SUMMARY

WTO negotiations on “modalities ”(1) (approaches and targets) for agriculture liberalization have regained momentum in the final weeks before the Cancun Ministerial Meeting, but competing proposals from several major blocs of Members have complicated negotiations even further.

Since missing the March 2003 deadline on modalities, key WTO Members in the past month have tried to break the deadlock over Chairman Stuart Harbinson’ s draft modalities by submitting new proposals. The most significant ones are the joint US-EU proposal tabled on August 13 and a counter-proposal put forward by a group of twenty developing countries (“G-20”) on August 20, led by Brazil, China and India. The US-EU proposal provoked a sudden and unexpected transformation in the landscape, and has shifted the traditional alliances among Members on the issue. Key developing countries that belonged to groupings such as the Cairns Group (of exporting countries), the Like-minded countries and Net-food importer countries, have rallied together to offer an alternative to the guidelines set forth in the US-EU proposal. It is likely that the two driving forces at Cancun will be the US and EU, on the one hand, and the G-20, on the other side.

In addition, the General Council Chairman, Carlos Perez del Castillo on August 24 released a revised ministerial declaration for the Cancun meeting that contains his own proposal on modalities for agriculture negotiations. Annex A of the Chairman ’s text elaborates the“framework ” for establish modalities and is intended as a compromise between the US-EU proposal and the G-20 counter-proposal. Reaction to the Chairman ’s text has been mixed. In any event, the Chairman’s text that was forwarded to Ministers on August 31 will serve as a basis for discussion at the Cancun.

This report highlights the recent events leading up to Cancun and the objectives of the recent proposals in relation to the “three pillars” of the Agreement on Agriculture (“ AA”) on (i) market access; (ii) domestic support; and (iii) export competition. Also, attached in the Annex is a chart comparing the Chairman ’s draft text with the proposals from the US-EU and the G-20.

ANALYSIS

I. Two Major Stages in Negotiations on Agriculture Modalities

WTO efforts to agree on modalities in agriculture can be divided into two stages:

A. First Stage: Negotiations Dominated by the Harbinson Draft; Little Movement

• March 18, 2003: Chairman of the Negotiating Group on Agriculture Stuart Harbinson circulated a revised version of his draft on agriculture modalities. The first version had been circulated on February 12, 2003(2). The revised version (not a second draft) is not much different than the first version, and acknowledges that serious differences remain among Members.

Compared to Ambassador Pierre-Louis Girard’s simplified draft on negotiating modalities for non-agriculture products, Harbinson’s draft is a comprehensive and contains specific liberalization targets. This degree of detail could have proved counter-productive since it implied an early agreement on many substantive issues. The draft was criticized heavily by all sides -by Japan and the EU as being unbalanced and neglectful of “non-trade concerns ” and by the Cairns Group and the US as lacking ambition on subsidy and tariff reductions.

• July 7, 2003: Chairman Harbinson submitted his report to the Trade Negotiating Committee ( “TNC ”) on the state-of-play of agriculture negotiations, highlighting in a non-exhaustive manner key issues and questions which, in his view, participants needed to address urgently(3). About two dozen trade ministers meeting at“mini-Ministerials” held in Egypt in June and Canada in July make little progress on agriculture.

B. Second Stage: Efforts to Break the Deadlock Stir Up Further Controversy

• August 13, 2003: The US and EU released a joint proposal in an effort to break the deadlock in the negotiations(4). This new proposal is less detailed than Harbinson’s draft and rather provides a “ framework” agreement on major issues. The US and EU have been keen to emphasize that their joint proposal is not comprehensive and that other important issues such as special and differential treatment for developing countries need to be defined in the final text.

• August 20, 2003: Brazil, India, China and a group of developing countries, most of them Cairns Group members (the so-called “ G-20” )(5), released a counter-proposal to the US-EU proposal. They model their proposal on the US-EU proposal, but insist that developed countries go much further in reducing subsidies and domestic support. They also seek greater flexibility in reducing their own tariffs, non-tariff measures and subsidies(6).
  
  
• August 24, 2003: WTO General Council Chairman Carlos Perez del Castillo released a revised Ministerial Declaration draft text to forward to Ministers for the Cancun meeting(7). Paragraph 4 of the Chairman’ s text reaffirms the mandate on agriculture as set out in Paragraph 13 of the Doha Ministerial Declaration.

