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Module 1 Domestic Support MeasuresN. Hag Elamin Commodities and Trade Division |
The objective of this module is to provide a brief overview of the basic provisions of the Agriculture Agreement on domestic support and commitments undertaken by developing countries in this area, in order to assist them in identifying issues of concern in the upcoming negotiations on agriculture.
1.1 Introduction
1.2 Provisions in the Agreement on domestic support
1.3 General observations on commitments made by developing countries
1.4 Scope for developing countries to support agriculture under the domestic support commitments
1.5 Some issues arising from implementation of domestic support commitments
Introduction of rules on domestic support
The GATT had traditionally concerned itself with trade measures and had not been much involved in purely domestic production policies, except where these had a trade impact (e.g. Article XVI on Subsidies of GATT 1994). The Uruguay Round (UR) Agreement on Agriculture (Agreement), however, disciplined domestic support to agricultural products and in this respect it overrules the provisions of GATT 1994 (Article 21 of the Agreement). The specific domestic support provisions stipulated in the Agreement were aimed largely at easing developed country trade conflicts and, in particular, at the removal of policies which had resulted in overproduction in the past. The intent is to discipline and reduce domestic support while at the same time leaving some scope for governments to design domestic agricultural policies in the face of, and in response to, the wide variety of the specific circumstances in individual countries. The approach agreed upon is also aimed at ensuring that the specific binding commitments in the areas of market access and export competition are not undermined through domestic support measures.
This module covers the following four aspects:
Under the Agreement, all domestic support in favour of agricultural producers is subject to rules. The Agreement entails two types of commitments on domestic support: one qualitative and the other quantitative. The qualitative commitment establishes a definition of domestic support policies which are exempt from the reduction commitments, while the quantitative commitment establishes schedules of commitments limiting subsidization covering agricultural products.
Exempt measures are not included in AMS calculation
Support measures which are exempt from reduction commitments are classified in a number of categories as shown below.
"Green Box" measures are listed in Annex 2 of the Agreement. The fundamental requirement for the exclusion of such policies from reduction commitments is that they have no, or at most minimal, trade distorting effects or effects on production. They must be provided through publicly-funded government programmes (including government revenue foregone) not involving transfers from consumers and must not have the effect of providing price support to producers. The outlays on these exempt measures can even be increased without any limitation under the WTO. The Green Box applies to both developed and developing country Members.
The list of measures of the Green Box includes the following:
Article 6 of the Agreement excludes from the reduction commitment some support measures that fit into the developmental category, whether direct or indirect, designed to encourage agricultural and rural development and that are an integral part of the development programmes of developing countries. They include:
Direct payments under production limiting programmes (often referred to as "Blue Box" measures) are exempt from the reduction commitments if:
All domestic support measures in favour of agricultural producers that do not fit into any of the above exempt categories are subject to reduction commitments. The de minimis exemptions allow any support for a particular product to be excluded from the reduction commitment if that support is not greater than 5 percent of the total value of production of the agricultural product in question. In addition, non-product-specific support which is less than 5 percent of the value of total agricultural production is also exempt from reduction. The 5 percent threshold applies to developed countries whereas in the case of developing countries the de minimis ceiling is 10 percent.
Support provided under non-exempted policies is subject to reduction commitments. The reduction commitments are expressed in terms of a "Total Aggregate Measurement of Support or Total AMS" which is the sum of expenditures on non-exempted domestic support, aggregated across all commodities and policies. For evaluating the level of support that is provided to the agricultural sector, the Agreement refers to four different measures of support, as follows:
Types of support measures in the AMS
The methodology for preparing domestic support commitments were contained in a document called Modalities, parts of which are included in Annexes 3 and 4 of the Agreement. The Modalities require a 20 percent (13.3 percent for developing countries and none for least developed countries) reduction in the Base Total AMS, to take place in equal annual instalments over the implementation period. This planned annual reduction commitments are included in country Schedules, which are legal documents. For each year of the implementation period, Members compute Current Total AMS which should not exceed the level committed in Schedules. It is worth noting that the negotiating modalities of the UR in terms of, for instance, the implementation period and reduction commitments, do not apply to newly acceding countries; for these countries specific commitments must be negotiated with Members, under Article XII of the WTO Agreement.
