Agricultural trade and food security

Government subsidies

A standard measure of government support is the Producer Subsidy Equivalent (PSE), which measures the total support to agricultural producers as a result of agricultural policy. In the Uruguay Round of GATT, a different measure, called the Aggregate Measure of Support (AMS), was used to identify support to producers. The AMS excludes transfers that do not affect producer prices or production levels³¹. It therefore refers only to those support measures that are “market-distorting”.

This has allowed industrialised countries in particular to continue providing support that are considered to be non-, or only minimally, trade distorting. These measures form the basis of the ‘green’ and ‘blue’ boxes in the Agreement on Agriculture (see Box 1).
By partially linking green and blue box subsidies to environmental improvements, both the EU and US have managed to split civil society opposition to the subsidy regime. In both the EU and the US, leading environmental organisations have expressed their support for a shift in subsidies to those supporting environmentally sound practices. Two examples follow:

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  In the US, environmental and wildlife groups are providing support for the “Lugar Bill” that aims to phase out crop support programmes and put twice as much money as allowed by US law into support for farm conservation programmes.³²
  
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  In the EU, the World Wildlife Fund (WWF) argues that, although steps should be taken to ensure that environmental measures do not serve as covert protectionism, national expenditure on environmental measures should not be limited.³³
  

While in principle these approaches need not be faulted, the shifting of subsidies still has negative influences on developing country producers. Despite the fact that such direct payment subsidies are not directly linked to production, their sheer size does ultimately distort the production regime, since they shift the supply curve to the left.

In other words, they encourage farmers to continue producing even if the prices they receive for their produce are below the costs of production, because they can use the government subsidies to make up the difference. The result is a greater volume of indirectly subsidised commodities on the world market, and a continuation of artificially depressed prices.
This point was implicitly recognised by the EU’s Agriculture Commissioner Fischler in August 2001 when he criticised the US’s domestic support system. Fischler asserted that the US’s farm relief aid “inevitably impacted on production and hence prices in both the US and international markets”³⁴. In turn, this discourages production in those countries absorbing the exports.

The “green box” subsidy

In order to qualify for the “green box”, a subsidy must not distort trade, or at most cause minimal distortion. These subsidies have to be government-funded (not by charging consumers higher prices) and must not involve price support. They tend to be programmes not directed at particular products, and include direct income supports for farmers not related to (are “decoupled” from) current production levels or prices. “Green box” subsidies are therefore allowed without limits, provided they comply with relevant criteria. They also include environmental protection and regional development programmes.

The “blue box” subsidy

The “blue box” is an exemption from the general rule that all subsidies linked to production must be reduced or kept within defined minimal (“de minimis”) levels. It covers payments directly linked to acreage or animal numbers, but under schemes, which also limit production, by imposing production quotas or requiring farmers to set aside part of their land. Countries using these subsidies — and there are only a handful — say they distort trade less than alternative amber box subsidies. At the moment, the blue box is a permanent provision of the agreement.

Source: Information & Media Relations Division, WTO Secretariat, 4 Oct 2001

As indicated in Box 1, blue box subsidies are linked to production, but are exempt from reductions. This only served to benefit the US and EU who were relying on such support during the Uruguay Round negotiations. However, subsequent reforms in the US mean that only the EU is using the blue box to any substantial degree.

The Peace clause

Related to these exemptions is the so-called Peace Clause, that says that until the end of 2003 green and blue box measures and export subsidies cannot be challenged in the WTO dispute settlement body, even though they violate the basic principles of the agreement.³⁵ One reason for the rush to conclude further negotiations is that blue box measures will be open to dispute when the Peace Clause expires.

