Agreement on Agriculture: An analysis

The Agreement on Agriculture is an international treaty of the World Trade Organization. It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into force with the establishment of the WTO.

The Tokyo Round of GATT negotiations had considerably reduced tariffs applied by developed countries to industrial products but failed to modify the highly protectionist agricultural policies pursued by some developed countries which had almost closed their markets to competitive imports. Further, no changes were made in the policy of subsidizing exports, which distorted conditions of competition in international trade. Under Uruguay Round negotiations countries have agreed to adopt liberalized trade in agricultural products.

It is common practice to divide agricultural products into two groups, tropical products and others. Though there is no agreed definition of tropical products, beverages like tea, coffee, cocoa, cotton and fibre like jute; fruits like bananas, mangoes and other products that are predominantly produced in developed countries are treated as tropical products. In the years following the establishment of GATT, these products were subject to both high tariffs and internal taxes in most developed countries. As these products are predominantly of export interest to developing countries, priority was given in the past round of GATT negotiations to the removal of barriers affecting the trade in such products. As a result, even before the Uruguay Round, a large number of these products, in both raw and processed forms, were entering developed markets either on a duty free basis, at low rates on MFN (Most Favoured Nation) terms, or under preferential arrangements.

Most developed countries, however, continued to apply to imports of other agricultural products such as wheat and grains , meat and meat products– both high level tariffs and non- tariff measures such as quantitative restrictions, discretionary licensing and variable levies. The government’s basic objective in providing protection to such products was to guarantee domestic producers prices that were much higher than world prices, in order to assure them reasonable incomes. These policies, apart from reducing trade opportunities for competitive foreign producers, also put heavy burdens on budgetary resources of government. This was inevitable, as the high cost of production in excess of domestic requirements could be disposed of in international markets only through exports subsidies.

Though agriculture is not as highly protected in developing countries, many of them impose tariffs and restrict imports through quantitative restrictions. Imports of food and other essential requirements are sometimes channelled through state trading organizations. The Agreement on Agriculture negotiated in the Uruguay Round establishes a programme for gradual reform of trade in agriculture. The programme aims at establishing “a fair and equitable market-oriented agricultural trading system” by requiring countries to adopt new disciplines governing both.

The most important aspects of the Agreement on Agriculture are the new rules. These require countries to abolish non-tariff measures by calculating their tariff equivalents and adding these to the fixed tariffs. As a result, developed countries have established higher rates of tariffs for products of temperate zones. To which they previously applied non-tariff measures. The tariff equivalent of non-tariff measures was calculated on the basis of average world market prices for the product subject to non-tariff measures and its guaranteed price in the importing countries. Tariff rates resulting from imposition of such tariffs as well as tariffs applicable to other products have been bound against further increase. Further, the obligation to put tariffs or quantitative restrictions does not apply to restriction maintained by developing countries in balance-of-payments difficulties, under the GATT provisions permitting them to impose such restrictions. Developing countries, including those in balance-of-payments difficulties, were however, required to bind their tariffs. In response, they often give ceiling bindings at rates that were in most cases higher than their then current tariff rates. Countries have agreed to reduce such bound rates by fixed percentages. The developed and transitional economies have undertaken to reduce tariffs by an average of 37 per cent and developing countries by 24 per cent. Such reductions were made by developed and developing countries over periods of six and 10 years respectively. The LDCs even though they have bound tariffs at higher ceiling rates, were not required to reduce them. The rules further require that a tariff on a particular product must be reduced by at least 15 per cent by developed countries and 10 per cent by developing countries.

In view of the importance of tropical products to the export trade of developing countries, negotiations on the reduction and elimination of tariffs and other restrictions applicable to these products were given priority attention and held separately. The negotiation brought about further progress in the removal of remaining MFN tariffs and other restrictions applicable to these products in the developed countries. Developing countries also reduced their duties on these products.

For temperate zone products, the rates of tariffs that now apply reflect the level of protection extended by non-tariff measures earlier. As this level was high, the new rates applicable to such products in some countries generally range between 60 per cent and 100 per cent; for some tariff line they were as high as 300 per cent to 350 per cent. One of the basic objectives of imposing tariff on the non-tariff measures was to add transparency to the protection granted. However, the objective has not been fully realized for a number of products as some countries have imposed specific duties. These are payable in some cases on the basis of either minimum values or reference prices. For products with high protection level, there was a danger that the ratification process by itself would not have a significant liberalising effect even after implementation.

The agreement also establishes a ceiling on both value and the volume of subsidized exports of agriculture products. Developed countries were expected to reduce their export subsidy by 36 per cent in six years in equal instalments. The volume of subsidized imports should also be cut by 21 per cent over six years, in equal instalments. For developing countries the percentage cut had been fixed at 24 per cent and 14 per cent respectively in equal instalments over a ten year period. These reductions were of particular significance to world trade in heavily subsidized products such as wheat, coarse grains, meat, dairy products and sugar. The total outlay on export subsidies for agricultural products by the end of the implementation period will be reduced from $22.5 billion to $14.5 billion of which the EU will account for half.

A number of studies have been made at the macroeconomic level by international organizations to assess the impact of reductions in subsidies. The gains which liberalization is expected to bring to world trade in goods will be shared by the industrial and agricultural sectors. In the agricultural sector, higher growth rates will be achieved in forestry products, and certain agricultural products. These estimated growth rates were over and above the annual increase of 4 per cent in world trade that is expected to take place even if the Uruguay Round results were not implemented.

It is important to note that all these assessments assume that in order to benefit fully from liberalization, countries will have to maintain liberal and open trade policies to ensure a more efficient use of domestic resources. In many countries because of economic downtrends, currency crises or cessation of the flow of the foreign investments find it impossible to maintain the pace of liberalization or might not be able to take advantages of the liberalization measures to the same extent as those in those in countries following open market policies. The realisation of the estimated gains might be delayed or blocked if the commitments made by countries in the negotiations were implemented in form rather than in substance. Recent information available from some researchers reveals that their earlier assessment of increase in trade in agriculture might have been too optimistic. Two factors have been responsible for the downturn. First, many tropical products in which developing countries had an export interest were entering the market of developed countries duty free or at low duty rates on either MFN or preferential basis. As a result reduction of duties or liberalization of trade would have no impact on the trade of those products. Second, some temperate zone agricultural products like cereals and meat while calculating tariff equivalent the incidence of non-tariff measures had been over-estimated.

Despite partial backsliding in implementation, the Uruguay Round package resulted in significant growth in world trade and income. However, the growth rates so far achieved might be lower than those estimated by macroeconomic studies. Preferential margin on export products has been reduced as a result of reduction in MFN tariffs. On the other hand studies at micro-level will have to be supplemented by subsequent research on potential demand in liberalizing markets. Many enterprises have concentrated on markets of developed countries. These new market opportunities that have been created by liberalization measures in developing and transitional countries should now encourage enterprise in these countries to give equal if not greater importance, to the development of trade among them.

The writer is a former Director General of Export Promotion Bureau. He can be contacted at hassan.youngconsultants@gmail.com