February 2002

SPECIAL AND DIFFERENTIAL TREATMENT OF DEVELOPING COUNTRIES IN AGRICULTURAL TRADE

Constantine Michalopoulos

The author is a consultant to the World Bank. The views expressed in this paper however, are solely those of the author and should in no way way be attributed to the World Bank. An earlier version of this paper was presented at the FAO Roundtable on Special and Differential Treatment in the Context of the WTO negotiations on Agriculture, Geneva, 1 February 2002. The author wishes to thank Panos Konandreas, and Ramesh Sharma of the FAO and various Roundtable participants for helpful comments on the paper.

SPECIAL AND DIFFERENTIAL TREATMENT OF DEVELOPING COUNTRIES IN AGRICULTURAL TRADE

I. Introduction

The main contribution of the Uruguay Round in agriculture was to start the process of subjecting agricultural trade to the same rules as trade in other products. The focus was reform in developed countries’ agriculture, not on how to increase agricultural production and trade in developing countries. But while the form of protection changed, little progress was made in actually reducing the level of developed country protection; and their export subsidies, while reduced, still remained at levels that undermined developing country production and exports.¹

Under the Agreement on Agriculture (AoA) developing countries are expected to adhere—with some exceptions, to the same rules as other countries. For example, they have had to bind all tariffs on agricultural products, which they did not have to do in manufactures. But more fundamentally, the philosophy of the Round was driven by the legitimate concern that agriculture in the developed countries was protected and supported too much. Thus, rules were designed on how to provide fewer supports in a more transparent and less trade distorting way. But agriculture in a number developing countries was being penalised, not supported by government policy.² And where it was supported, their capacity to provide such support through budgetary transfers was, and still is, quite limited. For them, the whole philosophy that drove the Uruguay Round was upside down. And while there were exceptions and special and differential treatment provisions, they were all permeated by this upside down philosophy. Indeed, many developing countries have argued, that the AoA has continued, albeit on a reduced scale, the special and more favourable treatment of developed countries in the international trading system.

The purpose of this paper is modest. We will review and assess the special and differential (S&D) provisions pertaining to agriculture primarily incorporated in the AoA in terms of their effectiveness in addressing developing country interests. We will not discuss the S&D provisions deriving from the Ministerial Decision on Measures concerning the Possible Negative Effects of the Reform Programme on Least developed and Net Food Importing Developing Countries (NFIDCs), or the proposals to create a special safeguard to deal with import surges in developing countries as these are discussed extensively in other parts of this volume.³ And we will present a number of conclusions and recommendations that could be taken into consideration in the current WTO negotiations on agriculture in order to make the special and differential provisions more responsive to developing country needs. However, we will not review all the issues that affect the interests of various developing countries and groups in the current Round of negotiations on agriculture.

II. The Special and Differential Provisions on Agriculture

A. The Provisions

The Agreement on Agriculture has a variety of provisions that call for different rules to be applied to developing country agriculture and trade. Some of these provisions are purely exhortary and of the ‘best efforts’ variety, such as those contained in the preamble of the agreement which commit developed countries to ‘take fully into account the particular needs and conditions of developing country members by providing for a greater improvement of opportunities and terms of access for agricultural products of particular interest to these members’. But others involve specific differences in the rules that apply to developing and least developed countries (LDCs) under the Agreement⁴. The main S&D provisions are:

• LDCs are completely exempted from making commitments to reduce tariffs, domestic support or export subsidies (Article 15.2);

• investment subsidies which are generally available to agriculture in developing country Members and agricultural input subsidies generally available to low-income or resource-poor producers are exempted from the calculation of aggregate measures of support (Article 6.2);

• the de minimis level of trade distorting domestic support permitted to developing countries is higher than that permitted to developed countries ( 10% vs 5%, Article 6.4b) ;

• reductions in tariffs, domestic support and export subsidies are lower or are to occur over a longer period of time (Article 15.2, 9.2b(iv);

• government stockholding programs aimed at enhancing food security whose operation is transparent and in accordance with officially published criteria are considered to be in conformity with the Agreement (Annex 2 para 3 footnote 5);⁵

• the provision of foodstuffs at subsidized prices with the objective of meeting the food requirements of the urban and rural poor on a regular basis and at reasonable prices is also supposed to be in conformity with the Agreement (Annex 2, para 4 footnotes 5 and 6).

In addition, as noted earlier, the ‘Decision’ on NFIDCs contains a number of additional provisions about these countries which are discussed elsewhere in this volume. Finally, the Agreement on Sanitary and Phytosanitary Measures also contains special and differential provisions in favor of developing countries and the LDCs. These fall into three general categories: general statements to the effect that in setting standards the interests of the developing countries will be taken into account; provisions that call for a longer period of implementation of the commitments made by developing countries and the LDCs; and offers of technical assistance to implement the provisions of the Agreement.

