Trade Liberalization under WTO-I

Trade Liberalization under WTO-I

Syed Wajid H. Pirzada
E-mail: wajidpirzada@hotmail.com

The GATT reached in Geneva in 1947 aimed at creating a framework that would regulate international trade and stimulate international commerce. The World Bank and the IMF, established in Bretton Wood's in 1944 to deal with matters of international finance, were associated initiatives. In addition to these two BWIs, policy makers then also envisaged formation of an International Trade Organization (ITO) that would oversee international trade and enforce a framework of rules. The GATT continued to be governed by provisional and interim measures and remained an Agreement without a formal organization to enforce it.

The signatories to GATT, known formally as Contracting Parties [CPs]-rather than Members, applied the GATT according to the Protocols of Provisional Application (PPA), and the secretariat, that administrated. The GATT, kept the title of Interim Committee of the International Trade Organization (ITO).

These provisional arrangements persisted up until 1994, when the final Act of the Uruguay Round (8th Round under GATT) eventually led to the establishment of WTO on January 1, 1995. The final Act, formally known as WTO Agreement, embodied results of UR negotiations. Presently 148 Members including Pakistan, are signatory to this Agreement, as WTO Members It is worth pointing that Pakistan was one of the [GATT]CPs and became Member of WTO on its inception in 1995, when GATT negotiation concluded at the Marrakech Ministerial Meeting under GATT, and CPs accepted the Marrakech Agreement, establishing WTO.

3.1. Agriculture and GATT

It was not until the UR (1986-1994) that agriculture, as a sector, was eventually placed firmly on the GATT negotiating table, the UR launched in 1986, envisaged following objectives with regard to agriculture "To achieve greater liberalization of trade in agriculture and bring all measures affecting import access and export competition under strengthened and more operationally effective GATT rules and disciplines".

An important element of the declaration was its explicit recognition of the effects that domestic agricultural policies have on trade. During UR, agriculture was finally fully drawn under umbrella of GATT and UR Agreement on Agriculture (URAA) was reached. Under URAA, countries agreed to substantially reduce agricultural support and protection in the areas of market access, domestic support and export subsidies. These three sets of disciplines on agricultural policy sometimes referred to as "three legs of stool" work in an interdependent and mutually reinforcing way, support the liberalization of agricultural trade sought under URAA.

3.2. Commitments under URAA

The primary objectives of URAA, now WTO/AoA, were to reform the principles of and disciplines on agricultural policy as well as to reduce distortions in agricultural trade caused by agricultural protectionism and domestic support. These forces have become very strong, as developed countries have sought means of protecting their agricultural sectors from the implication of unfettered markets. Historically, the developed countries have provided high protection through ingenious forms of trade barriers. Farm policies in the North, intensified farm support in the farm of subsidies responding to secular trend in agriculture in these countries, having fewer and fewer farmers on one hand and by extending protection on the other.

This raised farm incomes in those countries and gave the farmers signal to produce more. As most of the countries in the developed world were pursuing almost the same policy of domestic protection and support to their agriculture, the production outpaced the demand in local markets. At the same time these countries failed to capture a sizeable and sustainable market niche in the global markets to sell additional produce by the farmers. Nevertheless, their governments pursued a policy of favoring increase in their countries share in the global markets by subsidizing exports. Consequently world market for agricultural products became highly distorted.

Because of protectionism and support by developed countries, they developed artificial comparative advantage and started dumping their produce, through export subsidies, in DCs. The resulting price disincentive often compromised agricultural production, threatened livelihood of large sectors of population in DCs, whose income were derived from agriculture, and made many countries increasingly dependent upon cheap imports. This was, however, often of benefit to urban consumers in these countries, who have a political clout, and their governments pursued policies that satisfied urban consumers. This helped north to continue these policies to the disadvantage of poor farmers in South.

3.3. Pakistan's Commitments

A. Market Access: As signatory to UR, Pakistan has committed to bind around 33% of its tariff lines compared to earlier policies of no tariff binding at all. Around 81% of the country's agricultural import tariffs will be bound, most at ceiling rate % 100 percent. Tariff on tea, wheat, maize and sugar are bound at 150 percent. The ceiling rate for betel nuts is 200 percent. Various agricultural lines remain non-bound, mainly applying to alcoholic beverage, swine and pig meat and its products since Pakistan is an Islamic country.

Pakistan is committed to abolishing import licensing for most goods, allowing foreign companies to engage in export trade, converting non-tariff in to tariffs, reducing maximum and increasing minimum tariffs, incorporating the various ad hoc import taxes in the custom duties, and reducing the numerous duty exemptions (CGPRT Working Paper 44). Accordingly, since 1986 (base period) Pakistan has reduced Maximum Tariff Rates (MTRs) from 225% in 1986 to 25% in 2002.

I These high levels of binding were adopted in order to safeguard, import-competing agricultural sectors, in the short run from possible disruption as non-tariff barriers. (NTBs) were to be removed. Since, Pakistan offered "ceiling bindings" no commitment was required to reduce the tariffs during the UR implementation period (FAO, 2000). The tariff bindings, in respect of Pakistan are listed in the Table - 38, given below.

B. Domestic Support:

As indicated earlier, on reduction commitments, Aggregate Measure of Support (AMS) was subject to reduction. AMS is a measure that quantifies, in monetary terms, certain aspects of the support provided by the agricultural policies.

According to one estimate, EU accounted for most agricultural export subsidies in 1996, as out of $8.4 billion worth export subsidies 83.5% were provided by EU, 8.5% by South Africa, 4.4% by Switzerland 1.4% by US and 2.2% by rest of the world.

