WTO MC12: India faces tough challenges in moving from "peace clause" to "permanent solution"

Before suggesting the way forward, Ambassador Peralta should have looked at two stark realities of farm subsidies and the global agricultural markets that are responsible for distorting global agricultural trade. The first is that the subsidies granted by the major subsidizers — the US, the EU and China — have one common feature, namely, more than 80 per cent of their total subsidies are “Green Box” measures on which there is no spending limit. The second reality is that the US and the EU are among the largest exporters of agricultural products, implying thereby that these WTO members are subsidizing their agriculture for capturing global markets.

WTO MC12: India faces tough challenges in moving from "peace clause" to "permanent solution"

In less than a month, the 12th Ministerial Conference (MC12) of the World Trade Organization (WTO) will be held in Geneva, a year after it was scheduled to be held in Kazakhstan. As has been the case since the inception of the multilateral trading system almost seven and a half decades back, agriculture continues to be one of the most contentious areas with WTO members deeply divided on almost all issues pertaining to this sector. However, formal discussions on agriculture have been on a low ebb, even after the Chair of agriculture negotiations, Ambassador Gloria Abraham Peralta, had tabled an “initial draft text” at the end of July. The major reason why the Chair’s text has failed to evoke much discussion is that unlike in the past where the Chairs have tried to push the boundaries of the discussions/negotiations, Ambassador Peralta has opted for a minimalistic agenda. He has proposed adoption of a series of Ministerial Decisions covering all the major issues, which is an attempt to amend the Agreement on Agriculture (AoA) without considering the complexities of the WTO membership the needs and concerns of countries at different levels of development.

The major problem with Ambassador Peralta’s approach is that he uses the provisions of Article 20 of the AoA, which had mandated a built-in review of the Agreement commencing in 1999. Accordingly, WTO members initiated the process of Analysis and Information Exchange (AIE), an information sharing process for better appreciation of their experiences of implementing the AoA that would have, in turn, facilitated the review of the Agreement. The AIE process culminated in the preparatory work for the Doha Ministerial Declaration, which provided the negotiating mandate for reviewing and reforming the AoA, better known as the Doha Development Agenda (DDA). After 16 years of negotiations yielded no results, questions regarding the future of the DDA were raised in the Buenos Aires Ministerial Conference (MC11) in 2017. Although it was apparent that the Doha Ministerial mandate was rejected by an influential section of the membership, the decision of the Chair of agriculture negotiations to anchor the agriculture work programme on the pre-Doha Article 20 mandate is perhaps a confirmation that the DDA is passé. From the point of view of substance, the rejection of DDA is a clear articulation of the fact that the WTO work programme would henceforth be bereft of the development dimension, without which most developing countries would be unable to catch-up.

Proposals on Domestic Support

Among the three-pillar discipline that the AoA has in place, namely domestic support, or production-related subsidies, export competition, which includes export subsidies, and market access, the disciplines on domestic support have been the least effective. The subsidies’ discipline was introduced following the adoption of the mandate for the Uruguay Round negotiations in 1986 wherein the Contracting Parties of the General Agreement on Tariffs and Trade (WTO’s predecessor institution) had agreed to “increasing discipline on the use of all direct and indirect subsidies and other measures affecting directly or indirectly agricultural trade”. However, the discipline that was introduced finally as a part of the AoA excludes a sizeable share of subsidies granted by the advanced countries since they are deemed to have “no, or at most minimal, trade-distorting effects or effects on production”, and hence there is no limit on spending on “Green Box” subsidies. Some of the more prominent of these “Green Box” subsidies are used as market clearing mechanisms, especially by the United States and the European Union member states.

On the other hand, input subsidies and administered price mechanism that India uses to support its predominantly low-income or resource poor producers, which according to the Government’s submission to the WTO operated 99.4 percent of the farm holdings, are deemed to be trade-distorting according to the WTO. In other words, the so-called Government subsidises farmers essentially to protect livelihoods and domestic food security. There is, thus, no clear basis to categorise farm subsidies as trade distorting or otherwise, as has been done in the AoA. But ironically, the AoA limits the spending on these “Amber Box” subsidies to 10 percent of the value of production.

While suggesting a way forward on the issue of domestic support, the Chair of agriculture negotiations has proposed that Ministers of WTO member states adopt a decision in MC12 to initiate negotiations for new disciplines on domestic support that could potentially cover all so-called trade distorting subsidies. This includes the currently exempted input subsidies provided to the low-income or resource-poor producers (Article 6.2 of the AoA), a provision that currently favours India. Bringing the Article 6.2 subsidies under the spending limit of 10 percent would severely impact Indian agriculture.

We would suggest that before suggesting this way forward, Ambassador Peralta should have looked at two stark realities of farm subsidies and the global agricultural markets that responsible for distorting global agricultural trade. The first is that the subsidies granted by the major subsidisers, the United States, the European Union, and China have one common feature, namely, more than 80 percent of their total subsidies are “Green Box” measures on which there is no spending limit. The second reality is that the United States and the European Union are among the largest exporters of agricultural products, implying thereby that these WTO members are subsidising their agriculture for capturing global markets.

