Fig. 1 - Import protection alone, without domestic and export subsidies: the case of most DCs

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1 A comprehensive approach of dumping and import protection through four graphs according to the types of agricultural supports affordable by WTO Members Jacques Berthelot, Solidarité ( 27 June 2006 The WTO's Appellate Body has ruled that dumping should be defined as exports made at prices below the average production cost, but the question remains to identify this average production cost. Indeed, this concept is very ambiguous since a large array of upstream subsidies are reducing it in rich countries, whereas we have to compare the competitiveness of products on the world market in relation to poor countries which cannot subsidize their producers or their production factors upstream. That is why we have devised four types of graphs according to a rough typology of WTO Members and showing also the interrelations between the main indicators of agricultural supports used by OECD and the WTO boxes. 1) The 1 st graph (fig.1) illustrates the case of many poor DCs: Fig. 1 - Import protection alone, without domestic and export subsidies: the case of most DCs domestic price = production cost without subsidies. import protection negative consumers surplus distortion PSE: producer s support estimate no dumping of prices world price This graph illustrates the situation of many poor DCs which, lacking public financial resources to grant subsidies, can only afford to use an efficient import protection to maintain the competitiveness of their agricultural products. The level of import protection has to be fixed so that the domestic price covers the average production cost or even a slightly higher than average production cost (PC) to foster an increased production. This level depends on the capacity of poor consumers to face the domestic price or to find ways to subsidize them during the few years necessary to allow farmers to invest to raise their production and

2 productivity, which will lower their unit production costs and eventually allow them to lower their prices. The prevailing theory and OECD consider any gap between the domestic price and the world price, reflected by import protection, as a trade distortion measuring the negative consumers' surplus, obliged to pay a higher price than the world price to which they claim being entitled. They consider this gap as a consumers' subsidy to farmers, even though it is eventually pocketed by local traders, agri-food industries and supermarkets, not by farmers. And they fail to understand that these allegedly "true" world prices are highly dumped prices. In this context, the OECD's PSE (Producer Support Estimate) is equal to the negative consumers' surplus since there are no public expenditures. And it is also equal to the OECD's TSE (Total Support Estimate) as there are no more collective subsidies of the green box, most of which correspond to the OECD's GSSE (General Services Support Estimate). 2) The 2 nd graph (fig. 2) illustrates the case of some DCs, with some collective green subsidies (GSSE) but negligible individual subsidies. Fig. 2 - Import protection with some collective subsidies and possible social, ecological or monetary dumping: the case of some DCs possible types of non price dumping import protection domestic price = PC without individual subsidies negative consumers surplus Implicit total production cost brown box of social dumping purple box of ecological dumping white box of monetary dumping computable PC, without collective green subsidies decoupled subsidies collective green box: GSSE distortion world price PSE: producer s support estimate computable actual protection non computable actual protection and dumping 2

3 Although unable to grant individual domestic subsidies, most DCs tend to grant minimal collective subsidies in kind of the GSSE type: agricultural research, extension, pests alerts and some rural infrastructures. These subsidies enter into the TSE and enter also into the calculus of a comprehensive approach of import protection and dumping (for the exported products). We can also identify in some DCs an implicit total production cost (PC), linked to a social and/or environmental or even a monetary dumping, although these types of dumping, to which they are very often driven unwillingly, would most often be imputable to developed countries' policies. These types of dumping (see the annex) are almost impossible to calculate and correspond also to an implicit protection. Presenting them is neither a plea to justify an import protection based on social or ecological clauses although food sovereignty should be a right nor a means of underestimating the traditional dumping of prices which should first be abolished before Members could contemplate to address these types of dumping. 3) The 3 rd graph (fig. 2) illustrates the general case of developed countries. Fig. 3 - General case of developed countries with all domestic and border supports non agricultural subsidies and dumping specific (agricultural) subsidies domestic subsidies export subsidies computable PC, without all subsidies decoupled coupled total non computable production cost gold box of developed countries subsidies brown box of social dumping purple box of ecological dumping white box of monetary dumping domestic price = PC without export subsidies import protection collective green box: GSSE PC without individual subsidies individual green box PC without coupled subsidies semicoupled blue box amber box less AMSs linked to administered prices negative consumers surplus world price distortion PSE: producer support estimate computable total protection and prrice dumping non computable actual protection and dumping 3

