WTO and Subsidies

Ulhas Joglekar ulhasj at SPAMbom4.vsnl.net.in
Mon Jan 8 18:48:52 MST 2001


Thursday Dec 21 2000 | Updated 0044 hrs IST 1414 EST

Painting colours on subsidies

Anwarul Hoda & Ashok Gulati

TRADE policy is generally a drab colourless affair. While the WTO has
prohibited grey area measures, it has suffused trade policy with vivid
colours-red, green, amber and blue.

These colours have been painted primarily on subsidies, which fall under two
separate agreements, the Agreement on Subsidies and Countervailing Measures
(SCM Agreement), and the Agreement on Agriculture.

The SCM Agreement, which applies to non-agricultural products, follows the
traffic lights approach and classifies subsidies into prohibited,
non-actionable and actionable categories-red, green and amber.

Subsidies with high trade-distorting effects, such as export subsidies and
those that favour use of domestic over imported goods are prohibited (red).
Developing countries with a per capita income of less than $ 1,000 have been
exempted from this prohibition on export subsidies. Subsidies that are not
specific to an enterprise or industry or a group of enterprises or
industries are non-actionable (green).

Subsidies that are neither red nor green belong to the amber category. They
are actionable by the trading partners if their interests are adversely hit.
The affected country can seek remedy through the dispute-settlement
procedures, or go for countervailing duties.

In case of agriculture, the subsidy rules are somewhat different. The
approach adopted was to encourage gradual reduction of trade distorting
subsidies. No practice was prohibited, not even export subsidies. Red was
thus out.

For export subsidies six prevalent measures were listed for being reduced by
36 per cent in budgetary terms and 21 per cent in subsidised volumes over a
six-year period. The developing countries were given lower reduction targets
of 24 and 14 per cent respectively and a longer period of 10 years. In
addition, they were exempted from reducing marketing and freight subsidies.

In domestic support, a distinction was made between subsidies that distort
trade and those that do not. Only the trade distorting subsidies had to be
reduced, if above the permissible level. Subsidies with no, or minimally
trade distorting, effect were put in the Green Box, not subject to any
reduction commitments. It included all government service programmes.

In the bilateral discussions between EEC and USA another category of
subsidies was created in which a limitation on production was a condition of
domestic support being extended by government. And thus was born the Blue
Box.

The Blue Box was tailored mainly to fit the deficiency payments programme of
USA and the production-limiting programmes introduced in EEC in 1992. Direct
payments under these programmes fell under the Blue Box as they fulfilled
the requirements that the payments must be based on fixed area or yield or
that they must be made on 85 per cent or less of the base level of
production or that livestock payments must be made on a fixed number of
heads.

Certain subsidy practices in developing countries were also exempted from
reduction commitments. This includes investment subsidies, agricultural
input subsidies generally available to low-income or resource-poor farmers
and measures to encourage diversification from growing illicit narcotic
crops. No colour has yet been ascribed to this category, but may we suggest
white - the White Box for this category.

The AoA required each member to calculate the annual level of support
expressed in monetary terms, leaving out those measures that were in the
green, blue and white boxes. This was called the Aggregate Measurement of
Support.

During the Uruguay Round there was agreement that except where the
non-product specific support was less than 5 per cent of the value of
agricultural production or the product-specific support was less than 5 per
cent of the value of production of the relevant product, the developed
countries would reduce their total AMS by 20 per cent over six years. For
developing countries, the cut off point for AMS was 10 per cent and
reduction commitment 13.33 per cent over 10 years.

What has been the experience so far in the implementation of these
agreements? Legally, most of the countries have complied with the AoA. But
in many developed countries, especially EEC and USA, the overall level of
agricultural subsidies, instead of going down, has gone up.

This has been accomplished mainly by exploitation of measures in the Green
and the Blue Boxes. USA has given up the Blue Box measure of deficiency
payments but has resorted heavily to Green Box measures such as direct
payments and decoupled support. EEC has shifted massively to support
programmes in the Blue Box.

What are the lessons for India? First, instead of providing high price
support, spend more on general services including capital works for
infrastructural services (Green Box). Second, in negotiations, ask for
merging of Blue Box with Amber Box, and taking out measures like the
de-coupled income support from the Green Box and making them all subject to
reduction commitments.

Watch out, de-coupled income support in the developed countries can
considerably reduce the fixed costs. And they would be competing in world
markets virtually with their variable costs as against our full costs,
making the competition unfair.

Third, one could also negotiate for capping of the peak levels of domestic
support, say at 40 per cent as 'down payment' in the forthcoming
negotiations. This can then be subjected to reduction to the de-minimis
level within 5 to 7 years.

One can go a step further and perhaps negotiate for compensation (penalty)
from those that fail to bring down support to de-minimis level. The
compensation to be paid to a UN agency for helping the developing world
either in legal matters pertaining to disputes within WTO framework, or to
help the net food importing poor countries from the likely increase in
prices resulting from reduction of support in developed countries.

(Anwarul Hoda, a former Deputy Director General of WTO, is now a Professor
at ICRIER and Ashok Gulati is a NABARD Chair Professor at the Institute of
Economic Growth, Delhi)

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