Doha : A strategy for the European Union to counter the United States?

I.

Uncertain alliances make the future negotiations unpredictable

The negotiations within the framework of the Doha round have started up again and Pascal Lamy, the director general, has made a point of reminding the member states that the phase involving definition of the disciplines is scheduled for completion at the end of April.

His messages are meant to be positive but they are not, however, based on anything concrete. The only new element, if it can be called that, is that, informally, simulations have been carried out to determine the impact of the positions of the principal protagonists.

These simulations, carried out at the last meeting of the G-6 in London on the 10th and 11th of March, were based on a new model1 presented by its promoter, the Carnegie Endowment for International Peace, as being more advanced than the World Bank model which is more and more criticized
.
But even if the Carnegie model does represent a step forward in identifying the specificities of agriculture, the result still has too many flaws. Indeed, it does not take into account any of the vital dimensions such as poverty, innovation, exchange rates or transport costs and therefore cannot serve as a more reliable guide for international decisions than the World Bank model.

And it is important that this new “unfinished” tool should not be used by politicians and public opinion as a justification for a “quick fix” agreement that has not been fully thought out.

In fact, the principal protagonists are involved in a deceitful poker game :

> Brazil is pretending to make some gestures in the areas of industry and services,

> Germany, an insatiable exporter, is biding its time and waiting for the markets of developing countries to open,

> The European Commission, with Peter Mandelson in the lead, swears that the horizon line that was agreed on in the compromise of 28th October 2005 will be respected, while wistfully eyeing the report by the Carnegie Endowment for International Peace2, that promotes massive and generalized liberalization in every economic sector,

> India has a reversible strategy, belonging both to the G-20, that groups together exporting LDCs while moving closer to the G-33 importing LDCs in order to obtain the specific measures it wants,

> Japan is torn between two positions. It is sometimes close to the United States, in favor of a new reduction in internal subsidies and sometimes against the United States, refusing to make any concessions when it comes to access to the market,

> Finally, the African countries seem to be losing ground, but let us nor forget Cancun when they rallied at the last minute…

The cauldron of compromises is just heating up and no one can say what sort of concoction is in the making.

II. The American strategy is based on illusions that can lead Europe into a trap

The way the negotiations have been unfolding has led to an order of priorities that is strategically unfavorable for Europe.

Thus, an agreement on agriculture has become a condition for moving forward in the Doha round and in turn an agreement on export subsidies has become the key to the agreement on agriculture.

Europe has become trapped in a situation that is the result of an American strategy based on illusions.

This strategy has three stages :

> Laying the groundwork well in advance,

> Protecting the revenues of the American farmer

> Reaching a fatal consensus: an agreement on export subsidies is the key to the Doha round

A. The three “stages” of the American strategy

1.Laying the groundwork well in advance

Focus the attention of the European negotiators on their own export subsidies, their export refunds, while having the WTO, as early as 1996, declare that the American system of export subsidies, consisting in marketing loans and counter-cyclical payments (which appeared in 2002 as a replacement for exceptional state aid in the previous Farm Bill) fall into the category of internal support.

2.Protecting the income of the American farmer

By making the WTO include marketing loan benefits3 (MLB) in the amber box because of their obvious distorting effect on exchanges and by implying that counter-cyclical payments could be included in the blue box, and therefore where they would most likely be overlooked in the current negotiations, the United States has succeeded in pulling off an extraordinary sleight of hand.

Indeed, the Farm Bill system that, through construction, allows for a mechanism of accumulation and compensation between marketing loans and counter-cyclical payments, therefore offers, under any circumstances, stable global support for the American farmer at the target level of revenues set by the American government.

And this system has no risks because if the marketing loans are reduced (in Hong Kong the American government proposed a 60% reduction of the Aggregate Measure of Support4, which includes marketing loans), counter-cyclical payments, which are preserved, would be increased accordingly.

And assuming that the counter-cyclical payments were included in the blue box, they would only be capped at 5% of the mean value of American agricultural production which allows for the absorption of aid abolished at the level of marketing loans if their limitation is envisaged within the framework of the AMS.

Aware of this advantage, the American government has decided to take the initiative.

Rob Portman, the American representative for Trade, did indeed propose on October 12th 2005 to limit the blue box at 2.5% of the mean value of American agricultural production. The degree of compensation would therefore be lower but would globally allow for the maintenance of 90% of the measures of internal support if we look back and analyze the years 2002 to 2005.

