period (1995-2000).
• For developing countries the reduction commitments are 14 percent and 24 percent for volume and expenditure respectively, whilst the implementation period (1995-2004) lasts ten years rather than six.

Table 2.1: Commodity grouping for export-subsidy commitments

The base period

The base period for the purpose of the export subsidy commitments is different from the 1986-88 base period relating to commitments on market access and domestic support.

• For export subsidies the base period is generally taken to be the period 1986-1990.

However, an exception to this was negotiated between the US and the EC, under what was called the "front loading" accord, which was reached in December 1993, just before the conclusion of the Round. This allowed that:

• The starting level of export subsidy reduction commitments could be located at the level of subsidies prevailing in 1991-92, providing that the level of subsidies at this time exceeded those in the base period.

This was permitted provided that by the end of the six year implementation period, the cuts still brought subsidies down to the level that would prevail had the base period level been used as a starting point.

The Agreement came about because in some cases export subsidies had continued to increase substantially following the 1986-90 base period, and it was felt that a sudden cut to the base period level would have been too demanding. The result was that while the overall cut in export subsidies, under these arrangements, will have to be larger, the impact of the reduction at the beginning of the implementation period is minimised.