Related AMS provisions
Other related provisions on AMS include:
The methodology for the calculation of the AMS was outlined in the Modalities, and also reproduced in Annexes 3 and 4 of the Agreement. The AMS is calculated for the base period, 1986-88 (and called Base Total AMS) and for every year during the implementation of the Agreement (and called Current Total AMS). In calculating AMS, budgetary outlays as well as revenue forgone should be taken into account. Annex 3 of the Agreement mentions four categories of support for inclusion in the AMS:
AMS includes market price support plus non-exempt budget outlays
Market price support is measured by multiplying the gap between the applied administered price and a specified fixed external reference price ("world market price") by the quantity of production eligible to receive the administered price. For each product, the implicit subsidy of price support measures is added to other product-specific subsidies (e.g. a product-specific input) and direct payments which are not dependent on price gap to arrive at a product-specific AMS, which is then evaluated against the relevant de minimis level.
All non-product-specific subsidies are calculated separately and are added together to get the non-product-specific AMS, which should be included in the Current Total AMS only if it exceeds the relevant de minimis level. Box 1 illustrates procedures for calculating AMS following the guidelines on Modalities, while Box 2 provides a hypothetical example of Total AMS for a developing country.
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Market price support for a product = (administered price at the farm gate - fixed external reference price) x eligible production Where fixed external reference price = c.i.f. unit value for 1986-88
Market price support for an input (service) = (administered price at the farm gate - market price) x quantity of input (service) receiving subsidy Product-specific AMS = sum of all positive support to a basic product (market price support + other types of support not dependent on price gap) Product-specific AMS should be included in Total AMS only if it exceeds the de minimis level (5% for developed countries or 10% for developing countries), i.e. if (product-specific AMS/market value of total output of the product) x 100 is greater than 5 (or 10 in the case of developing countries) Non-product-specific AMS = sum of all positive non-product specific AMS Non-product specific AMS should be included in Total AMS only if it exceeds the de minimis level (5% for developed countries or 10% for developing countries), i.e. if (non-product specific AMS/market value of total output of the product) x 100 is greater than 5 or 10 respectively. Total AMS = (product-specific AMS exceeding de minimis + non-product specific AMS exceeding de minimis) |
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All Members must notify the WTO's Committee on Agriculture (CoA) of the extent of their domestic support measures. This requires a listing of all measures that fit into the exempt categories: the Green Box, the SDT, direct payments under production-limiting programmes and de minimis levels of support. Scheduled domestic support reduction commitments and the Current AMS must also be notified. In addition, all Members must notify any modifications to existing, or any introduction of new, measures in the exempt categories. All notifications are examined by the CoA on a regular basis.
The periodicity of notification is annual, except in the case of least-developed country Members which are only required to notify every other year. The details are available in the WTO Handbook on Notification Requirements (WT/TC/NOTIF/AG/1 Sep. 1996).
The following are some general observations on the submissions of developing countries on domestic support:
Inadequate information on support measures. Many countries merely reported that all their support to agriculture met the Green Box (GB) and the Special and Differential Treatment (SDT) categories without listing the measures or providing budgetary outlays. Others provided such a list and the outlays for the GB and SDT measures but did not report any information on AMS. Only a few countries reported AMS figures. Table 1 provides a summary of the basic information on domestic support submitted by 48 developing countries from Sub-Saharan Africa and the Near East regions.
Zero Base Total AMS limits future scope for domestic support
The majority of developing countries reported zero Base Total AMS. This means that in the future non-exempt support to agriculture in these countries should not exceed the de minimis level, which may limit their options to support agriculture. Even for the few developing countries with positive Base Total AMS, the reported AMS was generally low (less than 20 percent of the agricultural GDP in most of the cases). In contrast, the majority of the developed countries had their AMS in excess of 20 percent of their agricultural GDP.
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Source: WTO, Committee on Agriculture: Country Schedules: Part IV, 1996.
