INCEPTION REPORT FOR THE AGRICULTURE SECTOR STUDY

SUSTAINABILITY IMPACT ASSESSMENT OF PROPOSED WTO NEGOTIATIONS INCEPTION REPORT FOR THE AGRICULTURE SECTOR STUDY Prepared by Oliver Morrissey, Dirk Willem te Velde and Ian Gillson ODI, London, UK In association with: Impact Assessment Research Centre Institute for Development Policy and Management University of Manchester, UK Revised version: 27 April 2004

This report was prepared with financial assistance from the Commission of the European Communities. The views expressed herein are those of the Contractor, and do not represent any official view of the Commission. This Report has been prepared for the European Commission under Framework Contract No Trade 01/F3-1 (Sustainability Impact Assessment of Proposed WTO Negotiations) Specific Agreement No. 3. Project Reports and information about the project are available from the project website: http://idpm.man.ac.uk/sia-trade SIA of WTO Negotiations Agriculture Sector Study Inception Report Page i

CONTENTS ABBREVIATIONS...1 EXECUTIVE SUMMARY...2 1. INTRODUCTION...6 2. REVIEW OF NEGOTIATIONS ON AGRICULTURE...8 3. STUDIES OF THE IMPACT OF LIBERALISATION OF TRADE IN AGRICULTURE...15 4. ELABORATION OF SCENARIOS...18 5 SCREENING I: SELECTION OF PRODUCTS...19 6. SCREENING II: COUNTRY GROUPS AND CASE STUDIES...26 7. OUTLINE OF APPROACH...31 8. LINKS TO THE OTHER SECTOR STUDIES...34 9. SELECTIVE REFERENCES...36 List of Tables Table 1: Value of Agricultural Trade by Region 1998-2002, billion dollars (excluding EU internal trade)... 7 Table 2: Derbez Proposals on Market Access... 11 Table 3: Derbez Proposals for Reductions in Domestic Support... 13 Table 4: Derbez Proposals for Reductions in Export Subsidies... 14 Table 5: Effects on World Agricultural Prices of Eliminating all Agricultural Policy Distortions, by Commodity and Policy... 16 Table 6: Effects of Liberalisation for Four Cash Crops... 16 Table 7: Agriculture Imports, India... 28 Table 8: Elasticity Estimates... 30 Annex 1: Terms of Reference for the Agriculture Study SIA of WTO Negotiations Agriculture Sector Study Inception Report Page ii

ABBREVIATIONS ACP AMS CAP CCA CGE CoA DG EBA EC EU FMD GDP IDPM IIED LDC LDC LIDCs MEDCs M&E NGO NTB OECD ODI OOECD RPDCs S&D SIA SP SPS SSG TOR TRIPS TRQs UN UNCTAD UNEP URAA USA WTO African Caribbean Pacific Aggregate Measure of Support Common Agricultural Policy Causal Chain Analysis Computable General Equilibrium WTO Committee on Agriculture Directorate General Everything-But-Arms European Commission European Union Foot and Mouth Disease Gross Domestic Product Institute for Development Policy and Management International Institute for Environment & Development Developing Country Least Developed Country Low-income developing countries (non-ldc) Major Exporting Developing Countries Mitigating and Enhancement Non-Governmental Organisation Non-Tariff Barrier Organisation for Economic Cooperation and Development Overseas Development Institute Other OECD, represents non-eu developed countries Relatively Protected Developing Countries Special and Differential Sustainability Impact Assessment Sugar Protocol Special Preference Sugar Special Agricultural Safeguards Terms of Reference Trade Related Intellectual Property Rights Tariff rate quotas United Nations United Nations Conference on Trade and Development United Nations Environment Programme Uruguay Round Agreement on Agriculture United States of America World Trade Organisation SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 1

