The Doha Round

Lecture 21

The Economics of Food Markets

Alan Matthews

Lecture objectives

• To ensure you have sufficient understanding of the issues in the Doha Round agricultural negotiations to be able to follow the debate and explain its implications for the EU and the CAP

• This lecture takes the story up until the July 2004 Framework Agreement

Reading

• WTO agricultural backgrounder• ICTSD www.ictsd.org and

www.agtradepolicy.org• World Bank Trade Notes• FAO briefs• EU DG Trade and USTR websites• Anania et al. Agricultural Policy Reform and the

WTO• Matthews TEP paper plus Framework

Agreement commentaries

Chronology

• Third WTO Ministerial Meeting in Seattle in November 1999 failed to launch comprehensive negotiations

• Article 20 negotiations: – Analysis and Exchange– the EU’s Comprehensive Negotiating Proposal, December 2000

• Doha Mandate, November 2001• EU’s Specific Drafting Input, January 2003• Harbinson Modalities, Feb/March 2003• Adoption of the Fischler Reforms, June 2003• EU/US Joint Initiative, August 2003• Cancún Ministerial, September 2003 Derbez draft

Chronology

• EU’s offer to eliminate export subsidies, May 2004

• Framework Agreement, July 2004• Paris May 2005 agreement on AVEs• Dalien July 2005 G20 proposal on market

access• Zurich Oct 2005 proposals on market

access• Hong Kong Ministerial, December 2005

Chronology

• New deadline of April 2006 to reach agreement on modalities

• Chairman Falconer’s reference papers April-June 2006

• July 2006 Suspension of Doha Round

• January/Feb 2007 Revival of the Round?

Negotiation issues in agriculture

• Market access• Export subsidies• Domestic support• Special and differential treatment (S&DT) for

developing countries• Non-trade concerns• Peace clause

Tariff reduction issues

• High bound tariffs remained in agriculture after URAA – 62% on average

• Tariff-cutting approaches– Request and offer vs formula approach– Linear vs harmonising formulae– Cocktail formulae

• Principles suggested– Progressivity, flexibility, proportionality, and effective

market access – Latter raises the question of ‘binding or tariff

overhang’

Illustration of tariff overhang

• Tariff overhang is where a cut in bound tariffs would have no effect in cutting current applied tariff rates – no increase in effective market access

Bound tariff pre-Doha

Bound tariff post-Doha

Applied tariff

Bound tariff

50% cut

Example of Swiss formula

• T1 = aT0/(a+T0)

• With parameter a of 140, a tariff of 350% is reduced to 100%

• With parameter a of 60, tariff reduced to 51.2%

• With parameter a of 16, tariff reduced to 15.3%

Blended and banded formulae

• Banded (or tiered) formula, where higher bands would be subject to a higher average reduction

• Blended formula, where tariffs are reduced according to a mix of three approaches: the Uruguay Round approach, the Swiss formula, and cutting tariffs to zero.

• Harbinson proposed using UR formula within each band

• Options for flexibility – UR formula, sensitive products

Figure 1: Comparison of UR formula1), Swiss formula2) and Harbinson proposal3)

020406080

100120140160180

0 50 100 150 200 250

initial tariff rates

final

tar

iff r

ates

UR Formula Swiss Formula Harbinson proposal

1) A uniform cut of 36% is assumed for the UR formula. 2) A value of 25 is assumed for the coefficient of the Swiss formula 3) The highest possible values for developed countries are assumed within each band of the Harbinson-Proposal.

Source: Own calculations, FAL.

Formula: Pd = P0 ( 1 + 0.64 t ) or Pd = P0 ( 1 + 0.76 t )

Measuring the level of ambition

• “Cuts in the average tariff” vs. “Average of the tariff cuts”

• Former is the comparison of the average tariff level pre- and post- negotiations

• Latter is measured as the average of all individual percentage cuts

• Was the method used in the Uruguay Round, and also by US in criticism of the EU proposal

• Latter method has no economic meaning because a high average cut can by obtained by cutting low tariffs by a large amoung

Illustration of average tariff cuts

Product Initial tariff

Cut Final tariff

Cut in average

tariff

A 100 60 40

B 10 20 8

C 10 20 8

Average 40 33.3 18.7 53.3

Level of ambition in Oct 2005 proposals

Average tariff before

cuts

Average tariff after

cuts

Cut in the average

tariff

Average of tariff cuts

EU 28 15 47 39

US 15 8 48 37

Canada 21 10 52 38

Japan 61 20 66 40

Brazil 37 26 301 30

India 116 72 38 36

Sensitive products

July 2004 Framework Agreement

• “Without undermining the overall objective of the tiered approach, Members may designate an appropriate number, to be negotiated, of tariff lines to be treated as sensitive, taking account of existing commitments for these products.

• The principle of ‘substantial improvement’ will apply to each product.

• ‘Substantial improvement’ will be achieved through combinations of tariff quota commitments and tariff reductions applying to each product. However, balance in this negotiation will be found only if the final negotiated result also reflects the sensitivity of the product concerned.

Sensitive product issues

• How many tariff lines allowed sensitive?• What should be allowed deviation from the

tariff cutting formula (20%? 50%? Sliding scale 40-60%?)

