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Comparing What Might Have Been with the Likely Outcome of the Doha

Round Agriculture NegotiationThe Williams Text v The Falconer Text

Brett WilliamsFaculty of Law

University of Sydney

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Agriculture is a Microcosm of the GATT

• Allowing Member States to achieve their Objectives

• Encouraging Members States to Achieve Objectives by Choosing the Most Efficient Policy Instrument to Do So (instead of choosing trade measures

• Politicians won’t do this unilaterally – they will choose trade measures more often than is efficient

• So we have designed a system to help.• The Design of the System Does Matter

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Two Theories on How What Trade Agreements Do and How They Work

• On the terms of trade theory of trade agreements (Bagwell & Staiger): nations exchange commitments not to impose terms of trade losses on each other SO the trade agreement is a way to avoid the PD outcome which would arise from single nations attempting to maximize their own national welfare by imposing optimal tariffs but which leads to retaliation so that in fact they end up diminishing their welfare rather than enhancing it;

• On the political support theory of trade agreements (eg Ethier 2002):politicians exchange market access to supply each other with political support SO the trade agreement is a way to avoid the PD outcome which would arise from politicians in individual nations attempting to maximize their own political welfare which in fact leads to higher protection (etc) and lower welfare for the people within the nation

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Protecting People from Politicians

• Both: treaty provides an additional layer of quasi constitutional constraint to protect people from their politicians

• To Guide Politicians to an outcome different from what they would otherwise choose

• Eg. low protection instead of high protection• (eg comparisons with similar functions of EC

law: Tumlir (1986) or of US constitution Farber & Hudec (1994).

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For objective of Wealth Transfer which Choice of Policy Instrument Would Rank 1st in terms of:

Maximizing Politicians’ Political Welfare

Maximizing Citizens’ Economic Welfare

VER 1st 6th

Import Quota 2nd 5th

Import Tariff 3rd 4th

Export Subsidy 4th 3rd

Production Subsidy

5th 2nd

Input Subsidy 6th 1st

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Politicians Choosing To Maximize Their Own Political Welfare But Minimize Their Citizens’

Welfare• Politician Can Enhance

Own Political welfare by choosing:

• 1 High level of protection

• 2 High cost (most indirect) policy instrument

• 3 High dispersion between rates of protection

• 4 discriminatory preferences

• Economic Welfare of Citizens Enhanced by choosing:

• 1 low level of protection

• 2 low cost (most direct) policy instrument

• 3 low dispersion between rates of protection

• 4 non-discrimination

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Change Politicians Decision

• + Import Competing Producers

• - Consumer• - Taxpayers• - Exporting Producers• + Sympathy for Losers (SWF)

• = nth Best Decision

• + Import Competing Producers

• - Consumers• - Taxpayers

• - Exporting Producers

• - NPV of Support from Long Term Prosperity

• - Support of Rule of Law• + Sympathy for Losers (SWF)

• = 1st Best Decision

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What Makes the System Work• 1 Reciprocity• 2 Non-Discrimination• 3 Gradualism

• What does Reciprocity Entail?• Rules that Prevent Reciprocity from Being

Undermined• Ranking of Instruments: stricter rules on

measures which undermine reciprocity the most (QRs) , less strict on Measures which only undermine Reciprocity a little

• (corresponds to economic ranking of instruments for achievement of wealth transfers set out above (See Bhagwati (1971))

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What is our Starting Point with Agricultural Trade?