B. Assessment

As can be seen from the above listing, the provision of S&D in agriculture falls in the same broad categories and suffers from the same general problems as other S&D in the WTO agreements. There are general ‘best efforts’ commitments as well as offers of technical and other assistance, none of which are binding. There are also S&D provisions offering more extended transition periods as well as great flexibility, including lower or higher thresholds in implementing various commitments by developing countries and in some cases even greater flexibility and fewer commitments by LDCs (Michalopoulos, 2000). Unfortunately, there is little to suggest that any of these less demanding thresholds or longer transition periods were defined with any reference to the reality of the situation in the developing countries concerned or inputs from relevant experts. They all appear to be the product of a bargaining process in which little consideration was given to the institutional constraints affecting developing country agriculture.

An effort was made to apply the provisions in a somewhat differentiated fashion regarding the beneficiaries: there was recognition, for example, of the different needs of the NFIDCs—although the commitments regarding them were mostly of the non-binding ‘best effort’ type; and the category itself does not adequately capture the groups of countries facing the largest food insecurity (Diaz-Bonilla, et al. 2000). There was also recognition, in the context of export restraints, of the fact that some developing countries are major exporters. But most of the provisions lumped the developing countries ( except the LDCs) as a single group, which clearly, they are not.

At least four groups of developing countries can be identified—often reflected in the support different countries provide for different proposals in the negotiations: first, there is the group of major exporters of agricultural commodities which are members of the Cairns Group; second, there is a large group, consisting of the net food importing developing countries (NFIDC) and others, such as India, with a significant agricultural sector which produce but also import food, and export various agricultural products; a third group with small non diversified agricultural sectors, which either because of climatic conditions or land constraints (for example small island economies), face significant difficulties in competing in agricultural trade; and there is a small group of generally higher income developing countries that, like many developed countries, attach high priority to the many functions that agriculture plays in their society, irrespective of its efficiency or productivity.

The experience regarding specific aspects of the provisions was mixed: Some provisions appear to have been useful and could be retained and strengthened in a future agreement. Others may not have been very useful and could be amended or dropped or the objectives they aimed to attain pursued differently. And still others may need to be introduced to address the needs of different developing countries.

Market Access

There is little evidence that the general hortatory language regarding liberalizing products of particular interest to developing countries resulted in greater cuts in protection on such products in developed country markets. While the average tariffs developing countries face in developed country markets for some agricultural products are lower than overall agricultural tariffs, this appears to have been the result of earlier liberalization in tropical products. The remaining protection on developing country agriculture exports such as rice (Japan), tobacco and groundnuts (US) or grape juice (EU) is staggeringly high (Youssef, 1999; Michalopoulos 2001). It is unlikely however, that this central problem can be addressed by more verbiage and non-binding differential treatment commitments. The best way of addressing the issue of tariff peaks would be to adopt of formula approach which results in more than proportional cuts in the tariff peaks that are present in developed country agriculture.

Flexibility in Rules and Disciplines

This is a key area on which future efforts on special and differential treatment should focus, as some of the problems affecting developing countries’ agriculture, because of inadequate institutional capacity, are fundamentally different from those facing developed countries.

The AoA provisions in this area call for flexibility in the provision of aggregate levels of support, subsidies and other support to resource poor farmers, export subsidies and a number of food security provisions related to government stockholding and pricing of foodstuffs to the poor. The experience in implementing these provisions has been mixed. On the one hand, a significant number of developing countries have notified the use of these provisions in justifying the support they provide to agriculture (WTO, 2002, Youssef, 1999). Probably the number of countries that have actually used these provisions is even larger than those listed in the notifications, as notifications by developing countries have typically been rather incomplete (FAO, 2000).

But there are problems that derive from the overall philosophy permeating the AoA. In particular, the very important S&D provisions which exempt the support provided through investment and input subsidies to poor farmers under Article 6.2 are to not be found in the ‘green’ box of subsidies which are permanently permitted because they are non-distorting, but among the distorting measures of support which are temporarily permitted and which would have to be reviewed before they are continued—as if the problems afflicting poor farmers which justify government intervention could be solved in a few years time.

Indeed the subsidies referred to in Article 6.2 may be actionable under Article 13b, if they exceed the budgetary limit of subsidies decided in 1992. This means that, if a developing country provided its poor farmers subsidized credit in excess of that provided in 1992 and was successful in stimulating increases in their production so that it displaced some imports, previous suppliers to its markets could claim ‘serious prejudice’ under the Subsidies Agreement or ‘non-violation nullification’ under Article XXIII. (see C. Michalopoulos, 2001 and Diaz- Bonilla, et.al. 2002). It may be unlikely that a developed country member which saw its exports decline under these circumstances would complain in the WTO. But this is not the point: the point is that the philosophy and legal basis of the AoA is not development oriented.

