Need to change the WTO rules on Green Box subsidies (3rd of 3 articles on Green Box)

New disciplines are urgently needed to restrict the developed countries' wrong use of Green Box subsidies that are presently permitted under WTO rules, otherwise these subsidies will continue to distort agricultural production and trade, at the expense of developing countries.

This is one of the central messages from the paper by the UNCTAD India team on "Green Box subsidies: a theoretical and empirical assessment".

The paper shows how Green Box subsidies have boosted the agricultural exports and output especially the United States and European Union states. It exposes how 40 to 50 per cent of the agricultural exports of the United States, European Union and Canada are reliant on the continuation of their Green Box subsidies.

These subsidies thus have major distorting effects on trade and production, even though they are designated as "non trade distorting" in the WTO and they are not subject to a cap or to reduction disciplines.

"This paper shows that Green Box subsidies are production and trade distorting," says the paper. "The effects of the reduction of Green Box subsidies would be positive for developing countries including the LDCs... It is therefore necessary that the current negotiations address the issue of eligibility of criteria of Green Box subsidies in developed countries on an urgent basis with a view to restricting them."

The paper has a chapter and an Appendix describing the state of play of the WTO's Doha negotiations with regard to Green Box (GB) subsidies.

The WTO's July 2004 Framework mandates members to review and clarify the GB criteria to ensure that the trade or production effects are minimal or absent. The modalities of clarifying the GB criteria have been left to the negotiations.

In a new reference to developing countries' use of GB subsidies, Paragraph 5 of the WTO's Hong Kong Ministerial Declaration states that GB criteria will be reviewed to ensure that programmes of developing country Members that cause not more than minimal trade-distortion are effectively covered.

The paper also notes that WTO Members are pursuing two objectives in the GB negotiations: (I) making the eligibility criteria for developed countries more restrictive; and (ii) clarifying and inserting additional criteria for covering programmes of developing countries that cause no or minimal trade-distortions.

There is some resistance by some developed countries to altering the criteria to make it more restrictive for developed counties (to use the GB), says the UNCTAD paper. There is more openness to consider proposals to better tailor the GB criteria to meet the realities of developing country agriculture.

The paper summarises the North-South Green Box divide as follows. The July Framework also specifies that the review and clarification will need to ensure that the basic concepts, principles and effectiveness of the Green Box remain and take due account of non-trade concerns.

"Some developed countries are of the view that the current criteria are adequate, and might even need to be made more flexible to take better account of non-trade concerns such as environmental protection and animal welfare," says the paper.

"These countries are concerned that any change to the existing green box provisions might have the effect of undermining their reforms. Thus, there is, on the one side, a firm resistance to anything that is seen as departing from the existing disciplines while there is, on the other, an enduring sense that more could be done to review the Green Box."

Proposals at the WTO talks have been made on the different categories of GB support such as general services, public stock holding for security purposes, domestic food aid, direct payments to producers, decoupled income support, income insurance and safety net programmes, natural disaster relief payments, structural adjustment assistance through retirement programmes and investment aids and regional assistance programmes.

The paper distinguishes between proposals made which seek flexibility for developing countries and those that seek to tighten disciplines.

Proposals for more flexibility for developing countries include the following:

• Extend the coverage of general services to include categories such as agrarian land and institutional reform, including related services such as settlement programmes and also services related to developing country proposals on food, livelihood security, rural development and infrastructure provision.
• Unambiguous clarification that the acquisition costs of stocks of foodstuffs would be accommodated within the 10 per cent de minimis allowance for developing countries.
• Amend footnotes 5 & 6 (related to paragraphs on stockholding for food security purposes and domestic food aid) to cover the acquisition of foodstuffs at subsidized prices when generally procured from low-income or resource-poor producers in developing countries with the objective of fighting hunger and rural poverty.
• In terms of payments under regional assistance programmes the negotiating proposals seek to exempt developing countries from the requirement that a disadvantaged region must constitute a clearly designated contiguous geographical area with a definable economic and administrative identity.

