Regulation of international trade within the framework of the world trade organization (WTO)

Regulation of International Trade under WTO rules: objectives, functions, principles, structure, decision-making procedure. Issues on market access: tariffs, safeguards, balance-of-payments provisions. Significance of liberalization of trade in services.

04.06.2011
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First, the complaining Member must send notice for consultation to the offending Member and to the DSB, stating the reasons, the measures and the legal basis for the request.

Second, the responding Member must reply to the request within 10 days of receiving the request, and enter into consultation within 30 days of receiving the request, or within 10 days in cases of urgency, such as cases concerning perishable goods.

Third, the complaining Member may request the DSB for the formation of a panel within 60 days or 20 days in urgent cases of the receipt of the notice for consultation by the responding Member if the consultation has failed. Any offer made in the consultation is not binding.

Interested Members may give notice to the consulting Members and the DSB within 10 days of the date of circulation of the request for consultation in order to join the consultation, or may initiate a separate consultation.

Second stage: the panel (up to 45 days for a panel to be appointed, plus 6 months for the panel to conclude). If consultations fail, the complaining country can ask for a panel to be appointed. The country in the dock can block the creation of a panel once, but when the Dispute Settlement Body meets for a second time, the appointment can no longer be blocked (unless there is a consensus against appointing the panel).

Officially, the panel is helping the Dispute Settlement Body make rulings or recommendations. But because the panel's report can only be rejected by consensus in the Dispute Settlement Body, its conclusions are difficult to overturn. The panel's findings have to be based on the agreements cited.

The panel's final report should normally be given to the parties to the dispute within six months. In cases of urgency, including those concerning perishable goods, the deadline is shortened to three months.

The agreement describes in some detail how the panels are to work. The main stages are:

Before the first hearing: each side in the dispute presents its case in writing to the panel.

First hearing: the case for the complaining country and defense: the complaining country (or countries), the responding country, and those that have announced they have an interest in the dispute, make their case at the panel's first hearing.

Rebuttals: the countries involved submit written rebuttals and present oral arguments at the panel's second meeting. The responding Member has the right to make its rebuttal first, and then, the complaining Member will follow.

Experts: if one side raises scientific or other technical matters, the panel may consult experts or appoint an expert review group to prepare an advisory report.

First draft: the panel submits the descriptive (factual and argument) sections of its report to the two sides, giving them two weeks to comment. This report does not include findings and conclusions.

Interim report: The panel then submits an interim report, including its findings and conclusions, to the two sides, giving them one week to ask for a review.

Review: The period of review must not exceed two weeks. During that time, the panel may hold additional meetings with the two sides.

Final report: A final report is submitted to the two sides and three weeks later, it is circulated to all WTO members. If the panel decides that the disputed trade measure does break a WTO agreement or an obligation, it recommends that the measure be made to conform to WTO rules. The panel may suggest how this could be done.

The report becomes a ruling: The report becomes the Dispute Settlement Body's ruling or recommendation within 60 days of the date of circulation of the report to Members unless a consensus rejects it. Both sides can appeal the report (and in some cases both sides do).

Appeal process.

Either side or both sides can appeal a panel's ruling. The third parties which have indicated their interest in the dispute do not have such a right. Appeals have to be based on points of law such as legal interpretation -- they cannot reexamine existing evidence or examine new evidence.

Each appeal is heard by three members of a permanent seven-member Appellate Body set up by the Dispute Settlement Body and broadly representing the range of WTO membership. Members of the Appellate Body have four-year terms, and can be renewed once. They have to be individuals with recognized standing in the field of law and international trade, not affiliated with any government.

The appeal can uphold, modify or reverse the panel's legal findings and conclusions. Normally appeals should not last more than 60 days, with an absolute maximum of 90 days. The Dispute Settlement Body has to accept or reject the appeals report within 30 days -- and rejection is only possible by consensus.

Implementation of Recommendation.

If a country has done something wrong, it should swiftly correct its fault. And if it continues to break an agreement, it should offer compensation or suffer a suitable penalty that has some bite.

Even once the case has been decided, there is more to do before trade sanctions (the conventional form of penalty) are imposed.

The priority at this stage is for the losing defendant to bring its policy into line with the ruling or recommendations. The dispute settlement agreement stresses that prompt compliance with recommendations or rulings of the DSB [Dispute Settlement Body] is essential in order to ensure effective resolution of disputes to the benefit of all Members. If the country that is the target of the complaint loses, it must follow the recommendations of the panel report or the appeals report. It must state its intention to do so at a Dispute Settlement Body meeting held within 30 days of the report's adoption. If complying with the recommendation immediately proves impractical, the member will be given a reasonable period of time to do so.

If it fails to act within this period, it has to enter into negotiations with the complaining country (or countries) in order to determine mutually-acceptable compensation -- for instance, tariff reductions in areas of particular interest to the complaining side.

