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WTO Rules: How Could the G-33 Proposal Affect Food Security?

01-11-2013

Hepburn, J., Bellmann, C. 2013. WTO rules: How could the G-33 proposal affect food security? GREAT Insights, Volume 2, Issue 8. November 2013. Maastricht: ECDPM.

In November 2012, a group of developing countries tabled an informal proposal at the World Trade Organization (WTO), seeking additional flexibility in the global trade body’s rules on agriculture.

The group – known as the G-33, a coalition of developing countries with large populations of smallholder farmers – proposed that WTO members seek to fast-track agreement on three paragraphs of the draft Doha accord, at the Organization’s Ministerial Conference in Bali, Indonesia, in December 2013.

A number of developing countries – including the G-33 – have argued that concessions on agriculture must form part of the ‘small package’ of measures for agreement at Bali. The G-33 have argued that progress on agricultural trade is needed in order to balance concessions on an eventual deal on ‘trade facilitation’ – easing restrictions and red tape at customs, in order to make it easier for goods and services to cross international borders. The G-33 proposal involves three elements related to domestic farm support payments that are exempt from any cuts or ceiling under WTO rules, on the basis that they cause no more than minimal trade distortion – known as ‘green box’ subsidies by negotiators.

What does the proposal entail?

The G-33’s proposal includes three core elements. The first element would ensure an additional sub-category for developing country programmes is included alongside other payments currently allowed under the existing category of ‘general services’ in the green box. Governments currently use this category to report minimally trade-distorting support in areas such as research, pest and disease control, farmer advisory services, and some kinds of infrastructure payments. The G-33 proposal seeks to add a new sub-category to cover subsidy schemes most commonly used by developing countries – such as land reform, rural livelihoods, and poverty alleviation programmes.

The second change put forward by the G-33 would ensure that food purchases made at administered prices from low-income or resource-poor producers would not count towards a developing country’s maximum permitted subsidy limits at the WTO, so long as these were part of a public stockholding programme for food security purposes. WTO rules currently cap such purchases, by requiring them to count towards a country’s “aggregate measure of support” (AMS): for developing countries, this usually means the ‘de minimis’ ceiling, set at 10% of the value of production. However, there are no limits at the WTO on the amount of food that can be bought at market prices for food stocks, or which could be provided as domestic food aid at subsidised prices.

The third change sought by the group relates to a footnote to requirements on food stockholding and domestic food aid. Once again, the language seeks to exempt food purchases “procured generally from low-income or resource-poor producers” from the requirement to count this support towards the AMS.

Price inflation: eroding countries’ flexibility?

Since the original informal proposal, a sub-set of G-33 members have circulated two unofficial ‘non-papers’ in addition to the original G-33 proposal to facilitate discussion amongst WTO members. Both these documents explore options that could help developing countries overcome the problem that rising food prices have reduced the scope for governments to purchase food from producers at administered prices without exceeding current WTO ceilings. The reason for this is that food prices in many countries have increased substantially in the two decades since WTO members agreed on a 1986-88 benchmark for the reference price that is used to calculate the extent to which governments distort trade. Countries currently have to multiply eligible production by the gap between this reference price and the administered price – with ‘eligible production’ being understood as the totality of the farm product produced in the country. The G-33 argues that this methodology substantially over-estimates the actual degree of trade distortion resulting from domestic programmes in developing countries.

The first such document identified four variables that could potentially be modified or clarified so as to provide developing countries with greater flexibility under WTO rules. These included the ‘de minimis’ ceiling (which is set at ten% of the value of production for most developing countries), and three elements used to calculate countries’ levels of market price support: the external reference price, which is based on a 1986-88 benchmark; the volume of eligible production; and the level of administered prices.

The second ‘non-paper’ proposed an additional three options that the G-33 subgroup indicated could also help address their concerns. The first option suggests that developing countries could use a three-year rolling average to calculate how much their food stockholding purchases contributed towards their overall farm subsidy limit, instead of benchmarking support against the external reference price. Countries should also be allowed to use last year’s average price in the largest 1-3 suppliers of foodstuffs in the country, the group suggested. The second option would be to agree a draft decision allowing WTO members to take into account excessive rates of inflation – higher than 4%, the group suggested – in calculating the contribution of food stockholding programmes towards overall farm subsidy commitments at the WTO. Finally, a third option would be to agree a ‘peace clause’ exempting these programmes from legal challenge.

How can public stockholding schemes affect food security outcomes?

According to the G-33 proposal, the direct effects on trade of government purchases from low-income resource-poor producers at higher than market prices would be minimal – since these farmers are producing primarily for own consumption and sale in local rural markets. In many countries, public stocks account for only a small proportion of marketed production: in such situations, therefore, the effects on both domestic and international market prices is likely to be minimal. However, as with any market intervention, public procurement is likely to introduce some degree of price distortion. The possible effects on production, consumption, stock levels, and hence trade will depend upon the characteristics of markets and the procurement model used in each country.