• Discrimination = preferential margins• Quantitative Restrictions – Annex 5(K, P), Safeguards – AS, AoA Art 5, QRs

by Import Monopolies, TQs • Tariffs – Average Agricultural % > Average Industrial %; high dispersion and

high disparity• 6 digit lines, 8 digit lines – Eg (source WTO Tariff profile 2006)

– Cereals: > 500% (Egypt, Japan, Switzerland, Norway, Sth Africa. Korea) >150 (US, Canada, Turkey, Mexico) >100% (EC, India)

– Dairy: >400% (Japan, Switzerland, Norway) >200% (EC, Indonesia), >100% (US, India)

– Animal Products: >400% ( Japan, Canada, Switzerland, Norway), >200 (EC, Turkey, Mexico) , >100% (India, Sth Africa)

– Fats and oils: >400% (Japan, Korea), >200% (Canada, Switzerland, Norway, Mexico, India) >100% (US),

– Sugar: >400% (Switzerland), >200% (Norway, Korea, Mexico), >100% (US, EC, Japan, Turkey, India, Sth Africa)

Cf: Nothing over 80% (Philippines) 65% (China), 55% (Brazil), 35% (Argentina) • Export Subsidies – Bindings a significant levels;• Also export credits, consumer funded ES (export monopolist controls Q of

domestic supply) • High Per Unit Subsidies linked to Production – for OECD countries unevenly

spread over particular products – very high DS on particular products

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Priorities for Agricultural Negotiation• Reduce Discrimination (Diminish Diversion from existing

Discrimination)• Eliminate all tolerance of Quantitative Restrictions• Reduce Tariff as Much as possible (Force support onto

the government budget instead of import tariffs as far as possible)

• But Tariff Cuts not too high (Gradualism)• Aim for Reciprocity as far as possible at least in the long

term (and as far as reductions are welfare enhancing)• Leave sovereignty to achieve objectives with freedom to

choose least inefficient policy instrument ( Means leaving all Members free to impose some subsidies and leaving some Developing Members free to retain some tariffs)

• As far as possible squeeze government funded support away from links to production – encourage box shifting to more efficient policy instruments

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Compare with Negotiating Priorities in the Doha Round

• US & Cairns proposal beyond feasible gradualism• EC proposal of minimum 15% cuts & G10 proposal for sensitive products

inadequate to provide economic gains• Cairns Group accedes to the concept of excepting products from reductions

& seeks massive reductions in AMS• G20 & G33 seek even broader exemptions from reductions & even more

massive reductions in AMS• EC and G10 dig in on sensitive products – others focus on TQs; • US & G10 dig in on AMS – others focus on preventing box shifting• Leads to • On market access where > 90% of gains are available: Massive

Exceptions losing out on the biggest gains• On Domestic Support where < 10% of gains are available: application of

pressure that makes it harder to capture the 90% of gains from reducing import barriers and creation of complex rules still leaving scope for high per unit product specific subsidies on particular products which will only be able to be adjudicated upon after the event.

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One set of rules or Two

• The Williams Text: Move as far as possible toward having No separate Agreement on Agriculture

• The Falconer Text: entrenches many separate rules for agricultural trade

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Eliminate Quantitative Restrictions: Williams

• Terminate the AoA exception in Annex 5• AS Art 5.1 – prohibit QRs as safeguards• AoA art 5 – eliminate QR aspects• Stop limits on TQ Volumes: Turkey Rice helps

but better to Mandate Auctioning of TQ volumes– (Art II:1(b),2nd sentence does not apply: Korea Beef 1989

saying II:4 did not apply to price gap caused by quota volume)

• Stop QRs by Import Monopolies: helped by Korea Beef 1999 & insistence on private trader TQ entitlements but better to Prohibit Monopoly or exclusive import rights

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Eliminate Quantitative Restrictions: Falconer

• Terminate the AoA exception in Annex 5 - NO• AS Art 5.1 – prohibit QRs as safeguards - NO• AoA art 5 – eliminate QR aspects - Almost• Stop limits on TQ Volumes: Turkey Rice helps

but better to Mandate Auctioning of TQ volumes NO– (Art II:1(b),2nd sentence does not apply: Korea Beef 1989

saying II:4 did not apply to price gap caused by quota volume)