If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the Dispute Settlement Body for permission to impose limited trade sanctions (suspend concessions or obligations) against the other side. The Dispute Settlement Body should grant this authorization within 30 days of the expiry of the reasonable period of time unless there is a consensus against the request.

In principle, the sanctions should be imposed in the same sector as the dispute. If this is not practical or if it would not be effective, the sanctions can be imposed in a different sector of the same agreement. In turn, if this is not effective or practicable and if the circumstances are serious enough, the action can be taken under another agreement. The objective is to minimize the chances of actions spilling over into unrelated sectors while at the same time allowing the actions to be effective.

In any case, the Dispute Settlement Body monitors how adopted rulings are implemented. Any outstanding case remains on its agenda until the issue is resolved.

4. Case study: the timetable in practice

On 23 January 1995, Venezuela complained to the Dispute Settlement Body that the United States was applying rules that discriminated against gasoline imports, and formally requested consultations with the United States.

The case arose because the United States applied stricter rules on the chemical characteristics of imported gasoline than it did for domestically-refined gasoline. Venezuela (and later Brazil) said this was unfair because US gasoline did not have to meet the same standards -- it violated the national treatment principle and could not be justified under exceptions to normal WTO rules for health and environmental conservation measures.

Just over a year later (on 29 January 1996) the dispute panel completed its final report. (By then, Brazil had joined the case, lodging its own complaint in April 1996. The same panel considered both complaints.) The dispute panel agreed with Venezuela and Brazil.

The United States appealed. The Appellate Body completed its report (The appeal report upheld the panel's conclusions, making some changes to the panel's legal interpretation), and the Dispute Settlement Body adopted the report on 20 May 1996, one year and four months after the complaint was first lodged.

The United States and Venezuela then took six and a half months to agree on what the United States should do (i.e., to determine mutually-acceptable compensation). The agreed period for implementing the solution was 15 months from the date the appeal was concluded (20 May 1996 to 20 August 1997) (i.e., the United States agreed with Venezuela that it would amend its regulations within 15 months).

The Dispute Settlement Body has been monitoring progress -- the United States submitted status reports on 9 January and 13 February 1997, for example, and on 26 August 1997 it reported to the Dispute Settlement Body that a new regulation had been signed on 19 August.

Case before the WTO: The tuna-dolphin dispute.

This case was handled under the old GATT dispute settlement procedure but still attracts a lot of attention because of its implications for environmental disputes. Key questions are:

can one country tell another what its environmental regulations should be?

and do trade rules permit action to be taken against the method used to produce goods (rather than the quality of the goods themselves)?

In eastern tropical areas of the Pacific Ocean, schools of yellowfin tuna often swim beneath schools of dolphins. When tuna is harvested with purse seine nets, dolphins are trapped in the nets. They often die unless they are released.

The US Marine Mammal Protection Act sets dolphin protection standards for the domestic American fishing fleet and for countries whose fishing boats catch yellowfin tuna in that part of the Pacific Ocean. If a country exporting tuna to the United States cannot prove to US authorities that it meets the dolphin protection standards set out in US law, the US government must embargo all imports of the fish from that country. In this dispute, Mexico was the exporting country concerned. Its exports of tuna to the US were banned. Mexico complained in 1991 under the GATT dispute settlement procedure.

The embargo also applies to intermediary countries handling the tuna en route from Mexico to the United States. Often the tuna is processed and canned in one of these countries. In this dispute, the intermediary countries facing the embargo were Costa Rica, Italy, Japan and Spain, and earlier France, the Netherlands Antilles, and the United Kingdom. Others, including Canada, Colombia, the Republic of Korea, and members of the Association of Southeast Asian Nations, were also named as intermediaries.

The panel.

Mexico asked for a panel in February 1991. A number of intermediary countries also expressed an interest. The panel reported to GATT members in September 1991. It concluded:

that the US could not embargo imports of tuna products from Mexico simply because Mexican regulations on the way tuna was produced did not satisfy US regulations. (But the US could apply its regulations on the quality or content of the tuna imported.) This has become known as a product versus process issue.

that GATT rules did not allow one country to take trade action for the purpose of attempting to enforce its own domestic laws in another country -- even to protect animal health or exhaustible natural resources. The term used here is extra-territoriality.

What was the reasoning behind this ruling? If the US arguments were accepted, then any country could ban imports of a product from another country merely because the exporting country has different environmental, health and social policies from its own. This would create a virtually open-ended route for any country to apply trade restrictions unilaterally -- and to do so not just to enforce its own laws domestically, but also to impose its own standards on other countries. The door would be opened to a possible flood of protectionist abuses. This would conflict with the main purpose of the multilateral trading system -- to achieve predictability through trade rules.

The panel's task was restricted to examining how GATT rules applied to the issue. It was not asked whether the policy was environmentally correct or not. It suggested that the US policy could be made compatible with GATT rules if members agreed on amendments or reached a decision to waive the rules specially for this issue. That way, the members could negotiate the specific issues, and could set limits that would prevent protectionist abuse.

