Agriculture in the GATT:
The purpose of this module is to provide a succinct historical account of the treatment of agriculture in the GATT up to the conclusion of the Uruguay Round negotiations in order to provide a better understanding of the provisions of the Agreement on Agriculture.
4.2 Basic principles of the GATT/WTO
4.3 The treatment of agriculture in the GATT
4.4 World agriculture in "disarray"
4.5 Agricultural negotiations in the Uruguay Round
The General Agreement on Tariffs and Trade (GATT) came to life in 1947 in Geneva as a framework for regulating international trade. The World Bank and the IMF established in 1944 were associated initiatives to deal with matters of international development and finance. At the beginning, a charter was envisaged for the formation of an International Trade Organization but member governments never ratified this. As a result, the GATT continued to be governed by "provisional" and "interim" measures, and remained an agreement without a formal organization to enforce it. These "provisional" arrangements persisted up until 1994, when the Uruguay Round (UR) Agreement was concluded and the World Trade Organization (WTO) established.
Exceptional status for agriculture in the GATT
Agriculture has had a difficult history in the GATT. The GATT does not say much about agriculture specifically, which meant that in theory agricultural trade was to be treated essentially like trade in other goods. However, some GATT articles provided exceptional status for agricultural products, an indication that the drafters of the GATT were well aware of the unique political status that agriculture enjoyed in some major countries at that time. But agriculture was not forgotten altogether - the subject was brought in all successive rounds - but without much success. At the same time, it attracted a large number of trade disputes. It was the UR that finally brought agriculture closer to the GATT.
The purpose of this module is to provide a succinct historical account of the treatment of agriculture in the GATT up to the conclusion of the UR. It addresses the following four topics:
The objectives of the GATT 1947 were to establish an orderly and transparent framework within which barriers to trade could be gradually reduced and international trade expanded. For this, the agreement contained certain underlying principles and provisions that have been built upon over consecutive rounds of negotiations. Four key principles are summarized in Box 1.
Use of negotiating rounds
The principal mechanism for progress on trade liberalization within the GATT has 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 December 1993 and established the WTO1. The primary focus of the GATT rounds has been the promotion of multilateral tariff reductions, and the extension of the agreed reductions to all members in accordance with the MFN clause.
Most-Favoured-Nation (MFN) Treatment
Tariff binding and reduction
Rules designed to permit agricultural policies used by major producers...
The differences between the approach to agriculture and the approach to trade in manufactures in the GATT are fundamental in understanding the special role of agriculture in the GATT. For this, it is important to appreciate the agricultural policy environment in major trading countries in that period. The United States (US), the main agricultural exporter at the time the GATT was introduced, had its Agricultural Adjustment Act of 1933 fully operational by 1947. This Act permitted authorities to resort to tariffs and quantitative import controls and export subsidies where required in order to stabilize domestic producer prices. The European Community (EC) did not exist then and its Common Agricultural Policy (CAP) did not come into full force until the early 1960s. A majority of other countries that have become major traders now were either recovering from war or were newly independent. Some, however, did play an effective role in the debate and negotiations, e.g. Australia.
Domestic political and social pressures were also important factors behind some contracting parties seeking exemptions for agriculture. In richer countries, agriculture was in decline as industry expanded rapidly. The resulting difficulties in maintaining farm incomes and populations emerged as a politically sensitive issue. Agriculture was seen as a unique sector of the economy that, for various reasons including national food security, could not be treated like other sectors.
...led to major exemptions for agriculture
According to one commentator, given this environment, not only did agriculture receive "special treatment" in the GATT, but this treatment appeared to have tailored to the US farm programmes then in existence2.
There are some - but not many - places where exceptions were made for agriculture from the GATT rules. But that was enough to keep agriculture out of the general rules. The two places where the contrast is most striking are on subsidies and quantitative restrictions.
Agriculture not included in general prohibition on export subsidies...
The original GATT had only a section that required the contracting parties to report "any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into its territory, to other parties". Thus, originally there was no prohibition on subsidies, domestic or export. This became what is now Article XVI:1. Later, the prohibition against export subsidies on other than primary products3 was added as Article XVI:4.
It was only in 1955 when Article XVI was extended. Its Article XVI:2 recognized that export subsidies may have harmful effects. This is followed by the famous Article XVI:3 that says,
...provided they were not used to increase market share...
When Article XVI:4 that prohibits export subsides for other, non-primary products was made a part of the GATT, the special treatment of agriculture was complete.
...but rule open to many interpretations
Attempts were made subsequently to clarify the Article XVI provisions. For example, the Tokyo Round (completed in 1979) made efforts to define such terms as "equitable share of world export trade" and "representative base period". However, this and other attempts failed to make any significant progress.