EXECUTIVE SUMMARY The Inception Report provides the results of the preliminary screening exercise for the key sustainability impacts associated with liberalisation of trade in agriculture. The screening concentrates on identifying major product groups and specific products for focus, and on identifying country groups and specific countries for case study. The detailed SIA will be undertaken by an ODI team (Oliver Morrissey, Dirk Willem te Velde, Ian Gillson and Steve Wiggins) over the period May- September 2004. Assistance will be provided by IIED on assessing social and environmental impacts, and by in-country associates for the country case studies. The first section of the Inception Report reviews the importance of agriculture in world trade. Section 2 provides an overview of the current state of play on WTO negotiations regarding agriculture, and section 3 reviews some recent studies estimating economic effects of liberalisation proposals. These reviews inform our choice of scenarios for analysis, and these are set out in Section 4. The screening exercise is detailed in sections 5 (on commodities) and 6 (on countries), and Section 7 outlines how the SIA methodology is adapted to meet the specific circumstances of agriculture. Section 8 examines the links between the agriculture sector study and the sector studies for forest and distribution services. Negotiating Modalities on Agriculture Negotiations within the WTO on liberalisation of trade in agriculture identify three pillars, or components. The first is market access, reducing tariffs and non-tariff barriers to trade. Under current proposals, developed countries are expected to make the largest reductions in tariffs, and developing countries are required to make lesser reductions. The least developed countries (a sub-set of developing countries) are not required to implement any tariff cuts. The second pillar is reduction of export supports, especially export subsidies. The third pillar is trade-distorting domestic support, and a major negotiating issue here is which forms of domestic support are trade-distorting and which are exempted from reforms. As with market access, in the case of export and domestic support the developed countries are required to implement the greatest degree of liberalisation. In general, developing and least developed countries have minimal or no export or domestic supports. Scenarios for the SIA The study will take the current situation (i.e. current prices and patterns of trade and production) as the baseline. Three scenarios will be considered, one for each of the three pillars Tariff reductions - partial liberalisation. This scenario will apply percentage reductions in tariffs on agricultural imports. The degree of reduction will be greatest for developed countries, which will be projected to end up with the lowest levels of tariffs. The pattern of tariff reductions applied can be tailored to the type of country and product under examination. Reductions in export support. In our scenario, the effect of reductions in export support is represented by the effect on the world price, as it is this that generates changes in trade and production patterns. As the SIA will not model alternative scenarios, we will use the range of estimated world price effects from existing modelling studies to identify upper and lower bound estimates of the likely effects of potential reforms. The studies used will also include estimated effects on the countries reducing export support. Reductions in domestic support. The approach is the same as that for export support. The effect of alternative reductions in domestic support will be represented by the range of effects on the world price, as given in existing modelling studies. The studies used will also include estimated effects on the countries reforming their domestic support measures, and these results will inform the SIA for the developed countries. These scenarios will be used to generate effects of trade measures on world prices for reductions in export and domestic support, and on import prices for tariff reductions. These price effects alter incentives, leading to changes in production and trade patterns. We refer to these as adjustment or short-run effects. The SIA concerns how countries respond to these effects and their impacts. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 2

Screening I: Commodity Groups and Specific Products As it is not feasible for the SIA to address all agricultural products, we select six products that permit the SIA to address a very broad range of issues. The selection must include products affected by reforms to domestic and export support, including some that are important imports for developing countries and some that are important exports for different types of developing countries (especially the least developed). It is also important that the selection includes some products relevant to health and food safety issues, to food security concerns, to niche markets and to concerns of the poorest countries. We also want to ensure that the products chosen allow us to make links with the forestry and distribution services studies. The six products selected are: Wheat producers in developed countries receive support and exports are subsidised; liberalisation may have significant effects on world prices. Some developing countries are exporters, and benefit from liberalisation, others are importers and may be adversely affected by higher world prices. For the latter, an important issue is how domestic producers of wheat or substitutes are able to respond. Is a product for which GMO issues are relevant. Rice meets the same broad criteria as wheat, but tends to be more important for Asia, whereas wheat is relatively more important for other regions. Also allows us to consider issues relating to geographic indicators (such as basmati). Beef illustrates the important issues relating to meat/livestock, such as food safety and animal welfare. Is highly protected in some countries, and some developing countries are significant exporters. Provides a link to the forestry study, as expanding land for ranching has been associated with deforestation in Brazil. Sugar a major example of a product that is highly protected in developed countries, can be exported at low cost by some large developing countries, but is an important (relatively high cost) export product for many low-income developing countries. Sugar illustrates many of the tensions between different types of countries in the negotiations. Cotton illustrates a similar range of concerns to sugar, but tends to cover different countries. Also provides an example of niche markets for developing countries, in the case of organic and/or fair trade cotton. Green vegetables has emerged as a significant non-traditional export for many of the poorer developing countries. Is a good example of a product for which global value chains dominate the market, and provides a link to the distribution services study. Contract farming and food safety issues are also rlevant. Although the SIA will focus on only these six products, they cover most of the important issues in the negotiations and cover products important to different types of countries. Where appropriate, the SIA will refer to other products. Screening II: Country Groups and Case Studies Six country groupings or types will be covered in the study. The European Union (EU) and non-eu other OECD countries (OOECD) are the two groups to represent developed countries. For developing countries, four types are distinguished, for each of which we will select one country for case study, determined on the basis of how representative they are of the issue and crops we concentrate on. Developing countries that are significant net exporters for a wide range of products. Their main concerns will be increased access to foreign markets, and they are unambiguous beneficiaries from liberalisation. Brazil is a suitable example. Developing countries with a relatively protected agricultural sector, exporting some products but importing others. These countries can benefit from liberalisation in some products, but lose in others (where they reduce protection), and thus face mixed impacts. India is the example. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 3

