Special Report: US, EU subsidies weaken economies of poor countries

(Second of three parts)

The Doha Development Round which sought in 2001 to reform world trade rules that are largely skewed to favor rich countries, has a mandate to complete a roadmap by end 2006 that will define a more level playing field between the affluent nations and developing economies, especially in agriculture which is the most contentious issue that has blocked the completion of the round.

But developing countries like the Philippines which are still largely agri-based economies, are wary that economic giants led by the European Union and the US are not budging an inch to give up their trade-distorting export subsidies and domestic support to their farmers that allow dumping of agricultural commodities to poor countries.

An analysis of the EU and US proposals for an agreement on agriculture by think tank and development funding agency Oxfam International shows that these immovable forces will continue to enjoy their subsidies, and worse, expand their perks by creating new categories of subsidies.

The EU said its bottomline offer is to reduce its domestic support or aggregated measure of support (AMS) by 70 percent, and additional 65 percent in distorting "de minimis" support. The US is offering to cut overall subsidies by 54 percent in five years and offered to implement deeper cuts on higher tariffs.

Under the "de minimis" clause, countries are allowed to give domestic support equivalent to a percentage of total value of agricultural production. In the case of developing countries this is five percent.

It certainly sounds sincere, but a closer scrutiny, according to Oxfam, reveals that the the EU and US will in reality, raise their actual levels of support by 28.8 billion euro and $7.9 billion, respectively if they manage to wiggle their way successfully in the agricultural negotiations.

How is this possible? The key, explained Shalimar Vitan, policy coordinator of Oxfam Great Britain in the Philippines and the Philippine trade campaign Philippine spokesperson of Oxfam International, is in the expansion of the flexibilities provided under the so-called Blue Box. The Blue Box is a category of agricultural subsidies created in the Uruguay Round of Negotiations.

The Blue Box is supposed to provide forms of agriculture support that are less trade-distorting than the Amber Box while the Green Box was created for subsidies considered to be minimally distorting.

The Blue Box was also intended to support transitional programs that would enable countries to move away from trade-distorting subsidies (Amber Box) and move toward the Green Box.

The EU is the largest user of Blue Box subsidies and has spent so much in production-limiting subsidies before it implemented reforms under its Common Agricultural Policy in 2003. It has made it clear that its preservation will be one of its key negotiating objectives.

The US on the other hand is reversing its original position in 2002 to eliminate the Blue Box and has instead, called for expanding the definition of Blue Box.

"The box-shifting strategy is obviously being resorted to by the US to be able to hide their subsidies. In the end, they would not have to give up anything substantial but more so, they would be able to increase the subsidies they provide to their farmers by redefining their programs to fit into the Blue Box," said Vitan.

For one, redefining the Blue Box will allow the US to incorporate its counter-cyclical payments or CCPs into this new and expanded category.

CCPs are subsidies that are paid to producers when commodity prices fall below set prices. They resemble price-support subsidies which distort trade and are subject to WTO reduction commitments in the Amber Box.

Those critical of the US proposal believe that its overall cuts in trade distorting support will not bring the Doha ceiling below their current level of spending. In its proposal, the US payment ceiling would be lowered to $22.1 billion, while their real spending in 2001 was $21.4 billion. They said that existing loopholes compensate cuts because the proposed cuts in the Amber Box would be offset to a great extent by the flexibility created in the use of fully trade-distorting support under the de minimis and the Blue Box exceptions. Currently, the US does not have Blue Box subsidies but in the future could protect up to $5 billion of subsidies and which would have CCPs nearly doubling from $2.5billion in 2005 to $4.8 billion annually.

Vitan pointed out that the box-shifting strategy is actually intended to provide another outlet for both the EU and especially the US, to continue their domestic support and most likely, this will be increased in ensuing years.

Thus, EU and US farmers’ subsidies will further encourage them to produce more than what they can sell in the domestic market and export the surplus to developing countries at dump or artificially low prices.

And while developed countries are indifferent to calls to eliminate subsidies, they are demanding greater market access in developing countries through further tariff reductions.