The panel was also asked to judge the US policy of requiring tuna products to be labeled dolphin-safe (leaving to consumers the choice of whether or not to buy the product). It concluded that this did not violate GATT rules because it was designed to prevent deceptive advertising practices on all tuna products, whether imported or domestically produced.

P.S. The report was never adopted.

Under the present WTO system, if WTO members (meeting as the Dispute Settlement Body) do not by consensus reject a panel report after 60 days, it is automatically accepted (adopted). That was not the case under the old GATT. Mexico decided not to pursue the case and the panel report was never adopted even though some of the intermediary countries pressed for its adoption. Mexico and the United States held their own bilateral consultations aimed at reaching agreement outside GATT.

In 1992, the European Union lodged its own complaint. This led to a second panel report circulated to GATT members in mid 1994. The report upheld some of the findings of the first panel and modified others. Although the European Union and other countries pressed for the report to be adopted, the United States told a series of meetings of the GATT Council and the final meeting of GATT Contracting Parties (i.e. members) that it had not had time to complete its studies of the report. There was therefore no consensus to adopt the report, a requirement under the old GATT system. On 1 January 1995, GATT made way for the WTO.

Timetable for settling a dispute.

These approximate periods for each stage of a dispute settlement procedure are target figures -- the agreement is flexible. In addition, the countries can settle their dispute themselves at any stage. Totals are also approximate.

60 days - Consultations, mediation, etc

45 days - Panel set up and panelists appointment

6 months - Final panel report to parties

3 weeks - Final panel report to WTO members

60 days - Dispute Settlement Body adopts report

(if no appeal)

Total = 1 year (without appeal)

60-90 days - Appeals report

30 days - Dispute Settlement Body adopts appeals report

Total = 1y 3m (with appeal)

Case: Timetable for settling the US-Venezuela gasoline dispute

Time(0 = start of case)

Target/ actual period

Date

Action

-5 years

1990

US Clean Air Act amended

-4 months

September 1994

US restricts gasoline imports under Clean Air Act

0

60 days

23 January 1995

Venezuela complains to Dispute Settlement Body, asks for consultation with US

+1 month

24 February 1995

Consultations take place. Fail.

+2 months

25 March 1995

Venezuela asks Dispute Settlement Body for a panel

+2? months

30 days

10 April 1995

Dispute Settlement Body agrees to appoint panel. US does not block. (Brazil starts complaint, requests consultation with US.)

+3 months

28 April 1995

Panel appointed. (31 May, panel assigned to Brazilian complaint as well)

+6 months

9 months (target is 6-9)

10-12 July and 13-15 July 1995

Panel meets

+11 months

11 December 1995

Panel gives interim report to US, Venezuela and Brazil for comment

+1 year

29 January 1996

Panel circulates final report to Dispute Settlement Body

+1 year, 1 month

21 February 1996

US appeals

+1 year, 3 months

60 days

29 April 1996

Appellate Body submits report

+1 year, 4 months

30 days

20 May 1996

Dispute Settlement Body adopts panel and appeal reports

+1 year, 10? months

3 December 1996

US and Venezuela agree on what US should do (implementation period is 15 months from 20 May)

+1 year, 11? months

9 January 1997

US makes first of monthly reports to Dispute Settlement Body on status of implementation

+2 years, 7 months

19-20 August 1997

US signs new regulation (19th). End of agreed implementation period (20th)

Questions

1. Adjudicating vs. negotiating vs. negotiating international trade disputes - pros and cons?

2. How does the WTO dispute settlement procedure work?

3. Explain the concepts of reverse consensus and of cross-retaliation.

4. Who may participate in WTO dispute settlement procedure?

5. Are WTO Panels bound by earlier GATT/WTO decisions?

References

1. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p. 107-137.

2. Jackson/Davey/Sykes, 327-371.

3. Trading into the Future - WTO, 3rd edition, Revised August 2003

Lecture 9. Regulation of Agricultural Trade

1. Background for the Agreement

The original GATT1947 did apply to agricultural trade, but it contained loopholes. For example, it allowed countries to use some non-tariff measures such as import quotas, and to subsidize. Agricultural trade became highly distorted, especially with the use of export subsidies which would not normally have been allowed for industrial products. During 1997-2001, for example, the US injected export subsidies worth $78.87 billion. In May 2002, the US enacted another law authorizing massive farm subsidies. Farm subsidies account for more than 46% of the EU budget, spending U$7 billion in export subsidies to support 2% of its population involved in agriculture, accounting for 85% of all exports subsidies in the world. In Japan, the level of support is 65 percent (Switzerland 73% and Norway 69%) of gross farm receipts.