AMS disciplines have not been binding. For countries with AMS reduction commitment, including developed and developing, the reported Current Total AMS for the 1995 and 1996 implementation years were below the commitment levels. In general, AMS has not been a binding constraint for almost all WTO Members (Table 2). This was partly due to the methodology used to estimate AMS, partly to the base period used for its calculation, and partly to the various exemptions granted and unilateral policy reforms undertaken in many countries.
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Source: WTO, Committee on Agriculture, AIE/S2: Domestic Support, background paper by the Secretariat.
A number of methodological shortcomings were observed in the Schedules and Notifications. Such problems have been found in many cases, although the domestic support commitments have not presented any significant constraints for most of the developing countries so far. This might lead to difficulties in the future. Some of these shortcomings are discussed in Section 1.5.2.
Although domestic support commitments do not appear to have imposed constraints on policy design in developing countries as yet, commitments made to the WTO are of a binding nature and therefore have consequences for policy flexibility for the coming years. Thus, countries need to examine the extent of flexibility they currently have and how this may be affected in the next round. Based on the discussion in Section 1.2, administrative support (i.e. support governed by the domestic support provisions of the AoA) to agricultural producers in developing countries could compose the following items1:
Total support = Production/trade distorting support (AMS) above the de minimis level
+ de minimis support
+ Special & Differential Treatment support
+ Production-limiting support (the Blue Box)
+ Green Box support
There are thus five different options for the developing countries to use administrative support for agriculture in addition to tariffs2. As mentioned earlier, the majority of the developing countries reported zero or below de minimis Base Total AMS in their schedules, which means that they cannot resort to the first option (above the de minimis AMS support). However, there could be adequate scope to support agriculture through the remaining options. The Green Box covers many of the important agricultural support programmes in developing countries, which are mainly government services (research, plant protection etc.). In addition, the Special and Differential Treatment (SDT) exemption allows these countries a further scope for supporting their agriculture through input subsidies to low-income or resource poor farmers and investment subsidies to agriculture. The Blue Box is of much less significance since production-limiting support is very rare in developing countries.
Importance of the de minimis rule especially for countries with zero Base Total AMS
Most importantly, the de minimis rule allows exemptions in addition to what is already exempted under GB and SDT. Under the de minimis exemptions, a developing country can exempt up to 10 percent of its product-specific support and 10 percent of its non-product-specific support, and thus the total exemptions could theoretically come close to 20 percent of the total value of agricultural production. In addition, support is often granted to only the marketed share of production, which can be much lower than the total production in most developing countries. The lower the share of marketed output the higher the price support that can be provided. If, for example, the marketed output represents a share of 50 percent of total production, then the 10 percent de minimis clause could be equivalent to a 20 percent price support on marketed output, which is not insignificant3.
Figure 1 below shows a case of an average developing country where, during 1995-97, the average annual exempted support to agriculture under the GB and SDT was relatively low (below 10 percent of the agricultural GDP). Its non-exempt support was also low (3 percent)4. Thus, the average total annual support provided by the country during 1995-97 constituted about 13 percent of its agricultural GDP. However, when adding to this the unutilised possible support under the de minimis exemptions it becomes obvious that for many countries the exempt-support is significant, and perhaps beyond the current fiscal capacity of the bulk of the developing countries to subsidise agriculture. For a more elaborate analysis of the implications of the UR commitments on domestic support for agricultural policies in the developing countries see Konandreas and Greenfield (1996).
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Developing countries must weigh up the benefits of tighter restrictions on highly protecting countries against possible restrictions on scope for their own policy
The experience with the implementation of domestic support commitments has shown that there is a need for improvement in several areas including implementation issues that likely require additional clarification and/or establishment of new disciplines. This section selectively addresses some of these issues.
Tightening up criteria for inclusion to the Green Box (Annex 2). One of the key criteria for the Green Box policies is that they have a minimal distorting effect on production and trade. However, the concept of "minimal effect" has not been explained or quantified. The dividing line between "Green Box" and "distorting" measures is not clear in many cases, since, in the strict sense of the term, almost all production policies are potentially trade distorting. Within the CoA, many Members have pointed out the need to revisit the definition of Green Box measures in terms of identifying minimal or non-trade distorting support. Some countries called for a major surgery including the possibility of eliminating the reduction exemption afforded to Annex 2. In contrast, some countries do not see the need for a major change.
