OECD agriculture after Uruguay

The Uruguay Round of international trade negotiations under the auspices of the General Agreement on Tariffs and Trade was finally brought to a conclusion in Aril 1994, several years behind schedule. The Final Act, signed by the participating countries in Marrakesh, brings together the various agreements reached in the Round and provides the charter for the establishment of the World Trade Organisation (WTO), the successor organisation to the GATT.

One of the component agreements concerns agriculture and brings it, for the first time, within the ambit of a comprehensive set of rules and disciplines governing international trade. The negotiations on agriculture proved so difficult that, on several occasions, failure threatened to put the entire Round in jeopardy. Conclusion of the 'Agreement on Agriculture' has therefore been acclaimed as an important achievement.

In most OECD countries, there is widespread intervention in the agricultural sector. Producer and consumer prices are raised artificially by price regulation in internal markets and a host of other interventions, such as government stockholding. These internal measures were -- until implementation of conclusions of the Uruguay Round began in recent months reinforced by 'border' measures such as variable levies, import quotas or bans and voluntary export restraints, now replaced by tariffs alone. When production exceeds demand at the policy-induced higher prices, governments frequently resort to export subsidies. In recent years, as budget pressures and rising stocks rendered such domestic support policies untenable, governments increasingly applied measures to control domestic supply. International trade in agricultural products has been fraught with tensions and conflicts as some countries engaged in competitive export subsidisation in pursuit of market share, while countries unwilling or unable to engage in such trade practices lost out. Of the 82 trade disputes submitted to the GATT between 1980 and 1990, well over half concerned agriculture.

Why, then, had the GA not disciplined agricultural trade with the same success as had been achieved in other sectors? The basic reason is that over the years a number of exemptions and derogations from multilateral trade rules had been granted, reflecting a widely held view that agriculture could not be subjected to the full rigours of international trade without unacceptable consequences in social and economic disruption. Thus, the agricultural sectors of the United States and Switzerland benefited from country-specific derogations; agriculture was effectively exempted from the prohibition on export subsidies; import restrictions were permitted in support of domestic supply controls; and only a relatively small proportion of agricultural tariffs were 'bound', and thus could not be increased.

The Agreement on Agriculture has the potential to resolve many of the problems besetting trade in agricultural products. In addition to disciplines covering market access and export subsidies, there is an innovative, explicit discipline covering domestic support policies. There is also a separate agreement on sanitary and phytosanitary measures (box, right).

Market Access

On market-access measures (those which affect imports), the main feature of the agreement -- and arguably its most important systemic change -- was the requirement that all non-tariff barriers to imports (variable levies, import bans, quotas, voluntary export restraints) be converted to ordinary customs duties, a process referred to as 'tariffication'. Moreover, all tariffs (including pre-existing ones) were bound and were to be reduced by an average of 36% (and a minimum of 15%) over the implementation period of 1995-2000. Very few exemptions were permitted, the most important being imports of rice into the Japanese market, with the result that virtually 100% of agricultural tariff lines are now bound.

But for various reasons the tariffs which the process of tariffication has generated are high sometimes extremely high -- so that trade is unlikely to flow over them in the foreseeable future (Table 1). (Table 1 omitted) This will be so even at the end of the implementation period, because, in general, the lowest tariff reductions are applied to the sectors with the highest tariffs. Thus, for example, in most countries the minimum tariff cut of 15% has been applied to the dairy and sugar tariffs which are often measured in hundreds of percentage points.

Yet tariffication will bring substantial improvements in the longer term as inflation gradually erodes those duties which are bound in nominal, specific terms (that is, by a particular amount for a specified quantity of a product) and as further reductions are negotiated and implemented. Moreover, the existence of a single, transparent border measure makes the whole process of liberalisation easier. A further round of agricultural negotiations is scheduled to begin one year before the end of the implementation period of the present Agreement and this new negotiation should provide an opportunity to apply another across-the-board reduction in agricultural tariffs.

