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Brett Williams Faculty of Law University of Sydney

Comparing What Might Have Been with the Likely Outcome of the Doha Round Agriculture Negotiation The Williams Text v The Falconer Text. Brett Williams Faculty of Law University of Sydney. Agriculture is a Microcosm of the GATT. Allowing Member States to achieve their Objectives

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Brett Williams Faculty of Law University of Sydney

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  1. Comparing What Might Have Been with the Likely Outcome of the Doha Round Agriculture NegotiationThe Williams Text v The Falconer Text Brett Williams Faculty of Law University of Sydney

  2. Agriculture is a Microcosm of the GATT • Allowing Member States to achieve their Objectives • Encouraging Members States to Achieve Objectives by Choosing the Most Efficient Policy Instrument to Do So (instead of choosing trade measures • Politicians won’t do this unilaterally – they will choose trade measures more often than is efficient • So we have designed a system to help. • The Design of the System Does Matter

  3. Two Theories on How What Trade Agreements Do and How They Work • On the terms of trade theory of trade agreements (Bagwell & Staiger): nations exchange commitments not to impose terms of trade losses on each other SO the trade agreement is a way to avoid the PD outcome which would arise from single nations attempting to maximize their own national welfare by imposing optimal tariffs but which leads to retaliation so that in fact they end up diminishing their welfare rather than enhancing it; • On the political support theory of trade agreements (eg Ethier 2002):politicians exchange market access to supply each other with political support SO the trade agreement is a way to avoid the PD outcome which would arise from politicians in individual nations attempting to maximize their own political welfare which in fact leads to higher protection (etc) and lower welfare for the people within the nation

  4. Protecting People from Politicians • Both: treaty provides an additional layer of quasi constitutional constraint to protect people from their politicians • To Guide Politicians to an outcome different from what they would otherwise choose • Eg. low protection instead of high protection • (eg comparisons with similar functions of EC law: Tumlir (1986) or of US constitution Farber & Hudec (1994).

  5. For objective of Wealth Transfer which Choice of Policy Instrument Would Rank 1st in terms of:

  6. Politician Can Enhance Own Political welfare by choosing: 1 High level of protection 2 High cost (most indirect) policy instrument 3 High dispersion between rates of protection 4 discriminatory preferences Economic Welfare of Citizens Enhanced by choosing: 1 low level of protection 2 low cost (most direct) policy instrument 3 low dispersion between rates of protection 4 non-discrimination Politicians Choosing To Maximize Their Own Political Welfare But Minimize Their Citizens’ Welfare

  7. + Import Competing Producers - Consumer - Taxpayers - Exporting Producers + Sympathy for Losers (SWF) = nth Best Decision + Import Competing Producers - Consumers - Taxpayers - Exporting Producers - NPV of Support from Long Term Prosperity - Support of Rule of Law + Sympathy for Losers (SWF) = 1st Best Decision Change Politicians Decision

  8. What Makes the System Work • 1 Reciprocity • 2 Non-Discrimination • 3 Gradualism • What does Reciprocity Entail? • Rules that Prevent Reciprocity from Being Undermined • Ranking of Instruments: stricter rules on measures which undermine reciprocity the most (QRs) , less strict on Measures which only undermine Reciprocity a little • (corresponds to economic ranking of instruments for achievement of wealth transfers set out above (See Bhagwati (1971))

  9. What is our Starting Point with Agricultural Trade? • Discrimination = preferential margins • Quantitative Restrictions – Annex 5(K, P), Safeguards – AS, AoA Art 5, QRs by Import Monopolies, TQs • Tariffs – Average Agricultural % > Average Industrial %; high dispersion and high disparity • 6 digit lines, 8 digit lines – Eg (source WTO Tariff profile 2006) • Cereals: > 500% (Egypt, Japan, Switzerland, Norway, Sth Africa. Korea) >150 (US, Canada, Turkey, Mexico) >100% (EC, India) • Dairy: >400% (Japan, Switzerland, Norway) >200% (EC, Indonesia), >100% (US, India) • Animal Products: >400% ( Japan, Canada, Switzerland, Norway), >200 (EC, Turkey, Mexico) , >100% (India, Sth Africa) • Fats and oils: >400% (Japan, Korea), >200% (Canada, Switzerland, Norway, Mexico, India) >100% (US), • Sugar: >400% (Switzerland), >200% (Norway, Korea, Mexico), >100% (US, EC, Japan, Turkey, India, Sth Africa) Cf: Nothing over 80% (Philippines) 65% (China), 55% (Brazil), 35% (Argentina) • Export Subsidies – Bindings a significant levels; • Also export credits, consumer funded ES (export monopolist controls Q of domestic supply) • High Per Unit Subsidies linked to Production – for OECD countries unevenly spread over particular products – very high DS on particular products