The GATT rule in this area was the second major source of exemption of agriculture from the general rules. Four GATT rules deal with quantitative restrictions:
Two of these four Articles justified quantitative restrictions on the basis of balance of payments (BoP) difficulties. But these were basically irrelevant for the richer countries as they could not have resorted to the BOP exceptions. Several developing countries resorted to this exception, but it is unlikely that the impact on world markets in terms of trade distortions was significant in view of the small share of these countries in world trade. As a result, it was Article XI and Article XIII which were the main sources of exceptions. The agricultural exceptions under Article XI:2 are:
Import quotas permitted in some cases...
...and Section 22 waiver...
According to Hathaway, these provisions were largely written to fit the US agricultural programme. Despite this, the US soon found that it could not live with the provisions. In 1951, the US Congress stated that "no trade agreement could be applied in a manner inconsistent with this section" (Section 22 of the Agricultural Adjustment Act). Finally in 1955, the US insisted upon and received what is now known as the famous waiver, under the threat that it might otherwise be forced to leave the GATT4. This "temporary" waiver was in force for almost 40 years and was used to restrict imports of sugar, peanuts and dairy products until the UR.
The waiver was an exception to exceptions. Whereas Article XI permitted all contracting parties to take trade restrictive actions so long as there were policies in place that "restrict" the production or marketing of the domestic product, this waiver allowed the US to apply import restrictions without regard to such rules. This waiver, which thus discriminated against countries other than the US, has been a major source of continuing resentment by others and was used as an argument that the US was not serious about trade liberalization.
...also reasons why agriculture was not part of GATT
These two exceptions together were enough to keep agriculture "effectively" out of the GATT. They basically licensed countries to: subsidize their farmers to the extent they wished; provide border protection as desired; and export the surplus thus generated with export subsidies. It was not a coincidence that these were precisely the three areas addressed by the UR Agreement on Agriculture (AoA).
The term "disarray" was coined by Prof. D. Gale Johnson of the University of Chicago in a book published in 1973 to describe the distortions in world agricultural markets5. The principal source of these distortions was the various exemptions given to agriculture by the GATT, notably the latitude to restrict trade and provide producer subsidies which in turn generated huge surpluses that had to be disposed off in the world market with export subsidies. For obvious reasons, the distortions were most widespread in mainly the temperate-zone food products that are produced and exported by richer countries. Most developing countries could not afford to do so.
Distortions in world markets
A number of characteristics of the world agricultural markets seen in the 1970s and 1980s are used to describe the "disarray" in world markets6:
At the risk of oversimplification of a large number of issues that were discussed and negotiated for eight years (1986-93), what follows summarizes the main highlights of the negotiations on agriculture under three headings: the Punta del Este Declaration that started the Uruguay Round; the major actors and interests in agricultural negotiations; and key events leading to the Dunkel Draft of 1991 and the Final Act of December 1993.
Agreement to include domestic agricultural policies in remit of the Round
The UR was launched in 1986 by the Punta del Este Ministerial Declaration, in which the negotiating objectives of the Round were laid out. Box 2 reproduces relevant sections of the Declaration. An important element of it was an explicit recognition of the effects that domestic agricultural policies have on trade. It was agreed that the Round would concentrate not only on the issue of border protection and export subsidies, but also on a broad range of domestic agricultural policy issues.
Diverging views on the desired outcome
Again at the risk of oversimplification, the interests and positions in agricultural negotiations may be summarized with respect to the following countries or country groups: the US, the EC, the Cairns Group, Japan and the Republic of Korea, food-importing developing countries, and other developing countries7.
D. Subjects for Negotiations: Tropical Products
The CONTRACTING PARTIES recognize the importance of trade in tropical products to a large number of less-developed contracting parties and agree that negotiations in this area shall receive special attention, including the timing of the negotiations and the implementation of the results as provided by B(ii).
D. Subjects for Negotiations: Agriculture
Negotiations shall aim to achieve greater liberalization of trade in agriculture and bring all measures affecting import access and export competition under strengthened and more operationally effective GATT rules and disciplines, taking into account the general principles governing the negotiations, by:
(i) improving market access through, inter alia, the reduction of import barriers;
In order to achieve the above objectives the negotiating group having primary responsibility for all aspects of agriculture will use Recommendations adopted by the CONTRACTING PARTIES at their Fortieth Session, which were developed in accordance with the GATT 1982 Ministerial Work Programme, and take account of the approaches suggested in the work of the Committee on Trade in Agriculture without prejudice to other alternatives that might achieve the objectives of the negotiations.
Source: Croome (1999) Annex - Ministerial Declaration on the Uruguay Round.
Following the launch of the new Round in 1986, the first important step was the mid-term review in Montreal at the end of 1988. Already two years into the negotiations, the parties in the agricultural group were as far apart as ever and failed to produce an interim text for discussion there. Meanwhile, the Cairns Group refused to approve the draft texts of any of the other fourteen negotiating groups (in other areas) until there was a text on agriculture.