Least developed countries, which currently benefit from the most preferential treatment. They typically export cash crops and import food grain (although many have constrained but significant domestic production capacity). These countries could benefit from liberalisation if they can increase exports or if higher import prices provide a stimulus to domestic producers. Tanzania is taken for the case study. Low-income developing countries that are not classified as least developed but are quite similar in terms of the pattern and efficiency of their agricultural sector. These countries may be expected to reduce tariffs by more than least developed, and compete with the more preferentially treated least developed countries in their export markets. Ghana will be taken as an example. The types chosen allow us to address not only the differential impacts of liberalisation across countries, but also the tensions between different types of countries in the negotiations. Specifically, we have developed versus developing exporters, exporters versus importers among developing countries, and least developed versus low-income countries. Outline of Proposed Approach The SIA approach adopted starts from a generic causal analysis at the level of country and commodity groups, concentrating on quantifiable impacts on prices and associated effects on production and trade. These quantifiable impacts are then explored further to identify the most likely significant impacts (economic, social and environmental). Country-level and commodity-specific case study evidence is used to provide qualitative and quantitative information on impacts, and a number of country case studies are undertaken to explore linkages in greater detail. Five steps can be distinguished for the SIA. Step 1. Identify the trade measures. For the subsequent analysis, all trade measures (scenarios) will be represented by their price effects. Tariff reductions alter import prices, whereas reductions in export and domestic support alter world prices. Step 2. Identify the adjustment effects: the changes in relative prices induce changes in patterns of production and net trade effects. Elimination of tariffs means that the price of imports is reduced, which normally implies an increase in imports, and perhaps a reduction in domestic production.. The elimination of export subsidies will tend, in contrast, to increase world prices and therefore increase import prices, at least in the short-run. The countries removing subsidies will lose export market share, and could become net importers, whereas exporting countries that did not have subsidies will increase their market share. Countries that were initially net importers will face higher prices, and the impact depends on whether domestic producers can respond to the increase in incentives. Step 3. Identify the economic effects (economic SIA). In the case of imports, it is important to distinguish domestic producers that compete with the product from those that consume the product (consumers can be of final products or purchasing intermediate inputs, such as animal feed). In general, consumers gain from lower prices but competing producers lose (lower production and/or lower profits) unless they can respond with increased efficiency. Producers of the product for export would be expected to gain and may increase investment and employment. An important issue regarding agriculture is that possibilities for crop substitution are quite significant, although the extent depends on cross-price and factor substitution elasticities, which vary by country and farming system. In general, employment effects can be short-run adjustment costs whereas investment effects are more likely to occur in the medium to long term. Step 4: Identify the social effects (social SIA). The social nature of agriculture will vary by country and crop. In developed countries this is included in the notion of multifunctionality, in developing countries it relates to discussions of livelihoods. As trade liberalisation affects the mix of crops grown, it may have important community and livelihood impacts, varying according to the social nature of farming systems within different regions of a country. These can only be considered in detail in SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 4

country case studies. In the assessments of country and commodity groups, we can identify the most likely social impacts. Step 5: Identify the environmental effects (environmental SIA). Three broad types of impact can be distinguished. The first is land degradation, the impacts on the sustainable use of land, and irrigation with impacts on river systems. The second is broader environmental degradation, which can have impacts on biodiversity and environmental quality. A third type of impact relates to animal welfare. The SIA will consider all of these potential impacts, which may of course be positive or negative and will differ by product and across and within countries. There is another set of impacts that are both social and environmental in nature, for example regarding choices between organic and GMO crops and the (related) role of multinationals. If liberalisation increases the influence of multinationals, this can have major impacts. For example, contract farming is becoming more widespread and although it tends to have economic benefits it may impose social costs. Organic farming may be encouraged to access niche markets, and this could have favourable social and environmental impacts. A related issue, for developing countries, is fair trade initiatives, which may be encouraged by liberalisation. Where possible and appropriate, the SIA of agriculture will be linked to the other two studies. Distribution services are particularly relevant as agricultural products are processed and traded within distribution chains, what are known in the literature as value chains. There are unlikely to be many general links between the forestry and agriculture studies, but there will be links in particular cases. In some countries, where expanding agriculture means bringing more land into use, increased agriculture production can be at the expense of depleting forests (e.g. land clearing). This may apply to Brazil, and will be addressed in that study. The SIA will endeavour to be as comprehensive as is feasible in covering the most significant impacts on different types of commodities and countries, incorporating cross-cutting effects, relationship with the other SIA studies and identifying appropriate mitigating and enhancing measures. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 5