Because it was recognised that the tariffs resulting from tariffication were likely to be prohibitive in many cases, the market-access provisions in the agreement also allow for trade flows under the current and minimum-access provisions -- quantitative stipulations which will operate as tariff quotas. The current-access provision guarantees that access which already existed during the 1986-88 base-period is maintained or restored, while the minimum-access provision attempts to open-up new opportunities by providing for imports beginning at 3% and rising to 5% of domestic consumption.

Although these arrangements should generate trade flows which would not otherwise have occurred, they will, for the most part, be in the form of bilateral or other preferential arrangements and thus will not necessarily provide much competitive impetus in agricultural markets. On the contrary, much of the increased trade will be 'managed' in one way or another. A notification process has been set up under the auspices of the Committee for Agriculture of the WTO, and the countries affected are currently in the process of specifying the types of arrangements which they intend to use to implement their current and minimum-access obligations.

Domestic Support

One of the most innovative aspects of the Agreement on Agriculture is the discipline on domestic support. In essence, all OECD countries except Mexico have committed themselves to a 20% reduction in support by the year 2000 -- as measured by the 'Aggregate Measurement of Support' (AMS) -- from a 1986-88 base-period. The AMS is a measure of the monetary value of the kinds of support held to be the most distortive of production and trade. Market price support, which still dominates agricultural policy in the OECD area, is represented in the AMS by the difference between an administered price and a fixed external reference price. The measure does not change with world prices or exchange rates but does vary in line with regulated prices and with production. Thus, for example, the wheat AMS of the European Union will fall if the intervention price of wheat falls but will not increase if market prices rise or world prices fall. The AMS can therefore be used to negotiate binding disciplines. But, unlike the Producer Subsidy Equivalent measured by the OECD,(2) it is not a measure of the value of the transfers made because of agricultural support policies, nor can it be used to gauge the extent of economic distortion caused by agricultural policies.

Will the AMS discipline therefore have a measurable impact on the future evolution of agricultural policy in the OECD countries? The answer depends in part on the time-frame adopted. The effect is likely to be relatively modest during the implementation period of the current agreement. Most of the major OECD players -- it is mainly OECD countries that support their agricultural sectors and thus that are affected by this discipline -- have already comfortably met their commitments (Table 2). (Table 2 omitted) There are many reasons. Some are related to characteristics of the measure itself, and others to policy developments which have already occurred. A major factor has been the exclusion of 'production-limiting programmes', also known as the 'blue box', from the reduction commitment. There is no requirement to reduce such payments provided they meet the following conditions:

* the payments are based on fixed areas or yields

* they are made on 85% or less of the base volume of production

* livestock payments are based on a fixed number of head.

These provisions cover the 'area payments', which form the main plank of the 1992 reform of the Common Agricultural Policy of the EC, and the 'deficiency payments' of the United States, thereby exempting some very important measures of support from the discipline of the AMS. Moreover, the fact that the AMS discipline applies only to the agricultural sector as a whole and not to individual products, means that, by using the 'blue box' exemption for cereals, both the United States and the EU have been able to meet their commitments without reducing distortions in other agricultural products. Other countries, such as New Zealand, Australia and, more recently, Canada, have embarked on reform involving fairly widespread reductions in, or elimination of, programmes as part of a general deregulation of the economy as a whole(3) or in attempting to curb budget deficits. As a result these countries can meet their AMS targets with large margins of security. Japan has also already met its commitment, mainly through reductions in production and in the support price of rice. Only Norway and Switzerland have been identified as having to implement substantive changes in policy to be able to meet their AMS commitment.

An important feature of the discipline on domestic support is the definition and codification of a range of measures which are deemed not to distort production and trade, or to do so minimally; they are generally referred to as 'green box' measures. Their main features are that they may not be funded by consumers and may not provide price support to producers; nor should payments be based on current volumes of production or current use of factors of production.

Not only are payments which meet the 'green box' criteria exempt from reduction commitments; they are not subject to a ceiling of any kind and could increase. Thus, although the bulk of the programmes covered do indeed distort trade less than 'blue box' ones, there is still scope for total transfers to the agricultural sector to increase without any breach of international obligations.