Proposals which seek strengthening of disciplines (mainly for developed countries) include:

• Direct Payments: Various negotiating suggestions have been put forth regarding direct payments such that they should be delinked from production levels, including input levels therein; and they should be based on activities in a fixed and unchanging historical base period. It is proposed to direct payments exempt from reduction commitments conform to a revised criteria in paras 6 (a) through (e) of the Agriculture Agreement's annex on GB. Also, paras 6 to 13 should become an exhaustive list for possible direct payment support.
• Decoupled Income Support: In respect of decoupled income support changes have been suggested to constrain some of the eligibility criteria for this support. Proposals include that: (a) eligibility for such support be determined by criteria of low level of income, landholding and production in a notified and unchanging base period; (b) Land, labour or any other factor of production should not be required to be in 'agricultural use' in order to receive payments; ( c) Direct payments under paragraph 6 should not be made along with Amber Box or Blue Box support if the total value of support exceeds a certain percentage of the annual value of production of a given product.
• Insurance and safety net; and natural disaster relief: Negotiating proposals have also been made on the eligibility criteria and the payments for income insurance and safety net programmes as also for natural disaster relief programmes.
• In terms of structural adjustment assistance while no proposals have yet been made on resource/producer retirement programmes, for assistance programmes through investment aids it has been proposed that structural disadvantages must be clearly defined in the context of government programmes for re-privatization of agricultural land.

In a section on "Assessment of GB proposals", the paper says that under paragraph 6(a) of Annex 2 of the Agriculture Agreement, eligibility for decoupled income support is required to be based on clearly-defined criteria in a 'defined and fixed base period'.

According to the G-20 proposal, this has been interpreted by some WTO Members to fix the base period only for specific time intervals, which are subsequently updated. This reinforces the farmers' expectations, thereby influencing their future production decisions. Overall, updating the base year provides farmers with incentives to keep production levels high.

Stipulating base periods which are fixed and unchanging could remove the incentive for the farmers to maintain high levels of production so that they become eligible for higher support in case the base period is updated in future. The proposals seeking to insert 'a defined, fixed and unchanging historical base period' in paragraph 5(a) and 'unchanging historical base period' in paragraph 6(a) seeks to address this problem of updating base periods.

Another concern is that subsidies in general are concentrated in the hands of very few entities. Among subsidy recipients in the US, large farms collect almost all the money. Nationwide, 10% of the biggest subsidized crop producers collected 72% of all subsidies amounting to $104 billion over 10 years. Recipients in the top 10% averaged $33,283 in annual payments between 1995 and 2004. The bottom 80 per cent of the recipients received only $721 on average per year.

To address the issue of concentration of decoupled income support in a few entities and to avoid payments being received by big farmers, G-20 has proposed that eligibility for decoupled income support should be determined by criteria of low levels of income, landholding and production.

This proposal could have far-reaching effects, says the paper. First, it would restrict the eligibility for receiving decoupled income support to producers, thereby excluding landowners who are not producers. Second, in order to become eligible for receiving decoupled income support, the producer must simultaneously satisfy the three criteria of low income, low production and small landholding.

The proposed change in criteria could ensure that decoupled income support is not available to agri-business and rich farmers. The benefits of GB would be mainly available to small and poor farmers.

The paper points out however that what may be a low level of income in a developed country may represent high income in a developing country. Similarly, a small land holding in a country with extensive agriculture may not be considered small in a country practising intensive farming.

The paper then proposes that for the G20 proposal to be more meaningful, it should specify the indicators for the 'low level'. To illustrate, income could be categorized as low, if it is 15 per cent below the per capita income for the country. Similar indicators could be proposed for low production and low landholding.

Other proposals also seek to address the incentive for increasing production which arises when coupled support programmes(Amber or Blue Box subsidies) are implemented in combination with GB direct payments on the same product.

