By Martin Khor, Director, Third World Network

(This article is an edited version of the author's paper ‘The WTO's Doha negotiations and impasse: A development perspective' circulated at the South Asian Conference on Trade and Development organised by Centad in New Delhi on December 19-20, 2006 .)

Many commentators have remarked that the suspension of talks in the Doha Work Programme (DWP) of the World Trade Organisation will adversely affect developing countries, as the completion of the Doha Programme would have benefited these countries.

The talks broke down in July 2006 largely because of the failure of six major member countries to make sufficient progress among themselves on the modalities of negotiations in two key areas, agriculture and Non-Agricultural Market Access (NAMA).

However, an objective analysis of the frameworks that have been developed up to now and the major proposals that are on the table indicate that there is little development content.

There would be few benefits for most developing countries, danger of high costs, and the loss of policy space in many areas. Therefore, the suspension of negotiations should lead to a review, rethinking and revision of the frameworks of the DWP, instead of a resumption of talks along the same lines.

This article provides a summary of the state of negotiations on agriculture before the suspension of talks, and some implications for developing countries.

Agriculture: lack of process and substance

On the process, many developing countries including those in the African, Caribbean and Pacific (ACP) Group, have spoken out on how only a few members seem to be dominating the negotiations. The agriculture negotiations were initially conducted mainly and exclusively by the so-called ‘Five Interested Parties’ (US, EU, Brazil, India and Australia); and then Japan was included to form the G6.

The other WTO members were expected to wait for the G6 to reach agreement among themselves, and their role was seen to be confined to endorsing any deal reached by the six. Often, the majority of members were kept waiting for the six to make a decision, without even knowing what was being discussed by them, what the different positions were, or even where they were meeting.

On substance, the negotiations are guided by the Doha Declaration (2001), Annex A of the August 2004 Framework and the 2005 Hong Kong Declaration.

Export subsidies

On export subsidies, the Hong Kong Declaration agreed on elimination by end-2013, and there is also a stipulation for front-loading (most reduction to take place at the start of implementation). In ‘Why the EU and US offers on farm trade are not good enough' (TWN briefing paper 33), Bhagirath Lal Das has commented: “There is no reason for export subsidies to continue at all; hence the bulk of [the developed countries'] export subsidies, say 90%, should be eliminated right at the end of the first year of the implementation period of the outcome of the negotiations.”

Domestic support

On domestic support, there is a lot of confusion on two issues:

• The difference between the allowed levels (that is, the maximum levels) that members commit not to exceed, and the applied (or actual) levels of the various subsidies.
• The different types or “boxes” of subsidies.

The WTO's Agreement on Agriculture (AoA) distinguishes between “trade-distorting” and “non-trade-distorting” subsidies. Members are obliged to fix maximum levels for trade-distorting subsidies and to reduce some of these allowed maximum levels.

For subsidies considered non-trade-distorting (Green Box subsidies), there are no maximum levels and thus members can increase these subsidies without limit. The Green Box subsidies, such as payments to farmers to protect the environment, are supposed to be “de-coupled” from production, and thus they supposedly do not distort trade. However, some experts have pointed out that many of these subsidies are also distorting in that they provide grants to recipients who assist them in maintaining farming as a viable occupation, and that without these payments some of the farms or some of their production would not exist.

For trade-distorting domestic support, developed countries have been permitted by the AoA to maintain high allowed levels of trade-distorting domestic support, or TDS. These trade-distorting subsidies are in three categories:

• The Aggregate Measurement of Support (AMS) or Amber Box, which is linked to intervention on agriculture prices and considered the most trade-distorting.
• De minimis support (certain amounts of domestic subsidy that are allowed, calculated as a percentage of the value of agricultural production).
• The Blue Box subsidies, which are supposed to be linked to setting limits on production, and considered less distorting than the Amber Box.