One of the fundamental changes that developing countries should seek to establish in the new negotiations is that there are certain policies that may make sense in a development context which should always be available to developing countries—or at least to some groups of them. In other words, there should be a development box, which would contain these policies (WTO, 2000a)

What policies should go into the box would be something that will need to be discussed and negotiated. At the very least the current provisions of S&D regarding flexibility in the implementation of rules should be included, i.e. the current provisions regarding support to poor farmers, food security provisions on government stocks and prices. Given the problems affecting agriculture and the poor in most low income developing countries, government intervention would be necessary to strengthen institutions, improve market operations and provide support to the urban and rural poor in various ways, including support to expanding production of individual products.

Similarly, programs in support of product diversification for small economies dependent on one or two export crops should be specifically exempted from reductions in AMS. At present, the exemption to reductions in AMS on account of support for diversification in Article 6.2 is limited to diversification from ‘growing illicit narcotic crops’, primarily a developed country priority. On the other hand, small, low income developing countries which clearly need to diversify their production and export structure in order to reduce their vulnerability to external shocks do not enjoy an exemption from the AMS for such programs.

It is clear that operations of emergency food stocks should be included in some fashion in the development box. It may well be that some clarification of the existing provisions on this score should be considered ( for details see Diaz- Bonilla, et.al, 2002). In addition it may be helpful that in this and other calculations, the agreements start using more recent reference prices.

All these programs should be considered as the right of developing countries to pursue. They should be included in a development box; and they should not be considered aberrations or exemptions. As targeted programs to help the poor may be of importance to developing countries irrespective of their levels of income or size, such programs should be available for all developing countries to pursue. The ‘diversification’ exception however, should be limited to small, low income developing economies which are dependent on one or two crops for the bulk of their export earnings.

The concept of ‘low income or resource- poor producers’ to which the measures should apply is difficult to define in practice. Perhaps an operationally more practical approach would be to exempt from the AMS programs targetted to all households below a certain poverty line ( thus including households which may not ‘produce’ something, but work in agriculture and be equally or more needy than ‘ resource –poor producers).

Finally, the development box should exclude border measures. Tariffs and similar measures raise prices to consumers and have a larger adverse impact on poor consumers (who spend a greater percentage of their incomes on food) while they benefit mostly the bigger agricultural (and food) producers who have larger quantities of products to sell.⁶

The issue of export subsidies should be considered separately. They are obviously trade distorting, perhaps even more so than many forms of domestic support, and are not affordable to most developing countries. The problem here is more political than economic. Economically it may not make much sense to subsidize exports for any country. But since developed countries have been subsidizing exports in the past and most developing countries did not, reductions in developed country export subsidies from their high levels still leaves them with substantial more opportunities in subsidizing exports and thus gaining a commercial advantage against developing countries. An attempt to correct this asymmetry was made in the past by providing developing countries with slower reductions in export subsidies. Greater differentiation in future commitments is probably needed in this area, not because export subsidies are a good thing which developing countries should use, but in order to create more of a level playing field.⁷

The question of raising the de minimis exclusion is somewhat similar. There is no evidence that the 10% exclusion has limited developing countries from providing the support to agriculture they need to provide. If there is a well defined ‘development box’, it is unclear whether it is necessary to increase the de minimis provision from 10% to, say, 15%. Similarly, another proposal is to permit developing countries, which have negative support for certain items as a consequence of consumer food subsidies, to offset these against positive support in the calculation of aggregate measures of support. But this proposal may be unnecessary, if the 10% de minimis level were to be increased. There is also the question as which developing countries should be eligible to the larger de minimis exclusion. Should the major developing exporting countries, members of the Cairns group enjoy this ‘benefit’, although they do not need it?

Developing country proposals reagarding raising the de minimis exemption or establishing a total maximum aggregate level of support (which includes ‘green box’ measures) are to some extent driven by their desire to level the playing field so that they can enjoy the same freedom to provide supports to agriculture that developed countries have enjoyed in the past; not necessarily because they would want to, or because it makes developmental sense to do so. It has been argued by some that developing countries do not need more flexibility but should use international rules to introduce more restraint into domestic policies. The argument would be more convincing if the developed countries had practiced it consistently, instead of frequently establishing international trade rules for food and agriculture to accommodate their own domestic policies.

Sanitary and Phytosanitary Issues

The implementation of the new SPS agreement has raised significant problems for developing countries. Some result from the lack of developing country capacity to develop the institutional arrangements that permit them to meet their SPS related WTO commitments. Even if the capacity exists, they are costly to implement: standards along with testing and certification represent between 2 and 10 per cent of overall product costs. Thus, they impose a burden on developing country exports – even when the standards are used for legitimate reasons and the countries are able to meet them.

