By Peter Ungphakorn
POSTED AUGUST 24, 2020 | UPDATED JULY 20, 2021
In late March 2020, as the COVID-19 pandemic accelerated around the world, India announced it had broken a key trade rule.
It told fellow-members of the World Trade Organization (WTO) that its domestic rice subsidies had exceeded the limit it had agreed. But instead of facing a possible legal challenge for breaking a commitment, India invoked a “peace clause” agreed in 2014.
As always happens in cases like this, WTO members discussed the breach in the next meeting of the Agriculture Committee in July. Some delegations said they wanted to look further into India’s explanations.
• What’s the problem?
• What are the agreed limits for developing countries?
• How is trade-distorting support calculated?
• What has been agreed?
• What are the concerns?
• Why didn’t the ‘peace clause’ settle this?
• Is a compromise possible?
• Developing v developed countries? No
At the centre of the debate is food stockpiling in developing countries, officially “public stockholding for food security”. But there’s more to it than the title suggests. Also important in the debate is a category of farm subsidy, known in the WTO as trade-distorting domestic support for agriculture.
The debate has dragged on for years, even though an “interim” solution was found in the 2014 “peace clause”. It is also characterised by political rhetoric, particularly when WTO trade ministers have met periodically. Some politicians and activists accuse opponents of jeopardising the food security of the poor. But is that really the case? If only it were so simple.
The pandemic may have given the discussion a new lease of life. Advocates now say this kind of stockholding programme is an essential response to disruptions in agriculture caused by the pandemic and the lockdowns, to avoid food insecurity.
Agricultural production around the world has generally been spared the actual lockdowns, but it has been squeezed by disruption in processing and retail, by changes in demand, and by its workers suffering from the disease itself.
In some parts of the world, rural communities have seen the mixed blessing of workers returning from the cities, or in some cases a shortage of migrant labour. India has seen both.
The United Nations and its Food and Agriculture Organization have warned of worsening food insecurity in some parts of the world, although globally food supplies and stocks remain healthy — including in India where “government warehouses are overflowing with 71 million tons of rice and wheat”. The risk tends to be concentrated in some countries.
Holding stocks of food is obviously necessary for food security, but this particular type of stockpiling programme is by no means the only way. It helps to be clear what WTO rules do and do not say:
There are no WTO rules preventing public stockholding for food security.
So what’s the problem, and why won’t it go away?
None. Not if governments buy food into the stockpiles at market prices. In developing countries, the stocks can even be released as free handouts or at low subsidised prices — still no problem. This has always been the case in the 1995 WTO Agriculture Agreement (Annex 2, paragraph 3 and footnote).
But India and some other developing countries use the stockpiling for an additional purpose — to support farmers and encourage production, which also affects food security.
They buy the produce at prices that are set by the government, not by the market (the official term is “administered prices”).
When they do that, the purchases are counted as “trade-distorting” domestic support for farmers — support that affects market prices and production quantities. WTO members have agreed limits on this type of support.
In technical sessions in the WTO, some delegations argued that market prices are difficult to determine because markets are not working properly, so their governments cannot avoid setting the prices.
Whatever the reason, two features now come into play. One is the agreed limits on the support. The other is the formula for calculating how much support is actually given.
US DOMESTIC FARM SUPPORT
De minimis, product-specific — Alfalfa seed, almonds, alpacas, apples, apricots, avocados, barley, beans (fresh & processing), beef cattle & calves, bison, blueberries, broccoli, buckwheat, cabbage, camelina, cantaloupe, celery, cherries, chickpeas, chile peppers, corn, cranberries, cucumbers, cultivated wild rice, dairy, deer (in captivity), equine, figs, flowers, goats, grapes/raisins, grasses, green peas, hay and forage, hogs and pigs, honeydew, kiwifruit, lemons/limes, lentils, lettuce, livestock, llamas, macadamia nuts, mint, miscellaneous fruits/nuts/vegetables, melons, and other crops, nectarines, nursery, oats, olives, onions, oranges, orchards/vineyards/nursery, peaches, pears, pecans, peppers, pistachios, popcorn, potatoes, poultry, pumpkins, rice, rye, safflower, sesame, sheep and lambs, soybeans, squash, strawberries, sweet corn, sweet potatoes, tangerines/mandarins/tangelos, taro, tobacco, tomatoes, walnuts, watermelon
• Total product-specific de minimis = $1.2bn
• plus non-product-specific de minimis = $3.4bn; so total de minimis = $4.6bn
Product-specific full AMS (> de minimis) — Bananas, canola, coffee, cotton, dry beans, dry peas, flaxseed, grapefruit, honey/apiculture, millet, mustard, papaya, peanuts, plums/prunes, sorghum, sugar, sunflower, wheat.
