Technical note: the Cairns Group re-thinks domestic farm support

Unpredictable: taking a step back could simplify the talks, or make them more complicated

This technical note accompanies
WTO agriculture talks 2021: where ambition and cynicism collide

By Peter Ungphakorn
POSTED FEBRUARY 4, 2021 | UPDATED FEBRUARY 10, 2021

The agriculture negotiations in the World Trade Organization (WTO) are more than two decades old and have little to show for it. A number of WTO members now say it’s time to rethink how to reform agricultural trade. And as the talks restart in 2021, the focus is on domestic support for farming.

The talks do have one important achievement. In 2015, members agreed to scrap export subsidies on farm produce. And shortly before that, a compromise was struck on a much narrower issue: allowing food bought at government-supported prices for food security stocks to be shielded from legal challenge if the purchases breached domestic support limits.

Other than that, the rest of the large agenda — including access to markets, and domestic support — is mostly unresolved, after over 20 years of trying.

A year ago the Cairns Group, which has campaigned all along for radical reform in the trade, suggested starting again on farm support, almost from scratch. Australia, the group’s coordinator, is hoping that this year will see the new approach take off.

“Time for a re-set,” says Australian ambassador George Mina, pointing to lack of progress in over a decade.

“This is an issue on which pain has been felt by unsubsidised farmers across the world, particularly in developing countries. The time has come for a significant change.”

Whether or not that works remains to be seen. There are a number of rival proposals. And in the past, attempts to ditch what has already been achieved, if not agreed, have faced resistance. Some members are afraid of losing the concessions they secured in the latest draft, which has not changed since December 2008.

The approach in that draft was supposed to be fairly simple, while taking into account diverse concerns. The simplicity was the use of formulas for reducing each country’s support limits. But additional demands mounted. Some countries said they needed to be treated differently. Others called for new constraints to be added so that major subsidisers could not exploit loopholes by manipulating their programmes. And so the complexity piled up.

Map of the Cairns group | WTO
What is the Cairns Group proposing?Back to top

The new proposal is brief. Its focus is on “trade- and production-distorting” domestic support, for example guaranteed or topped up prices for farmers, or other support that affects production.

This is not the same as subsidies paid directly on exports, but it can still affect exports by creating surpluses that have to be offloaded into international markets, and making the exports cheaper.

The proposal contains four points.

  1. To cut by at least half by 2030, the worldwide total of countries’ entitlements on global trade-distorting subsidies.
  2. To negotiate to do this for all forms of trade-and production-distorting domestic support defined in the WTO Agriculture Agreement (article 6)
  3. Each country’s contributions to meeting that target would take into account the size of its current entitlements, the potential impact on global markets, and its development needs.
  4. Improving transparency — each country making “utmost efforts” to notify its domestic support as required under the rules.

Those are pretty broad objectives. The detail, such as how to take account of the amounts each country is allowed to subsidise, or the potential impact on world markets, would have to be negotiated.

Mina, says this could be done in two stages. First, the major “parameters” should be agreed by the next biennial WTO ministerial conference.

When that will happen is unknown. It has already been postponed from June 2020. Some think it might be at the end of 2021.

Then at the conference after that, the details should be completely agreed, says Mina, who concurrently serves as chair of the Cairns Group amongst its ambassadors in Geneva.

Tradition: the proposal keeps the focus on entitlements
Tradition: the proposal keeps the focus on entitlements
Why ‘entitlements’?Back to top

WTO agreements are all about rules and commitments. Agricultural subsidies are defined by negotiated rules. Countries then negotiate commitments: they want to reduce each other’s entitlements — the amounts they are allowed to subsidise.

They can go below the entitlements, which are legally binding limits, like ceilings. But they cannot go above. (Tariff commitments work in a similar way.)

The Cairns Group has chosen to keep to that tradition by continuing to negotiate reducing entitlements, which might or might not affect that actual amount of support in each country. For example, the EU currently only uses about 10% of its entitlement for trade-distorting support, so an 80% cut in the entitlement would have no effect on the EU’s present programmes.

In the past some countries have demanded cuts in entitlements that are deep enough to affect existing programmes. In 2008 India called for entitlement cuts that would bite into actual US support.

Sifting: the proposal attempts to remove complexity
Sifting: the proposal attempts to remove complexity
What would this change?Back to top

The WTO Agriculture Agreement (Article 6) disciplines three types of trade-distorting support:

  • aggregate measurement of support” (AMS), sometimes called the Amber Box. This is the most distorting because it directly affects prices and production and ultimately markets. Entitlements are fixed in dollars, euros or other local currency.
  • de minimis” is AMS or Amber Box support but supposedly in small doses — 5% of the value of production for developed countries, 10% for developing, 8.5% for China. De minimis entitlements are not fixed. They grow as production grows. The actual figure for each group is actually double those since it applies to support targeted at individual products as well as for agriculture in general.
  • Blue Box, essentially Amber Box but with constraints on production to reduce the impact on markets
Not fixed: de minimis entitlements grow as production grows
Not fixed: de minimis entitlements grow as production grows (FBTAMS = final bound total AMS) | Australia-NZ paper JOB/AG/171

AMS AND ENTITLEMENTS

Aggregate measurement of support (AMS), sometimes called “Amber Box”, is defined in an annex of the WTO Agriculture agreement for “market price support, non-exempt direct payments, or any other subsidy not exempted from the reduction commitment”.