The greatest costs of the SPS agreement however, may lie elsewhere. The agreement may serve to legitimize developed country actions that result in substantial problems for developing country trade, even if the actions appear to be justified, for example, on health grounds. A recent paper found that an 1998 EC regulation which raised the standards for the minimum level for certain types of aflatoxin, a toxic substance found in foodstuffs and animal feed, to levels higher than those required by the Codex Alimentarius, is estimated to cost close to $700 million in lost revenue to African exporters of groundnuts (Otsuki et al, 2000).

It is difficult to argue against developed country actions to protect the health of their consumers. But when such actions result in significant costs to developing country exports, it would seem fair that the developed countries be legally committed to take steps that will help the developing country meet the problem that the developed country regulation has created. To this end, a new provision should be inserted in the SPS agreement under which, if a developed country finds that a particular export of a developing country does not meet a specific sanitary or phytosanitary standard and for this reason is excluded from its market, the developed country would have the obligation to provide the developing country with the assistance needed to permit the improvement in product quality until the product meets the standard. In practice, the EU has provided such assistance to some developing countries in order to help them meet its fisheries standards. Ideally, the obligation should be legally bound under the WTO; but even a general reference that makes the link may be a useful first step.

III. Summary: Conclusions and Recommendations

A true development Round of negotiations on agricultural trade has to address the legitimate concerns of developing countries, especially those that are low income and least developed and face the greatest food insecurity on how to develop their food and agriculture sectors. Provisions should be introduced to do this not as exceptions and special treatment, but as legitimate objectives of general rule making. And there should be increased coherence between agricultural trade policy and aid to agriculture provided by the developed countries.

To this end, the agricultural negotiations should result in agreement on a development box of measures to support food and agricultural production of the rural poor in developing countries on a permanent basis. Included in this box should be the main elements of S&D now included in article 6 (2) of the AoA. These should not be articulated as ‘exceptions’ to reductions in AMS, but rather as developing country rights to provide:

• Direct and indirect investment and input subsidies or other supports to households below a poverty line in order to encourage agricultural and rural development; such supports could be general, or product specific, provided they are effectively targeted to the rural poor.

• Programs that support product diversification in the agriculture of small, low income developing countries dependent on a very small number of commodities for their exports.

• Foodstuffs at subsidized prices in targeted programs aimed at meeting food requirements of the poor ( whether urban or rural), as part of an overall effort to enhance food security.

In addition to these basic ‘rights’, consideration should be given to increasing the ‘de minimis’ exclusion of support e.g. to 15% for low income, food insecure or other vulnerable small economies.

There is a need to increase market access in the markets of developed countries as well as phase out, with a view to ultimately eliminating, their export subsidies at a faster rate than that applied to developing countries. In addition, tariff peaks in agricultural products need to be addressed on an urgent basis. This can be done through a formula approach which results in larger proportional cuts of high tariffs in developed countries.

Finally, there is a great need for increased coherence between agricultural trade policy and aid to food and agriculture in developing countries. This means, first, avoiding real incoherence, when donors on the one hand provide assistance to increase agriculture or food production in developing countries and on the other undermine their own and the developing countries’ efforts by supplying surplus agriculture or food products at subsidized prices into developing country markets; second, proactive coherence between trade and aid policy such as that would result from a developed country commitment to support developing countries to meet SPS standards in developed countries when these standards adversely affect developing country exports.

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Cm/2/15/02

¹ There is extensive literature on these issues. See inter alia, Das, 1998, Binswanger and Lutz, 2000, Michalopoulos, 2001 and the various submissions and proposals by developing countries in the context of the ongoing negotiations on agriculture (WTO, 2000a-d, WTO, 2001a-b).

² This was certainly more the case a decade ago when the Uruguay Round was being negotiated and perhaps even more so in the 1980’s, which are the reference years for the measurement of supports.

³ See FAO, 2002a-b.

⁴ For a complete listing, as well for information on developing country use of the provisions see WTO, 2002.

⁵ Note that this may not be much of a concession, as it currently stands, as the difference between acquisition price and external reference price is supposed to be counted in the AMS.

⁶ A case could be made for a lower pace of tariff reductions by developing countries in the coming negotiations (see Diaz-Bonilla et al. 2002); but this is not an issue for the development box, but rather of the overall negotiating principles to be used.

⁷ There are of course a number of other important issues in the negotiations pertaining e.g. to the future rate of AMS reductions by developed countries, limitations on their use of ‘green’ box subsidies, limitations on their use of exports credits etc, which are not discussed here as they are not S&D measures in favour of developing countries, but rather involve developing country proposals to level the playing field by having developed countries accelerate the reductions in their trade distortioning policies.