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AGRICULTURE NEGOTIATIONS: BACKGROUNDER

Export Subsidies and Competition

As the negotiations develop, the discussion on export subsidies and competition shifts from broader over-arching principles to details under specific headings.

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UPDATED 1 DECEMBER 2004

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This briefing document explains current agricultural issues raised before and in the current negotiations. It has been prepared by the Information and Media Relations Division of the WTO Secretariat to help public understanding about the agriculture negotiations. It is not an official record of the negotiations.


By the time of the 2002-2003 preparations for “modalities” the discussions have separated into five headings: export subsidies; export credit, guarantees and insurance; food aid; exporting state trading enterprises; and export restrictions and taxes. Within each heading, are a list of subheadings such as: general comments; scope/definitions/product coverage; stages/timetables; transparency and notification; and so on.

Special and differential treatment for developing countries and non-trade concerns are discussed under all of them, although members differ as to whether the Doha declaration treats these as equals or whether non-trade concerns have a lesser priority.

Who can subsidize exports?

25 WTO members can subsidize exports, but only for products on which they have commitments to reduce the subsidies. Those without commitments cannot subsidize agricultural exports at all. Some among the 25 have decided to greatly reduce their subsidies or drop them completely. In brackets are the numbers of products involved for each country. 

Australia (5)
Brazil (16)
Bulgaria (44)
Canada (11)
Colombia (18)
Cyprus (9)
Czech Rep (16)
EU (20)
Hungary (16)

Iceland (2)
Indonesia (1)
Israel (6)
Mexico (5)
New Zealand (1)
Norway (11)
Panama (1)
Poland (17)

Romania (13)
Slovak Rep (17)
S Africa (62)
Switzerland-
Liechtenstein (5)
Turkey (44)
United States (13)
Uruguay (3)
Venezuela (72)

The agreement includes certain temporary exemptions for developing countries, allowing them to subsidize marketing, cost reduction and transport (Art 9.4)

For more details, see WTO Secretariat background paper “Export subsidies” TN/AG/S/8.

 

Phase 1  back to top

In this phase, some countries are proposing the total elimination of all forms of export subsidies, in some cases with deep reductions right at the start of the next period as a “downpayment”. Others are prepared to negotiate further progressive reductions without going so far as the subsidies’ complete elimination, and without any “downpayment”.

Many (but not all) developing countries argue that their domestic producers are handicapped if they have to face imports whose prices are depressed because of export subsidies, or if they face greater competition in their export markets for the same reason. This group includes countries that are net food importers and also want help to adjust if world prices rise as a result of the negotiations.

In addition, many countries would like to extend and improve the rules for preventing governments getting around (“circumventing”) their commitments on export subsidies — including the use of state trading enterprises, food aid and subsidized export credits.

Some countries, such as India, propose additional flexibility for developing countries to allow subsidies on some products to increase when subsidies on other products are reduced.

Several developing countries complain that the rules are unequal. They object in particular to the fact that developed countries are allowed to continue to spend large amounts on export subsidies while developing countries cannot because they lack the funds, and because only those countries that originally subsidized exports were allowed to continue subsidizing — albeit at reduced levels. One group of developing countries compares the effect of various types of export subsidies with “dumping” that harms their farmers.

As a result of all of these concerns, some proposals envisage sharply different terms for developing countries. ASEAN and India, for example, propose scrapping all developed countries’ export subsidies while allowing developing countries to subsidize for specific purposes such a marketing. Some developing countries say they should be allowed to retain high tariff barriers or to adjust their current tariff limits, in order to protect their farmers — unless export subsidies in rich countries are substantially reduced. Some other developing countries counter that the barriers would also hurt developing countries that want to export to fellow-developing countries.

Proposals containing positions on export subsides and competition submitted in Phase 1
(see also proposals on developing countries and on non-trade concerns)

 

Export subsidies: Phase 2  back to top

In Phase 1, the discussion on export subsidies and competition spans several subheadings. After that, as the talks go into greater detail, these are separated.

On export subsidies, one proposal in Phase 2 involves a 50% reduction as an immediate down­payment, followed by eliminating subsidies completely in three years (for developed countries) or six years (for developing countries)

Another proposal is similar but with more emphasis on flexibilities for developing countries. It includes expanding the types of export subsidies that developing countries are currently allowed under Article 9.4 of the Agriculture Agreement. This group’s proposed formula would continue reductions at the same pace as under the present agreement while negotiations continue, followed by complete elimination within three years of the negotiations’ end or 2006, whichever is earlier — with a longer deadline for developing countries.