• Stop QRs by Import Monopolies: helped by Korea Beef 1999 & insistence on private trader TQ entitlements but better to Prohibit Monopoly or exclusive import rights NO

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Reduce Import Tariffs: Williams

• Finish Tariffication – convert all duties to ad valorem duties on day 1

• What size tariff reductions?• Dispersion • – so harmonization necessary• - need to avoid averages and use line by line• Apply harmonization formula to all (NAMA and

Agriculture) products and all countries• Must apply to all countries and all products

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Rates of Tariff Cuts: WilliamsThat part of the Bound rate in the range

To be Cut by

0%-50% 30%

50% - 100% 38%

100% - 150% 46%

150% - 200% 52%

200% - 250% 60%

250% - 300% 68%

300% - 350% 76%

350% - 400% 84%

>400% 92%

.

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Exceptions to Tariff Reductions: Williams• In theory: Members in situation in which:• 1 +ve production externalities & -ve consumption

externalities Exceed -ve production externalities & +ve consumption externalities

• 2 transaction costs of alternative non-trade policy are so large as to make trade policy the least cost instrument for addressing the externalities.

• In practice: use per capita income as proxy• Group 1 – 50% longer implementation periods• Group 2 – sliding scale to 100% longer implementation

period• Group 3 – sliding scale to 150% longer implementation

period • Group 4 – 150% longer implementation period + 2/3 rate

of reduction• Additional delay to start of period for those without export

subsidies

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Allowance for Tariff Increases

• Article XXVIII

• -in exchange for reducing tariffs on other products

• Clarify that adjustments to Schedules must conform to Art XI: i.e no TQs (adopt a specific waiver for existing TQs)

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Tariff Reductions: Falconer Tariff Conversion on Day 1: NO

Bound Rate

Dev’ed Member Cut

Bound Rate

Developing Member cut

0-20% [48-52]% 0-30% [32-37]%

20-50% [55-60]% 30-80% [36-40]%

50-75% [62-65]% 80-130% [41-42]%

>75% [66-73]% >130 [42-48]%

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Summary of Market Access & Exceptions: FalconerDeveloped member Developing member

Rate of Tariff Cut Approx 50% to 70%

But minimum 54% (including rate of cut on Sensitive Products)

Tropical P: Up to 85%

Escalat’d Processed: 50+? to 70+?

Approx 33% to 47%

But maximum 36% (including …..?)

Tropical P: N/A

Excalat’d Processed: N/A

Implementation Period 5 years 8 years

Except % of tariff lines designated as Sensitive (8 digit)

4% - 6% Sensitive Lines 5.3-8% Sensitive Lines

With 2/3 of ordinary cut Expand TQ volume by 3-5% of consumption

Expand TQ volume by 2-3.3% of traded consumption

With ½ of ordinary cut Expand TQ volume by 3.5-5.5% of consumption

Expand TQ volume by 2.3-36% of trade consumption

With 1/3 of ordinary cut Expand TQ volume by 4-6% of consumption

Expand TQ volume by 2.6 -4% of trade consumption

Except % of lines designates as special

Zero special lines Between 8% and 20% designated as special

With tariff reductions on special Products of:

…… (N/A) 1st 6% lines: [8][15]% cut

2nd 6% lines [12][25]% cut

Rest of lines: not close to agreement on size of cut

Volume Triggered Safeguard SSG: if 125% of benchmark (prev 3 years

Existing SSG + SSM: if: [110][130]% of benchmark (prev 3-5 years)

Price Triggered Safeguard SSG – half existing % of gap b/w price and benchmark

SSM – 50% of gap b/w price and benchmark of [70]% of 3 yr Avg imp price

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Safeguard Tariff Increases: Williams• Available to All Countries – A on S – but outlaw QRs, and

apply 5.1 so that justification required for using tariff instead of subsidy (transition for Groups II, II, IV)