Overall, revision of Annex 2 definitions is a likely issue in the upcoming negotiations Any tightening of these definitions would probably affect developed countries more so than developing countries, since the Green Box policies are much more common in the former countries.
The Blue Box. These measures are mainly relevant for the US and the EC. The most notable of these are the compensatory payments and land set-aside programmes of the EC's Common Agricultural Policy, and the United States' deficiency payments scheme. It is of much less importance to developing countries where production-limiting programmes are not at all widespread.
The Blue Box exemption was originally developed as a transitional mechanism to encourage countries to move from the most trade-distorting to less distorting measures. This, in addition to the fact that only a few countries are using it, makes it a possible target for revision in the next round. The revision may take the form of reviewing the eligibility criteria for exemption, calculation methodologies or the entire elimination of the exemption. It is generally felt that with the FAIR Act of 1996, which eliminated its deficiency payments scheme5, the US could take a position against the Blue Box exemption.
Countries with zero Base Total AMS have nothing to lose from further reductions
Further reduction of the AMS. It would be anticipated that future commitments would involve further reductions of the AMS ceilings. One possibility is that reductions may continue along the UR-formula, i.e. based on the aggregate AMS for the entire farm sector and at moderate rates. Such reductions, however, may not be significantly restrictive for all countries (developed and developing). It would allow countries to make heavier cuts in some `unimportant' product sectors with little or no reduction in sensitive sectors. Thus, a second option could be to reduce AMS for each product or product group. This method would hurt sensitive food production sectors and would bite even deeper in the long run. This option, however, seems unlikely, since it was rejected during the UR negotiations.
Negative AMS. Only a few countries have reported negative base AMS in their Schedules, the result of overall negative product-specific support (domestic prices being below external reference prices) more than offsetting positive product-specific AMS as input subsidies are typically positive. This pattern could hold for a vast majority of developing countries, where domestic product prices are generally kept low for political economy reasons, at the same time compensating the agricultural sector through input subsidies. The Agreement does not discipline taxation of production and negative AMS is ignored in the computation of AMS level. One view expressed by some of these countries holds that if they could exchange negative AMS with positive AMS, they would have increased flexibility to provide AMS type supports in the future. But current rules do not allow that.
Although domestic support commitments appeared to be the least constraining commitments for developing countries, a number of implementation difficulties have been encountered by these countries that might become significant constraints in the future, and as such these are issues of interest to them in the next round of negotiations.
Should changes to original notifications be allowed under SDT?
Under-reporting of Base Total AMS. It appears that some of the support programmes in many developing countries were not declared and the reported Base Total AMS (which is predominantly declared as equal to zero) seemed to underestimate actual support given to agriculture during the base period. Support to inputs such as fuel and electricity and to services such as irrigation and stockholding are often ignored in AMS calculations. In some cases, low AMS also resulted from incorrect calculation, e.g. the inclusion of negative support in Total AMS. Since a zero Base Total AMS puts limits on the extent to which direct price support can be given in the future, the issue is whether these countries would be permitted to correct these mistakes.
Problems related to inflation and currency adjustment. With a few exceptions, all developing countries submitted their AMS in domestic currency terms. The main problem of this relates to inflation and currency adjustment. With inflation as high as 10-15 percent per annum, "current" administered prices rise by several folds above the fixed base period external prices, thereby magnifying Current AMS levels, which easily exceed committed maximum levels. In a hypothetical example shown in Table 3, a 2 percent annual inflation during the period from 1986-88 to 1996 (i.e. 18 percent inflation in 1996 compared with 1986-88) keeping other things the same, increases the 1996 current product-specific AMS for a specific product by over 100 percent above its base AMS, with a consequent increase in its share in total value of output from 8 percent (within the de minimis limit) during 1986-88 to 15 percent in 1996. A simple comparison of actual inflation in developing countries, which is very often above 10 percent per annum, with the above hypothesised rate of inflation (2 percent annum) will illustrate the magnitude of the problem.