4 Fig. 3 characterizes the general situation of developed countries where the domestic price and the market production cost are largely reduced by a whole range of coupled (amber box), semi coupled (blue box) and allegedly decoupled (green box) domestic subsidies. The trade distortion is equal to the import protection (or export subsidies when they are higher) plus the coupled domestic subsidies, without taking into account the productspecific AMSs linked to administered prices since they are a fake market price support, given the presence of an import protection or/and export subsidies. Since the Framework Agreement of 31 July 2004, the blue box subsidies are also considered, rightly enough, as coupled and are included in the trade distortion level. To get the PSE we add to the trade distortion the individual green box subsidies. Adding the collective subsidies of the green box, corresponding broadly to the GSSE (although OCDE puts some of them in the PSE, rightly enough since it should have put all of them!) we get the TSE which can also be identified to the computable production cost an computable level of protection and dumping. Adding finally the non-specific, i.e. non agricultural, subsidies but which can hardly be computed, of the "gold box" of developed countries (see the Annex) and of their brown, purple and white boxes, we get the total non computable production cost and the non computable actual total level of dumping and protection. 4) The 4 th graph (fig. 4) characterises the final aim of the WTO and all free traders, an aim the EU is already approaching through the new CAP adopted the 26 June 2003 and which is still going on. Under the pressure of agri-food industries the EU is in the process of aligning all its domestic agricultural prices on world prices by compensating farmers with supposedly fully decoupled payments the "single farm payment" granted to farmers without any commitment to produce, in order to put them in the green box so that the EU could increase its agricultural exports without any formal dumping and sustain at the same time much lower tariffs, just the level necessary to cover the internal transport cost between the farther border and the main consumption areas. Once domestic prices aligned on world prices, export subsidies disappear, which has almost be the case for the EU's exports of wheat from July 2001 to June 2002, even if a stronger euro has forced the EU to grant some small refunds afterwards. For the mainstream theory and OECD, once domestic prices are aligned on world prices, there is no longer any trade distortion since there are no import protection, no export subsidy and no negative consumer's surplus. The reality is clearly the opposite since higher green subsidies have replaced the amber market price supports and the amber and blue subsidies. So that the domestic prices, now equal to world prices, are much below their production costs without all these individual and collective green subsidies. Actually the EU domestic subsidies going to exported products have reached on average 142% of export refunds from to (the EU notified years) for the sum of cereals, dairy products, bovine meat, pig meat and poultry meat. 4

5 If the sum of the domestic subsidies to these products has remained more or less constant over time (they have increased per hectare and cattle head but the volume of exports has decreased), the export refunds have decreased, so that the domestic subsidies have represented an increasing proportion of the refunds: from 114% in to 233% in , and this trend has continued up to now. Fig. 4 The total decoupling of domestic subsidies of developed countries: the EU to-morrow? non agricultural subsidies and dumping domestic green subsidies collective individual implicit total production cost gold box of developed countries subsidies brown box of social dumping purple box of ecological dumping white box of monetary dumping production cost without green subsidies GSSE: research, training, extension, pest warning, collective agricultural infrastructures production cost without individual green subsidies PSE: prodcucer support estimate computable price dumping non computable actual protection and dumping domestic price = world price export subsidies, import protection, negative consumers surplus and distortion are nil At the same time the EU and US, not to speak of the IMF and WB, are pressuring DCs, which cannot afford to subsidize their farmers, to lower their agricultural tariffs not only at the WTO but also in their bilateral free-trade agreements. 5