The agricultural negotiations of the Uruguay Round were largely dominated by exchanges between the US and the EU. On the eve of the Uruguay negotiations, the US was the world's biggest exporter of agricultural products and the second biggest importer. In contrast, the EU was the biggest importer and the second biggest exporter at world level. When the Round began, the two major exporting powers had both reached self-sufficiency because of the effectiveness of the CAP, technological progress and improved productivity, and were trying to conquer the export market. Only with a simultaneous and similar modification of farm policies on both sides of the Atlantic could there be a sharing of the cost of agricultural policy reform. The agricultural negotiations that were initially multilateral in the GATT context rapidly turned into bilateral negotiations between the EU and the US. The agriculture negotiations blocked the rest of the multilateral negotiations. The concessions obtained were in fact no more than an international consolidation of internal reforms.

Reasons for the existence of exceptional arrangements for agriculture.

Governments usually give three reasons for supporting and protecting their farmers, even if this distorts agricultural trade to make sure that enough food is produced to meet the country's needs

In many countries, support for agriculture is primarily strategic in nature. By encouraging agriculture, a country can guarantee its food supplies against fluctuating harvests and protect its population from famines. Self-sufficiency in agricultural products means a country does not have to depend on supplies from third countries, which could one day turn out to be its enemies. It is particularly significant for the developing countries with chronic shortage of foreign exchange. It is not practical for them to depend on imported staple food, even though it may be cheaper to import, because they may not have adequate foreign exchange to import the food products. Considering the uncertain nature of their foreign exchange availability and also, perhaps, the uncertainty in the supply of food grain even if the necessary foreign exchange were available, several countries would like to develop their own production base for their staple food, rather than depend on imports.

To shield farmers from the effects of the weather and swings in world prices.

The objective of ensuring consumers reasonable prices and protecting producers against fluctuations in the price of agricultural products is often put forward to justify the existence of agricultural policies. One of the main characteristics of the agricultural product market is indeed its wide price variations due to the fact that demand for foodstuffs is constantly rising because of world population growth whereas supply can vary enormously because of fluctuating harvests and weather conditions. Variable customs duties, as are given in EU, can correct any variation in world prices and guarantee a fixed price on the domestic market thus ensure a stable income for producers. Loans to farmers or an insurance mechanism that guarantees producers a minimum income, irrespective of fluctuations in world prices, as is the case in the US, can also achieve this goal.

To preserve rural society.

Many Western democracies remain closely attached to the cultural, social, and historical values that agriculture perpetuates. In the US, people still cherish the image of the pioneer farming families who settled the vast expanses of America. Similarly, the Japanese remain very attached to maintaining national agriculture through which they can preserve their ancestral traditions. In the European Community, the existence of the common agricultural policy (CAP) is nowadays justified by the multifunctional aspect of agriculture. Thus regional planning, safeguarding the rural way of life, animal welfare, environmental protection and food security are financed via support for agriculture.

Several developing countries have a more deep-seated concern. Agriculture in these countries is not so much a matter of commerce; it is intimately interwoven with the pattern of rural life. Many farmers cultivate their land not as a commercial venture, but more as a family tradition. The land has been with their families for generations and they have been cultivating it as they have no other source of income to support their families. Such developing countries fear that their small and marginal household farmers will be in great difficulty when they are called upon to face the challenge of world competition.

To win political support.

This is an inexplicit motivation in granting favorable agricultural policies. In many Western democracies, agricultural interests have a political clout that gives them a decisive influence on the political life of their countries. This is the case in the US where the thinly populated states of the farm belt have as many senators as densely populated states like California, and similarly in Japan or Canada where the political systems also encourage over-representation of rural rather than urban areas. This phenomenon also exists in the EU. In Germany the weight of farming interests in the south of the country was decisive in keeping Chancellor Kohl in power; in France the rural electorate still influences a very large share of the vote although farmers account for only some 5% of the working population.

This cultural and sociological dimension of agricultural support, which is very evident in the urban electorate, coupled with the strong political representation enjoyed by the agricultural electorate in the major Western democracies, helps to understand why, apart from reasons of simple economic logic, the major Western democracies remain firmly attached to maintaining agricultural policies.

But the policies have often been expensive, and they have encouraged gluts leading to export subsidy wars. Countries with less money for subsidies have suffered. In negotiations, some countries have argued that trying to meet any of these objectives is counter-productive. Others have attempted to find ways of meeting the objectives without distorting trade too much.

Overriding feature of the agreement: Where there is any conflict between the Agreement and other WTO agreements, the provisions of the Agreement on Agriculture prevail.

The objective of the Agreement is to establish a fair and market-oriented agricultural trading system, thus improve predictability and security for importing and exporting countries alike.

2. Areas of Commitments under the Agreement on Agriculture

- market access, i.e., the disciplines on import restraints and import limitations;

- domestic support, i.e., support by government to domestic producers;

- export subsidies, i.e., support by government to exporters.

The agreement does allow governments to support their rural economies, but preferably through policies that cause less distortion to trade. It also allows some flexibility in the way commitments are implemented. Developing countries do not have to cut their subsidies or lower their tariffs as much as developed countries, and they are given extra time to complete their obligations. Special provisions deal with the interests of countries that rely on imports for their food supplies, and the least developed economies. Peace provisions within the agreement aim to reduce the likelihood of disputes or challenges on agricultural subsidies over a period of nine years.

