The Hindu Business Line : Life in WTO after the Peace Clause

IS THERE life for the World Trade Organisation (WTO) after the expiry of the Peace Clause? The clause expired on December 31, 2003, unsung. Its extension was not considered in the WTO General Council Meeting held in mid-December 2003. By then it had become contentious. Even as the EU and the US wanted extension for some more years, over 30 NGOs wrote to the Chairman of the Council demanding that the clause be allowed to lapse. In their view "it runs directly counter to the WTO's founding principles, and to any understanding of international obligations." Many economists and experts began to analyse the implications of its expiry. The Economist (January 1) commented that "... the clause expired on December 31. The peace is over; is trade war about to begin?" What is this peace clause?

In terms of realpolitik, it was the lynchpin of the WTO arrangements. Paradoxically, though the WTO would not have come into force without it, it could not live with it. By 2000, the honeymoon was over for the developing countries. In contrast to the relative harmony obtaining in 1995, the altered balance of power and the adverse economic circumstances worked against the wedlock.

A part of the change was due to exogenous developments; but a larger part was due to the WTO arrangements themselves. As events unfolded, those arrangements were viewed as iniquitous and working against the interests of the developing countries. The villain was the Peace Clause in the Article on Agriculture (AOA). Why was it necessary to have a special provision in the AOA?

GATT enlargement

When the GATT (General agreement on trade and tariffs) arrangements were agreed upon, they covered only the manufacturing sector. With the expansion of global trade and the increase in the size and power of multinational corporations (MNCs), they began to lobby for GATT enlargement to include such new areas as agriculture, services and investment. GATT had to be rebalanced to facilitate their global reach. Not surprisingly, the US took the lead.

The Uruguay Round (UR) of GATT commenced in September 1986. For the first time, agriculture was at the centre of negotiations. European countries, with their legacy of agriculture subsidies and protection under the Common Agricultural Policy (CAP), blocked the negotiations for half a decade. Developing countries such as Brazil and India also resisted the inclusion of new areas such as services.TheUR triggered the formation of Cairns group, which was led by Australia and included countries from Latin America and Asia with a strong agricultural base. The trouble was that there was no common ground between the EU and the US on agriculture.

The major concern was over the autonomy of domestic farm policies and the extent to which they could be disciplined by multilateral institutions. The other was whether agriculture could contribute to welfare and development without public intervention or could be left to the vagaries of private trade. Europe's own legacy was one of heavy public intervention through direct and indirect subsidies. For the US, around those years, farm support policies did not seem to matter more than its attachment to the market. There was, thus, a policy divide and it could not be bridged. The stalemate persisted until the mid-1990s. Surprisingly, the UR was rescued by some of the developing countries, which had earlier opposed the GATT enlargement.

By the mid-1990s, the Washington Consensus was on its ascent and many developing countries were adopting the structural adjustment policies. While some liberalised under IMF conditionalities, others did so unilaterally. And they needed market access in developed economies for their agriculture and textiles. The EU could no longer drag its feet. The stalemate was ultimately broken by a bilateral accord reached in Blair House.

Once the major partners had reached the accord, it was thrust on others as the only way to conclude an agreement. It was fortified with the new principle of its being a "single undertaking". It meant that the agreement had to be taken as a whole and not in bits and pieces as in GATT. Added to it was the machinery for enforcement through Dispute Settlement Board (DSB) procedures. In the final stages of the UR, the developing countries seemed to have played no role. As Sylvia Ostry, Distinguished Research Fellow, Centre for International Studies, University of Toronto, put it: They "took it without a full comprehension of the profoundly transformative implication of this new trading system."

Trade analysts generally refer to Article 13 of the WTO's Agreement on Agriculture (AOA) under the title `Due restraint' as the Peace Clause. The clause prohibits countries from challenging other countries' use of export subsidies and domestic support programmes that are otherwise permitted under the agreement's rules. These again are subject to categorisation of subsidies with varying thresholds.

Classification of subsidies

Subsidies are categorised under various boxes: Green, Blue and Amber. Green box subsidies are exempt from any action. Blue and Amber cover the aggregate of subsidy measures (ASM). Classification of subsidies turned out to be more metaphysical than economic. Amber box subsidies could face countervailing duties, but members must exercise "due restraint" in imposing them. The Peace Clause stipulated that spending under Blue and Amber boxes could not exceed 1992 levels. None of these subsidies could be challenged on the ground that they violated other agreements such as the Subsidies and Countervailing Measures Agreement (SCM). Under the Peace Clause, agricultural subsidies could not be challenged even if they undercut another member's exports.