• Modify Art 5 so that: • Art 5 – version 2: for volume trigger (add ratchet mechanism

on benchmark) 120% of trigger level with Max SSG 75% of Doha reduction; for price triggered: also require 110% increase in volume & halve the size of the price triggered safeguards

• Art 5 – version 3 as for version 2 but set Max volume trigger to 50% of Doha reduction; for price triggered: halve size again

• Available to Developed Countries – Art 5 version 2 until end of implementation period plus 5 years; then apply Art 5 version 3

• Available to Developing Countries – old Art 5 for 10 years, then Art 5 version 2 until end of implementation period plus 5 years; then apply Art 5 version 3

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Safeguard Tariff Increases: Falconer

• Amendments to AoS: NO• Adjust AoA Art 5 – Quantity trigger lifted to 124%; Price

trigger – half the SSG

• New Developing Member SSM: not agreed [no time limit agreed]

• Volume trigger: [105 - 130]% of 3yr avg etc: • Max Volume-triggered SSM of % of Bound rate or X

percentage points [up to UR rate?]• Price trigger: [70 – 100]% of 3yr Avg.• Max Price triggered SSM of [50 -100]% of price gap or

[50-100]% of Doha reduction

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Export Subsidies: Williams• Final Rules:• SCM Art 3.1(a) already applies or Set date for applying SCM Art

3.1(a) and letting AoA provisions on export subsidies lapse• This catches export credits• What about Export monopolies? • What about consumer financed export subsidies (like Canada Dairy

& EC – Sugar) (i.e where there is a QR on domestic sales in presence of prohibitive tariff)

• Solution is: prohibit QRs on domestic supply or reduce tariffs and prohibit import monopolies.

• The transition during the interim period:• Reduce total outlay bindings • Add per unit subsidy bindings• Reduce per unit bindings• No more bindings on volumes (minimize the impact of the cross-

subsidization decision in EC–Sugar)

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Export Subsidies: Falconer

• Final Rules:• Not clear on whether AoA fades away and Art3.1

operates or if AoA continues to operate on zero bindings

• Adds separate rules on export credits• Export monopolies – either prohibited or prohibit

exercise of power that circumvents elimination of ES (but no limit on import monopolies – and too many exceptions from tariff reductions to remove prohibitive tariffs which facilitate consumer financed ES)

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Domestic Support: guiding principles

• 90% of welfare gains come from reducing tariffs & only <10% from reducing ES / DS.

• So Forget about balancing the 3 pillars.

• Focus on Reducing the per unit subsidies that are the biggest proportion of market price

• Box Shifting is GOOD: Encourage it.

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Domestic Support: Williams• US Cotton applies serious prejudice to price gap subsidy on fixed Q – do

not give insulation from SCM Art 5 & 6 claims to the extent that they relate to the effects of subsidies in other markets

• EC Oilseeds applies NonVN&I to price gap subsidy on fixed Q – do give insulation from SCM Art 5 & 6 claims to the extent that a subsidy within a bound limit would be exposed to a Non-V N&I claim re effect in own market.

• Adjust definition AMS – count price gap for actual intervention purchasing not for unimplemented

intervention purchasing) (annex 3, art 8,10)– count all AMS not just the margin of support above a reference price (annex 3,

arts 8-11)

• Set product specific AMS caps on a per unit basis• Apply harmonizing reductions to per unit product specific AMS caps – with

these rule we can challenge a law without having to wait for the data

• Adjust definition de minimis – that part of what falls within definition of AMS that is within the % limits

• Blue Box – set caps on a product specific basis• Maintain Green Box rules: no price support, no transfers from consumers,

no Inks to current production or current price

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Allow Article XXVIII flexibilities

To Increase a Can give Compensation in

Tariff Reducing Tariffs

Production Linked Subsidy

Reducing tariffs, or

Reducing production linked subsidies

Blue Box Subsidy

Reducing Tariffs, or

Reducing Production subsidies, or

Reducing Blue Box Subsidies

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Domestic Support: Falconer text