  10. Priorities for Agricultural Negotiation • Reduce Discrimination (Diminish Diversion from existing Discrimination) • Eliminate all tolerance of Quantitative Restrictions • Reduce Tariff as Much as possible (Force support onto the government budget instead of import tariffs as far as possible) • But Tariff Cuts not too high (Gradualism) • Aim for Reciprocity as far as possible at least in the long term (and as far as reductions are welfare enhancing) • Leave sovereignty to achieve objectives with freedom to choose least inefficient policy instrument ( Means leaving all Members free to impose some subsidies and leaving some Developing Members free to retain some tariffs) • As far as possible squeeze government funded support away from links to production – encourage box shifting to more efficient policy instruments

  11. Compare with Negotiating Priorities in the Doha Round • US & Cairns proposal beyond feasible gradualism • EC proposal of minimum 15% cuts & G10 proposal for sensitive products inadequate to provide economic gains • Cairns Group accedes to the concept of excepting products from reductions & seeks massive reductions in AMS • G20 & G33 seek even broader exemptions from reductions & even more massive reductions in AMS • EC and G10 dig in on sensitive products – others focus on TQs; • US & G10 dig in on AMS – others focus on preventing box shifting • Leads to • On market access where > 90% of gains are available: Massive Exceptions losing out on the biggest gains • On Domestic Support where < 10% of gains are available: application of pressure that makes it harder to capture the 90% of gains from reducing import barriers and creation of complex rules still leaving scope for high per unit product specific subsidies on particular products which will only be able to be adjudicated upon after the event.

  12. One set of rules or Two • The Williams Text: Move as far as possible toward having No separate Agreement on Agriculture • The Falconer Text: entrenches many separate rules for agricultural trade

  13. Eliminate Quantitative Restrictions: Williams • Terminate the AoA exception in Annex 5 • AS Art 5.1 – prohibit QRs as safeguards • AoA art 5 – eliminate QR aspects • Stop limits on TQ Volumes: Turkey Rice helps but better to Mandate Auctioning of TQ volumes • (Art II:1(b),2nd sentence does not apply: Korea Beef 1989 saying II:4 did not apply to price gap caused by quota volume) • Stop QRs by Import Monopolies: helped by Korea Beef 1999 & insistence on private trader TQ entitlements but better to Prohibit Monopoly or exclusive import rights

  14. Eliminate Quantitative Restrictions: Falconer • Terminate the AoA exception in Annex 5 - NO • AS Art 5.1 – prohibit QRs as safeguards - NO • AoA art 5 – eliminate QR aspects - Almost • Stop limits on TQ Volumes: Turkey Rice helps but better to Mandate Auctioning of TQ volumes NO • (Art II:1(b),2nd sentence does not apply: Korea Beef 1989 saying II:4 did not apply to price gap caused by quota volume) • Stop QRs by Import Monopolies: helped by Korea Beef 1999 & insistence on private trader TQ entitlements but better to Prohibit Monopoly or exclusive import rights NO

  15. Reduce Import Tariffs: Williams • Finish Tariffication – convert all duties to ad valorem duties on day 1 • What size tariff reductions? • Dispersion • – so harmonization necessary • - need to avoid averages and use line by line • Apply harmonization formula to all (NAMA and Agriculture) products and all countries • Must apply to all countries and all products

  16. Rates of Tariff Cuts: Williams

  17. Exceptions to Tariff Reductions: Williams • In theory: Members in situation in which: • 1 +ve production externalities & -ve consumption externalities Exceed -ve production externalities & +ve consumption externalities • 2 transaction costs of alternative non-trade policy are so large as to make trade policy the least cost instrument for addressing the externalities. • In practice: use per capita income as proxy • Group 1 – 50% longer implementation periods • Group 2 – sliding scale to 100% longer implementation period • Group 3 – sliding scale to 150% longer implementation period • Group 4 – 150% longer implementation period + 2/3 rate of reduction • Additional delay to start of period for those without export subsidies

  18. Allowance for Tariff Increases • Article XXVIII • -in exchange for reducing tariffs on other products • Clarify that adjustments to Schedules must conform to Art XI: i.e no TQs (adopt a specific waiver for existing TQs)