1. INTRODUCTION Multilateral liberalisation of trade in agricultural commodities offers all countries (developed and developing) potential gains from trade. Increased market access, as other countries reduce their barriers to imports, would allow many developing countries to increase their exports, to developed countries and globally. Import liberalisation also offers benefits: consumers gain from access to a wider variety of cheaper goods, and competition from imports encourages domestic producers to become more efficient. A less restricted and less distorted global trade regime encourages increased efficiency in the allocation of resources, both within and across countries. The gains are not evenly distributed and some countries, and some producers within countries (especially those who lose protection and are constrained in their ability to increase efficiency), will incur losses. Multilateral trade liberalisation in agriculture will affect patterns and intensity of production, within and across countries, and will therefore have social and environmental impacts, both positive and negative. The purpose of the SIA is to identify the probable distribution of gains and losses associated with the variety of economic, social and environmental impacts. The study will recommend mitigating and enhancement measures that can promote benefits, minimise losses and compensate losers. There are three basic components to negotiations on liberalisation of trade in agriculture reduction of tariffs and non-tariff barriers (NTBs), reduction of export support (especially subsidies) and removing the trade distortions associated with domestic support measures. The SIA study will consider each of these separately and assess their combined effects, specifically the effects of liberalising imports and expanding exports in particular sectors of agriculture in particular types of countries. The SIA will focus on the impacts of those reforms that are most directly related to trade, and specifically will focus on the impacts on developing countries. Although general impacts on the EU and other developed countries will be addressed, more detailed analysis and country case studies will be confined to developing countries. In the context of agriculture, where subsidies for domestic farmers are significant and pervasive in many developed countries (especially in the EU and US), reforms to domestic support will have significant impacts on farmers, agribusiness and consumers in those countries. Although such impacts are not ignored, the economic, social and environmental impacts on developed countries will not be addressed in detail. Exporting countries (actual or potential) expect to benefit from enhanced market access. However, the extent of benefits will vary for different countries and enhancing measures may be required to ensure that benefits are realised. Cheaper imports benefit consumers of final and intermediate goods. There will be losses and adjustment costs in countries opening up to increased competition from imports, and these costs are likely to be greater the higher the degree of initial protection and the poorer the country. As poorer countries typically have inflexible economies and their agricultural producers face multiple constraints (e.g. limited access to inputs, irrigation, markets, technology, etc), they will face difficulties in meeting the costs and actually making the required adjustments. One cannot presume that in all cases liberalisation will have a beneficial economic impact (the costs and/or constraints on adjustment may be too great in some countries, or for certain producers). Even where the economic impacts are positive, it cannot be assumed that the environmental and social impacts are always positive or insignificant. Where adverse impacts are likely, mitigating measures will be discussed, distinguishing both short-run and long run issues. The study will cover the range of agricultural commodities, drawing distinctions between food and cash crops, temperate and tropical products, and crops and livestock (noting that measures relating to the latter can impact on animal feeds). As it is not feasible or practical to try and address the full range of agricultural products in any detail, the analysis will concentrate on specific products. The products are selected to represent broad categories of agricultural commodities: food grains (wheat and rice), livestock (beef), cash crops (cotton, sugar) and horticulture (green vegetables). The products are also selected to ensure that a wide range of issues relevant to the negotiations can be addressed. For example, most of the products are affected by all three elements of reform (tariffs, export and domestic support), all are important exports for some developing countries, some are important imports for developing countries, and some are especially important for the least developed countries. The commodity impact analysis concentrates on the products in question, at both country and global levels. Where appropriate, especially in the country studies, other products will be considered. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 6

The overall sustainability impact on any particular country will depend on the composition of its agricultural trade, the structure of the agricultural sector (including economic and social contexts) and the nature of production (encompassing how agriculture relates to the environment). For any country, the beneficial (adverse) impact for one product may be offset by adverse (beneficial) impacts on other products. It is not feasible to consider all countries, and the study will consider six representative groups of countries, two developed and four developing. The EU and other OECD are the two groups of developed countries. The four developing country types are chosen to represent major exporters, countries with high levels of protection, least developed countries (LDCs) and low-income countries (whose agriculture sector is similar to that of LDCs, but who cannot avail of LDC status). Within each developing country type one country will be selected for a detailed case study. This Inception Report provides the results of the preliminary screening exercise for the key sustainability impacts associated with liberalisation of trade in agriculture. The screening concentrates on identifying major product groups and specific products for focus, and on identifying country groups and specific countries for case study. Section 2 provides an overview of the current state of play on WTO negotiations regarding agriculture, and section 3 reviews some recent studies estimating economic effects of liberalisation proposals. These reviews inform our choice of scenarios for analysis, and these are set out in Section 4. The screening exercise is detailed in sections 5 (on commodities) and 6 (on countries), and Section 7 outlines how the SIA methodology is adapted to meet the specific circumstances of agriculture. The detailed SIA will be undertaken by an ODI team (principally Oliver Morrissey, Dirk Willem te Velde, Ian Gillson and Steve Wiggins) over the period May-September 2004. Assistance will be provided by IIED on assessing social and environmental impacts, and by in-country associates for the country case studies. To complete this section and put the study in context, we briefly review the place of agriculture in world trade. Importance of Trade in Agriculture Table 1 shows the value of agricultural trade, by region in 1998 and 2002. Agriculture accounts for about ten per cent of total world merchandise trade, similar in value to all mining products (including oil). However, trade in agriculture has not expanded as rapidly as global trade, i.e. the rapid sustained growth has been in manufactures. Developing countries share of world agricultural exports rose slightly from 36% in 1990 to 38% in 1998, a significant proportion of which is trade between developing countries. The EU is the single largest market for developing countries, importing almost 30% of their agricultural exports in the late 1990s, compared with 15-20% for North America and about ten per cent for Japan. Table 1: Value of Agricultural Trade by Region 1998-2002, billion dollars (excluding EU internal trade) Region 1998 2002 Exports Imports Exports Imports Western Europe 76.0 100.8 76.8 96.5 European Union 56.1 64.4 57.4 61.2 Switzerland/Norway 2.7 7.1 2.8 7.3 Transition Economies 17.2 29.3 16.6 28.0 North America 72.7 52.7 72.1 57.8 Caribbean 6.1 4.1 5.0 4.8 Asia 70.4 101.7 72.1 107.3 Japan 1.6 34.8 1.6 33.6 Australia/NZ 20.0 3.6 22.2 4.5 Developing Asia 48.8 63.4 48.3 69.1 Africa 19.5 22.1 17.7 22.3 Middle East 5.4 19.9 6.5 18.8 Latin America 58.0 26.3 59.2 24.4 Total agricultural trade 308.1 327.5 309.3 331.8 Source: Derived from UN COMTRADE statistics. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 7