3. Market Access

Tariffication.

The new rule for market access in agricultural products is tariffs only. Before the Uruguay Round, some agricultural imports, especially for many temperate zone agricultural products, were restricted by quotas and other non-tariff measures. These have been replaced by tariffs that provide more-or-less equivalent levels of protection -- if the previous policy meant domestic prices were 75% higher than world prices, then the new tariff could be around 75%. (Converting the quotas and other types of measures to tariffs in this way was called tariffication.) The tariffs on virtually all agricultural products traded internationally are bound in the WTO.

Tariffication formula - tariffication referred to the conversion to an ordinary tariff rate of the full extent of protection given to a product through both tariff and NTBs. The Modalities document prescribed the use of the price gap method to measure tariff equivalents, as follows:

T = (Pd - Pw)/ Pw * 100

Where T = ad valorem tariff equivalent

Pd = domestic price (e.g. wholesale price)

Pw = world reference price (import or export parity price)

Base year - the average of three years, ex.1986, 1987 and 1988.

Tariff Reduction.

A Member has to reduce its tariff total every year in equal steps over a prescribed span of time.

Developed Members will, from 1995 to 2000, reduce their tariffs on agricultural products by 36% on average, with a minimum cut of 15% in each tariff line. For developing Members, the cuts are 24 and 10% respectively from 1995 to 2004. Least-developed Members were required to bind all agricultural tariffs, but not to undertake tariff reductions.

In practice, major importers of agricultural products have bound the tariffs at very high levels, assuming very high tariff equivalents for non-tariff measures, thus making the entry of imports almost impossible.

Typical High Tariffs

Canada: butter 360%,

cheese 289%,

eggs 236.3%

EU: beef 213%,

wheat 167.7%,

sheep meat 144%

Japan: wheat products 388.1%,

wheat 352.7%,

barley products 361%

US: sugar 244.4%,

peanuts 173.8%,

milk 82.6%.

These tariffs are so high that even in the final year of the implementation period they would still be very high.

Tariff Reduction formulas.

No method or formula for further reduction of the tariffs has been identified as yet for the next round within the formal WTO process - in fact, this itself would be a subject for negotiations. However, reflecting the importance of this matter, this subject has attracted considerable attention from analysts. What follows is a summary of various ideas, albeit all informal, by which tariffs may be reduced. Given that tariff binding is a matter of strategic concern, it is important for countries to be aware of these possible methods and how these would affect their currently bound tariff rates.

Across-the-board linear reduction. A linear reduction formula is simply Tn = (1-r*t)*T0, where Tn and T0 are new and original tariff rates respectively, r is agreed reduction rate and t is the time period for reduction. For example, if r = 0.06 (i.e. 6 percent reduction per year) and t = 6 years, a 100 percent tariff is reduced to 64 percent. This method was applied in the Kennedy Round with the "r*t" set at 50 percent. As a result of some exceptions negotiated subsequently, the final reduction was 35 percent. The approach is both simple and transparent. While tariffs could be cut significantly if the reduction rate is high (e.g. 50 percent compared to 36 percent on average in the Uruguay), another linear cut would still leave many tariff peaks in agriculture left by the Uruguay formula.

Linear reduction with conditions on minimum cuts. This was the formula used in the Uruguay AoA (36 percent average reduction with a 15 percent minimum per tariff line). Although tariffs were reduced by an average of 36 percent, the method left many tariff peaks, as countries had the freedom to cut tariffs on "sensitive" products by only the minimum 15 percent while reducing by more for others, in order to reach the (un-weighted) average of 36 percent. This formula could be improved, e.g. by raising the minimum to, say 25 percent, or by seeking a balance in the trade volume between those with higher and lower than average cuts, i.e. trade-weighted tariff reductions.

The Uruguay formula with the same base as in the Uruguay. Rather than using the bound rates reached at the end of the implementation period of the Uruguay as the benchmark for further reduction, a further 36 percent cut in the average level of tariffs from the same base as in the Uruguay would imply a 72 percent cut over the two reform periods, a significant reduction over a dozen years or so. This approach has some other advantages, e.g. giving a sense of the continuity of the process of reform by using the same formula; no controversy over the choice of a new base period; and full "credit" for unilateral reductions during the negotiation period.

Successive linear reductions. Compared with the linear method, here the base tariff rate, T0, is adjusted every year to its new level. The formula for this, also known as a radial formula, is

Tn = (1-r)t * T0. With this, if r = 0.06 and t = 6 years, a tariff level of 100 percent is reduced to 69 percent, compared with 64 percent with the linear formula. As the base itself gets reduced every year, the overall reduction at the end of the period is smaller. However, for a smaller reduction rate and a shorter time period, the difference in reduction rates from the two formulae is not much.

