The Hindu Business Line : WTO framework for global trade — Farm sector can grow without subsidies

All direct farm subsidies given by developed countries to their farmers, as opposed to multi-purpose subsidies, should be clearly identified and targeted for elimination within a specified time-frame.

THE new framework for global trade arrived at after intensive deliberation on major issues of farm subsidy, reduction in industrial tariffs and streamlining Customs procedures, may be open to criticism on whether it has resulted in fair return to developing countries in exchange to what they have given, but the achievement of the Geneva meet is in breaking the impasse at the WTO Ministerial negotiation process.

From the Seattle conference onwards, the attitudes were hardened between the developed and developing countries with the result no progress could be made except at the Doha meet in 2001 where, for the first time, a development approach was taken.

The Cancun meet last September ended without any agreement. Against this backdrop, one could hardly disagree with the WTO Director-General, Mr Supachai Panitchpakdi's observation that the G-20 meeting in Geneva was a minor triumph. The agreement itself has to be ratified by the full membership of the WTO.

Second, this framework agreement might open the way for further progress on Doha development issues which, though modest, have been on the backburner for quite a while, since there continues to be no meeting point the between developed and developing countries on the reduction of farm subsidies by developed countries.

Apart from farm subsidies, high tariff rates on selective basis and quota system in place in developed countries have made a mockery of the talk of free trade.

Then, there is the special safeguard mechanism used by rich countries to regulate or shut off imports of specified commodities from developing countries. What is needed is a holistic view of the entire gamut of trade-distorting elements and not subsidies in isolation.

Trade-distorting farm subsidies in the OECD region account for $300 billion a year — approximately $1 billion a day.

It is important to understand the dimension of global agriculture trade, region-wise, and the implications of farm subsidies. On a global scale, farm exports may account for 5-6 per cent of total trade in value terms. About 80 per cent of farm exports take place among the developed countries, notably North America, the European Union, Australia and Japan.

In South Asia, for example, in the past 20 years, there has been a steady decline, in percentage terms, of farm exports to the total exports from 35 per cent to just about 12 per cent last year.

The gradual shift from primary products to manufactures and engineering items partly explains the falling share of developing countries in global agriculture exports. Moreover, part of the problem arises from the fact that many of these countries are net importers of foodgrains.

But we have to look at the potential for growth in farm products, which is large. Apart from ensuring a level-playing ground for farm exports in the global markets, the farmers, most of whom are at subsistence level farming, must be protected from artificially low-priced imports.

Although India has identified some 60 products where it can regulate imports, in the long term, the farm sector should become more competitive.

Developing countries gained market share in every manufacturing sub sector, except food processing. Protection levels for processed foods in industrial countries are quite high, much above those of any other manufacturing sub sector.

In fact, duty goes up once the product goes higher in the value chain. They are also subject to sanitary and phytosanitary screening.

Farm exports from all developing countries total $25 billion; of which $15 billion, representing mainly tropical products not produced in the US, enter duty-free.

Here, trade preferences have virtually no effect. They benefit a few least-developed countries, mainly from Africa. Countries like India hardly get any benefit.

In recent years, there has been a general decline in the competitiveness of manufactures exported by developed countries, whereas developing countries, particularly from South-East Asia, have seen improvement in export competitiveness.

There has been specialised export from developing countries such asl India of knowledge-based services. What is the reason for this change being witnessed and what is its implication to agriculture?

According to the World Bank report, Global Economic Prospects-2004, "Changes in production factors used by developing countries probably improved their competitiveness. Other likely influences on the structure of outputs and exports include changes in trade and investment policies; that in the market opportunities facing developing countries; and the development of new market opportunities in which developing countries have, or can develop, a competitive advantage."

Certain farm products such as cocoa are region-specific. They originate largely from Africa. In agriculture, the shift takes place from grains to other commercial crops, depending on demand and price considerations.

There is a belief among policy-makers in the developed countries that trade reform, particularly cutting down subsidies, would be detrimental to their rural communities and the farm sector. This is not true, as is borne out by the experience of New Zealand, which has, over the years, reduced subsidy element drastically.

Today, it has the lowest level of farm support among the OECD countries. Its producer support, estimated to be around one per cent of the value of agricultural production during 2003, is essentially dedicated to research funding.

According to the World Bank report: "Removal of subsidy has led to impressive growth in agricultural productivity which reached an annual average rate of 5.9 per cent over a period of 15 years, compared to one per cent prior to subsidy abolition in 1986."

This is recorded evidence that protection and subsidies are not required for the continued growth of the agricultural sector. Indeed, doing away with protection can trigger faster growth of the farm sector through productivity increase without significant decline in rural population or standard of living.

An estimate of the gains flowing from removal of all barriers to trade indicates "a global welfare gain of $400-900 billion, more than half of which would go to developing countries.

Agriculture and food account for 70 per cent of these gains". Improvements in developing countries in terms of better input supply, technology, irrigation management, cheaper credit and effective extension support form part of the reform process.

All direct farm subsidies given by developed countries to their farmers, as opposed to multi-purpose subsidies, should be clearly identified and targeted for elimination within a specified time-frame.

In the recent past, several working formulae were evolved to eliminate farm subsidies, notable among them, the Harbinson proposal named after Stuart Harbinson, Chairman of the WTO negotiating group on agriculture.

The basic principle was to have steeper cuts on bound tariffs at different levels with a five-year phase-out period for developed countries while less severe cuts with ten-year phase-out period for developing countries.

Trade talks are usually complex and involved testing to the extreme the negotiating and diplomatic skill of participating countries.

One fact that was in evidence at the Geneva talks was that developing countries were able to forge a unified approach to see that a reasonably equitable decision was reached on the framework, although it is still arguable whether optimal conditions have been established for future trade negotiations.

(The author is a New Delhi-based management and financial consultant.)