Farm subsidies: India must keep a vigil

James J Nedumpara / Sparsha Janardhan | Updated on March 27, 2019 Published on March 27, 2019

Against the grain Chinese subsidies   -  istock.com/MediaProduction

WTO‘s ruling on China’s farm subsidies has important lessons for India and other developing nations

Agriculture is a widely subsidised sector in several countries. Amidst the escalating trade war between the US and China, the WTO gave a notable ruling in February 2019, in a challenge involving certain agricultural policies of China. This ruling is on one of the two disputes filed by the US against China’s farm subsidies on grains.

China – Agricultural Producers (DS511) related to China’s compliance with its domestic support commitments under the WTO Agreement of Agriculture (AoA). China not being an original WTO member, but a member that acceded much later, received a certain unique treatment. China undertook obligations not to provide domestic support in excess of the de minimis level of 8.5 per cent of the total value of agriculture production.

Although China received treatment as a developing country, it did not receive the cushion of 10 per cent de minimis limit which other developing countries received. In this dispute, the allegation was that China exceeded the de minimis for Indica rice, Japonica rice, wheat and corn for the years 2012 to 2015. The calculation of domestic subsidies in agriculture is particularly complex and is captured in the concept ‘aggregate measurement of support’ (AMS). Most governments provide agriculture subsidies in the nature of market price support. In China, the Minimum Procurement Price (MPP) programmes for wheat and rice apply in certain provinces such as Hubei, Anhui, and Jiangsu.

Under the programme, government purchases of agricultural products occur only when market prices fall below the established MPP level. Such market price support programmes should be included in the calculation of AMS.

Complex calculations

The AMS is not just the budgetary expenditure of the government to provide subsidies to the agricultural products. It depends on certain external factors as well. The calculation of quantum of market price support is based on the price gap between the ‘applied administered price’ identified in the domestic support measure and the ‘fixed external reference price’ multiplied by the quantity of eligible production.

An understanding of these concepts is crucial in evaluating the agriculture policies of other agrarian countries such as India. India too provides certain minimum support price (MSP) for agricultural products, which is akin to the applied administered price.

The determination of AMS significantly depends on the quantity of production eligible to receive the applied administered price. There is lack of clarity in the AoA as to whether “eligible quantity of production” refers to the total production of the concerned product or the amount actually procured by a WTO member.

The China dispute sheds some light on the quantity of eligible production, albeit in a limited sense. Previously, the Appellate Body ruling in Korea –Beef (2000) interpreted the eligible quantity of production to mean the amount of commodity produced that is entitled to receive the support, rather than the production actually purchased by the government.

Interestingly, China applied a number of criteria to limit the quantity of eligible production, such as: the geographical scope (MPP programmes limited to certain provinces), temporal scope (time period in which purchases were made), activation and de-activation (procurement only in cases where price drops below certain levels), minimum grain quality requirement, and consumption of grains in small-scale farms.

The WTO panel examined these factors and concluded that the quantity of production eligible to receive the market price support to be the entire volume of production in the relevant specified provinces. China successfully convinced the panel on the geographical scope and the grain quality requirement but failed to do so with the rest of the criteria. Pursuant to AMS calculations, the panel concluded that China had breached its de minimis level and acted inconsistently with the AoA.

The decision’s import

This decision has significance for a number of developing countries, including India. Most developing countries do not set targets for procurement of foodgrains in their market price support programmes. A possible consequence could be that some of the agriculture support programmes could come under WTO dispute scrutiny.

The Ministerial Decision in Bali on Public Stockholding for Food Security Purposes gives reasonable comfort to developing countries to provide agricultural support for food security purposes. However, countries will have to fulfil certain conditions such as notification and transparency requirements. Developing countries that take recourse to the Bali decision will find some parts of the China farm dispute particularly useful and instructive.

Nedumpara is Professor and Head, Centre for Trade and Investment Law, Indian Institute of Foreign Trade, and Janardhan is a Research Fellow.

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Published on March 27, 2019
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