Some of the developing countries have already faced this problem - i.e. their Total Current AMS exceeds the bound level, thus breaching the commitment. To overcome the problem, some countries notified their current AMS in US dollars (although their base AMS submissions were in local currencies), while some others have adjusted their external reference prices to accommodate changes in exchange rates. These corrections have been questioned at the CoA. Although the Agreement recognises the problem of inflation and the need for giving due consideration to this, the precise way to give such a "consideration" as well as the meaning of "excessive rates of inflation" are not spelled out in the Agreement.
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1 Based on the AMS methodology, the external reference price (c.i.f. unit value for 1986-88) should be kept fixed for the entire implementation period.
Differences in interpretations of certain terms associated with domestic support commitments. Some of the important terms have been interpreted differently, which could be a potential source of problems; and so these terms may be revisited in the next round. Some examples are:
For them, input subsidies are essential to facilitate the adoption of improved farming technology, which is required to modernise agriculture. Therefore, how this issue is clarified is of immense importance for them.
Other methodological difficulties. Some other methodological difficulties were observed in the Schedules and Notifications of developing countries:
Re-visiting AMS submission. The foregoing discussion suggests that in the UR many developing countries did not systematically calculate their AMS. In view of this, and considering the immense importance of agriculture in these countries, there is a need for some special consideration for them. This could be:
Compliance with notification requirements. The experience over the first three years of implementation has shown that compliance rates of the developing countries in domestic support were substantially lower than those for the developed countries. For example, until end-1997, more than half the developing country Members (excluding those exempt from notification in this period) have not submitted their Notifications on domestic support. This reflects a general weakness in their human resource and institutional capacities.
Terms of accession to the WTO. As mentioned earlier, accession is governed by Article XII of the WTO Agreement, which stipulates that accession will be on terms to be agreed between the acceding country and the WTO. From what is known so far, newly acceding developing countries seem to be facing tough negotiations on domestic support. Many of these, it appears, were even denied the special and differential treatment in this area.
Conclusions
In conclusion, existing provisions on domestic support seem to provide reasonable flexibility for developing countries to support their agriculture. Notwithstanding this flexibility, many developing countries experienced some difficulties in implementing their commitments. These difficulties could be compounded by new obligations arising from the negotiations on agriculture. It is very likely that, as part of these negotiations, some of the rules on domestic support measures agreed in the UR may be proposed for revision. It is therefore important that these countries participate actively in the next round to ensure that their interest and concerns on matters such as new emerging disciplines and interpretations are taken into account.
Towards preparing for the negotiations, it would be very helpful to re-appraise the support measures submitted in the UR, or those that were left out, in the context of the questions being asked on these measures by trading partners at the WTO. This is particularly important since many developing countries did not undergo this exercise in the UR. They should also bring to the notice of the CoA, before the start of the next round, any difficulties they encountered in implementing their commitments or in fulfilling their notification obligations; this would help them to establish a case for simplifying and reducing these obligations.
FAO. 1998. The Implications of the Uruguay Round Agreement on Agriculture for Developing Countries: A Training Manual. Training Material for Agricultural Planning No. 41, Rome.
FAO. 1997. The Impact of the Uruguay Round on Agriculture in Southern Africa Implications and Policy Responses. Proceedings and papers submitted to FAO/SADC Workshop held in Harare, Zimbabwe, 21-23 January 1997.
Konandreas, P. & Greenfield, J. 1998. Policy Options for Developing Countries to Support Food Security in the Post-Uruguay Round Period, FAO. Canadian Journal of Development Studies, Volume Six, Special Issue.
Konandreas P. & Greenfield, J. 1996. Uruguay Round Commitments on Domestic Support: their Implications for Developing Countries. Food Policy, Vol. 21, No. 4/5.
WTO. 1995. The Results of the Uruguay Round of Multilateral Trade Negotiations: the Legal Text. Geneva.
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1 Separate from the provisions on domestic support, support to agricultural producers can be provided by tariffs.
2 This flexibility is envisaged within the limits of Article 13, due restraints.
3 This would be true if the "eligible production" referred to in the Agreement refers to marketed output, as against total output; however, what exactly is the eligible output is not as yet clearly defined.
4 GDP is used here as a proxy for the value of total agricultural production as data on the latter were not available.
5 In 1996, the US reported zero production-limiting support (WTO document: G/AG/N/USA/17).