A breakthrough came with the resumption of the mid-term review in April 1989. This culminated in the Geneva Accord that saw the US negotiators drop their demand for a zero-for-zero option and led to the adoption of a series of short-term measures that involved a freeze in current levels of domestic support, export subsidies and border protection. The negotiating parties 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 on 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 UR. However, the text prepared then was rejected by the EC and the deadline passed without any agreement. It was not until 1991 that the negotiators finally arrived at a consensus, whereby countries would agree to make concessions in each of the above three areas. Having agreed on this principle, the next step was to establish the level of specific concessions, which took two more years of tough negotiating.
The Dunkel draft
In December 1991, the then director-general of the GATT presented a comprehensive Draft Final Act, also known as the Dunkel Draft, in the hope of bringing the Round closer to a conclusion. The Draft covered agriculture, as well as other areas under negotiations. It included the first complete text on agriculture, in which quantitative proposals were presented with respect to concessions in each of the three major areas of agriculture. But three days later, the EC rejected the draft saying that parts of it would have to be re-negotiated. In the meantime, the adoption by the EC of the reform of the CAP in May 1992 was a major development that facilitated the negotiations. This reform brought EC's agricultural policy much closer to meeting the targets outlined in the Dunkel proposals. Its most important element in the context of the ongoing negotiations was to substitute a certain amount of domestic price support with direct payments to agricultural producers.
However, two issues continued to linger in the negotiations. The EC was still reluctant to make substantial cuts in export subsidies, and a question hung over whether the direct payments under the new CAP should be subject to domestic support reduction commitments.
Blair House Accord
It was against this background that the US and EC negotiators undertook a series of bilateral discussions, that eventually led to an agreement known as the Blair House Accord. These meetings focused on making suitable amendments to the Dunkel Draft. These amendments, which are now in the Final Act, included the following:
Thus, the Blair House Accord broke the impasse in the agricultural negotiating group and the UR was finally concluded in December 1993. With the Agreement on Agriculture in the Final Act Embodying the Results of the Uruguay Round Multilateral Trade Negotiations, agricultural trade came much closer to the GATT disciplines after 46 years - a long time indeed. And this is only "much closer", not fully in, because the Agreement still permits the use of domestic and export subsidies.
Croome, J. 1999. Reshaping the World Trading System: A History of the Uruguay Round. Kluwer Law International for WTO.
FAO. 1998. The Implications of the Uruguay Round Agreement on Agriculture for Developing Countries: A Training Manual, by S. Healy, R. Pearce & M. Stockbridge. Training Materials for Agricultural Planning No. 41. Rome.
Hathaway, Dale. 1997. Agriculture and the GATT: Rewriting the Rules. Policy Analysis in International Economics. Washington, DC, Institute for International Economics.
Ingersent, K.A, Rayner, A. & Hine, R. 1994. Agriculture in the Uruguay Round. New York, St. Martin's Press.
Johnson, D. G. 1973. World Agriculture in Disarray. London, Fontana/ Collins.
Josling, T, Tangerman, S. & Warley, T.K. 1996. Agriculture in the GATT. London, Macmillan Press Ltd.
Tyers, R. & Anderson, K. 1992. Disarray in World Food Markets: A Quantitative Assessment. Cambridge, Cambridge University Press.
Valdes, A. & Zietz, J. 1980. Agricultural protection in OECD countries: its costs to less developed countries, IFPRI Research Report Number 21. Washington, DC, IFPRI.
1 The eight negotiating rounds were Geneva (1947), Annecy (1949), Torquay (1950), Geneva (1956), Dillon (1960-61), Kennedy (1962-67), Tokyo (1973-79) and Uruguay (1986-93).
2 Hathaway (1987).
3 A primary product was defined to be any product of farm, forest or fishery, or any mineral, in its natural form or which has undergone such processing as is customarily required to prepare it for marketing in substantial volume in international trade (as defined in Ad Article XVI of the GATT).
4 Hathaway (1987).
5 Johnson (1973).
6 Many analysts have "modelled" these distortions in order to demonstrate the effects that would result if these distortions were reduced or removed. The typical results are: world market prices would rise; these prices would become more stable; and production and exports would shift from subsidizing to non-subsidizing areas, which is also consistent with the theory of comparative advantage. See, for example, Valdes and Zietz (1980) and Tyers and Anderson (1992).
7 Ingersent, Rayner and Hine (1994) describe in detail the position of all key players in the negotiations.
8 The Group consisted of 14 countries, from both the developing and developed world: Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand and Uruguay.
9 Excellent accounts of the history of the Uruguay Round negotiations are found in Croome (1999) and Josling, Tangerman and Warley (1996).