Harmonization of tariff rates - the Swiss Formula. This formula was used in the Tokyo Round to harmonize tariff peaks on industrial products left as a result of the linear formula used in the Kennedy Round. The Swiss formula is Tn = (amax * T0)/(amax + T0), where amax is the upper bound on all resulting tariffs. With amax = 50, an initial tariff of 40 percent would be reduced to 22 percent while a 100 percent tariff would be reduced to 33 percent. On the other hand, with amax = 25, a 40 percent tariff is reduced to 15 percent and a 100 percent tariff is reduced to 20 percent. The value of amax then becomes the parameter for negotiations. Figure 1 shows how three of these methods discussed here compare in terms of tariff reductions.

Capping all tariffs at some maximum rate. For example, a maximum rate of 60 percent could be agreed to which all higher tariffs would have to be reduced over an agreed period. This rule may be applied in conjunction with other reduction methods.

Using actual protection rates for recent years as the benchmark. In this approach, negotiators agree to eliminate the gap, or a good part of it, between the bound and the applied rates, the so-called "discretionary protection" or "water in the tariff", using some recent period to measure the gap, e.g. 1995-97. This approach, while it makes some economic sense, appears problematic due to problems associated with measuring (or agreeing with the measurement of) the protection rate. This was one of the problems that led to inflated tariff equivalents (and thus bound tariffs) on many commodities in the Uruguay, which came to be known as "dirty tariffication". This method is less helpful for developing countries where domestic prices tend to be lower than or similar to world reference prices, resulting in negative or zero bound rates, which would not be acceptable.

Tariff Quota.

As the tariffs existing after the tariffication of non-tariff barriers are very high in several cases, there would be no meaningful market access opportunities. Hence, particular provisions were made in the document for market access opportunities. There are three types of such provisions.

Current access opportunity.

Opportunity has to be provided for a level of import equal to the average annual import level during the base period 1986-88 by having very low tariffs for imports up to this extent.

Minimum access opportunity.

Opportunity for a level not less than 3% of the annual consumption in the period 1986-88 has to be provided in 1995. This level would be raised to 5% by the end of 2000 by developed countries and by the end of 2004 by developing countries by having very low tariffs for imports up to this extent.

Special minimum access opportunity.

Members who have opted for non-tariff measures instead of tariffication have to provide such opportunity, i.e., Japan, the Philippines and the Republic of Korea for rice, and Israel for sheepmeat, wholemilk powder and some dairy products. For developed Members, it means import in 1995 to the extent of 4% of the annual average consumption in the base period 1986-88, and an increase of 0.8% of the base period consumption every year thereafter up to the end of 2000. For developing Members, it means import in 1995 to the extent of 1% of the annual average consumption in the base period, rising uniformly to 2% in 1999 and then to 4% in 2004.

These above-mentioned access opportunities are to be provided by tariff quotas, i.e., by having very low tariffs up to the stipulated extent of imports, and above that level, having the normal tariffs which, in the case of agricultural products, are generally very high. Except for cases of bilateral and plurilateral agreements, these quotas should generally be global quotas, i.e., on a non-discriminatory basis, rather than country-specific quotas.

A tariff-quota.

This is what a tariff-quota might look like: Imports entering under the tariff-quota (up to 1,000 tons) are charged 10%. Imports entering outside the tariff quota are charged 80%. Under the Uruguay Round agreement, the 1,000 tons would generally be based on actual imports in the base period or an agreed minimum access formula.

Tariff quotas are also called tariff-rate quotas.

Special Safeguard Provision (SSP).

Generally, safeguard action can be taken only if there is existence of serious injury or the threat of serious injury to domestic production, whereas the special safeguard action can be taken without the demonstration of any adverse effect on domestic production. A special safeguard action can be taken if the import price falls below a particularly prescribed level (trigger price) or if the import quantity rises above a particularly prescribed level (trigger quantity).

Price trigger.

The trigger price is normally to be determined as the average cost, insurance and freight (CIF) import price of the product during the 1986-88 base period. If the trigger price is high, the import price may fall below this level more often, and consequently, it will be easier to take the special safeguard action.

Formula for the calculation of the ceilings of price trigger.

1) if the difference between the trigger price and the import price is 10% of the trigger price or less, no additional duty can be imposed;

2) if the difference is more than 10%, but not more than 40%, the additional duty will be 30% of the amount by which the difference exceeds 10%;

3) if the difference is more than 40%, but not more than 60%, the additional duty will be 50% of the amount by which the difference exceeds 40%, plus the duty in 2);

4) if the difference is more than 60%, but not more than 75%, the additional duty will be 70% of the amount by which the difference exceeds 60%, plus the duty in 3);

5) if the difference is more than 75%, the additional duty will be 90% of the amount by which the difference exceeds 75%, plus the duty in 4).

For example, when the trigger price is $200 per unit, and the current price falls to $80 per unit, the difference is $120.

According to 1), there is no additional duty if the difference is only up to 10% of the trigger price, i.e., $20.