The AoA obliges developed countries to reduce their total AMS by 20%, by 2000, below the 1986-88 level, and to limit their de minimis support to 10% of production value, of which 5% is for general support and 5% for product-specific support. Developing countries have to reduce their AMS by 13% and limit de minimis support to 20%. No limit was set on the Blue Box.

Since the Uruguay Round, developed countries have been reducing their actual levels of AMS to below the allowed levels, and they were able to do this partly by shifting subsidies from one box to other boxes.

In a dispute settlement case on cotton, it was found that the US had been wrongly shielding some trade-distorting subsidies within the Green Box, and was asked to change its policies accordingly. The US has to remove these subsidies, or to shift them into one of the trade-distorting boxes. One option is to move the subsidies to the Blue Box, which it has previously not used. The US thus seeks to change the definition or criteria of this box to enable the shifting to take place.

The EU, which makes extensive use of the Blue Box, is reducing its “trade-distorting” subsidies, but significantly increasing its Green Box subsidies (de-coupled payments) under its Common Agricultural Policy (CAP) reform. The Green Box subsidies are not under reduction discipline and thus can be raised without limit.

This enables some subsidies that are, in effect, trade-distorting to be counted as non-trade-distorting subsidies.

The level of total actual TDS is presently far below the level of total allowed TDS for the US and the EU. Therefore, developed countries can afford to reduce the level of allowed TDS significantly, before the cut reaches the level where the present actual TDS is affected.

In the informal language of WTO negotiations, this would mean that the US and EU would only cut “water” (that is, the difference between allowed and actual subsidies) and not their actual subsidies.

This is the reason why the EU and US have been able to announce offers to cut their AMS and their total allowed TDS by a seemingly large degree, while in reality these offers do not necessitate real cuts in the present applied level in the case of the US, or in the applied level that is already planned for, in the case of the EU, with reference to its CAP.

This is one of the present stumbling blocks to the reaching of an agreement on agriculture modalities.

In October 2005, the US announced that it would:

• Cut the allowed AMS by 60%.
• Restrict the Blue Box to 2.5% of production value.
• Reduce the allowed de minimis support from 10% to 5% of production value.

This may seem generous at first sight, but analysis has shown that in fact this offer would allow the US to have a level of total allowed TDS of $ 22.7 billion. This compares with the $ 21.4 billion of actual TDS in 2001, the last year in which the US notified to the WTO; and the $ 19.7 billion of actual TDS in 2005 that was estimated in a simulation exercise by WTO members.

In other words, the US offer would allow it to maintain a total TDS of $ 22.7 billion, which is $ 3 billion higher than its actual 2005 level.

This offer was not acceptable to the EU, Brazil , India and Australia in the June and July 2006 meetings of the G6 trade ministers in the WTO. They argued that the US would not have to effect any real cuts in its present TDS, but would even have the “water” or space to increase its TDS by $ 3 billion.

The refusal or inability of the US trade representative to improve on this offer was the immediate cause of the breakdown of the G6 talks, which, in turn, led to the suspension of the Doha negotiations.

The demand of developing countries in the Group of 20 (G20) is that the US reduce its allowed TDS to $ 12 billion, and the EU reportedly asked for a level of $ 15 billion.

From 2001 onwards (to now), the allowed levels of trade-distorting support for the US were estimated as follows:

• Amber Box support of $ 19.1 billion.
• De minimis support of $ 19.8 billion, being 10% of production value, made up of $ 9.9 billion for product-specific support (5% of production value) and $ 9.9 billion for general support (5% of production value).
• An implied level of Blue Box subsidy of about 5% of production value, and a total allowed TDS of $ 48.2 billion.

The US actual levels in 2001 as notified to the WTO were:

• Amber Box support of $ 14.4 billion.
• De minimis support of $ 7.0 billion, made up of $ 216 million product-specific support and $ 6.8 billion general support.
• Zero Blue Box support.
• Total actual TDS of $ 21.4 billion.
• Green Box subsidies of $ 50.7 billion.

Thus, total domestic support was $ 72.1 billion.