It may be argued that reform of the subsidies’ discipline must take into consideration these two realities. According to the statistics provided by the United States Department of Agriculture, the United States, the third largest exporter of wheat, exported 54 percent of its production in 2020-21. It was the largest exporter of corn, exporting nearly 20 percent of its production, and it also exported 41 percent of its rice production. The European Union members were among the largest wheat exporters, and they exported nearly a fourth of their production. In contrast, India, as the largest rice exporter had exported around 10 percent or less of its production for a considerable length of time. It was only in 2020-21 that its exports increased to 16 percent of its rice production. India also emerged as an exporter of wheat in 2020-21, but its exports were 2.3 percent of its total production. These figures show that Indian agriculture is overwhelmingly domestic market oriented, while the driver for United States’ agriculture is exports.

Our argument is that the extent to which WTO members are using subsidies to export their agricultural products should be taken as a basis for introducing stricter subsidies’ disciplines. The new disciplines should not jeopardise domestic food systems and livelihoods, especially in countries where agriculture continues to support a significant share of their workforce.

Proposals on Market Access

Besides domestic support, the other key issue in agriculture is market access. As regards this pillar of AoA, Ambassador Peralta has relied on a proposal submitted by a few WTO members, which seeks to introduce enhance “transparency and predictability in the application of … applied tariff rates”, or the actual tariffs. Currently, WTO rules on tariffs require countries to indicate the maximum (bound) tariffs that they would impose on imported products. The applied (actual) tariffs for most developing countries are often much lower than the bound tariff rates, which allows countries to raise their actual tariffs under exceptional circumstances. This is an important policy space that the governments currently enjoy. By shifting the focus from bound tariffs to applied tariffs, the Chair agriculture negotiations is seeking alter the basis for tariff negotiations, the implications of which can be far reaching.

Ambassador Peralta’s specific proposal aimed increasing “transparency and predictability” in the imposition of actual tariffs is ironically based on a proposal whose contents have not been made public. Broadly speaking, this proposal speaks of imposing the tariffs on a shipment that prevailed on the day the shipment began its journey. This proposal, if implemented can be a nightmare for the customs officials, who would then have to impose different tariffs for each consignment of the same or similar imported products. The trend in lowering of administrative costs of trade can easily be reversed as a result.

Public Stockholding for Food Security Purposes

In agriculture, the most crucial issue for India is Public Stockholding for Food Security Purposes (PSH). This issue has arisen because the AoA imposes two sets of conditions on WTO members maintaining food stocks to provide subsidised food to address the problem of domestic food insecurity. First, every member must procure foodstuffs and sell them at administered prices. Secondly, if the foodstuffs are sold below the administered prices, implying that if a member sells at subsidised prices, the difference between the administered prices and selling prices must be accounted for in the subsidies bill of the member concerned. Thus, the AoA considers providing subsidised foodstuffs to the poor as market distorting and, therefore, countries implementing food security programmes by using publicly held stocks of foodstuffs, are not allowed to breach the subsidy threshold of 10 percent of their value of agricultural production, which we had discussed earlier.

The provisions regarding PSH became important for India after the government began implementing the National Food Security Act (NFSA) in 2013. Having made the commitment to provide subsidised food grains to almost two-thirds of the country’s population, India was staring at a situation where possibility of breaching the subsidies’ threshold of 10 percent become imminent. If the government had continued to implement the NFSA despite breach the subsidy limit, any other WTO member could have initiated a dispute against India. And, if India had lost the dispute, distribution of subsidised food grains would have to be discontinued immediately.

In 2013, India was able to negotiate a “peace clause”, or a temporary reprieve from facing a dispute even if it had breached the subsidies’ threshold of 10 percent while implementing the NFSA. WTO members must find a “permanent solution” of this problem that India is faced with. But the discussions in the run-up to the MC12 shows that the odds are stacked against India owing to two proposals that have been included in the Chair’s text. The first is that a developing country like India would have to limit its total procurement to 15% of the domestic production of “traditional staple food crops” to implement public stockholding programmes for food security purposes. The second proposal states that countries maintaining public food stocks must not allow exports from such stocks. What does this condition imply for India?

Restricting procurement of food grains can have serious implications for India in terms of realising the twin objectives of supporting livelihoods of the low-income or resource-poor farmers and meeting domestic food security. In 2019-20, India’s production of its main staple crop, namely rice, was 118.4 million tonnes, and the government’s rice procurement was nearly 52 million tonnes. According to Government of India’s submission to the WTO, the quantity of rice released in compliance with NFSA was about 33.4 million tonnes. Thus, while more than 34 million tonnes are needed for the government to provide subsidised food grains to the country’s under-privileged, the WTO is proposing that India should have procured less than 18 million tonnes.

In case of wheat, the government procured 34 million tonnes in 2019-20, while 20.2 million tonnes were distributed to the beneficiaries, as per the records of the Department of Food and Public Distribution. As against these requirements for minimally supporting the farmers and the underprivileged, the WTO is proposing that can procure at most 16 million tonnes.

The second proposal was tabled by the G-33, a developing country grouping in which India has played a major role in the past. Implementing this proposal, which states that countries maintaining the food security stocks must ensure the stocks are not used to promote exports, could entail administrative burden for the country at a time when exports of cereals from India are on an upswing. Clearly, Government faces serious challenges as MC12 takes a call to find a permanent solution regarding PSH.

(Dr Biswajit Dhar is a Professor at Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. The views expressed here are his own.)