According to 2), up to $80, the duty is 30% of $60 (%80-$20), i.e., $18.

Thereafter, up to a difference of 60%, i.e., $120, the duty is 50% of the difference exceeding 40%, i.e., 50% of $40 ($120-$80), i.e., $20.

Hence, the additional duty may be to the extent of $18+$20, i.e., $38 on each unit.

Quantity trigger.

If the volume of imports is higher than a trigger level of 105-125% of the average level of imports during the preceding three years, and the import is above 30% or 10-30% of the domestic consumption, special safeguard measures can be imposed. Higher import penetration will enable a Member to take SSP action at a lower level of increase in imports.

Formula for the calculation of base trigger level, i.e., the increase in the import quantity:

1) if the import is 10% of domestic consumption or less, 125% of the average quantity of imports in the three preceding years for which data are available;

2) if the import is 10-30% of domestic consumption or less, 110% of the average quantity of imports in the three preceding years for which data are available;

3) if the import is above 30% of domestic consumption or less, 105% of the average quantity of imports in the three preceding years for which data are available;

The actual trigger level is the sum of the increase in import quantity and the change in domestic consumption, and must not be less than 105% of the average quantity of imports in the three preceding years for which data are available.

The measure is, under the SSP, an increase in duty, which must not exceed one-third of the ordinary customs duty and will terminate by the end of the imposing year. For example, when domestic consumption is 1000 units and the import quantity is 280 units, i.e., 28% of domestic consumption, the base trigger import quantity level will be 110% of 280 units, i.e., 308 units. Suppose the consumption has grown to 1000 units from 900 units, which means a change in consumption of +100 units, the actual trigger level in this case is 308+100, i.e., 408 units. If the import quantity exceeds 408 units, an additional duty can be imposed. Suppose the ordinary customs duty on this item is 30%, the maximum additional duty that can be imposed is one-third of 30%, i.e., 10%.

Domestic Support.

Reduction of domestic support.

Domestic support measures are disciplined through reductions in the Total Aggregate Measurement of Support (Total AMS), including product-specific AMS and non-product-specific AMS. The Total AMS is a means of quantifying the aggregate value of domestic support or subsidy given to each category of agricultural products.

Example: Calculation of the current total AMS.

Member X (developed country), year Y

Wheat:

> Intervention price for wheat = $255 per tonne

> Fixed external reference price (world market price) = $110 per tonne

> Domestic production of wheat = 2,000,000 tonnes

> Value of wheat production = $510,000,000

> Wheat AMS (AMS 1) ($255-$110) x 2,000,000 tonnes = $290,000,000

(de minimis level=$25,500,000)

Barley:

> Deficiency payments for barley = $3,000,000> Value of barley production = $100,000,000

> Barley AMS (AMS 2) = $3,000,000

(de minimis level=$5,000,000).

Oilseeds:

> Deficiency payments for oilseeds = $13,000,000> Fertilizer subsidy = $1,000,000

> Value of oilseeds production = $250,000,000

> Oilseeds AMS (AMS 3) = $14,000,000

(de minimis level=$12,500,000)

Support not specific to products.

> Generally available interest rate subsidy = $ 4,000,000

Value of total agricultural production = $860,000,000

> Non-product-specific AMS (AMS 4) = $4,000,000

de minimis level=$43,000,000

Current total AMS (AMS 1 + AMS 3) = $304,000,000.

If a support measure exists but the method of calculation of the AMS cannot be applied to it, the calculation of an equivalent measurement of support (EMS), i.e., budgetary outlays, will be made and included in the Total AMS.

Generally, price support is measured by multiplying the gap between the applied administered price and a specified fixed external reference price, i.e., world market price, by the quantity of production eligible to receive the administered price. The fixed external reference price is the average unit price during the period 1986-88. It is the FOB price for the net exporting country and the CIF price for the net importing country.

The schedule on the reduction in domestic support prescribes that the Base Total AMS must be reduced by 20% for developed Members over 6 years (1995-2000 both inclusive) and 13.3% for developing Members over 10 years (1995-2004 both inclusive), while there is no reduction required of least-developed countries.

Measures of domestic support.

Domestic support measures are the aid granted to agricultural production that are not export subsidies. These aids are classified into three categories of two types: green and blue box measures free of reduction commitments and yellow/amber box measures subject to reduction commitments.

Green box measures: measures having no or at most minimal trade-distorting effects or effects on production, and must be provided through a publicly-funded program (including revenue foregone) not involving transfer from consumers. It implies a preference for agriculture support policies financed in a transparent way by the taxpayer as opposed to price support policies financed by the consumers.

1) Government service programs for agriculture and the rural community, such as pest and disease controls, support for training and information, infrastructure (water, electricity) or research programs, which involve no direct payments.

2) Domestic food aid programs for people in need, provided that products are bought from producers at market prices, and aid for public storage of agricultural products for food security purposes.