It would only be necessary to set the ceiling of the blue box at 2.8% of the value of production in order to preserve 100% of internal support (once again if we analyze past years).

Then if agricultural prices increase again, even by a small percentage in relation to their historic level, the Americans will have preserved their entire system of support.

3. The fatal consensus: making an agreement on export subsidies the key to the Doha round

The Hong Kong declaration includes only one concrete decision which is an agreement in principle on export subsidies that are set to be dismantled in 2013, on the condition that a parallel and progressive system can be set up. The definition of this system is essential for the next part of the negotiations.

At first glance, this decision should not be a problem for the European Union that had decided, within the Luxembourg compromise in June 2003, to progressively align domestic prices on international prices, which is the same as abolishing export refunds in the medium term

Therefore if the abolition in Hong Kong of export refunds for the 2013 horizon is the consequence of this choice, making it official without anything tangible in exchange opens wide the road to a second level of negotiations concerning domestic support and market access.

B. What would happen if this strategy were successful?

The European Union, principal target of the negotiations, would only demand, in terms of parallel equivalent measures in compensation for the abolition of its export refunds, measures concerning state-run monopolies or food aid. It would not make any demands concerning marketing loans and counter-cyclical payments which have been classified a long time ago as domestic support.

Then the second and third stages of negotiation could start on domestic support and market access during which marketing loans would, of course, be reduced but immediately compensated, totally or partially, by counter-cyclical payments.

In addition, marketing loans along with counter-cyclical payments constitute barriers to market access. Indeed, by pushing domestic prices down, they artificially boost the competitiveness of agricultural raw materials and American agribusiness and therefore limit foreign imports. This leads to a diluting of the effects induced by marketing loans in the three categories defined by the WTO and not just in the category of domestic support.

To sum up, three “sleights of hand” have allowed this strategy to be carried out :

> The order of the negotiations working as a trap,

> Using the phenomenon of compensation to make the decrease of marketing loans a sham,

> The watering down of their impact on all the subjects of the negotiations.

These three effects are at the heart of a game theory process because Europe :

> will definitively lose its export subsidies,

> will dismantle most of its customs duties,

> will only be left with decoupled aid distributed according to bureaucratic criteria

Whereas the United States will have globally preserved its system of export subsidies by maintaining the system of target prices, which could be completed, if there were a severe drop in market prices white taking into account ceilings on marketing loans and counter-cyclical payments, by complimentary forms of aid from a form of revenue insurance about which there has been a lot of talk lately.

3. Challenge the classification of counter-cyclical payments in the blue box.

Indeed, according to the system of compensation outlined in the Farm Bill, they would replace, by extension, marketing loans.

4. Finally, initiate new global negotiations free of the rigid categories set up by the WTO (export subsidies, domestic support and market access) and the system of boxes (amber, blue and green).

III. How to use the terms of the Hong Kong agreement

Article 6 of the Hong Kong agreement stipulates mainly :

« We agree to ensure the parallel elimination of all forms of export subsidies and disciplines on all export measures with equivalent effect to be completed by the end of 2013. This will be achieved in a progressive and parallel manner, to be specified in the modalities, so that a substantial part is realized by the end of the first half of the implementation period […] The date above for the elimination of all forms of export subsidies, together with the agreed progressivity and parallelism, will be confirmed only upon the completion of the modalities. ».

The terms of this article are clear :

A- Any “export measure with the equivalent effect” of an export subsidy is concerned

This appendix is from a memo entitled “Focus on American support for agriculture” available on the WOAgri website www.momagri.org

Currently all of the American measures in support of agriculture are contained in one legislative bill voted in 2002 called the “Farm Security and Rural Investment Act” otherwise known as the Farm Bill. This law is applicable for 6 years and has 10 aid programs.

One of the objectives of the 2002 Farm Bill is to allocate subsidies in order to guarantee a minimum turnover for the American farmer through a system of supplements to the market price in three forms (direct payments, marketing loans and counter-cyclical payments).

It introduces new measures compared to the previous Farm Bill in 1996, notably more important environmental measures, and a system of “counter-cyclical payments” that guarantees the target price for farmers whatever the real market price. It therefore represents a return to a more interventionist policy.

The system provided a global minimum budget of 180 billion euros over ten years (an increase of 78% in total agricultural spending compared to the 1996 Farm Bill) adaptable according to international price levels.

But in fact, the amount of aid allocated to American farmers is much larger.