Critically, however, the extent and effects of these price distortions will also differ across time, depending upon whether the programme is procuring, holding, or releasing stocks. One of the main risks of excessive involvement of the public sector in purchasing and holding food staples is that it can crowd out private traders. These market actors could be providing marketing services and market infrastructure at a lower cost, and could be more effective in conveying market signals. Furthermore, if private traders are crowded out, the efficiency of marketing channels for both domestic and international markets could also be harmed by declining investments in improved market infrastructure.

The costs of holding stocks can be fiscally unsustainable, particularly during periods of consecutive average or above average harvests, and the potential for food waste where storage systems are inadequate can be significant. The need to release stocks onto domestic or international markets can result in sales, whether through “commercial” channels or through government-to-government contracts, at below market prices. The timing of release, especially if unpredictable and not factored into traders’ decision making, can significantly influence price levels and volatility, both domestically, and, if the country is a significant trader, internationally. There are concerns that the release of large quantities of surplus stock into already thin global markets (such as the case of rice) could have a suppressing effect on international markets to the detriment of other exporters.

Government food stocks can however also contribute to food security in other countries. For example, following the 2007-2008 spike in food prices, India entered into a deal with Bangladesh wherein about 400 thousand tonnes of rice were exported to Bangladesh at US$400/tonne while the world price was as high as US$800/ton. However, such government-to-government deals can, particularly where sustained over time, result in significant shifts in trading patterns, sometimes to the detriment of traditional exporters to the importing country.

Bali

Trade negotiators have made slow progress in informal talks in the run-up to the WTO ninth ministerial conference in Bali, Indonesia, this December. However, in October, delegates moved closer to agreement on how best to make information on subsidised food purchases for stockholding programmes more transparent to other WTO members. The transparency conditions would apply to countries benefiting from an ‘interim mechanism’ to provide greater flexibility to countries whose subsidised purchases for stockholding programmes could put them at risk of breaching current ceilings on trade-distorting support. Trade officials are exploring whether countries could temporarily agree to refrain from bringing legal disputes, in exchange for various safeguards and conditions. This “peace clause” would then temporarily shield these programmes from legal challenge.

The chair of the agriculture negotiations, New Zealand ambassador John Adank, told negotiators that, by discussing transparency requirements, conditionality and safeguards, “members had already taken steps towards elaborating quite specific requirements on which the flexibility will be dependent”, suggesting that the mechanism may take the form of a ministerial decision.

Conclusions

The G-33 proposal can more broadly be seen as symptomatic of the challenges many countries face in designing policies to achieve food security goals in the new price environment. Current disciplines on agriculture in the multilateral trading system deal primarily with the challenges of structural oversupply on global markets that characterized the 1980s and 1990s, but arguably do not respond effectively to problems associated with the volatile and rising prices for food and agriculture that many experts expect will continue to predominate in the years ahead. As a result, while exporting countries are able to rely on a relatively well-developed set of rules and mechanisms to address trade distortions on the import side, importing countries (including the poorest ones) are unable to rely on an equivalent regulatory framework to ensure stability and predictability in the supply of farm goods on world markets.
Ambiguities and inconsistencies continue to affect the ability of WTO Members to understand and monitor new phenomena properly, such as support to biofuels. Furthermore, Members have done little to consider the possible implications of future challenges such as climate change – not least due to slow progress on the ongoing round of Doha trade talks. While enhanced flexibilities at the multilateral level could deliver real benefits to low-income, resource-poor farmers, the design of international disciplines on public procurement and domestic food aid could have far-reaching implications for global agricultural markets that need to be given careful consideration both in the run-up to the Bali Ministerial Conference and beyond.

In order to address food security effectively, governments will have to engage meaningfully with a wide range of disciplines and measures on trade – including agricultural export restrictions, biofuel subsidies and a number of other long-standing concerns such as rules on market access for farm goods and trade-distorting subsidies. Negotiators could usefully explore the scope for establishing a post-Bali work programme looking at the full range of trade and food security concerns, with a view to improving the ability of the multilateral trading system to respond effectively in this area.

This article is based on a longer ICTSD/FAO information note, available online here: http://ictsd.org/i/publications/176915/.

Jonathan Hepburn is Programme Manager for Agriculture at the International Centre for Trade and Sustainable Development (ICTSD). Christophe Bellmann is the Programmes Director at ICTSD.

This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).

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Economic Transformation and TradeFood SecurityG33TradeWorld Trade Organisation (WTO)

External authors

Jonathan Hepburn

Christopher Bellmann