3) Direct payment: aid for developing agricultural structures such as resource retirement programs, or investment aid for producers totally and permanently retire from production, or de-coupled income support measures granted to producers suffering an income loss and not related to the quantities produced or the prices charged or factors of production employed.

4) Regional assistance for farmers in disadvantaged regions and environmental aid

5) Payments for relief from natural disasters.

Blue box measures: direct payments under production limiting programs made on fixed areas and yield or a fixed number of livestock, or on 85% or less of production in a defined base period, particularly aids respecting certain criteria precisely met by European direct support (the central pillar of the very recent CAP reforms) for products subject to quantitative production limits and deficiency payments granted by the US.

Blue box measures can be considered to be partially-decoupled, that is, production is still required in order to receive the payments, but the actual payments do not relate directly to the current quantity of that production.

Amber/yellow box measures: any domestic support measures not correspond to the exceptional arrangements of the green and blue boxes are classified as being yellow and must therefore be included in the calculation of reduction commitments. The reduction commitment is a global commitment. In other words, Members have not undertaken to reduce the support granted to each product by 20%. A Member is considered to be in compliance with its domestic support commitments if its domestic support in favor of agricultural producers expressed in terms of current total AMS does not exceed the corresponding annual or final bound commitment level specified in its Schedule.

Other exempt measures.

1) development measures: measures of assistance, whether direct or indirect, designed to encourage agricultural and rural development and that are an integral part of the development programs of developing countries, including investment subsidies, agricultural input subsidies available to low-income or resource-poor producers in developing countries and domestic support to encourage diversification from growing illicit narcotic crops in developing countries.

2) de minimus levels of support: When the aggregate value of product-specific or non-product-specific support does not exceed 5% (for developed countries) or 10% (for developing countries) of the total value of production of the agricultural product in question, there is o requirement to reduce such trade-distorting domestic support.

Summary:

The main complaint about policies which support domestic prices, or subsidize production in some other way, is that they encourage over-production. This squeezes out imports or leads to export subsidies and low-priced dumping on world markets. The Agriculture Agreement distinguishes between support programmes that stimulate production directly, and those that are considered to have no direct effect.

Domestic policies that do have a direct effect on production and trade have to be cut back. WTO members have calculated how much support of this kind they were providing (using calculations known as total aggregate measurement of support or Total AMS) for the agricultural sector per year in the base years of 1986-88. Developed countries have agreed to reduce these figures by 20% over six years starting in 1995. Developing countries are making 13% cuts over 10 years. Least developed countries do not need to make any cuts.

Measures with minimal impact on trade can be used freely -- they are in a green box (green as in traffic lights). They include government services such as research, disease control, infrastructure and food security. They also include payments made directly to farmers that do not stimulate production, such as certain forms of direct income support, assistance to help farmers restructure agriculture, and direct payments under environmental and regional assistance programmes.

Also permitted, are certain direct payments to farmers where the farmers are required to limit production (sometimes called blue box measures), certain government assistance programmes to encourage agricultural and rural development in developing countries, and other support on a small scale when compared with the total value of the product or products supported (5% or less in the case of developed countries and 10% or less for developing countries).

4. Export Subsidies

Background: Before the WTO, particularly in the 1970s and 1980s, success in international market for agricultural products became increasingly determined by the financial power of national treasuries rather than the efficiency and marketing skills of agricultural producers and exporters. Export subsidies also became a major factor in depressing, or destabilizing, world market prices for many agricultural products. When the Uruguay negotiations began, the common objective of the US and the Cairns Group1 countries was the pure and simple abolition of export subsidies. The possibility of granting export subsidies was finally incorporated in the Agreement on Agriculture at the request of the EU.

Definition: Export subsidies are subsidies contingent on export performance, including:

1) direct export subsidies contingent on export performance

2) sales of non-commercial stocks of agricultural products for export at prices lower than comparable prices for such goods on the domestic market

3) producer-financed subsidies such as a levy on all production is then used to subsidize the export of a certain portion of that production

4) cost reduction measures such as subsidies to reduce the cost of marketing goods for export like handling cost and cost for international freight

5) international transport subsidies applying only to exports

6) subsidies on primary agricultural products incorporated in a processed agricultural product such as wheat contingent on their incorporation in export products of biscuits.

Rates of Reduction:

The Agriculture Agreement prohibits export subsidies on agricultural products unless the subsidies are specified in a member's lists of commitments. Where they are listed, the agreement requires WTO members to cut both the amount of money they spend on export subsidies and the quantities of exports that receive subsidies. All in all, 25 Members (counting the members of the EU as one) have export subsidy reduction commitments specified in their schedules, with a total of 428 individual reduction commitments.

Taking averages for 1986-90 as the base level, developed countries have agreed to cut the value of export subsidies by 36% over the six years starting in 1995 (24% over 10 years for developing countries). Developed countries have also agreed to reduce the quantities of subsidized exports by 21% over the six years (14% over 10 years for developing countries). Least developed countries do not need to make any cuts.


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