  19. Tariff Reductions: FalconerTariff Conversion on Day 1: NO

  20. Summary of Market Access & Exceptions: Falconer

  21. Safeguard Tariff Increases: Williams • Available to All Countries – A on S – but outlaw QRs, and apply 5.1 so that justification required for using tariff instead of subsidy (transition for Groups II, II, IV) • Modify Art 5 so that: • Art 5 – version 2: for volume trigger (add ratchet mechanism on benchmark) 120% of trigger level with Max SSG 75% of Doha reduction; for price triggered: also require 110% increase in volume & halve the size of the price triggered safeguards • Art 5 – version 3 as for version 2 but set Max volume trigger to 50% of Doha reduction; for price triggered: halve size again • Available to Developed Countries – Art 5 version 2 until end of implementation period plus 5 years; then apply Art 5 version 3 • Available to Developing Countries – old Art 5 for 10 years, then Art 5 version 2 until end of implementation period plus 5 years; then apply Art 5 version 3

  22. Safeguard Tariff Increases: Falconer • Amendments to AoS: NO • Adjust AoA Art 5 – Quantity trigger lifted to 124%; Price trigger – half the SSG • New Developing Member SSM: not agreed [no time limit agreed] • Volume trigger: [105 - 130]% of 3yr avg etc: • Max Volume-triggered SSM of % of Bound rate or X percentage points [up to UR rate?] • Price trigger: [70 – 100]% of 3yr Avg. • Max Price triggered SSM of [50 -100]% of price gap or [50-100]% of Doha reduction

  23. Export Subsidies: Williams • Final Rules: • SCM Art 3.1(a) already applies or Set date for applying SCM Art 3.1(a) and letting AoA provisions on export subsidies lapse • This catches export credits • What about Export monopolies? • What about consumer financed export subsidies (like Canada Dairy & EC – Sugar) (i.e where there is a QR on domestic sales in presence of prohibitive tariff) • Solution is: prohibit QRs on domestic supply or reduce tariffs and prohibit import monopolies. • The transition during the interim period: • Reduce total outlay bindings • Add per unit subsidy bindings • Reduce per unit bindings • No more bindings on volumes (minimize the impact of the cross-subsidization decision in EC–Sugar)

  24. Export Subsidies: Falconer • Final Rules: • Not clear on whether AoA fades away and Art3.1 operates or if AoA continues to operate on zero bindings • Adds separate rules on export credits • Export monopolies – either prohibited or prohibit exercise of power that circumvents elimination of ES (but no limit on import monopolies – and too many exceptions from tariff reductions to remove prohibitive tariffs which facilitate consumer financed ES)

  25. Domestic Support: guiding principles • 90% of welfare gains come from reducing tariffs & only <10% from reducing ES / DS. • So Forget about balancing the 3 pillars. • Focus on Reducing the per unit subsidies that are the biggest proportion of market price • Box Shifting is GOOD: Encourage it.

  26. Domestic Support: Williams • US Cotton applies serious prejudice to price gap subsidy on fixed Q – do not give insulation from SCM Art 5 & 6 claims to the extent that they relate to the effects of subsidies in other markets • EC Oilseeds applies NonVN&I to price gap subsidy on fixed Q – do give insulation from SCM Art 5 & 6 claims to the extent that a subsidy within a bound limit would be exposed to a Non-V N&I claim re effect in own market. • Adjust definition AMS • count price gap for actual intervention purchasing not for unimplemented intervention purchasing) (annex 3, art 8,10) • count all AMS not just the margin of support above a reference price (annex 3, arts 8-11) • Set product specific AMS caps on a per unit basis • Apply harmonizing reductions to per unit product specific AMS caps – with these rule we can challenge a law without having to wait for the data • Adjust definition de minimis – that part of what falls within definition of AMS that is within the % limits • Blue Box – set caps on a product specific basis • Maintain Green Box rules: no price support, no transfers from consumers, no Inks to current production or current price

  27. Allow Article XXVIII flexibilities

  28. Domestic Support: Falconer text • Tiered formula for reductions in OTDS • Tiered formula for reductions in Total AMS • Product Specific AMS caps • Reductions in De Minimis • Blue Box definition and Cap • Amendment of Definition of Green Box • Special reductions for AMS on cotton

  29. Caps on Product Specific AMS – But NO Reductions– Table 3

  30. Table 4 Rates of Reduction in Total AMS

  31. Table 5 Rates of Reduction of De Minimis Support • No reduction for REALIM, D’ing M with no AMS commitments, D’ing M with AMS commitments but that allocate almost all that support for subsistence and resource poor farmers, Listed NFIDMs