These proposals receive some support, and some opposition, particularly over the complete elimination of export subsidies.

An alternative proposal includes “rebalancing” or “modulation” — more moderate reductions on some products in return for steeper reductions on other products, with the possibility of raised ceilings — without eliminating export subsidies. Again, this idea has received both support and opposition, some countries predicting that with rebalancing, the products they most need to export will face competition from the highest subsidies.

Some countries emphasize matching measures on imports with those on exports. Subsidy reductions would be gradual and not lead to elimination. To match the concept of bound tariffs, export subsidies would be bound per unit (e.g. per ton).

Many countries say other forms of export subsidies (such as food aid, subsidized export credit and insurance, trading by state enterprises) should be disciplined, and say they will elaborate on this later. Even among the countries that agree on the need to tackle these, there is a difference of opinion as to whether these other forms are as serious as direct export subsidies.

Some smaller developing countries argue that export subsidies should be eliminated but over a longer period of time to help them adjust to higher food import bills. They call for stronger measures to help net food-importing developing countries and least developed countries adjust.

Phase 2 papers or “non-papers” from: The Cairns Group, five developing countries (Nicaragua, Panama, Peru, Venezuela and Zimbabwe), Switzerland, Japan

 

Export subsidies: preparations for ‘modalities’  back to top

Proposals include:

  • a 50% immediate reduction as a downpayment, down to zero in three years for developed countries, six for developing countries  
  • similar but without the downpayment  
  • down to zero in five years  
  • broadly, “elimination is neither included nor excluded”, depending on what happens in other areas, including export credit and domestic support  
  • “modulation” that allows more moderate cuts for some products in return for steeper cuts in others.

Some countries propose additional commitments on per unit subsidies (e.g. dollars per tonne of wheat).

Many developing countries support elimination and downpayments. But as a whole developing countries differ as to how special and differential treatment should be handled. Some want to see exemptions along the lines of Article 27 and Annex 7 of the Subsidies Agreement. Others say this would worsen distortions and damage trade between developing countries.

Some important players have not proposed specific numbers in this phase, and this has led to criticism from others.

 

The revised first draft ‘modalities’ on export subsidies back to top

The draft proposes export subsidies be eliminated at two speeds: in five years (10 years for developing countries) for one set of products; in nine years (12 years for developing countries) for the rest.

Developing countries would continue to enjoy exemptions under Article 9.4 for subsidies to support marketing, handling, upgrading, and international transport.

 

The draft frameworks on export subsidies  back to top

(see Cancún ‘framework’ proposals)

Most of the various drafts — including the Pérez del Castillo and Derbez attempted compromises — envisage action on two groups of products. First, export subsidies would be eliminated on products “of particular interest to developing countries”. Which products, and how long the elimination would take, would be negotiated.

The drafts differ on what happens to the second set of products: whether the remaining subsidies should be reduced ( EU-US, Norway) or eliminated (G-20). The Derbez draft proposes that an end date for phasing out all forms of export subsidies (i.e. including subsidized export credit and some forms of food aid) should be negotiated.

Slightly differently, the African Union/ACP/least-developed countries call for all export subsidies to be reduced substantially “with a view to phasing out, within a specified period”. The Caricom paper proposes that developing countries’ export subsidies should be eliminated over a longer time period when those products are exported under importing countries’ preference schemes.

 

Export credits: Phase 2  back to top

Most delegations who speak in the negotiations say subsidized export credit (along with export guarantees and insurance, various forms of food aid, activities of state trading enterprises) could be used to circumvent export subsidy commitments. They call for disciplines on the subsidy portion of theses measures.

Some say that export subsidy reductions should be negotiated as part of a package that also includes disciplines and reductions in subsidized credit. Others argue that export subsidies are far more serious.

Countries taking a more cautious view of this say they are in favour of disciplines along the lines of those being developed in the OECD, but also argue that export credits do not contain large amounts of subsidies and are useful for food security in importing countries suffering from financial crises or food supply problems.