For market price support, AMS is the difference between the current government-set price and a historical reference price, usually the average for 1986–88, multiplied by production that’s eligible for the support. (Both the reference price and how to define “eligible” production have become contentious.)

AMS is calculated when the support is (1) for specific products and (2) for agriculture as a whole. The two are added to make “total” AMS. (AMS is the usual approach, but if it cannot be calculated an alternative is available)

If AMS is below a particular percentage of production — whether for specific products or in general — it is considered conceptually small, called “de minimis” and excluded (counted as zero) when totting up total AMS.

The percentages are: 5% of the value of production for developed countries, 10% for developing, 8.5% for China — potentially double in each case since that applies to both product-specific AMS and support generally for agriculture.

Current AMS entitlements are the result of negotiation and are legally binding. The negotiations include phased reductions over a period. So the present commitments are the “final bound total AMS” entitlements.

Only the major subsidising countries had this entitlement, as a commitment to phase down the subsidies. They also committed to negotiate further reductions from 2000. Those talks are still going on. All WTO members, including the major subsidisers are entitled to de minimis.

The group estimates that entitlements under the most distorting category alone (AMS or Amber Box, including de minimis) will reach $2 trillion by 2030 if left unchecked.

The December 2008 draft has a complicated pair of formulas for domestic support.

One formula constrains AMS or Amber Box support, giving the steepest cuts to the countries with the largest entitlements, and the gentlest to those with the smallest.

The 2008 draft would introduce new curbs on Blue Box support.

But some were concerned that subsidising countries could manipulate their support programmes so they change between Amber and Blue Box and de minimis to get round the entitled limits (known as “box shifting”).

So a second formula was created to constrain all three types together: “overall trade-distorting support” (OTDS). How this would work is not particularly straightforward either.

The Cairns Group proposal essentially dumps all of that. It is theoretically possible to reach the target of cut-by-half-by-2030 using the 2008 formulas, but that would be even more complicated and would miss the point.

The most visible difference is a worldwide target, to be achieved by a fixed date. Previous techniques used in the WTO, including the 2008 draft, applied cuts to individual countries over a number of years.

But even if members want to use it — and many will take a lot of persuading — negotiators would still have to sort out issues such as:

  • How to deal with each of those three components of trade-distorting support — Amber and Blue box, and de minimis. Separately or lumped together?
  • How would support targeted at specific products and non-targeted support for agriculture in general be treated?
  • Would the definition of trade-distorting need to be expanded beyond those three, for example to include some parts of the Green Box (considered “minimally” distorting and therefore having no limits)?
  • How to identify the “potential impact” on international markets?
  • Is there are simpler and more rational way of identifying “level of development” and giving it appropriate treatment — how to reflect the difference between China, Jamaica and Tanzania?
  • Would the cuts still be done by formula? Or would something different work better such as countries responding to each other’s requests and offers?

One other point might also be considered. It is pretty esoteric, but with a real impact. AMS or Amber Box calculations for price-support programmes involve a time shift. Here, AMS is the different between government-set purchase prices and a base-period reference price. And that base period is usually 1986–88, relevant in the WTO’s early years but now around 35 years old. That means comparing the 2021 purchase price with a 35-year-old reference price. The purpose was to prevent big spenders like the US and EU from inflating their entitlement because of price increases.

The pros and cons of this are complex.

Box: would thinking outside it help?
Box: would thinking outside it help?
Anyone else?Back to top

Brazil, a member of the Cairns Group, probed further. On December 7, 2020, it addressed some criticisms other members made about the group’s proposal.

Poorer countries are allowed to exempt some types of support from AMS or Amber Box limits, for example subsidies for inputs (Agriculture Agreement Article 6.2). Some of them criticised the Cairns Group for including these types of support in its proposal.

Brazil said historically this provision had not been used much and asked how developing countries would be affected if the “policy space” created by the exemption were put under new rules, which in any case have not yet been specified.

In particular, Brazil went on, since use of this exemption is concentrated among a few countries, the vast majority of developing nations would benefit from disciplines to prevent international market distortions.

Canada has compiled data showing that the largest users of the exemption by far are India and Indonesia followed by Brazil itself, Mexico and the Philippines. (The data are in two Excel files described as an “analytical tool on domestic support” — in nominal values and percentages.)

Brazil also questioned the wisdom of proposing that limits on trade-distorting support be set per farmer. Countries should be able to use programmes under the Green Box, which do not distort trade, or do so minimally, and are allowed without limit.

The Canadian compilation also shows that many members are not up-to-date with their notifications to the WTO on their use of domestic support. Brazil said the negotiations need to be based on up-to-date data and not abstract concepts.

The Cairns Group’s proposal, and other “outside-the-box” ideas, open the door to re-examining basic concepts. This could further complicate the talks.

On the one hand there’s a decades-old draft which is simpler to debate because at least the principles are known. But even haggling over specific numbers has yielded no results, because politically countries see trade-offs between domestic support and market access.

On the other hand, starting from scratch is time-consuming because negotiators have to agree on the concepts.

It’s “we can’t continue like this” versus “we must still try”.


Updates:
• February 10, 2021 — correcting most of the final section “Anyone else?”, adding the Canadian compilation
• February 5, 2021 — adding sidebar box on AMS; minor edits for clarity

Image credits:
• Photos CC0
• Cairns Group map | WTO