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Ambiguities about the WTO Farm Subsidies for Food Security Purposes


Ambiguities about the WTO Farm Subsidies for Food Security Purposes

Ambiguities about the WTO Farm Subsidies for Food Security Purposes

The WTO negotiations on Public Stockholding (PSH) for food security purposes is one of the highly contested topics in the agriculture negotiations. PSH programmes are instruments that are used by some developing countries to prevent domestic food insecurity. Under the PSH programmes, developing countries are allowed to purchase and stockpile food for distribution to food insecure households when the need arises. Food procured under PSH programmes is either sold to households at prices that are below market prices or given out for free. Some PSH programmes involve support to farmers and thus may be considered to be distorting trade. Through the PSH programmes support to farmers is either provided directly (by paying a high price to suppliers) or indirectly through the effect of associated interventions on the domestic market price.

The WTO Agreement on Agriculture (AoA) has rules that discipline PSH programmes. These rules are part of domestic support disciplines as PSH programmes include public procurement at administered prices. This is a form of price support, which is accounted for with the other forms of non-exempted domestic support in the AoA. In essence, although PSH programmes for food security purposes in developing countries is placed under the Green Box, there is a provision that the subsidy element in PSH programmes should be accounted for in the aggregate measurement of support (AMS). The AMS is the main category of subsidies considered to be trade-distorting. The AMS for most developing countries is limited to the de-minimis amount of 10% of production value for all developing countries and 8.5% for China.

The accounting of PSH programmes under the AMS is the main source of controversy in the WTO PSH negotiations. Developing countries regard this provision as an unfair condition. This is based on the fact that there is no limit to the Green Box subsidies. Additionally, other Green Box subsidies, including those that developed countries mostly use, do not carry such a condition.

Developing countries in the WTO, led by the G33[1] have argued that food bought from resource poor farmers and distributed to poor consumers should be considered part of the Green Box without conditions. Consequently, before the Bali Ministerial Conference in 2013, the G33 proposed amendments to the current WTO rules on PSH. The proposed amendments were discussed during the Bali Ministerial Conference in December 2013. However, the Bali conference failed to reach an agreement on PSH. Instead, members only agreed on a Peace Clause. The Peace Clause protects developing countries’ food procurement programmes against action from WTO members in case the subsidy ceilings are breached. The subsidy celling for all developing countries is 10% of Value of Production (VoP) and 8.5% of the VoP for China. The need to find a permanent solution to PSH was re-affirmed in the Nairobi Ministerial Conference in December 2015 as well as the 2017 Ministerial Conference in Buenos Aires.

Since the Bali Peace Clause was adopted in 2013, the proponents of PSH have submitted various iterations of proposals and submissions in an attempt to formulate a Permanent Solution on PSH. The Bali Peace Clause offered protection to developing countries from legal challenges arising from breaching their commitments under the WTO rules when undertaking PSH programmes until 2017. The protection under the Peace Clause only covered agricultural crops that are part of the traditional staple foods of the member concerned as well as programmes that were in existence when the Peace Clause was agreed upon. Additionally, developing countries using PSH programmes also need to inform the Committee on Agriculture (CoA) about the potential breach of their Bound Total AMS or de-minimis level for a specific food commodity. Furthermore, under the Peace Clause, PSH programmes should not distort trade or affect food security of other countries with their food stocks. These PSH programmes must also have fulfilled and continue to fulfill the member’s Domestic Support Notifications. The Peace Clause mandated members to agree on a permanent solution on or before the 11th Ministerial Conference in 2017.

A general concern regarding PSH programes relates to the flawed calculation of all domestic subsidies under the AoA, including the green box subsidies. The calculation of all domestic subsidies is based on the 1986-1988 external reference prices as defined in the AoA. The 1986-1988 base year is problematic in two ways. Firstly, the 1986-1988 external reference price does not consider the changes that have taken place in the global economy in the past thirty-five years. Secondly, calculating current subsidies based on 1986-1988 prices overestimates the subsidy and the method of calculation fails to consider inflation.

The Current Negotiations on PSH

In an attempt to achieve a permanent solution on PSH, Indonesia on behalf of the G33 circulated a draft ministerial decision on the permanent solution for PSH programs in JOB/AG/214/Rev. Similarly, the African Group circulated a proposal in JOB/AG/204, with concrete steps for a permanent solution on PSH. The urgency for permanent solution on PSH is propelled by the consequences of the global COVID-19 pandemic. The permanent solution on PSH seeks to address food security for developing countries and LDCs. Food reserves is a critical component of PSH programmes. The G33 proposal for a permanent solution on PSH has made a concerted effort to address the concerns of the non-proponents of PSH. One of the areas of concern raised by the non-proponents is a need to strengthen the safeguard provisions. The G33 proposal offers to enhance the safeguard provisions by guaranteeing that agricultural products covered by PSH programmes are not exported or released to domestic and global markets. Additionally, the G33 proposal seeks to adhere to WTO transparency obligations. It recognises the importance of notifications in a realistic and not too onerous manner to enable developing countries and LDCs to comply.

The G33 proposal has received support from many developing countries in the WTO. The African Group and the African Caribbean and Pacific group of states (ACP) are some of the groups of developing countries that support an effective and improved permanent solution that will have expanded country and product coverage. Although these developing countries support the current status quo as defined in the Peace Clause, they have raised a number of issues for inclusion in the permanent solution. These issues range from the extension of the scope of coverage to include new programmes that were not part of the programmes under the Peace Clause. Additionally, developing countries seek a permanent solution that extends the product coverage from the traditional staple food crops to include more staple foods. Furthermore, there is a need for the transparency and notification requirements to be less onerous for developing countries and least-developed countries. Lastly, developing countries are concerned about the anti-circumvention and safeguard conditions under the Peace Clause, which makes it impossible to use these programmes.