In effect, the Peace Clause became an impenetrable fortress behind which developed countries could promote domestic agriculture in disregard of the impact on developing countries. The disciplines were so vague and weak that they allowed spending by developed countries to continue unchanged or even increase. They could `creatively' manipulate subsidies and shift many, such as food aid, to the green box. Newer schemes such as the so-called production-delinked subsidies were evolved to escape the obligations. They could dump agricultural products on poor countries. At the same time, those countries had to dismantle state support for agriculture such as through marketing boards, state procurement or public distribution schemes, to meet the fiscal limits set under adjustment programme. The resulting iniquity outraged global conscience.

As Oxfam described it, "... the system which governs world agricultural trade, in the form of the Uruguay Round Agreement on Agriculture (AOA), is inherently unjust. It legalises unfair trading practices by rich countries, thereby denying poor countries the chance to benefit from their share of the wealth generated by global trade." (Boxing match in agricultural trade, Oxfam Briefing Paper, No.32, November 2002.)

The outrage turned into violence. Poor countries, supported by civil societies, rose against it in Seattle and broke up the conference. In Doha, they linked trade with development and forced the issues upon the EU and the US. Cancun collapsed precipitously.

Four African states — Benin, Burkina Faso, Chad and Mali — submitted the Cotton Initiative pleading remedy for the damage done to their people by the US' cotton subsidies. More than 10 million people depended on cotton directly or indirectly. They produced cotton of the highest quality at the lowest cost, but could not compete with 25,000 American farmers who received subsidies of over $3 billion. As The New York Times (August 5, 2003) described it: "If the United States terminated its cotton subsidies, commodity prices would rebound to more realistic levels, allowing third-world cotton farmers to compete and earn profit on their crops. And by terminating trade distorting subsidies, Washington would defuse a potent source of feverish anti-Americanism."

Cancun collapse

Though the WTO Secretary-General went out of his way and pleaded for special consideration, the developed countries treated the issue with indifference. They sidetracked it by suggesting a comprehensive study of the fibre industry as a whole. They also recommended that the cotton-dependent West African countries could be assisted to diversify into other areas! The anger over these cavalier decisions led to the collapse at Cancun. It has not recovered since. Since then the Peace Clause has expired. So what are the implications?

From a purely legalistic angle, the expiry of the Clause implies that subsidies — domestic or otherwise — are vulnerable to challenge under the DSB procedure. Since the WTO was, and continues to remain, a "single undertaking", the removal of the AOA also implies that agriculture as such has no special status and could be subject to all the restraints of SCM. Thus, it is open to affected countries to seek redress. It is in such a context that the WTO panel ruling in the Brazil/US dispute assumes importance.

A preliminary ruling was given on April 26. It is yet to be confirmed and details are awaited. However, those who have followed closely the case can safely infer the contents of the ruling.

Except for its proximity to the date, the dispute was not related to the expiry of the Peace Clause. It was plain vanilla and sought remedy for the `serious prejudice' caused to Brazil's cotton exports by US subsidies. It rested its case on the 1992 threshold set for subsidies in the AOA. Brazil engaged Prof. Daniel A. Sumner as its consultant. He is a professor of agriculture economics and an old hand of the US Agriculture Department. Through elaborate econometric models, Prof. Sumner showed that without subsidies, the US exports would have fallen by 41.2 per cent and world prices risen by 12.6 per cent. It is our surmise that the panel would have accepted these claims of Brazil. Once it is confirmed, it is open to other countries to seek redress even within the scope of AOA. Expiry of the Peace Clause adds a new dimension.

In one reputed study on the implications of the expiry of the Peace Clause, two US professors took the view that "non-subsidising developing countries can be expected to bargain in the shadow of this legal vulnerability, demanding that the Community and the US commit a further subsidy reduction." This is indeed an idealistic view of academics. (The latest EU proposals on agriculture do not suggest that they are bargaining from a position of legal vulnerability.)

On the contrary, there are reports of the EU warning developing countries that it will ``poison the atmosphere'' in the WTO and jeopardise the chances of reviving the Doha round if the letter launched a barrage of cases after the expiry of the Peace Clause.

The EU Agriculture Commissioner, Mr Franz Fischer, was more threatening and said: "Developing countries would `punish themselves' if they started challenging the EU subsidies." The US Trade Representative, Mr Robert Zoellick, was no less vehement when he said, "If other countries decide to stand back and litigate their way, as opposed to negotiating a new agreement, I think it will be very complicated and non-productive approach to everyone."

There are other disturbing grounds. It is not easy for small countries such as those in West Africa to fight against giants in the DSB. It is time-consuming and expensive. Moreover, they do not have the legal expertise. Even if they win, there is no way they can enforce the rulings on big brothers who are often their major trading partners and aid providers. The legal remedy in the wake of the expiry of peace clause is more notional than real. In the meantime, the ground under their feet is being cut by emerging regional or bilateral agreements. What we witness is the gradual replacement of the rules-based system with a power-based system.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)