• Tiered formula for reductions in OTDS

• Tiered formula for reductions in Total AMS

• Product Specific AMS caps

• Reductions in De Minimis

• Blue Box definition and Cap

• Amendment of Definition of Green Box

• Special reductions for AMS on cotton

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Caps on Product Specific AMS – But NO Reductions– Table 3

Product Product Specific Cap

Products for Developed Members The average AMS for the product during 1995-2000

Products for the USA The average proportion of total AMS for that product during 1995-2004 as a proportion of total AMS during the period 1995-2000

Products for which a Developed Member has introduced AMS above de minimis since 2000

The average AMS for the product during the ‘most recent two notified post base period years’

Products for which a Developed Member’s AMS during 1995-2000 was below the de minimis level

The [current] [new] de minimis level

Products for Developing Members Choice of:

(a) Average applied levels during either 1995-2000 or 1995-2004; or

(b) Two times the Member’s product specific de minimis level; or

(c) 20% of the Annual Bound Total AMS in any year.

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Table 4 Rates of Reduction in Total AMSThe Member’s Final Bound Total AMS in US$ billion

Reduction rate for Developed Country

Reduction rate for Developed Country with AMS>40% of production

Reduction rate for Developing Country (over a longer implementation period)

Reduction rate for SLI-RAMS or NFIDCs

>40 [70%]

25% then

5 equal annual

Zero

15<FBTAMS<40

[60%] [60%] + [70-60]%

Zero

FBT AMS < 15

[45%]

6 steps over 5 years

[45%] + 0.5 [60]-[45]%

2/3 x [45%]

9 steps over 8 years

Zero

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Table 5 Rates of Reduction of De Minimis Support

• No reduction for REALIM, D’ing M with no AMS commitments, D’ing M with AMS commitments but that allocate almost all that support for subsistence and resource poor farmers, Listed NFIDMs

Member Rate of reduction of de minimis support

By equal instalments over

Developed Members Higher of [50][60]% and rate of cuts to OTDS

Implementation period

[1st day][5 steps]

Developing Members Higher of 2/3 of [50][60] % and rate of cuts to OTDS

As above + 3 years

Recently Acceded Members

1/3 of [50][60]% As for Dev’d Members + 5 Years

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Blue Box under Article 6.5

• Adjust 6.5 so that exclusion would be lost if the production or asset limit does not continue to be based on the base year

• The exclusion can apply if no production is required at all• Limit 6.5 exemption to amount bound in Schedule -

total payments not exceeding 2.5% or 5% (Dg M) • Limit 6.5 exemption to product specific ceilings bound in

Schedule which can be increased if product specific AMS caps are reduced by a corresponding amount (but without exceeding total Blue Box binding)

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Green Box amendments include:

• Para 2(h) rural employment programmes (presumably not specific to employment in agricultural sector?)

• Para 3 on whether losses made on selling stocks from public food security stocks count in the AMS (for Dg M permits some price support)

• Para 6(a) for income payments not linked to production or prices after the base year - that a programme would lose green box status if the base year is changed

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Overall Trade-Distorting Support (OTDS) - Table 6The Member’s Base Overall Trade Distorting Support in US$ billion

Reduction rate for Developed Member

33% then 5 annual steps

Reduction rate for Developed Member with OTDS>40% of production

Reduction rate for Developing member with AMS commitments (20% then 8 annual steps)

Reduction rate for Developing Member without any AMS commitments

Reduction rate for SLI-RAMs or NFIDCs

>60 [75][80]% Zero Zero

10<OTDS<60 [66][73]% [66][73]

+ 0.5(difference between [75][80] – [66][73]%)

Zero Zero

OTDS<10 [50][60]% 2/3 x [50][60]% Zero Zero

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Net Result of Williams text• Removes all QRs • - from AoA, Annex 5 • - from AoS, Article 5.1• - from under-allocation of TQ volumes by requiring auctioning• - prohibits import monopolies so no QRs imposed by import monopolies