The domestic support policies of most developed countries, especially the EU and US, have had a significant effect in distorting world trade in many agricultural commodities. By restricting imports and subsidising exports, these policies depress world prices, which constrains the ability of developing countries to export and thus denies them market share. Furthermore, the subsidised exports undermine the competitiveness of local producers in importing countries. This could create food security problems in importing (developing) countries, although this is unlikely as in many cases the subsidised imports do not compete directly with local produce. In countries that are net food importers, consumers benefit from the subsidy. In the European Union, WTO negotiations and the heavy financial burden of the Common Agricultural Policy (CAP) have constituted strong pressure to liberalise trade in agriculture. The CAP already accounts for about half the EU budget, although farming represents less than five per cent of total employment and less than 1.5 per cent of EU GDP (Serger, 2001). This understates the true importance of agriculture, as agri-business (especially food) probably accounts for a fifth of GDP, and many of the subsidies actually go to business rather than farmers (this is even more relevant to the US). This has resulted in the situation where the CAP fails to meet the needs of most farmers, is a burden on consumers and distorts world trade, resulting in strong impetus for change. Proposed reforms include Agenda 2000, which sets new rules for market intervention and reduces price support, especially for cereals (EC, 2000). A similar distinction, between domestic support and trade per se, arises for other developed countries with high protection and domestic support (e.g. US, Japan, Norway and Switzerland). Consequently, negotiations on liberalising trade in agriculture have been complicated by the need to address reform of domestic support in addition to trade policies. Had it only been tariffs and non-tariff barriers at stake (as for most other sectors, where export subsidies are prohibited), liberalisation of trade in agriculture could have proceeded faster. For the purposes of this study it is essential to distinguish the issues of domestic support and trade. Developed countries are not required to eliminate support for their domestic agriculture sectors. The issue is how they provide support, and specifically that they do so in a way that does not distort world trade. In our analysis we will use projections of the effect on world markets of removing the trade-distortions associated with domestic support. Typically, these will be represented as estimated effects on world prices, from which one can infer potential effects on exporting and importing countries. Elimination of export subsidies will also be represented as affecting world prices. We will represent tariff and NTB liberalisation as affecting domestic prices (i.e. lower tariffs reduce import prices). It follows that we do not need to review the modalities that are being discussed in negotiations on agriculture in the WTO in great detail, as our scenarios will be relatively simple. The direct trade reforms are the reductions in tariffs and non-tariff barriers that these countries implement, as it is these that influence the price in the local market of agricultural imports (given world prices). Reforms to export and domestic support in developed countries will affect domestic and world prices, and these price effects will induce changes in patterns of net trade. The effect on the world price is an appropriate summary indicator of the effect on relative incentives that will determine the impact on developing countries. The detail of the reforms will also have implications for the developed countries. We will not undertake any global modeling or simulations in this study, but will simply take estimates of world price effects from studies that are available. 2. REVIEW OF NEGOTIATIONS ON AGRICULTURE The Uruguay Round Agreement on Agriculture (URAA), which was incorporated into the WTO, aimed to liberalise agricultural trade. The Agreement included specific commitments by WTO Member governments to reduce protection in the areas of market access, domestic support and export subsidies (the three pillars of the URAA). The implementation period for these country-specific commitments was six years, beginning in 1995. For developing countries, however, this reduction, along with other commitments, could be implemented over a ten-year period. Agricultural negotiations are conducted within the WTO by the special (negotiating) session of the WTO SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 8