Phase 2 papers or “non-papers” from: The EU, US, and Australia.

 

Export credit, insurance, etc: preparations for ‘modalities’  back to top

By now, two approaches have emerged. One is “rules based”. Export credit and insurance would have to be on “commercial terms”, which would be defined according to criteria such as duration of credit (e.g. 180 days), benchmarks for interest rates (e.g. Libor — the London inter-bank rate — plus something), appropriate insurance premiums, and so on. Anything else would be classed as “export subsidies” and would have to be reduced or eliminated.

The alternative is to have “reduction commitments”, which means calculating the subsidy component of credit, insurance and guarantees and treating them in the same way as regular export subsidies.

Several developing countries complain that the reduction-commitment route would reinforce the unfairness of the current export subsidy set up — those with high subsidies in the base period are allowed to subsidize more during the reform period. Some countries warned against being too drastic because subsidized credit can be needed in times of foreign currency crises.

Again there were complaints that the proposals lack concrete figures. But some countries said they need more information before they can provide a specific proposal.

 

The revised first draft ‘modalities’ on export credits  back to top

The draft deals with this in Attachment 5. The technical details include the forms and providers of credit that would be subject to discipline, terms and conditions such as repayment terms and interest rates, “non-conforming” support (which would have to be reduced), emergency exceptions, transparency and notification, and special treatment for developing countries. (Export credit has been a subject discussed in technical consultations since the draft was issued, with some progress on the details.)

 

The draft frameworks on export credits  back to top

(see Cancún ‘framework’ proposals)

The US-EU draft proposes that disciplines on “distorting elements” of export credits should mirror those of export subsidies, both in the selection of products, and the reduction or elimination. So, in its own way, does the G-20 proposal, which seeks elimination in both subsidies and subsidized credit, adding that the interests of net-food importing and least-developed countries need to be looked after.

The Pérez del Castillo and Derbez drafts also envisage disciplines that mirror their texts on export subsidies. And they take up the calls from Kenya, the four central American countries and the African Union/ACP/least-developed countries for disciplines on export credit to take into account the concerns of net foood-importing developing countries and least-developed countries.

 

Food aid: Phase 2  back to top

(See also decision on net food-importing developing countries)

All agree that food aid for humanitarian purposes is essential. Most of the discussion has been about how best to ensure that the aid goes to those really in need, does not harm domestic production in countries receiving aid, does not distort trade (in particular jeopardize exports from competing suppliers), responds genuinely to demand, does not amount to the disposal of surpluses in subsidizing countries, and does not allow countries to get around their export subsidy commitments.

Most countries argue that aid should only be in the form of grants — i.e. not on credit. But some warn that this could be too rigid and prevent food aid from promptly reaching those who need it.

Many developing countries are calling for binding commitments from donor countries on the amounts they supply, with rising amounts of food at times of high prices, aid supplies in response to demand, technical and financial assistance to help countries develop domestic production instead of relying on food aid, and increased transparency through notifications to the WTO Agriculture Committee. Some developed countries also endorse some of these ideas.

Also discussed are ideas for international stock piling and a revolving fund (proposed by some developing countries in Phase 1).

Phase 2 papers or “non-papers” from: 7 developing countries (Cuba, Egypt, Grenada, Mauritius, Nigeria, Sri Lanka, Uganda), EU, Japan, MERCOSUR, Namibia, Norway

 

Food aid: additional issues (Phase 2)  back to top

Two papers have only just been circulated at the final Phase 2 meeting, and several are circulated afterwards, so most comments are brief and preliminary.

There is some sympathy for proposals to avoid the use of food aid as a way of offloading surpluses and expanding market share, although one country questions the proposal to limit food aid to grants only on the grounds that this might prevent speedy distribution.

Phase 2 papers or “non-papers” from: some Caricom countries (Food aid, Green Box subsidies, Non-trade concerns, special agricultural safeguard mechanism for developing countries and small developing economies, trade preferences)

 

Food aid: preparations for ‘modalities’  back to top

Most countries say aid is not a problem if it is given in response to an appeal from a relevant international organization (such as the World Food Program, Food and Agriculture Organization, etc, or if the organization declares an emergency).