• Achieve tariff reductions on all high tariffs • – including on tropical products, and on escalated processed products• - does not create any more TQs and diminishes the rent from existing TQs• - Gives Developing Members more time to adjust• - Gives LDCs more time to adjust and lower reductions• - Reduces Discrimination (and trade diversion) arising from bilaterals and other preferences• ( Leaves US and EU free to pay aid in cash to compensate for reductions in preferences)

• Leaves limited scope for Members (more for Developing Members) to use tariffs to help Members adjust to tariff reductions – AoA Article 5 versions 1, 2 & 3

• Eliminates Export Subsidies (tariff reductions make consumer financed Ex Subsidies impossible)

• Leaves Members free to use subsidies to help producers adjust to tariff reductions• - production linked subsidies up to bound product specific per unit bindings (not counting de minimis)• - plus blue box up to product specific per unit bindings which can be increased under XXVIII by reducing product

specific AMS bindings• - unlimited income support payments

• Achieves reductions in high per unit product specific subsidies (including on cotton)• Any subsidy exceeding product specific per unit bindings can be challenged as soon as the law is

published or as soon as payment made without needing to wait for data on the effects actual payment on markets and prices

• Any non-Green subsidy having effects in other markets would be subject to remedies under SCM art 5 (even if within bindings)

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Net Result of Falconer text• QRs remain –

– Annex 5 invocations remains– Import monopolies remain undisciplined– TQ volumes – private trader rules will help– New TQs some where effective constraints is the volume

• High Tariffs – Agricultural tariffs will remain higher than industrials– EU, G10 will retain high tariffs on several product areas (mostly sugar,

dairy, meat, some tropical products); US high tariffs in less areas – sugar, dairy, peanuts; Canada in some areas too

– Many important Developing Members will retain high tariffs across several product areas, possibly with effective constraints being the volume of TQ (eg India)

– Safeguard (AAM) may make tariff barriers worse not better (eg China, India)

• High Subsidies on particular products: High subsidizing countries will continue to pay high subsidies focussed on particular products

• Need to wait for the data before a complaint can be brought

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Williams text v Falconer text• Which achieved the promise of a Development Round?• Which confers more economic welfare gains? (Model it!

• Which imposes more discipline on the most welfare diminishing policy instruments

• Which leaves the most sovereignty to achieve objectives by applying the most efficient policy instruments?

• Which helps the system to help the powerful countries to become and stay open?

• Which helps the system help the less powerful countries to over come political forces for protection?

• Which makes the next round easier?

• Why is it better?

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Achieving a Better Result comes from paying attention to What Makes the System Work

• 1 Non-Discrimination• 2 Gradualism• 3 Reciprocity

• Ensuring the Rules Protect Reciprocity against Being Undermined by:– Ranking of Instruments: stricter rules on measures which

undermine reciprocity the most (QRs), less strict on Measures which only undermine Reciprocity a little

– Prohibit Undermining Measures eg No Quantitative Restrictions

• Achieves the objective of changing political decisions toward:– Lower protection– Better choice of instrument for achieving domestic objectives– Less dispersion between rates of protection– Less discrimination

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How much can we deviate from:

• Reciprocity

• Gradualism

• Non-Discrimination

• Ranking of Instruments

• Low Dispersion

• Before the System will No Longer Work?

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The Choice

• Everyone comes to negotiations to strengthen the principles of reciprocity, ranking of instruments, low dispersion, non-discrimination

• Outcome – world in which price signals flow around the world and everyone is constantly adjusting to changes occurring all over the world

• Everyone comes to negotiations to negotiate an exception for themselves and leaves it to others to protect the system.

• Outcome – no multilateral system; parts of the world insulate themselves from changes occurring in other parts until sudden and painful changes are necessary; small countries need to negotiate one on one with big countries