I. Introduction and General Topics

PURPOSE

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.

CONTENTS

4.1 Introduction

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

KEY POINTS

• The basic principles underlying the GATT include the principles of non-discrimination, reciprocity, transparency and the use of tariffs rather than quantitative measures to provide protection.
• Agriculture was treated separately in the GATT under a number of headings, of which subsidies and quantitative restrictions were the most important. These exemptions meant that there were few disciplines on agricultural policy, particularly in developed countries. World agriculture was thrown into disarray.
• The difficulties in reaching an agreement on agriculture were one of the main reasons it took so long to complete the Uruguay Round negotiations. Important stepping stones on the way were the mid-term review in April 1989, the presentation of the Dunkel Draft Final Act in 1991 and the US-EU bilateral Blair House Accord in November 1993.
• The Agreement on Agriculture means that agriculture comes closer to, but is still not fully covered by, the general GATT disciplines on trade in manufactured goods.

4.1 INTRODUCTION

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:

• basic principles of the GATT/WTO;
• treatment of agriculture in the GATT;
• "disarray" in world agricultural markets; and
• agricultural negotiations in the Uruguay Round.

4.2 BASIC PRINCIPLES OF THE GATT/WTO

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.

Box 1: The basic principles of the GATT

4.3 THE TREATMENT OF AGRICULTURE IN THE GATT

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.

4.3.1 Subsidies in the GATT

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.

4.3.2 Quantitative import restrictions

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:

• Article XI prohibits the use of quotas (with certain exceptions);
• Article XII provides for an exception to Article XI for balance of payments reasons;
• Article XIII outlines rules on quotas (on imports and exports); and
• Article XIV provides exceptions to Article III under certain balance of payments situations.

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:

• export restrictions can be used to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting countries;
• import and export restrictions can be used to bring about "the application of standards or regulations for the classification, grading, or marketing of commodities in international trade"; and

Import quotas permitted in some cases...

• import restrictions can be applied on any agricultural or fishery product imported in any form necessary to the enforcement of governmental measures that operate to:
  - restrict the production or marketing of the like domestic product or of a domestic product that is a close substitute;
  - remove a temporary surplus of a like domestic product by making the surplus available to groups of domestic consumers free or at reduced prices;
  - restrict the quantities produced of any animal product that is directly dependent wholly or mainly on the imported product.

...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).

4.4 WORLD AGRICULTURE IN "DISARRAY"

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:

• The high level of domestic support to producers - about 60 percent of the value of production in OECD countries in 1986-88 - paid by taxpayers and consumers as a result of both domestic support and border protection led to increasing amounts of surplus production which could be disposed off in world markets only with export subsidies.
• Where domestic prices were not linked to world prices, the responses to changing international prices in both supply and demand that might have helped to dampen world price fluctuations were absent. As a result, world market prices became more unstable. Examples of such "insulation" policies included the variable import levies of the EU, where duties varied inversely with movements in world market prices in order to maintain a fixed internal price. In some major import markets, state trading enterprises vary the mark-ups on imports to generate similar effects.
• The large scale use of export subsidies, mainly by the US and the EC, in order to dispose of their surpluses tended to depress world market prices and make them more unstable, as subsidies were essentially political decisions and were unpredictable. This practice generated negative effects for rest of the world producers and exporters of these goods. Indeed, during the second half of 1980s, there was a "subsidies war" between the two major exporters as they fought to maintain their share in world markets.
• For non-subsidizing countries (including most developing countries), agricultural protectionism also imposed implicit taxes on farmers. Artificially low world prices created a downward pressure on domestic prices. The resulting price disincentives often compromised agricultural production, threatened the livelihoods of large sectors of the population mainly living on agriculture, and made many developing countries increasingly dependent upon cheap food imports. These effects were frequently accentuated by domestic agricultural policies, which effectively taxed producers.
• Countries with a comparative advantage in the production and export of tradable agricultural commodities were also unable to produce and export as much as they would have under a more liberal trading regime, and have 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.
• International tension and disputes over agricultural trade arose with increasing frequency. The GATT institutions were often used in an attempt to resolve these disputes, but not with much success as rules were made ineffective due to the various exemptions. In fact, 60 percent of all trade disputes submitted to the GATT dispute settlement process between 1980 and 1990 were concerned with agriculture.

4.5 AGRICULTURAL NEGOTIATIONS IN THE URUGUAY ROUND

Highlights

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.

4.5.1 The Punta del Este Declaration launching the Uruguay Round

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.

4.5.2 The major actors and interests in agricultural negotiations

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.

• The US was enthusiastic about promoting greater liberalization in agricultural trade, and was keen to reduce the protection and support granted to EC producers under the CAP.
• The EC was much less amenable to far reaching liberalization, 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 US. The EC had a strong opposition to across-the-board reforms, and wanted instead to negotiate concessions on a commodity by commodity basis.
• The Cairns Group⁸ of countries as net exporters of agricultural commodities generally shared a common interest on greater liberalization in farm trade; it argued strongly for a reduction in protectionism and support measures in developed countries.

Box 2: Selected sections of the Punta del Este Declaration on the Uruguay Round (Part I- Negotiations on Trade in Goods)

Source: Croome (1999) Annex - Ministerial Declaration on the Uruguay Round.

• Japan and the Republic of Korea had highly protected agriculture, particularly their rice markets, as well as a strong domestic opposition to reform of the sector. Thus they were keen to protect their farmers from international competition, particularly in the rice sector, for which they sought and received special treatment.
• The developing countries outside of the Cairns Group also had a strong interest in negotiations, although their influence over the proceedings was relatively minor. A group of net food-importing developing countries were concerned with the possible negative effects of the reform process on their food import bills. Because of their efforts, the UR included a Ministerial Decision in their (including least-developed countries) favour that addressed some response mechanisms to possible negative effects.
• The rest of the developing countries, as well as well the above group, were hopeful of greater access to import markets in developed countries and so supported market access reforms. They also sought special and differential treatment, emphasizing that agriculture plays a major role in their economic development, and that the new GATT rules and disciplines should not inhibit agricultural growth by placing excessive constraints on government support policies.

4.5.3 Key events leading to the Dunkel Draft and the Final Act ⁹

Mid-term review

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:

• the permitted volume of subsidized exports was reduced to 21 percent from the original proposal of 24 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 income payments made under production limiting programmes such as EC's scheme under the reformed CAP and the US's deficiency payments were made exempt from domestic support reduction commitments; and
• commitments to reduce domestic support on a product-by-product basis were replaced by a commitment to reduce overall support to the agricultural sector.

Agreement

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.

REFERENCES

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).