Non-product-specific AMS = 0
• Total full AMS = $4.3bn
• Total de minimis + full AMS = $8.9bn
(Notification for marketing year 2017 in document G/AG/N/USA/135, 24 July 2020.)
For almost all developing countries, the only limits on trade-distorting domestic support are “de minimis”, conceptually small but in practice potentially large since it’s linked to the value of production.
All developing countries are allowed to up to 10% of the value of production (except China, which has agreed 8.5%).
The limit for developed countries is 5% of the value of production, but several have an additional “AMS” entitlement (see below) because they were cutting it from much higher levels.
In practice the limit could be double those amounts. De minimis support can be given for individual products such as rice or beans (“product-specific” support). The 5%, 8.5% and 10% limits apply to the support for each product.
Additional support can also be given to the whole of agriculture (“non-product-specific” support), with those same percentages allowed. Rice and beans can also benefit even if they are not specific targets, meaning they can receive a double dose of de minimis support.
So the ultimate limits are 10% for developed countries, 17% for China and 20% for developing countries.
In a recent notification to the WTO, the US said it provided product-specific support for 95 products, from alfalfa seeds to wheat, 77 of them within the 5% de minimis limits, and 18 exceeding that and therefore subject to a higher “AMS” limit (explained below).
Back to India’s limit-breach — it told the WTO that in 2018/19, its trade-distorting support for rice was just over $5 billion. The value of rice production was $43.7bn, so the support exceeded the 10% limit of $4.4bn.
In 2019/20, the support increased to just over $6.3 billion, exceeding the $4.6bn 10% de minimis limit by even more — the value of production was notified at $46.1bn.
WHO CAN SUPPORT MORE?
A crude calculation suggests China’s entitlement could now be more than double the US’s and growing. But China argues that this is less than the US’s when measured per person or per farmer.
China’s entitlement is de minimis, 8.5% of the value of production, but finding the actual de minimis numbers is not straightforward.
China’s latest notification for domestic support is for 2011 (document G/AG/N/CHN/42, December 14, 2018). It values agricultural production (for product specific and non-product-specific support) at about CNY10.73 trillion or roughly $1.7 trillion (2011 exchange rate).
China’s de minimis limit for 2011 would be roughly $141bn. Since then China’s agricultural production will have grown.
For the US it’s both AMS and de minimis.
The US AMS limit is $19.1bn. In marketing year 2017, the US also claimed de minimis (product-specific and non-product-specific) on production worth $864bn (document G/AG/N/USA/135, July 24, 2020). The 5% de minimis limit on that would be $43.2bn. Together with AMS, the effective entitlement for the year would be about $62.3bn
How did India arrive at that $5bn figure? Using a formula in the WTO agreement known as the “aggregate measurement of support (AMS)”, which applies only to trade-distorting support.
AMS is the difference between the present support price and the original 1986–88 reference price multiplied by the quantity of production that is eligible for the support
Countries that had large amounts of support before 1995 were allowed more than de minimis provided they reduced the support — often known as “Amber Box” support, explained here.
The formula may seem odd since the base period is now over 30 years old. But it was designed this way for a reason: to prevent the big subsidisers — the EU, US, Japan, etc — from using inflation as an excuse to reduce the calculated figure for the support (AMS), effectively increasing the entitlement to subsidise.