Committee on Agriculture (CoA), set up by the URAA. This Committee is responsible for overseeing the implementation of the Agreement, as well as future negotiations. The URAA (Article 20) ensured that new negotiations would begin in 2000 to continue the process. These negotiations are now well under way and the Doha Ministerial declared that modalities for further commitments [in agriculture], including provisions for special and differential treatment, [were] to be established no later than 31 March 2003. 1 These modalities are to set out targets including numerical targets and rules-related elements, based on which Members will subsequently prepare their individual offers. Defining modalities is one of the most critical stages of the agriculture talks, as the modalities to be agreed will determine the shape of the final outcomes of the agriculture negotiations under the Doha mandate. On 12 February 2003, Stuart Harbinson, Chair of the CoA, submitted his first modalities proposals. Despite leaving unresolved the issues around the further reduction of Members tariffs, export subsidies and domestic support, these proposals offered options for modalities even in the most contested areas, such as that of the formula for tariff reduction. On substance, the paper comprehensively addressed special and differential treatment for developing countries in most of the modalities items as provided for in the Doha Declaration although no particular role was assigned to agricultural non-trade concerns on an across-the-board basis. Following intense discussions of the first proposal at the Special Session held between 24 and 28 February 2003, a number of participants indicated that the draft did not correspond in various ways with their vision of the modalities that needed to be established. Both importers and exporters of agricultural products expressed disappointment with the document, seeing proposals as either too ambitious or not ambitious enough. Most WTO Members did express a willingness to examine technical matters, such as tariff quota administration, some aspects of special and differential treatment in the area of market access, and export support measures (e.g. export credits, food aid,). However, although a number of useful suggestions emerged, positions in key areas remained far apart. Many developing countries insisted on the immediate elimination of export subsidies, elimination of trade-distorting support and capping, and tighter rules for non-distorting support. On 18 March 2003, Harbinson issued a revision of the first draft modalities, 2 based on the outcome of negotiations and consultations among WTO Members. However, having actually intended to prepare a third modalities draft, he found himself unable to do so, owing to Members inability to compromise on the key parameters for an agricultural framework accord. There were differences in views with regard to appropriate provisions for special and differential treatment, even among developing countries. There were also differing views regarding how much and what ways to take into account non-trade concerns, such as food security, poverty alleviation, rural development, protection of the environment, food safety, and animal welfare. In particular, WTO Members were dissatisfied by the fact that the revised draft ignored what they called the majority view (75 out of 145 WTO Members), which favoured the use of the Uruguay Round formulae for tariff reduction as opposed to Harbinson s three-band approach. Although most of the members of the WTO agreed on the need to make progress in the reform of agricultural markets, consensus did not emerge as to how to achieve this objective. Finally, on 31 March, Harbinson had to declare formally that Members efforts to agree on agricultural modalities by the end-march deadline had failed. Agricultural negotiations improved in the period immediately preceding Cancún, with the EU and the US having tabled a joint paper outlining a framework for agricultural modalities on 13 August 2003. The document, which differed radically from those issued earlier by Harbinson, prompted a complete counter-proposal from 20 developing countries, as well as less comprehensive proposals and comments from a number of other WTO Members. Based on these contributions, the Chair of the General Council, Carlos Pérez del Castillo, issued a compromise framework for establishing modalities in agriculture the Pérez del Castillo text on 24 August 2003. This was attached as Annex A to the draft Cancún Ministerial text. Further discussions in Cancún led to a revised annex in 1 WT/MIN(01)/DEC/1 2 TN/AG/W/1/Rev. 1 SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 9