Signatories to the AoA agreed to further negotiations on reforms as part of the agreement, and this is legally binding. Therefore, negotiations on agriculture started in January 2000 despite the collapse of broader negotiations in Seattle in 1999. A number of articles in the Agreement are only valid for the implementation period (5 years), including special safeguard provisions and the Peace Clause.³⁶ Until March 2001, member countries made submissions on the content for further negotiations. Submissions and proposals on export competition, domestic support, market access, non-trade concerns and development were made by 121 countries made. Relevant aspects of the EU and South African proposals will be spelled out in the text that follows.
Common Agricultural Policy (CAP) reform in the European Union
Reform of the Common Agricultural Policy (CAP) in the EU provides a good example of the way industrialised countries have used planned domestic reforms as the basis of their negotiating positions in the WTO AoA. While in principle this cannot be faulted, they have been presented as compromises and used by the industrialised countries to squeeze concessions from developing countries, particularly on market access and trade liberalisation.
The CAP was established in 1958 to encourage increases in agricultural productivity in many European countries, specifically to ensure domestic food security. Market forces determined the prices received by producers, but these were controlled within certain upper and lower limits to encourage stability.
If they rose above the upper limit, traders would import supplies from outside the EU. If they fell below the lower limit, traders would sell into intervention stores where the government provided minimum prices, or exported the supplies with the aid of export refunds.³⁷ Variable import levies were used, adjusted weekly at a rate just enough to keep out imports from entering at a price below the minimum guaranteed price. Food was sold to consumers at the higher, protected price.³⁸ Budget costs only occurred when production increased above the level of domestic consumption.
The government needed to build up buffer stocks or to provide export subsidies to sell surpluses at below cost outside the EU. Initially, the import levies generally covered the administrative costs and export subsidies.³⁹
This system worked until the mid-1980s when there was a growing contradiction between structural surpluses, a fairly static domestic demand and the maintenance of guaranteed minimum prices for producers on the domestic market.
The result was a troubling overproduction, high domestic prices for consumers and rapidly expanding export subsidies to remove surpluses. This created a number of problems for the EU:⁴⁰

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  By the mid-1980s, 60% of the EU budget was going to agriculture, and of this 80% was going to larger farmers;
  
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  There was growing opposition from food exporting countries to what was seen as unfair competition;
  
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  Environmentalists had grown in power and were concerned about the ecological unsustainability of the existing CAP system.
  

At about this time, the US pushed for agriculture to be included in GATT negotiations. The US wanted reduced import tariffs and export subsidies, with direct payments to producers. This system – which was adopted in the Uruguay Round, as seen previously – allowed for more predictability in EU budgeting. But it also meant that the government had to carry some costs previously passed onto the consumer.⁴¹ This was the basis of the 1992 CAP reforms.

By the time the WTO was formed, the reforms were in progress. The EU could claim that it had met its obligations under the AoA. As discussed above, the formulation of the blue and green boxes, in bilateral negotiations between the US and EU, was sold to the other countries in the GATT negotiations as the only possible solution to the impasse. It allowed the EU carry out the CAP reforms in its own chosen way. Since the EU’s direct payments fall into the blue box, they are thus exempt from reductions.
The shift from price support to direct payments aimed to reduce the internal price of agricultural products in the EU without undermining farm incomes. Lower prices have resulted in an increase in domestic consumption, a narrowing of the gap between EU prices and world prices and a reduction of surpluses.⁴² According to the European Research Office, the long-term aim of the ongoing CAP reforms is to:

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  reduce the real value of direct aid, so as to
  
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  encourage more efficient cropping patterns and improved competitiveness of basic agricultural products, and
  
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  gradually move to non-product specific direct aid payments to farmers.⁴³
  

Since internal EU prices will have dropped, the market will decline as a key export destination for agricultural products from other countries, including developing countries. The increased competitiveness of EU agricultural producers will also mean there will be an increase of exports from the EU (in both raw agricultural products and processed goods), and hence greater competition for other producers.

This programme can only be carried out if the EU is allowed to continue providing payments to its producers while restructuring the agricultural sector. The AoA allows the EU to do this through the blue box and peace clause, while at the same time constraining other countries from taking up this option.
In its current negotiating position, the EU is prepared to support a gradual reduction in farm support on condition that green and blue boxes remain. It also wants the indefinite continuation of the peace clause.⁴⁴ This is seen as essential to the shift from price support to direct farming aid that is the cornerstone of CAP reform.⁴⁵ In other words, the EU believes it should be allowed to continue providing massive levels of direct payments to farmers.
EU benefits from “special and differential treatment”
Behind this protectionist barrier, The EU is restructuring its agricultural sector so that when it brings the protective barriers down, its domestic producers will be able to compete internationally. This is a clear case of “special and differential treatment”, in favour of one of the richest and most industrialised trading blocs in the world.
The other pillar of the negotiating positions of the US and EU is to push for greater trade liberalisation and market access for their own products into other countries. Both the US and the EU are major agricultural export economies, and they have used the negotiations to open markets for these exports, whether subsidised or unsubsidised. Built in to a new round of agricultural negotiations is further reform in a market-oriented trading system,⁴⁶ and this will be used by the industrialised countries to further establish their “right to export” while protecting domestic producers as far as possible.
SOUTH AFRICAN GOVERNMENT POSITIONS REGARDING FOOD SECURITY AND AGRICULTURAL TRADE
Two parts of the South African government’s policies need to be considered:

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  Firstly we need to look at what the government is calling for in the international negotiations,
  
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  Secondly the government’s policy and practice regarding agriculture and food security inside the country needs attention.