Despite the overwhelming support for the G33 proposal from like-minded developing countries, there is resistance from the major developed countries, who see the permanent solution on PSH as creating a new loophole for potentially unlimited trade-distorting subsidies. Other non-proponents oppose the G33 proposal on the basis that it lacks balance and is not consistent with the mandate for PSH programmes. Additionally, non-proponents have questioned the necessity for a permanent solution on PSH because of the limited use of the Peace Clause. Presently, India is the only developing country that has invoked the Peace Clause. Consequently, the non-proponents are questioning the demand for a permanent solution on PSH founded on a Peace Clause which has not been used optimally. Other objections arise from the argument that PSH programmes should be linked to domestic subsidy negotiations. The proponents of PSH regard it as a standalone issue, which is mandated by the Bali Ministerial Decision of 2013, the General Council Decision of 2014 as well as the Nairobi Ministerial Decision of 2015.

The Chair of the Committee on Agriculture in Special Session (CoASS) has circulated a draft textual proposal in JOB/AG/215, which contains all aspects of the agriculture negotiations. With regards to PSH, JOB/AG/215 has proposed two decisions. The first decision on PSH is similar to the Bali Ministerial decision and therefore suggests that the Peace Clause is converted to a permanent solution. It does not consider the difficulties of developing countries with regards to the Peace Clause. These difficulties include limited product and country coverage. The second proposed Ministerial Decision on PSH as articulated in JOB/AG/215 suggests that the negotiations on PSH should be postponed and continued after MC12. Developing countries have raised concerns with these two decisions. The first decision does not cater for new PSH programmes and additional staple foods and thus exclude many developing countries from the benefits of PSH programmes. The second decision is not feasible because a permanent solution on PSH is a mandated issue. The delay in reaching a permanent solution leaves out the majority of developing countries from taking recourse on the Peace Clause.

Breaches of the WTO obligations on PSH by India and China

China is one of the developing countries that has been challenged by the United States through the Dispute Settlement Body (DSB) for breaching the WTO rules on PSH programmes. In 2016 the U.S filed a complaint against China for paying its farmers more than the allowed limit. China’s WTO membership agreement permits trade-distorting subsidies of up to 8.5 percent of its total VoP. During the period 2012-2015 China exceeded the 8.5 % of the VoP limit in supporting farmers for wheat, Indica rice and Japonica rice. The U.S argued that by exceeding its allowable limit of domestic subsidies, China provided an artificial incentive for farmers to produce more and thus lowering world prices of the aforementioned grains. China disputed the alleged breach of its WTO obligations, stating that only the grains procured by government should be counted as subsidised. The United States successfully argued that state buying at prices that are below market prices artificially lowered the market prices. In essence this successfully challenged the calculation methodology that is used by China.

It is worth noting that another developing country, namely India uses the same methodology that is used by China for calculating subsidies provided to farmers under PSH programmes. The 2018/2019 domestic support notifications from India to the WTO reveal that India breached its allowable subsidy levels, which is 10% of its total VoP. This breach attracted a lot of scrutiny from other WTO members, particularly those that are opposed to PSH programmes. As a result of this breach, India invoked the Peace Clause, thus avoiding being challenged legally for breaching its allowable subsidy limit. By invoking the Peace Clause, India became the first WTO member to make use of the Peace Clause. In 2019/2020, India breached the allowable subsidy limit provided to rice farmers and invoked the Peace Clause for exceeding the 10% of its total VoP ceiling offered to its rice farmers. Invoking the Peace Clause protects India from legal challenges by the WTO members for breaching its allowable ceiling. The invocation of the peace clause by India was questioned by the WTO members who are opposed to PSH programmes. The questions raised to India are about the conditions that should be met before a member can invoke the Peace Clause. These range from additional notification obligations, reporting methodologies and the trade impact of the support provided. The non-proponents have also reacted through submitting counter-notifications in opposing the notifications submitted to the WTO by India. The counter-notifications attempted to show flaws in the methodology used by India in calculating the subsidies provided, and have revealed that the subsidies provided by India are far above what is captured in the notifications.

Is a compromise possible?

The WTO Agriculture negotiations seek to redress the imbalances in the AoA, by focusing on the areas of the agreement that need further strengthening. One of the areas that are skewed in favour of the developed countries is trade distorting domestic subsidies. Developed countries continue to enjoy large domestic subsidy entitlements, while many developing countries have limited domestic subsidy entitlements.

The PSH debate is aimed at redressing the eminent imbalances in the AoA. The need for a permanent solution on PSH remains valid because PSH programmes are intended to provide food security to poor households in developing countries. This need has become more evident because of the global impact of the COVID-19 pandemic. The Peace Clause excludes many developing countries from PSH programmes. It also excludes many food staples that are critical in developing countries for food security purposes.

The current stalemate in the WTO Agriculture negotiations on PSH symbolizes the eminent diversity of views between developed and developing countries. These divergent views continue to diminish the possibilities of an outcome on PSH at MC12. A permanent solution on PSH is necessary to support and improve the livelihoods of the rural poor, increase economic production in rural areas and revive rural economies. Given the missed deadlines, the expectation is that WTO members should prioritize the delivery of a permanent PSH solution at MC12.

[1] The G33 is a coalition of developing countries with defensive concerns regarding agriculture in relation to World Trade Organization negotiations, and seek to limit the degree of market opening required of developing countries.

About the Author(s)

Kedibone Machiu

Department of Trade, Industry, and Competition, South Africa

Mpho Leseka

Management Consultant

Noncedo Vutula

Department of Agriculture, Land Reform and Rural Development, South Africa

Thembekile Mlangeni

Department of Trade, Industry and Competition, South Africa

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