Since 2002, the amounts allocated by Washington to its farmers within the framework of the Farm Bill is closer to 30 billion dollars a year, or an increase of more than 60% compared to the initial budget.

It is important to understand that the initial annual budget of 18 billion dollars, set in large part according to international prices, is really only a “minimum” and that the aid that is eventually allocated can be much greater if the prices on the market turn out to be lower than forecast. This has, in fact, been the case since 1999.

Support for production6 can be broken down into three categories of aid :

> Direct payments represent 40 billion dollars over 10 years or 28% of total support,

> Les marketing loans ou « prêts de soutien à la commercialisation », représentant 63 milliards de dollars sur 10 ans, soit 44% des aides,

> Counter-cyclical payments represent 40 billion dollars over 10 years or 28% of expenditures,

1. Direct payments

Direct payments are a fundamental part of the American farmer’s income. He receives these payments no matter what he has planted during the year, except for fruit and vegetables.

For this reason it is assumed that they have no direct influence on basic production and are considered as “decoupled” aid. This means that they are not linked to production volumes. They are therefore considered by the WTO as non-trade-distorting and are classified in the green box with domestic support.

2. Marketing loans

Since the revenues of farmers depended directly, and too heavily, on the rates of agricultural markets, which are by nature very volatile, the government decided in 1996 to set up a mechanism that would guarantee a minimum turnover for American grain, cotton and oil seed farmers.

This mechanism, which is called “marketing loans”, is based on the attribution of loans by the Ministry of Agriculture for a period of nine months and which allows American farmers to put off commercializing their products if the prices are lower than an intervention price (the loan rate). This baseline price set by the Farm Bill differs according to regions and types of crops. The American producer has the choice between two alternatives: opt for a loan that evaluates his production at the “intervention price” and reimburse it at the market rate (marketing loan gain) or opt for direct immediate aid equivalent to the difference in price (loan deficiency payments).

Thus the system guarantees American producers a minimum turnover which encourages them to produce and commercialize their crops whatever the trends of the market.
Then marketing loans have a direct impact on basic production and are therefore considered as “coupled” support by the WTO, that is to say, linked to production volumes in the category of domestic support7. They are classified in the amber box along with domestic support.

Since American farmers have the guarantee that they can make a living from their production whatever the level of the market price, they contribute to a permanent lowering of domestic and international prices, increasing artificially the competitiveness of agricultural raw materials and agri-businesses.
It is therefore a system that is fundamentally anticompetitive.

The system of counter-cyclical payments guarantees producers with even more stable resources by providing an agricultural revenue security net in case of sharp declines in prices. They are determined according to the historical area cultivated and production references and are a compliment to marketing loans that, since they are based on basic production, cannot protect the revenues of American farmers against a natural disaster, for example.

Counter-cyclical payments are allocated to the American farmer when the price he receives, taking into account the first two levels of support (equal to the total of the market price, the marketing loans and the direct payments) is still lower than the target price determined by the Farm Bill. They are therefore directly linked to the amounts allocated under the two first levels of support and allow the American system to function like a series of sluiceways.

Since counter-cyclical payments are calculated according to the difference between the target price and the total amount of the other direct aids, a decrease in marketing loans would cause a proportional increase in counter-cyclical payments.

The accumulation of these three forms of production support allows the American government to guarantee a level of prices for farmers for their crops no matter what the international price is and therefore to protect their revenues.

Jacques Carles
General Delegate of WoAgri

1 Cf. the memorandum by WOAgri entitled “One model can hide another” or the strategy of the United States via the Carnegie Foundation, on the WOAgri site www.momagri.org
2 Entitled “Winners and losers: Impact of the Doha round on developing countries”, dated February 2006. Cf. the article on this subject on the WOAgri website
3 Loan deficiency payments et marketing loan gains
4The Aggregate Measure of Support (AMS) covers several measures of domestic aid that distort exchanges and that are included in the amber box. With an authorized limit of 19.1 billion dollars, it includes specific measures by product, such as MLBs, and others concerning irrigation or insurance. MLBs have represented at least one third of this amount over the last few years. The 60% reduction of the AMS proposed by the Americans will not affect linearly the different measures that make up the AMS and integrally preserve the MLBs.
6 The figures put forward below correspond to a minimum budget of 180 billion dollars.
7 Domestic support is, along with market access and export subsidies, one of the three categories of support defined by the WTO.