• How should the corresponding TRQ increase be calculated– As percentage of domestic consumption– Expansion based on existing TRQs– Expansion based on current imports

Other tariff issues

• Should there be a tariff cap?• Tariff escalation• Should specific tariffs be forbidden?• Future of Special Safeguard mechanism

(SSG)• Administration of TRQs• Tropical products• Preferences and preference erosion

TRQs

• Recall that a TRQ has three elements – quota, in-quota tariff, out-of-quota tariff

• Increase minimum access or reduce in-quota tariff

• Effect depends on whether TRQ is binding

• TRQ administration judged on quota fill and bias in the distribution of trade

• (auctions, first come first served, historic shares, applied quotas)

Domestic support

• AMS trade-distorting support: how much reduction? Reduction method – should support be reduced by a given amount or to a particular level? Limit product-specific support/

• De minimis – what to do about it?• Blue Box – eliminate it or discipline it?• Green Box – should criteria be tightened?

Should additional measures be allowed, e.g. non-trade concerns

Export competition

• Export subsidies – various roads possible to full elimination (by commodity, by tightening value and volume constraints)

• Export credits – discipline by rules, or by constraining government outlays?

• Food aid – is food aid a form of subsidised export?

• Exporting State Trading Enterprises – issues over government guarantees, monopolistic and monopsonistic powers, ability to price discriminate, price pooling

Initial US position

• Two phase process, leading to complete liberalisation

• Elimination of export subsidies within 5 years• Use of harmonising tariff reduction formula to

ensure maximum tariff is 25%• Expansion of TRQs• Limit AMS to 5% of value of agricultural

production and eliminate Blue Box• Limited SDT for developing countries

Initial EU position

• Continuation of UR formula for tariff reductions (36% on average with 15% minimum)

• 55% cut in AMS subsidies over 6 years• Reduction in export subsidy expenditure by 45%

and elimination for specific products• SDT for developing countries, including free

access for the least developed countries• Emphasises non-trade concerns such as food

labelling, animal welfare, geographical indications and precautionary principle in the agricultural negotiations

The Harbinson draft

• Cutting high tariffs more than low tariffs using a banded approach

• Introduced formula to tackle tariff escalation• Proposed doubling TRQs• Elimination of export subsidies over 10 years with

parallelism on export credits, food aid and export STEs• 60% reduction in AMS over 5 years• Either moving Blue Box into AMS or capping Blue Box

and reducing by half over 5 years• Revisiting Green Box but making environmental and

animal welfare payments eligible

Market access – level of ambition?Harbinson proposal 2003

Current tariff level

Average cut Minimum cut

< 15% 40% 25%

15% - 90% 50% 35%

>90% 60% 45%

The July 2004 Framework Agreement

• Followed the failure at Cancun and the Lamy/Fischler letter offering to conditionally eliminate export subsidies

• Pre-modalities document – set out principles to guide the negotiations but contains no figures and little structure

July 04 Framework Agreement – market access

Tariff cuts Substantial improvement in market access through tariff reductions from bound rates.

Single approach for all countries: tiered formula to ensure progressivity. Types of reduction commitments within bands and number of bands to be negotiated.

Role of a tariff cap to be evaluated.

Designation of an “appropriate number” of sensitive products, which would be subject to a mix of tariff cuts and TRQ expansion.

Tariff rate quotas Reduce in-quota tariffs and improve administration (as part of balance of concessions).

Some TRQ expansion for all sensitive products.

July 04 Framework Agreement - market access

Safeguards Future of special agricultural safeguard (SSG) under negotiation.

Establish new special safeguard mechanism (SSM) for developing countries.

Special and differential treatment for developing countries

Proportionately less tariff reductions for developing countries, with longer implementation period.

Developing countries may designate special products on criteria of “food and livelihood security,” which would be subject to more flexible treatment.

Fullest possible liberalization of trade in tropical products and alternatives to illicit narcotic crops by developed countries.

Other Tariff escalation reduced by formula to be agreed upon.

Erosion of preferences to be addressed using Harbinson Para 16 as reference.

July 04 Framework Agreement – domestic support

Amber Box Reduce total aggregate measures of support (AMS) substantially by use of tiered formula: greater efforts to reduce support by countries with higher Amber Box payments.

Cap product-specific AMS levels at historical averages.

Reductions in total AMS should lead to product-specific reductions.

Blue Box Redefine to include payments with production limiting requirement and those with no production required: include payments based on fixed areas and yields and headage as well as payments based on less than 85% of base production.

Cap payments to 5% of agricultural production from start of implementation period.

July 04 Framework Agreement – domestic support

Green Box Review Green Box criteria and improve surveillance and monitoring.

De minimis level Negotiate the reduction of the level of de minimis support.

Special and differential treatment for developing countries

Developing countries have longer implementation periods.

Developing countries have lower reduction coefficients and higher de minimis levels.

Developing countries retain the use of Article 6.2, allowing extra scope for domestic program.

July 04 Framework Agreement - export competition

Export subsidies Eliminate export subsidies by a credible end date.

Schedule and modalities of reductions to be agreed.

Export credits Eliminate export credits, guarantees, and insurance programs with repayment period of more than 180 days.

Food aid Eliminate food aid that is not in conformity with disciplines to be agreed. Disciplines will be aimed at preventing commercial displacement.

Other food aid issues (role of international organizations, humanitarian and development issues, and provision of aid in grant form) will be discussed in negotiations.

State trading enterprises

Eliminate trade-distorting practices of state trading enterprises.

Further negotiation on issue of use of monopoly powers.

July 04 Framework Agreement – export competition

Special and differential treatment for developing countries

Longer implementation periods for reductions and elimination.

Developing countries to continue to benefit from Article 9.4 exceptions.

Appropriate provisions for export credits in line with Decision on Least Developed and Net Food-Importing Countries.

Developing countries to receive special consideration in negotiation of disciplines on STEs.

Ad hoc temporary financing arrangements relating to exports to developing countries may be agreed in exceptional circumstances.

Export restrictions

Strengthen disciplines on export prohibitions and restrictions.