The types of programmes which are excluded if they meet 'green box' criteria include general services, public stockholding for food security, domestic food aid, direct payments to producers, income-support decoupled from production or use of factors of production, income-insurance and safety-net programmes, relief from natural disasters, structural-adjustment assistance, and environmental and regional-assistance programmes.

Overall, then, it is difficult to see substantial change in policy arising from the AMS commitment in the immediate future, even though the total volume of assistance to agriculture is very high -- 43% of the value of production for the OECD as a whole in 1994.(4) In the longer term, the existence of an all-encompassing discipline on domestic support, defined in nominal terms and subject to a 'Peace Clause'(5) will mean that effective constraints will eventually be imposed on the measures that most distort production and trade. But it is worrying that the 'production-limiting' measures remain exempt. These policies are quite far removed from the sort of targeted, minimally distorting measures which are more desirable and which are specified in the 'green box'.

Export Subsidies

The third element of the Agreement on Agriculture is a requirement to reduce subsidies for exports -- a very important aspect of the agreement and perhaps the one most likely to have immediate and tangible consequences. The signatory countries have entered into commitments on both value and volume of export subsidies, and these commitments are specific to individual commodities. By 2000 the value of export subsidies must be 36% lower than it was on average over the period 1986-90, and the volumes of subsidised exports must be down by 21%. As many export subsidies had been rising since the base period, these requirements may prove to be quite onerous and could indeed stimulate policy changes in a number of products. Export subsidies on primary agricultural products that are incorporated into processed products must also be reduced. Moreover, no new export subsidies of any kind will be permitted. On the other hand, the volumes of export subsidy that are still permitted could prove disruptive in some markets and will continue to deprive competitive producers of market share.

With implementation of the Agreement on Agriculture now beginning, immediate benefits will be felt as increased trading opportunities arise and as export subsidies begin to be scaled back. But many of the systemic changes introduced -- chief among them tariffication and the explicit discipline on the AMS -- will not be translated into tangible, substantial improvements in the trading environment or in agricultural policy until the end of the implementation period in 2000 and beyond.

Indeed, the full significance of the Round can be judged only in the light of experience during the implementation period. There is still some uncertainty about how the various disciplines will work in practice. Much also depends on the outcome of the further round on agricultural negotiations scheduled to begin a year before the end of the implementation of the current agreement.

The current agreement already contains features which will become more constraining over time -- the binding of domestic support and export subsidies in nominal base-period values, for example. Other pressures -- not least from budget deficits -- will also play a role, as will issues, now gaining in importance, involving the environment and equity between sectors. If the opportunity is taken to build on and deepen the disciplines already adopted in the Uruguay Round, the long-term objective to establish a fair and market-oriented agricultural trading system and to bring about substantial reductions in support and protection is within reach.

1. The Uruguay Round: A Preliminary Evaluation of the Impact of the Agreement on Agriculture in the OECD Countries, OECD Publications, Paris, 1995.

2. The Producer Subsidy Equivalent (PSE) measures the value, in a given year, of the monetary transfers to agricultural production from consumers of agricultural products and from taxpayers resulting from a given set of agricultural policies.

3. Adrian Orr, 'Spotlight on New Zealand: The Results of Openness', The OECD Observer, No. 192, February/March 1995.

4. Agricultural Markets and Trade in OECD Countries: Monitoring and Outlook 1995. OECD Publications, Paris, 1995.

5. Article 13 (the 'Due Restraint Provision') of the Agreement on Agriculture grants protection from legal challenge to measures which have been accepted as 'green box'. Protection is granted also to other measures which are exempt from the reduction requirements (including 'blue box' measures), provided that, on a commodity-specific basis, payments do not exceed the figures decided during the 1992 marketing year. Export subsidies which are in conformity with the relevant discipline are also exempt from specific legal challenges.

Copyright Organisation for Economic Cooperation and Development Oct/Nov 1995
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