The World Bank has pointed out that 'the co-existence of coupled and decoupled programmes means that incentives to overproduce remain'. In the EU, member states have the option to keep part of the payment linked to crop and livestock production. Up to 25% of the payments for arable crops, and 50 to 100 per cent of animal payments may remain linked, or coupled.

France and Spain have both made use of this option in the case of area payments. Cereal farmers who stop production, or shift to livestock production, for example, receive only 75% of their previous payments, and have to cover the costs of keeping the land in good condition. If they continue production, however, they receive 100% of the payments, plus the income from marketing their crops.

The second option would obviously be attractive if the variable costs of production were reasonably compensated by crop prices. This is particularly likely in France, Europe's largest and arguably most competitive cereal producer.

In the US counter-cyclical payments are administered in conjunction with direct payments. As a result, they work inversely with market prices - payments are large when market prices are low and payments are small or non-existent when market prices are high.

To address this issue and to avoid magnifying incentives for overproduction, it has been proposed that GB support should not be allowed in combination with other trade- distorting support.

The UNCTAD India paper also points out two specific areas where additional proposals are needed for disciplining the GB subsidies - decoupled payments granted for planting flexibilities; and improved disciplines on general services and environment programmes.

Exclusion of certain crops for determining eligibility to receive decoupled payments provide an incentive to channel production towards crops that are eligible for support. The WTO dispute panel in US cotton case has ruled that planting flexibility limitations relate to the type of production undertaken by the producer after the base period and hence do not fully conform to the requirements of paragraph 6(b) of Annex 2.

In the 2002 Farm Act the planting flexibility provisions are the same as those in the 1996 Act, except that wild rice will be treated at par with fruit/vegetable. Thus violation of requirements of paragraph 6(b) of Annex 2 would continue even under the 2002 Farm Act.

The finding on planting flexibility has important implications not only for direct payments in US but also for EU's single payment scheme under CAP reforms of 2003. This scheme has been claimed to be decoupled, and therefore it is likely that EC would claim eligibility for classifying it under GB.

However, the single payment scheme may be used for any agricultural activity except for fruit, vegetables and table potatoes. The scheme may, therefore, not be in conformity with the findings of the WTO dispute panel.

On the second area, the paper says its empirical analysis shows hat GB support for general services and environment programmes have significant effects on production. However, the negotiating proposals made so far do not seek strengthening of eligibility

criteria for receiving payments under these two categories.

The paper then asks countries to consider making the following negotiating proposals:

• (I) GB support for training services, extension and advisory services, inspection services and marketing and promotion services should be available only to resource poor or subsistence farmers.
• (ii) GB support for environmental programmes should be available only to farmers with farm size holdings below a specified level.

By specifying the above criteria, big farmers and agri-business would not be eligible to receive these payments which in turn would limit the effects on production to an acceptable de minimis level, says the UNCTAD India paper.

The paper also contains a very useful Appendix on the state of play of the WTO negotiations on GB. For each element of the GB, the Appendix does four things: (1) It lays out the what the present WTO rules on GB say about what is covered and the criteria for eligibility; (2) It then describes the proposals on the table on amending the criteria for eligibility; (3) It describes the significance of the proposals and assesses their usefulness; (4) In some cases, the paper makes its own proposals.

The elements of the GB that are analysed in this way in the paper are: general services, public stockholding for food security purposes; domestic food aid, direct payments to producers, decoupled income support, income insurance and income safety net programmes, structural adjustment through investment aids, relief from natural disasters.

Given the findings of the paper on the trade distortions caused by the Green Box subsidies, it would be useful to assess whether the strong efforts to reducing the "trade distorting" subsidies (under the Amber and Blue Box) would be rendered ineffective if the big subsidising countries are able to maintain and increase their Green Box subsidies.

The paper itself does not do that. The same UNCTAD India team could supplement their valuable report by doing follow-up research on the implications of its findings for the Doha agriculture negotiations.

(This is the third and final part of a three-part series on the UNCTAD India Team's paper on the Green Box. The first two articles appeared in the two previous issues of SUNS.)