On the run-up to Hong Kong, the talks on agriculture as pushed by developed countries has tilted toward more market access through ambitious tariff reduction using a single-tiered approach that applies to both rich and poor countries

The EU proposal on agriculture, while closer to the defensive position of the G-20 and G-33 coalition of developing economies, is hinged on conditionalities.

Specifically, the EU said it would pursue its elimination of trade-distorting subsidies in agriculture but only if it is satisfied with the outcome of talks on non-agriculture market access or NAMA. Predictably, the US said it would support EU on this position.

This is unacceptable to many developing countries because many of these economies have already previously applied substantial tariff cuts on their industries. Further tariff cuts will curb the capacity of developing countries to push its industrialization and development strategies.

New findings by Oxfam seem to support earlier suspicions that a number of other US and EU agricultural subsidies are also illegal. These subsidies cover a slew of products from butter to orange juice, tobacco to tomatoes, and corn to rice.

The total illegal subsidies highlighted by data gathered by Oxfam show huge amounts at •3.6 euro ($4.2 billion) for the EU and $9.3bn (•7.9-billion euro) for the USA. It said that there are several other suspect subsidies worth billions of dollars.

"If the USA and the EU do not negotiate the elimination of these subsidies in the Doha trade negotiations, challenges brought before the WTO court, the Dispute Settlement Body (DSB), could find them to be inconsistent with WTO rules," said Oxfam in a statement.

In all of the potential cases Oxfam listed, the USA and EU are breaking the WTO’s agreement on subsidies and countervailing measures by granting prohibited subsidies or by causing adverse effects to developing country WTO members. The prohibited subsidies favor the use of domestically-produced agricultural products, over imported ones, as inputs in the manufacture of processed agricultural products. Adverse effects occur when subsidies impede exports, suppress market prices, or cause injury to the domestic industries of other WTO members.

Agriculture Undersecretary Segfredo Serrano pointed out that even if the developed nations grudgingly open their markets, there would still be a lot of substantial residuals, particularly the huge subsidies that their farmers will enjoy.

Already, many countries are criticizing the EU’s "bottom-line" offer to implement the deepest ever cuts in European farm-trade subsidies, saying these are not nearly enough to make meaningful impacts on poor agriculture economies from the developing world.

There is an ongoing blame game being played out by EU and the United States over farm subsidies which Serrano sees as part of the bigger scheme to skirt the real issues.

"Many of us are already getting a sense of a farce here, they are setting up developing countries. What the EU is actually saying to developing countries is that if you want us to be more ambitious in agriculture, then poor nations should also be more ambitious in NAMA. And what do you think is going to happen? Of course the US will support them in NAMA, they will sidestep agriculture again. They might have a ploy to completely ignore us if we don’t act forcefully and consolidate our position, they will nibble at NAMA which will then become their new basis for collusion."

The US on the other hand, also recently asked for the inclusion of a new Peace Clause in any agreement on agriculture reached in the Doha Round. This is an agreement among WTO members not to permit challenges at the WTO on certain issues. For developing countries, this is a license for rich countries to continue stacking the odds in their favor.

In the old Peace Clause established under the Uruguay Round, rich countries were allowed to grant huge agricultural subsidies which could not be contested for nine years under WTO rules.

Another issue that is hardly being talked about but which would be critical for developing countries is the treatment of food aid.

"The US is adamant about not subjecting food aid to further disciplines. Food aid should be in the form of commodities and should not be linked to commercial transactions. Also, they should only be allowed in cases of emergency," said Jessica Reyes-Cantos, lead convenor of Philippine Rice Watch and Action Network.

Cantos cited food aid programs of the United States Department of Agriculture such as the Public Law 480 which is usually in the form of rice or corn grants to the Philippines. These grants are monetized by the National Food Authority and the staples find their way into the domestic market, usually during the peak of the harvest season which tends to dampen farmgate prices of palay.

Clearly, the developed countries are asking far too much for market access in developing countries in return for their token reforms. (To be continued)