The US offer of October 2005 was that it would:

• Reduce allowed AMS by 60%, to $ 7.6 billion.
• Reduce the allowed de minimis to 5% of production, or $ 10 billion, made up of $ 5 billion product-specific support (2.5% of production) and $ 5 billion general support (2.5% of production).
• Cap the Blue Box to 2.5% of production value, or $ 5 billion.

The total allowed TDS would thus be $ 22.7 billion, or a 53% cut from the present total allowed TDS of $ 48.2 billion.

The European Union made its offer on domestic support on October 28, 2005 . This comprised the following:

• 70% cut in allowed AMS.
• 80% cut in allowed de minimis.
• Restriction of the Blue Box to 5% of production.

The total allowed TDS would be cut by 70%.

Some independent analysts have estimated that the EU would also not have to reduce its already planned level of actual domestic support with its proposal. In fact, there will be some “water” between, on the one hand, what the EU has already scheduled to do under its CAP reform, and on the other, the proposed new level of allowed trade-distorting support in its WTO proposal.

Thus, the proposal enables the EU to have a level of domestic support beyond what it had planned in the CAP.

According to the estimate of one expert, Jacques Berthelot, this “water” is around 6 to 13 billion euros, depending on the assumptions (‘Why the EU's domestic support offer is empty promise.' South-North Development Monitor , November 2, 2005 ).

Berthelot says that his analysis “shows that [EU Trade Commissioner Peter] Mandelson's offers are actually compatible with the CAP reforms of 2003-04, in that they do not commit the EU to do more than what it has already planned to do, and in fact give it the space to have supports at levels higher than it had planned under the CAP reforms”.

The present estimated allowed levels of trade-distorting support of the EU are as follows:

• AMS 67.2 billion euros.
• De minimis 19 billion euros.

With the inclusion of the actual Blue Box level of year 2001-2 of 23.7 billion euros, the total allowed TDS is estimated at 110 billion euros.

In 2001-2, the actual levels of trade-distorting support of the EU were:

• AMS: 43.7 billion euros.
• De minimis : 1 billion euros.
• Blue Box: 23.7 billion euros.

Total actual TDS was 68 billion euros.

Through the CAP reform, these actual levels are planned to be scaled back so that by 2008 the actual levels are expected to be:

• AMS: 18.8 billion euros.
• De minimis : 1 billion euros.
• Blue Box: 7 billion euros.

Total TDS would be 26.8 billion euros.

The EU's October 28, 2005 , offer at the WTO would bring the allowed levels to the following:

• Allowed AMS would be cut by 70%, to 20.2 billion euros.
• De minimis would be cut by 80%, to 3.8 billion euros.
• Blue Box would be restricted to 5% of production at the end of the implementation period, to 12.3 billion euros.

The total of these three would be 36.3 billion euros. However, the EU also committed to bringing down its allowed total TDS by 70%, implying a level of 33 billion euros.

The significant conclusion is that the EU's offer to cut its allowed total TDS by 70%, to 33 billion euros still allows it to have “water” of 6.2 billion euros above the 26.8 billion euros that it had already planned for its actual total TDS in 2008, upon completion of the CAP reform.

In other words, the EU's offer to the WTO allows it to increase its planned actual total TDS by more than 6 billion euros.

The conclusion from the above is that even when considering only trade-distorting support, the US and EU offers are not sufficient to ensure real cuts in actual or already planned levels of domestic support.

Moreover, developed countries can continue to use the Green Box subsidies without limit, as the August 2004 Framework and the Hong Kong Declaration do not put a cap on these.

Some of these Green Box subsidies are actually trade-distorting, as the cotton dispute decisions have shown. They should have been allocated to the trade-distorting boxes such as Amber or Blue or de minimis .

Market access

On market access, it has been agreed that tariffs be cut according to a “tiered formula” in which there are three or four bands according to tariff ranges, with the band of highest tariffs to be cut by the highest percentage, and so on.