6 Annex: the gold, brown, purple and white boxes 1) The "gold box" of developed countries It encompasses all types of past and present non agricultural supports and past agricultural supports, including a high import protection which the developed countries have been using for decades but which are not taken into account by the GATT, the Antidumping Agreement and the Agreement on subsidies and countervailing duties because they are not "specific". Nevertheless these present non agricultural supports and past non agricultural and agricultural supports including a high import protection are the main reasons of the present higher competitiveness of developed countries since they have reduced largely the unit production cost of their agricultural products. Some of these gold box subsidies are: efficient transport and information infrastructures, which reduce greatly their corresponding costs; general education and research; health and pensions of farmers financed by society at large, at least in the EU; wealthy consumers with an ever increasing purchasing power, able to pay fair prices to farmers, even if these prices are too low; democratic States able to enforce commercial contracts, to recover tariffs, etc. 2) The brown box of social dumping The gross exploitation of labour, including child and prisoners' labour, allows many countries to enjoy an unjustified competitiveness, including of their agricultural products. This social dumping is not practised only in DCs since the exploitation of migrant seasonal workers, underpaid and not getting social security benefits, is a common practice in the EU and the US, notably in agriculture and the building industry. Within DCs one has to distinguish between the poorest countries where child labour can hardly be avoided, notably in agriculture and countries like Brazil where the gross exploitation of agricultural manpower is unjustifiable given the high level of economic and land resources of the country with an average per capita income of $3,000 in But the social and environmental dumping practised in DCs is to a large extent attributable to the North itself, given the gross exploitation of DCs themselves by the developed countries through the past and present iniquity in the North-South economic relations, including in the AoA's rules allowing the perpetuation of a Northern dumping hidden under the allowed domestic subsidies going to exported products. b) The "purple box" of environmental dumping Again environmental dumping is not the sole practice of DCs since it is also common in developed countries, and under multiple forms. The US agricultural products would have lost to a large extent their competitiveness if its domestic oil prices had not been so low, even if they have been rising in the last years as everywhere: they were indeed 3 to 4 times lower than in France and Germany, although they were already too low there to internalize environmental costs. No wonder that the US, with 6

7 only 4.5% of the world population, is responsible for 25% of the emission of the gases with a greenhouse effect. Among DCs, we can distinguish again between the poorest and the richest. In the first group, the degradation in soil fertility and biodiversity is largely due to the impoverishment of farmers by too low agricultural prices, largely due to the dumping of Northern agricultural products and the pressures of the IMF and WB to lower their import protection. Consequently they have not been able to invest in better farming practices to improve soil fertility but have been forced to overexploit their natural resources. In the latter, like again Brazil, the overexploitation of the environment is largely imputable to an export-oriented factory farming externalizing the ecological costs, through an excessive deforestation of the Amazone for extensive ranching or soybean production. More generally the WTO push for an increased trade liberalization would increase much international and domestic transports, which represent a growing share of the emission of gases with a greenhouse effect, contributing to the climate change, more harmful to DCs. 3) The "white box" of monetary dumping Monetary dumping is essentially used by the US given the dollar's unique privilege allowing this country to borrow and reimburse its foreign debts in its own currency without being penalized by its depreciation, thus reinforcing the competitiveness of its products, notably agricultural ones. At the same time it can go on importing without being penalized by the dollar depreciation since most commodities and many industrial products are traded in dollars. Indirectly this allows many DCs whose currency is pegged to the dollar to practise the same monetary dumping, including of agricultural exports, as China has been blamed to do. However this concept of monetary dumping should be handled with caution: e.g. the high euro depreciation against the dollar in recent years can as well be imputed to a too restrictive monetary policy of the European Central Bank, refusing to reduce its interest rates since its sole objective is to avoid inflation, without consideration for economic growth. Most DCs are suffering unwillingly from a negative monetary dumping since, their domestic currency being hardly convertible, they have to maintain very high real interest rates to attract capital flows and limit capital outflows, avoiding at the same time a too large depreciation of their currency. Brazil is again a good case in point, having maintained in the last years astronomic real interest rates and a high Budget primary surplus to avoid a depreciation of the real, the end result being the slowdown of economic growth and a significant appreciation of the real having reduced Brazil's competitiveness since Indeed history and wisdom commands DCs to control strictly short term capital flows since it is illusory to think that DCs could get the confidence and convince capital markets. The very experience of the EU Member States, particularly France before the euro, shows that, with the freedom of short term capital movements, even these countries have been forced to maintain too high real interest rates to prevent attacks to their currencies, to the detriment of economic growth, without succeeding to convince the financial markets that their currencies would be stronger with lower rates. So that monetary dumping will only be avoided by coming back to fixed but adjustable parities, which would require to stop short term capital movements. Indeed the experience of China shows that controlling these flows has largely contributed to its growth performance. 7