In addition, Paragraph 4 offers further guidelines on agriculture negotiations:

(a) Annex A “Framework ” - Provides for a“framework ” in Annex A on a basic agreement for establishing modalities. The framework outlines objectives for the three pillars of agriculture and special and different treatment, and is intended as a compromise text between the US-EU proposal and the G-20 counter-proposal.

(b) Conclude modalities at a later date - Directs the Special Session of the Committee on Agriculture to conclude its work on establishing modalities; timeframe to be agreed at Cancun.

(c) Submit schedules at a later date - Provides for a deadline for Members to submit draft Schedules based on the negotiating modalities; timeframe to be agreed at Cancun.

In addition to these proposals, other Members such as Switzerland, a group of six newly acceded Members; Japan; Norway(8) and Kenya have also submitted their own proposals. Some elements in these proposals are reflected in the Chairman’s text.

II. New Alliances Formed in the Rural Landscape

The release of the US-EU proposal has provoked a sudden and unexpected transformation among the traditional alliances of agriculture producing countries. The most significant new grouping is the G-20 group, led by Brazil, China and India, and includes developing countries from the Cairns Group, net-food importers developing countries and some Like-minded countries. These countries apparently put aside their usual differences, in particular on market access, in order to put forward a counter proposal to the US-EU proposal. The counterproposal is also a reaction against the conservative approach on domestic support and export subsidies adopted by the two major trading powers.

In addition to these two contending groups, other key players appear isolated and might side with one group or the other, depending on the issues. These key players include traditional supporters of the EU such as Norway, Japan and Switzerland, and Cairns Group members Australia, New Zealand and Canada. Other like-minded developing countries and some newly acceded countries also remain on the sidelines.

III. Key Proposals in Relation to the “ Three Pillars” of Agriculture

A. First Pillar: Domestic Support

• Aggregate vs. product-specific formula for reduction of Amber Box support(9): Both the Chairman’s text and the US-EU proposal call for the reduction of trade-distorting domestic support. Reductions would be made in an aggregated (non-product specific) manner following the Uruguay Round approach, and would not be harmonized. There would be no distinction between products exported and those supplied to the domestic market.

These proposals are in sharp contrast with the G-20 approach, which calls for (i) a reduction on product specific basis; (ii) steeper cuts on products which benefited from levels of domestic support, above the average, during a certain time period, bringing the final levels closer together (to harmonize the levels of support); and (iii) deeper cuts, with a view to elimination, for products benefiting from domestic support which are exported.

In addition, the text also provides a further capping of domestic support - the sum of allowable support under the Amber Box and de minimis must be reduced so that it is significantly less than the sum of de minimis, payments under the Blue Box and the final bound Amber box level in 2000.

• Controversial cap or elimination of Blue Box support (Art. 6. 5 AA)(10): The Chairman ’s text introduces a cap on Blue Box measures of 5 percent of the total value of agriculture production in the 2000-2002 period, and subjects them to an annual linear reduction (reduction percentage and time period to be agreed). The US-EU proposal does not refer to the Blue Box, and the G-20 paper calls for the complete elimination of Blue Box measures. Opponents of the Blue Box contend that these measures are trade distorting, since production is still required in order to receive the payments (although payments are not directly related to the current quantity of production)(11). The US and EU are shifting more programs to the Blue Box and are resisting its elimination.
  
  
• Negotiate, cap or reduce Green Box support (Annex 2, AA)(12): the Chairman ’s proposal calls for the continuation of negotiations of “ Green Box criteria.” While the US-EU proposal does not refer to the Green Box, the G-20 proposal calls for ambitious reduction including (i) capping and/or reducing green box direct payments in the case of developed countries and (ii) the elaboration of additional disciplines.

The G-20 text reflects the serious concern of developing countries about the abuse by developed countries of the Green Box. It should be noted that the recent EU agreement on the reform of the Common Agriculture Policy (CAP) would shift about 60 percent of existing Amber Box subsidies to the Green Box.

• Differential treatment in reduction of de minimis subsidies (Art. 6.4 AA)(13): The Chairman’s text calls for the reduction of de minimis subsidies by developed countries but less so for developing countries. The Chairman supports the G-20 on this issue, which is in sharp contrast to the US-EU proposal that does not provide for special and differential treatment. However, the G-20 proposal is more ambitious and would allow developing countries to maintain de minimis subsidies at the existing levels.
  
