Devil in the details of WTO accord

Phar Kim Beng, The Straits Times, Asia News Network, Singapore

World Trade Organization (WTO) members approved a plan on Sunday to end export subsidies on farm products and cut import duties, a key step towards a comprehensive global accord which has been discussed since the Doha Round in 2001.

A recent University of Michigan study found that cutting global trade barriers by one third would boost the world economy by US$613 billion (S$1 trillion) -- the equivalent of adding an economy the size of Canada to the world.

Where agricultural subsidies are concerned, their full elimination would result in an annual world welfare gain of $56 billion, about 0.2 percent of global gross domestic product (GDP). According to one United States study, developing countries would stand to gain up to $20 billion. What stands in the way of such gains are a series of measures used by rich countries to prop up their farmers.

The introduction of the 2002 Farm Bill in the U.S., for instance, provided additional support of $180 billion over the next 10 years to its minuscule population of farmers. With the Organization for Economic Cooperation and Development countries already providing support of $311 billion a year to agriculture, the addition of $180 billion raises the total budgetary support for agriculture in rich countries to $491 billion.

The sheer scale of these subsidies ensures that they distort trade. The money keeps already powerful producers afloat, though cheaper agricultural produce could be sourced from the developing world.

According to Indian trade specialist Devinder Sharma: "The U.S. spent $1.3 billion on income support for rice farmers in 1999 to 2000, when its total rice production was worth $1.2 billion. Japan's subsidies to its farmers are greater than the entire contribution made by agriculture to the nation's economy. The total transfers to agriculture amounted to 1.4 percent of GDP in 2000, compared to the sector's 1.1 percent share of GDP."

In a way, last Sunday's interim agreement should not have come as a surprise. There has been a great deal of movement on the agricultural issue lately. In April, the WTO, in response to a case brought by Brazil, ruled that the U.S. farm subsidies to its cotton farmers were illegal.

Brazil had accused the U.S. of breaking rules that limited the subsidies it could pay American cotton growers every year to $1.6 billion. The U.S. defended them as domestic subsidies that do no harm to global markets. But using data from the U.S. Department of Agriculture, Brazil argued that they had led to increased American cotton production, destroying Brazil's export markets and undermining its farmers.

Without the subsidies, U.S. cotton production would have fallen 29 percent and its cotton exports by 41 percent, Brazil estimated. That would have led to a 12.6 percent rise in international cotton prices, helping Brazil's cotton farmers.

Together with Brazil and other countries, the 25-nation European Union agreed in April to start dismantling protections for hops, olive oil and cotton by 2006. Under the agreement, production-linked payments for cotton will be cut by 60 percent. Sunday's WTO accord will help secure this move towards dismantling agricultural subsidies.

However, it would be a mistake to believe member states will not revisit the issue again. Sunday's agreement will bring no immediate cut in trade barriers. Rather, it marks the end of talks about talks and sets broad guidelines for the conduct of future talks.

No date has been set for dismantling farm subsidies, while the compromises needed to conclude the weekend agreement have left much to be desired. Indeed, it merely allowed member states to proceed with their discussions until another round of key meetings in Hong Kong by the end of next year. If there is an agreement in Hong Kong, it will probably kick in by 2006, assuming the respective rich countries are able to ratify the agreement in their legislative chambers.

So far, the biggest stumbling block to a future agricultural agreement is neither the U.S. nor Japan but the EU -- specifically, France. In fact, in the event of any removal of subsidies, the U.S. and Japan can adjust very well to the new global reality. For instance, the long-term welfare benefits to the U.S. from eliminating world agricultural policy distortions are estimated at $13.3 billion annually, or about 24 percent of global gains. The EU has traditionally accounted for more than 90 percent of the world's export subsidies, while the U.S. has accounted for only 2.2 percent, and all other countries about 3 percent.

As Prof. Robert Hunter Wade, a political economist at the London School of Economics, put it: "The weekend's agreement is way behind the schedule agreed to in 2001 in Doha, Qatar. We should now have been at the 'modalities' stage, whereas the current agreement is no more than a 'framework'. The distinction is important.

A framework agreement is limited to general principles and directions, while a modalities agreement deals with details -- specific formulas and trajectories of tariff cuts, for example. Modalities are where the tough choices lie and these are yet to be faced."

The legally-binding framework agreement reached on Sunday is a positive move, but the devil remains in the details.

The writer will be senior analyst at the Institute of Strategic and International Studies in Kuala Lumpur from next month. He recently received a grant from The Sumitomo Foundation for his research on Japanese politics and the WTO.