the new draft declaration, the Derbez text, which was compiled by the Ministerial Chair, Mexican Foreign Minister Luis Ernesto Derbez, and circulated on 13 September 2003. On 14 September, the WTO Ministerial Conference held in Cancún ended without consensus on any of the issues under discussion. One of the principal reasons for the Members failure to adopt the draft Ministerial Text formally was continued disagreement on the substance of the agriculture draft, largely based on the EU-US joint paper. In the remainder of this section, we outline the proposals made in the Derbez text. A key feature of the Derbez proposal is the general absence of numbers or dates for reductions in tariffs, domestic support and export subsidies (the general expectation was that these were to be negotiated later). As such, information contained within square brackets [ ] in the following sections are estimates based on number or details proposed in the negotiations pre-cancún (as indicated in the footnotes). This is done as we require some numbers on which to base our scenarios for the SIA analysis. Market Access Of the three pillars covered by the URAA, barriers to market access have been estimated as inflicting the greatest damage to efficient agricultural exporters, although the effects of such barriers vary widely among countries. The Uruguay Round committed industrial countries to reducing agricultural tariffs by 36% on a simple average basis and by a minimum of 15% at the product level. In order to minimise liberalisation, many countries used the degrees of freedom implied by simple averaging to apply proportionately higher reductions to the lowest tariffs. As a result, very little liberalisation took place in highly protected sectors, like sugar and dairy. Tariffication of non-tariff barriers also produced many specific tariffs that, by making the level of protection contingent on the level of international prices, distorted the pattern of production and trade more than ad valorem tariffs. Tariff escalation also remained a prevalent characteristic of agricultural protection. Tariff rate quotas (TRQs) were a response to the URAA obligation to provide minimum access to markets: low in-quota tariffs facilitated imports up to a threshold level, above which the tariff rose steeply. The utilisation rate of TRQs has been declining but they remain highly discriminatory, as most are country-specific. The allocations to specific countries are most prevalent for dairy products, sugar and beef. The URAA developed an additional trade measure, the special agricultural safeguards (SSGs). The products eligible for protection by these were those that had undergone a tariffication of non-tariff barriers (NTBs) and that could only be invoked after quotas were filled. A loophole was that these safeguards could be implemented without an injury test: safeguards were triggered by certain threshold levels on import prices and quantities. In the URAA, eight OECD countries retained the right to use SSGs on their tariffied products. On market access, Derbez proposed a three-pronged approach to tariff cuts, subject to a minimum average cut in tariffs across all agricultural products (see Table 2). Least developed countries were to be exempt from reduction commitments. In addition, the Derbez text proposed that developed countries provide duty-free and quota-free market access for agricultural products originating from least developed countries. Within the market access modalities, some flexibility was provided for sensitive products: increases in market access could be achieved through a combination of tariff reductions and increases in TRQs. To address tariff peaks, the Derbez text proposed a cap for developed country tariffs. Tariff escalation was to be managed by a requirement that tariff reductions on processed products be increased (by an unspecified multiple) if the tariff on a processed good were higher than that in its primary form. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 10

Table 2: Derbez Proposals on Market Access Developed Countries (i) Approach percentage [33%] of tariff lines cut using [36%] * linear reductions in average tariffs, subject to a minimum [15%] * cut per tariff line Time Period [6 years] * (ii) percentage [33%] of tariff lines cut using the Swiss formula with a coefficient of [25] ** [6 years] * (iii) percentage [33%] of tariff lines would be duty-free [6 years] * Developing Countries (i) percentage [33%] of tariff lines cut using * [24%] linear reductions in average tariffs, subject to * a minimum [10%] cut per tariff line Delayed implementation [10 years] * (ii) percentage [33%] of tariff lines cut using the Swiss formula with a coefficient of [37.5] ** Delayed implementation [10 years] * Least developed countries (iii) percentage [33%] of tariff lines would be bound between 0% and 5% Exempt from reduction commitments Delayed implementation [10 years] * Notes: * Following the Uruguay Round, developed countries committed to reducing agricultural tariffs by 36% on a simple average basis and a minimum reduction of 15% at the product level over six years. Developing countries committed to reducing agricultural tariffs by 24% on a simple average basis and a minimum reduction of 10% at the product level over 10 years. ** A Swiss formula is defined as: ( a T0 ) T1 = ( a+ T ) 0 where T 0 is the initial bound tariff rate and T 1 the final bound rate. This approach produces much steeper cuts on higher tariffs. Proposals from several countries pre-cancún suggested leaving a maximum tariff of 25% in developed countries (requiring a developed country coefficient no greater than 25). Assuming developing countries are required to make two-third of the cuts of developed countries, as in the Uruguay Round, this would imply a developing country coefficient of 37.5. Special Products In addition to allowing developing countries to make lower tariff reductions and to have longer implementation periods, the Derbez text proposed that developing countries be provided with special flexibilities with respect to their commitments for a (not defined) number of products deemed important for food security, rural development and livelihood concerns. Such special products would be subject to fewer liberalisation commitments, with a view to maintaining a certain level of tariff protection. In particular, special products would only be subject to linear cuts; where tariff bindings were deemed to be very low there would be no requirement to reduce tariffs. The Derbez text provided no indication as to the manner in which special products were to be defined and selected, although a number of developing countries have requested that they be self-selected. 3 3 These are the Dominican Republic, Honduras, Kenya, Nicaragua, Panama and Sri Lanka. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 11