  
• Special & Differential treatment: The Chairman’s text includes a list of several S&D provisions for developing countries, “[…] having regard to their development, food security and/or livelihood security needs […], ” The list includes: (i) lower reductions of trade-distorting domestic support; (ii) longer implementation periods; (iii) retaining the so-called “ developmental measures” (Art. 6.2 AA)(14); and (iv) new S&D provisions under the Green Box. The G-20 has proposed to expand the scope of Art. 6.2 (development measures) so as to include focused and targeted programs.

The US and EU support S&D treatment to some extent, but do not favor a double standard in the WTO whereby developing countries would not be subject to meaningful liberalization commitments.

B. Second Pillar: Market Access

• Mixed formula for tariff reduction by developed countries: The Chairman adopted the US-EU approach which provides for:

1. “Three-part blended formula” (Uruguay Round/Swiss formula/zero duty treatment)(15) - Provides for three categories of tariff lines, depending on the sensitivity of the product(s). In the case of“import-sensitive tariff lines” (1^st category), the UR formula will be combined with tariff-rate quotas (TRQs).
   
   
2. “ Capping” - For those tariff lines that exceed a maximum (to be established), developed countries may reduce that maximum or grant additional market access in these or other products through a request-offer process that could include TRQs.

This approach is in sharp contrast with the G-20, which (i) does not provide for the application of tariff-rate quotas in case of sensitive products (for 1^st category products); (ii) addresses the issue of tariff escalation in the case of products subject to the UR formula; and (iii) calls for a capping of tariff lines that a exceed a maximum to be established and for commitment to reduce them to that maximum.

• Options for tariff reduction for developing countries: The Chairman provides developing countries flexibility in choosing a tariff reduction formula, including a choice between: (i) the application of the UR formula to three different categories of tariff lines, depending on their sensitivity; and (ii) a blend of the UR and Swiss formulas, without a zero duty category.

In both cases, the Chairman proposes for the first category of products (sensitive tariff lines):

• Combination - Option of tariff cuts and TRQs (similar for developed countries).
• Flexibility on SPs - Flexible criteria for designation of “ Special Products” (“ SP”), introduced by Harbinson draft(16), which would only be subject to linear cuts of a minimum percentage and no new commitments regarding TRQs.

By providing developing countries the ability to designate SPs, the Chairman has tried to avoid the criticism of the US-EU proposal which does not mention the concept of SPs(17)

The G-20 ’s proposal also calls for the establishment of SP “ under conditions to be determined in the negotiations.” This cautious language reflects the differences among G-20 members on this issue as some fear the abuse of the SP concept(18).

• Duty-free access for imports from developing countries. Along the same approach as the US-EU proposal, the Chairman’s text provides that “ all developed countries will seek to provide duty-free access for at least […]% of imports from developing countries through a combination of MFN and preferential access.”

The G-20 proposed, instead, a more explicit commitment from developed countries to provide duty-free access to all tropical agricultural products, products of particular importance to the diversification of production from the growing of illicit narcotic crops, and other agricultural products representing a percentage to be agreed on of imports from developing countries.

• Further negotiations on TRQs and safeguards. In sharp contrast with the G-20 proposal, the Chairman ’s text supports the US-EU call for further negotiations on several sensitive issues, including TRQs and safeguards:
  
  
  • Expansion/Opening of [existing]TRQs and in-quota tariff rates. The G-20 proposes that TRQs “be expanded by [ ] % of domestic consumption and in quota tariff rates [be] reduced to zero. […] Larger expansion or creation of TRQs could be the result of a request and offer process. ” In addition, the G-20 calls for the exemption of developing countries from making commitments regarding TRQ expansion and reduction of in-quota tariff rates. The Chair ’s text supports further negotiations instead.
  • Special Agricultural Safeguard (SSG). The G-20 calls for the elimination of the SSG for developed countries. The Chair’s text supports further negotiations instead.
  • Special Agricultural Safeguard (SSM): The Chairman’s text calls for the establishment of a SSM for use by developing countries subject to conditions and for products to be determined.

C. Third Pillar: Export Competition

• Two-tier approach to reducing export subsidies: The Chairman’s text supports the US-EU approach and calls for a two-tier approach on reducing export subsidies:

1. Elimination within a certain time period of export subsidies for products [to be designated] of special interest to developing countries;
2. Reduction, “with a view to phasing out,” of export subsidies for the remaining products. Unlike the US-EU proposal, the paper also provides that the “question of the end date for phasing out of all forms of export subsidies remains under negotiations.”