The base period is fixed; the actual current support prices can be affected by inflation, so the gap between them increases with inflation, giving a bigger AMS number.
India and its allies did propose changing the base period for stockholding, but other WTO members were reluctant to tinker with the formula.
Even the concept of “eligible production” is controversial — is it right to say only the quantity actually purchased was “eligible”, or should it be total production?
They said that for these programmes, even if domestic support limits were breached, they would not launch a WTO legal dispute — the “peace clause”.
But to alleviate concerns among a number of members that this might impact other countries and world markets, the decision also says countries breaching the limits have to provide additional information and be prepared to discuss the breach with other members (see this fact sheet). India’s notifications for 2018/19 and 2019/20 include the required information.
India is the world’s largest rice exporter. It is buying the rice at a subsidised price, holding it in stocks and then releasing it. India has assured WTO members that the released rice is not exported.
But many of them are unconvinced. Even if particular grains of rice are not exported, the release is bound to lower prices on India’s domestic market. And since India is a major exporter, that is bound to lower India’s export prices and affect world markets.
Concerns have been raised, not only by competing exporters such as Thailand, Uruguay and Paraguay, but also others such as Pakistan who have argued that cheaper Indian rice would be imported and hurt their own farmers.
On July 15, 2021, Canada, Chile, Colombia, Paraguay, the US and Uruguay circulated a paper presenting “factual and analytical information” on the issue, focusing on how members have used this type of policy.
They made their purpose clear: to negotiate a permanent solution that “does not lead to distortions or uncertainty in international agriculture markets, and that does not adversely affect the food security of other Members, including developing country Members.”
India and its allies have argued repeatedly that the obligations on providing information are a bureaucratic burden that is too heavy for developing countries to bear because of limited resources and difficulty in collecting the data.
They were only willing to accept the peace clause and its transparency conditions as an “interim” solution. They continue to push for a permanent one that makes it easier to stockpile food when bought at government-set (“administered”) prices.
Other countries are unconvinced, particularly if the stockpiling country is a major exporter.
In theory, yes. In theory. In practice it will take significant climb-downs, which seem unlikely (to put it mildly) in the present climate — bearing in mind also that WTO decisions are only by consensus.
In the end it might need emerging economies such as India and China to recognise that there are genuine concerns over the impact on international markets when they are major exporters. This might allow the other countries to accept more flexibility on transparency for smaller players that have genuine capacity constraints.
The price of achieving that recognition might also be agreement by developed countries to cut their entitlements to use trade-distorting domestic support in general. Sometimes trade-offs like this work. But it would add another layer of complication. And, for example, there’s no sign the US would accept it.
Because this issue has become so symbolic, WTO members could waste another decade debating it inconclusively. Meanwhile the peace clause will remain in place.
Officially the proposal comes from a group of developing countries known as the G–33, currently 47 WTO members. The group’s official coordinator is Indonesia, which has also been a vocal advocate, as have some other members such as the Philippines.
But India has been the most prominent proponent and it’s the first to have a programme that breaches the de minimis limit and to invoke the peace clause.
The debate is sometimes described as a tussle between developed and developing countries, not least because the most visible confrontations at WTO ministerial meetings have been between the US and India.
But that description is wrong. A number of other developing countries oppose this and other proposals from the G–33, including Chile, Colombia, Costa Rica, Malaysia, Pakistan, Paraguay, Thailand, Uruguay and others.
Behind the rhetoric: the special safeguard mechanism
July 20, 2021 — adding India’s 2019/20 notifications, the new July 15 paper from six countries, expanding the list of developing countries opposing or sceptical about the proposal
April 10, 2021 — adding India’s 2018/19 notification, and a link to the original Bali decision
September 10, 2020 — adding the “Who can support more?” box
Graphics as credited. Photos all royalty-free CC0 except where stated.
• Worker with rice sacks, Yogendra Singh via Pexels CC0
• Women working in their rice paddy fields in Orissa in India, Justin Kernoghan, Wikimedia, CC 2.0 generic.