But what if the aid is given bilaterally or through other institutions? Some countries would suspect that this is an attempt to offload surpluses, although some delegations point out that individual governments can respond to an emergency faster than international organizations. There are also differences about whether aid should only be in grant form, or whether price discounts and credit should be disciplined under export subsidy disciplines.

 

The revised first draft ‘modalities’ on food aid  back to top

The draft deals with this in Attachment 6, which is a proposed replacement for Article 10.4 of the Agriculture Agreement. The technical details include proposed criteria for determining whether there is a genuine need for food aid (such as appeals from recognized international organizations) and whether the food is being given on specific terms — for example only aid given in grant form would qualify. Other aid would have to be included in export subsidy reduction commitments or be banned. (Food aid has been a subject discussed in technical consultations since the draft was issued, with some progress on the details.)

  

The draft frameworks on food aid  back to top

(see Cancún ‘framework’ proposals)

The US-EU, G-20, Norwegian, Pérez del Castillo and Derbez drafts all envisage disciplines or “additional” disciplines to prevent food aid from replacing commercial trade. The African Union/ACP/least-developed countries’ paper says food aid to deal with developing countries’ emergencies “should be addressed”, and in general it should be continued in order to meet chronic shortages or development goals.

 

Exports and state trading enterprises/single-desk traders: Phase 2  back to top

(See also tariff quotas)

This issue matures into a heading in its own right in Phase 2. Particular emphasis is on these enterprises as exporters, although the concerns are not shared by all members, and state trading enterprises’ role on the import side, for example in tariff quota administration, is also debated.

Ideas discussed in this phase:

Symmetry: is the present agreement biased because it has tougher disciplines on importing enterprises than on exporting ones? Some countries say “yes” because exporting state enterprises supply world markets and could distort world trade more. Some exporting countries with state trading enterprises say “no” because importing enterprises have a serious impact on market access through tariff quota administration, etc, with knock-on effects on world markets.

Tackle the enterprises or specific measures? Behind this debate is the question of whether state enterprises are fundamentally different from private companies.

Some countries see little difference. They say their state companies operate on a commercial basis. They add that private companies can also enjoy monopoly power, use differential pricing, and can be bailed out with subsidies when they are in trouble. These countries therefore argue that the disciplines should not apply to state enterprises in general, but to specific measures. Some are calling for specific disciplines on multinational corporations.

Some developing countries say they need state enterprises to fill in where the private sector is too weak to trade or to compete with large foreign traders, or to serve government objectives such as food security.

The other side of the debate is the view that there really is a fundamental difference, because state enterprises or marketing boards have a monopoly when buying commodities for export, and they also enjoy government guarantees, and do not work with commercial objectives.

Phase 2 papers or “non-papers” from: Japan, and the US

 

Exports and state trading enterprises/single desk operators: preparations for ‘modalities’  back to top

This deals with the possibility that exporting state-owned companies, marketing boards or similar enterprises could be a means of subsidizing exports outside the agreed subsidy limits. A lengthy discussion has narrowed down part of the debate to whether a monopoly given by a government to an exporting enterprise is automatically suspect or whether it is the actions of the enterprise that would determine whether it is subsidizing exports.

A number of countries oppose government-granted monopolies. Simply put, one view is that if a monopoly is granted, then the price is transparency — purchase and sales prices and transactions costs would have to be notified. Some countries with state-owned or monopoly exporting enterprises object on the grounds that these are trade secrets that private companies don’t have to reveal.

 

The revised first draft ‘modalities’ on state trading export enterprises  back to top

The draft deals with this in Attachment 7, which is a proposed replacement for Article 10.5 of the Agriculture Agreement. Proposed are disciplines designed to ensure that these state enterprises operate commercially, without subsidy, allowing competition and without government support or other financial privileges.

 

The draft frameworks on state trading export enterprises  back to top

(see Cancún ‘framework’ proposals)

The US-EU draft proposes disciplines on privileges for single-desk exporting enterprises — “including ending” the privileges — and on state traders’ pricing practices. Kenya’s draft wants developing countries exempt from these disciplines because of the role the enterprises play in development. The Pérez del Castillo and Derbez drafts say disciplines on export subisidies and subsidized export credits should also apply to all relevant export subsidies — whether they are related to the enterprises, or provided by them, or provided through them, and whether directly or indirectly. They put the question of disciplines on export privileges under the broad heading of “issues of interest but not agreed”.



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