The G-20 text is more ambitious and seeks the elimination of the second category of export subsidies, but over a longer phase-out period to be agreed upon.

Developing countries also seek S&D treatment, including: (i) longer implementation periods for reduction commitments; and (ii) the ability to exempt certain transport and marketing subsidies from export subsidy reduction (Art. 9.4 of AA) until all exports subsidies have been fully phased out by all Members.

• Balanced disciplines on export credits: The Chairman’s text supports the US-EU approach and provides that subsidized export credits (trade-distorting elements of export credits) would be treated in parallel and equivalent manner with export subsidies (i.e. application of the same two-tier approach). Moreover, the Chairman ’s text supports the G-20 call for the establishment of disciplines on the identification and elimination of the subsidy component. The text also provides that Members must ensure that disciplines on export credits must take into account Paragraph 4 of the Decision on Measures Concerning the Possible Negative Effects of the Reform Programme on Least Developed Countries and Net Food Importing Developing Countries.”(19)
  
  
• More ambitious disciplines on State trading enterprises (“ STEs” ): The Chairman ’s text differs from the US-EU proposal on this point. The Chairman’ s text provides that “the provisions related to the reductions of, with a view to phasing out, all forms of export subsidies […] shall apply equally to all forms of export subsidies related to or provided, directly or indirectly, to, by, or through STE.” While the G-20 does not refer to this issue, the US-EU paper only calls for the establishment of disciplines.
  
  
• Disciplines on food aid operations: All proposals support negotiations of additional disciplines in order to prevent commercial displacement through food aid operations.
• Disciplines on export prohibitions, export restrictions and export taxes: The Chairman ’s text calls for the strengthening of Art. 12 of the AA on export prohibitions and export restrictions. It also calls for further negotiations on modalities to establish disciplines on export taxes.

D. Other Issues

The Chairman’s text also lists several “ issues of interest but not agreed” and calls for further work on modalities. The list includes:

• “Peace clause” - Moratorium on disputes on subsidies set to expire this year. The EC and others want it renewed, while the G-20 want it to expire as scheduled;
  
  
• “Continuation clause” - Art. 20 of the AA provides for the continuation of the reform process;
  
  
• Non-trade concerns - Trade-related issues such as environment-related and animal welfare measures, supported by the “Friends of Multi-functionality” including the EC, Japan, Norway, Switzerland and others;
  
  
• Sectoral initiatives - e.g., Initiative by some African countries to eliminate subsidies on cotton;
• Inter-pillar linkages - e.g., The Philippines seeks to condition new market-access commitments for developing countries to the prior substantial reduction of OECD farm subsidies; and
• Geographical indications - Extension of trademark protection beyond wine and spirits, a controversial initiative by the EC, Switzerland and others.

OUTLOOK

Reaction to the Chairman ’s draft has been mixed. The EU and the US have criticized many provisions as going too far, including on reduction of domestic support and export subsidies - and not ambitious enough on market access targets for developing countries. The G-20 along with such exporters as Australia and Canada, on the other hand assert that the text does not ambitious enough on many of the same issues. Nevertheless, Chairman Perez del Castillo indicated that the draft will be forwarded to Ministers at Cancun in its present form (as of August 31), and will likely serve as the basis of negotiations at Cancun.

With the exception of Australia and New Zealand, which are leaning towards the position of the G-20 on certain issues - the battle over agriculture is turning into a North-South divide. This new scenario is in considerable contrast with the previous patchwork of groupings (e.g. food exporters, net food importers, Members with subsidized agricultural sector, etc.) that has prevalent until the release of the recent proposals. Notwithstanding, it remains to be seen whether the unusual coalitions of the US-EU and G-20 will continue to hold throughout the Cancun negotiations. The strategies of these groups are likely to shift as they strike compromises on key positions.

It should be realized that WTO Members at Cancun will seek to reach an agreement on the “framework ” for agricultural modalities, and not to establish the modalities themselves. This objective is less ambitious than the target set at Doha (for March 2003), and is an acknowledgement that the establishment of modalities is still far from reach. Nevertheless, without an ambitious agreement at Cancun on the framework for agriculture negotiations - most, if not all other issues on the Doha agenda will be paralyzed. Agriculture will by far be the dominant issue at Cancun and for the rest of the Doha Development Agenda.