  32. Blue Box under Article 6.5 • Adjust 6.5 so that exclusion would be lost if the production or asset limit does not continue to be based on the base year • The exclusion can apply if no production is required at all • Limit 6.5 exemption to amount bound in Schedule - total payments not exceeding 2.5% or 5% (Dg M) • Limit 6.5 exemption to product specific ceilings bound in Schedule which can be increased if product specific AMS caps are reduced by a corresponding amount (but without exceeding total Blue Box binding)

  33. Green Box amendments include: • Para 2(h) rural employment programmes (presumably not specific to employment in agricultural sector?) • Para 3 on whether losses made on selling stocks from public food security stocks count in the AMS (for Dg M permits some price support) • Para 6(a) for income payments not linked to production or prices after the base year - that a programme would lose green box status if the base year is changed

  34. Overall Trade-Distorting Support (OTDS) - Table 6

  35. Net Result of Williams text • Removes all QRs • - from AoA, Annex 5 • - from AoS, Article 5.1 • - from under-allocation of TQ volumes by requiring auctioning • - prohibits import monopolies so no QRs imposed by import monopolies • Achieve tariff reductions on all high tariffs • – including on tropical products, and on escalated processed products • - does not create any more TQs and diminishes the rent from existing TQs • - Gives Developing Members more time to adjust • - Gives LDCs more time to adjust and lower reductions • - Reduces Discrimination (and trade diversion) arising from bilaterals and other preferences • ( Leaves US and EU free to pay aid in cash to compensate for reductions in preferences) • Leaves limited scope for Members (more for Developing Members) to use tariffs to help Members adjust to tariff reductions – AoA Article 5 versions 1, 2 & 3 • Eliminates Export Subsidies (tariff reductions make consumer financed Ex Subsidies impossible) • Leaves Members free to use subsidies to help producers adjust to tariff reductions • - production linked subsidies up to bound product specific per unit bindings (not counting de minimis) • - plus blue box up to product specific per unit bindings which can be increased under XXVIII by reducing product specific AMS bindings • - unlimited income support payments • Achieves reductions in high per unit product specific subsidies (including on cotton) • Any subsidy exceeding product specific per unit bindings can be challenged as soon as the law is published or as soon as payment made without needing to wait for data on the effects actual payment on markets and prices • Any non-Green subsidy having effects in other markets would be subject to remedies under SCM art 5 (even if within bindings)

  36. Net Result of Falconer text • QRs remain – • Annex 5 invocations remains • Import monopolies remain undisciplined • TQ volumes – private trader rules will help • New TQs some where effective constraints is the volume • High Tariffs • Agricultural tariffs will remain higher than industrials • EU, G10 will retain high tariffs on several product areas (mostly sugar, dairy, meat, some tropical products); US high tariffs in less areas – sugar, dairy, peanuts; Canada in some areas too • Many important Developing Members will retain high tariffs across several product areas, possibly with effective constraints being the volume of TQ (eg India) • Safeguard (AAM) may make tariff barriers worse not better (eg China, India) • High Subsidies on particular products: High subsidizing countries will continue to pay high subsidies focussed on particular products • Need to wait for the data before a complaint can be brought

  37. Williams text v Falconer text • Which achieved the promise of a Development Round? • Which confers more economic welfare gains? (Model it! • Which imposes more discipline on the most welfare diminishing policy instruments • Which leaves the most sovereignty to achieve objectives by applying the most efficient policy instruments? • Which helps the system to help the powerful countries to become and stay open? • Which helps the system help the less powerful countries to over come political forces for protection? • Which makes the next round easier? • Why is it better?

  38. Achieving a Better Result comes from paying attention to What Makes the System Work • 1 Non-Discrimination • 2 Gradualism • 3 Reciprocity • Ensuring the Rules Protect Reciprocity against Being Undermined by: • Ranking of Instruments: stricter rules on measures which undermine reciprocity the most (QRs), less strict on Measures which only undermine Reciprocity a little • Prohibit Undermining Measures eg No Quantitative Restrictions • Achieves the objective of changing political decisions toward: • Lower protection • Better choice of instrument for achieving domestic objectives • Less dispersion between rates of protection • Less discrimination

  39. How much can we deviate from: • Reciprocity • Gradualism • Non-Discrimination • Ranking of Instruments • Low Dispersion • Before the System will No Longer Work?

  40. Everyone comes to negotiations to strengthen the principles of reciprocity, ranking of instruments, low dispersion, non-discrimination Outcome – world in which price signals flow around the world and everyone is constantly adjusting to changes occurring all over the world Everyone comes to negotiations to negotiate an exception for themselves and leaves it to others to protect the system. Outcome – no multilateral system; parts of the world insulate themselves from changes occurring in other parts until sudden and painful changes are necessary; small countries need to negotiate one on one with big countries The Choice

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