Safeguards Safeguards are temporary contingency restrictions on imports taken in order to deal with special circumstances, such as a sudden surge in imports. These restrictions normally come under the Safeguards Agreement but the Agriculture Agreement has its own special provisions (Article 5). In agriculture, unlike with normal safeguards, higher safeguards duties can be triggered automatically when import volumes rise above a certain level, or if prices fall below a certain level. In addition, it is not necessary to demonstrate that serious injury is being caused to the domestic industry. The special agricultural safeguard (SSG) can only be used on products that have been tariffied these amount to less than 20% of all agricultural products (as defined by tariff lines ). They cannot be used on imports within the tariff quotas and they can only be used if the government has reserved the right to do so in its schedule of commitments on agriculture. For developed countries, the Derbez text proposed that the use and duration of the SSG remain under negotiation. For developing countries, in addition to the concept of Special Products, the Derbez text proposed the establishment of a new special safeguard mechanism (SSM) for use on certain products and under certain circumstances (to be negotiated). There is some concern about how an SSM will relate to the provisions regarding special products. Domestic Support During the Uruguay Round, negotiators attempted to separate domestic policies that had no direct effect on agricultural trade (e.g. government-supported research) from those that did have clear trade and production-distorting effects (e.g. government-fixed minimum purchase prices). The first were included in what is called the Green Box and the second in the Amber Box. Under the URAA, policies in the Amber Box were subject to reduction commitments whereas those in the Green Box were not and could even be increased. In addition to the Green Box, three other forms of assistance were not affected by the URAA reduction commitments. These were those which corresponded to (i) developmental objectives in developing countries; (ii) de miminis levels according to which 5% (10% in the case of developing countries) of the contributions in the Amber Box were exempt; and (iii) direct payments for production-limiting programmes or the so-called Blue Box (mainly used by the EU). The commitment that developed countries made under the URAA was to reduce, in the base period, by 20% over a period of six years, the value of domestic assistance granted by Amber Box policies (aggregate measure of support or AMS. Figures representing the reduction of AMS from the base period (1986-88) to 1997 indicate that this obligation was met. The EU made reductions from $80.7 billion to $56.9 billion; Japan from $33.8 billion to $26.2 billion; and the US from $23.9 billion to $6.2 billion. However, the economic impact of this compliance was lessened as a result of not only an increase in Green Box subsidies but also several other considerations. First, owing to low international prices in the base period, domestic policies afforded very high levels of assistance. Secondly, the levels of AMS in the base period proved to be inflated by policies that had been transferred to the Blue Box, which was free from reduction commitments. This implies that it was possible for a country to have complied with the URAA simply by making this switch and then notifying the WTO. Thirdly, the commitment to reduce AMS at the aggregate and not the product level implied that assistance to specific commodities could be increased. Fourthly, the AMS excluded support provided by protection. Finally, it is thought that Blue Box policies are more distortionary than Green Box policies and yet the former were excluded from the URAA obligations. The Derbez Text The Derbez proposals for reductions in domestic support are illustrated in Table 3. The overall architecture of the URAA is to be maintained, with the three categories of domestic support measures preserved. SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 12

Table 3: Derbez Proposals for Reductions in Domestic Support Domestic Support: Amber Box (trade-distorting measures) 1. Developed countries: a) Reduce the Final Bound Total AMS in the range of [ ]% [60] * % [over 5 years] * b) Product-specific AMS capped at their respective average levels during the period [ ] [2000 02] 2. Developing countries: As above but with lower reductions [40%] * and longer implementation periods [10 years] * 3. Least developed countries: No change Domestic Support: Green Box (at most, minimally trade-distorting support) 1. Developed countries: No reductions 2. Developing countries: No reductions 3. Least developed countries: No change Domestic Support: Blue Box (direct payments under production-limiting programmes) 1. Developed countries: a) Not to exceed 5% of the total value of agriculture production in the 2000-2002 period by [2007] ** b) Subsequently, subject to an annual linear reduction of [10] ** % for a further period of [5] ** years 2. Developing countries: As above but with lower annual linear reductions [3%] ** and longer implementation periods [10 years] ** 3. Least developed countries: no change Notes: * The revised Harbinson text proposed reducing AMS from final bound levels by 60% over five years (40% over 10 years for developing countries). ** The revised Harbinson proposal advocated capping and then reducing blue box support for developed countries by 50% over five years (33% over 10 years for developing countries). The Derbez text proposed broadly reducing Amber Box support by a range of percentages to be negotiated countries with larger trade-distorting supports were to make a greater effort. The proposal specified that the reductions should be on total AMS (i.e. for the whole agricultural sector) but that product-specific AMS should be capped at some (unspecified) historical level to reduce the ability of governments to shift support between products. The Derbez text also required a reduction in the combined value of supports in the Blue Box, de minimis and Amber Box, compared with the levels in 2000. Under Blue Box support, the Derbez text proposed modifying the definition removing the reference to production-limiting programmes from Article 6.5 of the Agriculture Agreement and limiting this to 5% of the value of agricultural production by the end of the implementation period. In addition to capping the Blue Box, annual linear reductions in support were to be made beyond the end of the implementation period. The Derbez text maintains the Green Box virtually unchanged, other than calling for a review to ensure that it is minimally trade-distorting. Export Competition Article IX of the URAA listed six categories of export subsidies that were to be subject to reduction obligations. These included: direct payments by governments to firms, industries or producers contingent on export performance; subsidised stock exports; producer-financed export subsidies; export marketing-cost subsidies; export-specific transportation subsidies; and subsidies on goods incorporated into exports. The URAA obliged industrial countries to reduce over six years the base SIA of WTO Negotiations Agriculture Sector Study Inception Report Page 13