There is pressure from the US and the Cairns Group and some exporting developing countries to have a high ambition in cutting agricultural tariffs steeply. This is resisted by the EU and the G10 developed countries that have defensive interests.

The US has proposed that tariffs in developed countries be cut sharply by 60% to 90%, according to a tiered formula. It wants developing countries to reduce by almost the same rates. The EU has proposed more lenient cuts for developed countries and the designation of 8% of tariff lines as sensitive products that are eligible for even more lenient treatment.

The EU proposal has been estimated by the G20, for instance, to result in an average cut of 39% for itself, without calculating the effects on this average of the inclusion of sensitive products. The G20 is quite ambitious in the cuts it proposes for developed and developing countries. Its proposal indicates an average 54% tariff reduction for developed countries and an average 36% for developing countries.

The ACP Group has recently tabled a proposal with more lenient reductions for developing countries.

The EU offer is seen as inadequate for not resulting in significant cuts, especially in products with high tariffs. The EU informally indicated it was willing to increase its offer so as to result in an average tariff cut of around 50% -- near to but not reaching the G20 request of 54%. This new offer is contingent on an adequate offer by the US on domestic support.

However the US , which wants an average 66% cut by the EU, also indicated that the EU offer is still inadequate.

Implications for developing countries

From a development perspective, developing countries are most likely to get a bad deal because there is a likelihood that the developed countries' domestic subsidies will not be really reduced, or at best by only a little. Thus, developed countries will be able to continue to dump products that are subsidised at artificially low prices onto poorer countries that cannot afford to subsidise.

Developing countries are only able to defend themselves through tariffs, due to their inability to subsidise significantly, and due to the prohibition on quantitative restrictions. Yet they are being obliged to cut their tariffs even more steeply than during the Uruguay Round, especially since they have to cut all their tariffs, line by line, by the formula, unlike in the Uruguay Round where they only had to cut their tariffs by an overall average of 24%, subject to a minimum cut in all lines.

For countries with ceiling bindings, the problem is worse as they have bound all their agricultural tariffs at high levels. According to the tiered formula, this means that they have to cut all their tariffs by the highest or near the highest rate.

Countries that receive trade preferences will also suffer the erosion of their preference margin. The steeper the tariff cut on preference products, the more the erosion of preference.

Most developing countries have defensive interests in agriculture and their main priority has been to protect the interests of small farmers whose livelihoods and incomes are at risk from having to compete with imports.

The G33 group of countries that have defensive interests in agriculture have been fighting to establish two instruments that developing countries can use:

• Special Products -- products linked to food security, livelihood security and rural development, which they argue, should not be subject to tariff reduction or should be subject to only small reductions.
• Special Safeguard Mechanism through which tariffs on agricultural products can be temporarily raised above the bound rates when there is a rise in import volume or a fall in import price beyond a certain extent to be negotiated.

The G33 has proposed that developing countries be allowed to self-designate 20% of agricultural tariff lines as Special Products (SPs). It has also proposed the price and volume “triggers” that would enable a developing country to make use of the Special Safeguard Mechanism (SSM), and in what manner.

The United States , which says such a proposal on SPs would block its access to developing countries' markets, has counter-proposed that SPs be restricted to only five tariff lines. It also presented a proposal on SSM that severely restricts the conditions and manner of its use and thus renders it ineffective.

When negotiations resume, the US and a few countries that have an agricultural export interest can be expected to put pressure on developing countries in the G33 to make large concessions. The pressure and resistance may well become the major battle of future negotiations.

The ACP Group's proposal on market access includes a formula in which developing countries will have to cut their tariffs by lower rates than in the US or G20 formulae. Also, countries with ceiling bindings do not have to cut their tariffs according to the tiered formula. And some proposals are made to moderate tariff cuts on products that receive preference, so that the loss of preference margin will not be so great.

The agriculture negotiations are made more complicated by the fact that the US and the EU are demanding that their proposals be linked to the condition of extreme liberalisation commitments to be undertaken by developing countries in NAMA.