The support and protection of farm sector continues under EU's Common Agricultural Policy (CAP) that has roots in the 1960s, where West Germany and France moved to create Common Agriculture Policy. Recent reforms in CAP are but a preemptive step, on lines of 1992 CAP reforms as a result of Blair House Accord, now in the face of likely deal between US and EU. According to the Economist (July 13, 2002) "Since its inception CAP has been one of the biggest public policy disasters in the rich world. It has been hugely expensive for tax payers and consumers.

It takes up half of the EU's budget, although farmers are less than 5% of the work force. It keeps food prices in Europe far above world levels. It has produced big surpluses that have been exported with subsidies. It has badly hurt farmers in poor countries, who have not only seen exports shut out by European tariffs but also suffered at home from dumped surpluses".

It further adds that "the second is the US, for years one of the chief critics of trade-distorting farm protection. Now the Americans have approved a new Farm Bill that not only vastly expands farm subsidies, but also against the European trend, links them more closely to production. Besides being an egregious waste of American's money, the farm bill is sure to make the negotiations under Doha (Work Program) for harder".

President Bush in 2002 signed the Farm Security and Rural Investment Act of 2002, the latest in a series of farmer support legislation going back to 1933. Critics say that the law, which increases spending by more than 70%, will further undermine the faltering free movement of trade (Scientific America). According to the J.B. Penn, the Under Secretary of Agriculture USA "the Farm Bill contains few new incentives to expand overall acreage or to encourage crop shift. Charges that the new law provides a radical increase in spending fail to recognize that congress approved assistance package boosting farm income by roughly $7.5 billion in each of the past four years.

The farm bill continues support at almost exactly the same level: $ 7.4 billion per year. It is thus hard to argue that we will see any supply response that we have not already seen in the past four years. The only significant difference will be that our farmers are now able to plan for the long-term. The Bill is also completely within our WTO obligations. Our domestic support ceiling is relatively low at only $9.1 billion, compared with $31 billion for Japan, and $62 billion for EU (the Economist July 20 th , 2002) farm subsidies are properly the domain of the new round of world trade talks launched in Doha, but are also a source of much hypocrisy.

It is outrageous that rich countries preach free trade to the poor while lavishing over $ 300 billion a year on their own farmers. Despite its recent increase in production subsidies for agriculture, he US recently put forward a welcome long-term proposal for reducing subsidies for agriculture, much pooh-poohed in Europe. The Johannesburg summit offers a fresh opportunity to embarrass the Europeans into taking the proposal seriously, and to get all sides committed to a broader dismantling of subsidies in Doha Round (the Economist August 31, 2002).

In sum, although just 4% of EU's population works in agriculture, subsidies for farmers are budgets biggest single item. The $33 billion dispensed every year through CAP, consumes almost half of the EU spending, the EU likes to boast that it has largest aid budget in the world. But its own farm policy inflicts massive indirect damage to the world's poor. The new American Farm Bill will grant $190 billion of old style production subsidies to American farmers over ten years. In US only farmers who produce certain crops benefit from subsidies: growers of corn, wheat, oilseeds, rice and cotton got more than 90% of payments in 1999, yet they accounted for less than 36% of total agricultural output.

All farmers, however, can benefit USDA programs, including those for conservation and subsidized crop insurance. The prices of some crops, such as sugar, are kept high by restrictive tariffs of the estimated 1.9 million farms in US, those with $ 250,000 or more in sales - about 7% of the total number - received 45% of direct federal subsidies in 1999. CAFOD Trade Justice Campaign finds European trade rules crazy, and has observed "Did you know that Europe's 21 million dairy cows could take a luxury round - the world trip for the amount European governments spend subsidizing their farmers every year.

It means European cows receive more income per day than the 3 billion people in the world, who live on less than US $ 2 a day. It's your money that's paying for there subsidies under Europe's CAP. The CAP adds an average of £ 16 to a British family shopping basket every week. Yet, most of that money ends up in the pocket of Europe's richest farmers. The Duke of West Minister - one of the Britain's richest men - receives over half a million pounds in subsidies every year. To add insult to injury, the high subsidies paid to EU farmers lead to the dumping of artificially cheap food on world markets, with devastating consequences for third world farmers.

Milk production in Jamaica has dropped up to a third since 1995 because EU milk powder has flooded the local market. Jamaica dairy farmers have been forced to throw away thousands of litres of milk. As a result, many have lost their jobs and their livelihoods, while millions of small farmers in the developing world struggle to survive on less than £ 260 per year, European farmers are getting an average of £ 11, 500 in subsidies. Today Indian dairy farmers feel threatened because of EU's subsidies in dairy sector that can inflict severe harm to the Anand's model white revolution, a cooperative dairy set up in India. Pakistan is 5th largest milk producing country with relatively low cost of production i.e. 9$/100kg milk and net margin of profit of 18%.

Its dairy sector too feels insecure in the wake of trade liberalization as milk powder is already being dumped in the country by EU through subsidized exports. Such huge subsidies mean an unfair playing field for DCs. Up to 80% of the population in the World's poorest countries rely on agriculture to make a living, while in Europe just over 4% of the population works in farming. And in Britain, farmers make up just 1% of the work force. These facts lead us to the following conclusions.

• That there are growing inequalities in trade, agriculture and food security, which are but harsh realities of globalization.

• Mr. Ha-Joon Chang, in his productive study titled "Kicking away the ladder" while examining the great pressure on DCs from the developed countries, find that the economic evolution of now- developed countries differed dramatically from the procedures that they now recommend to poor nations. His conclusions are compelling and disturbing "developed countries are attempting to "Kick away the ladder" by which they have climbed to the top, thereby preventing DCs from adopting policies and institutions that they themselves used".

This is particularly true of CAP and US farm support, which even today, they are not ready to change. "Farming may be the oldest of economic activities. It also accounts for an ever decreasing share of rich countries output and employment. So it is strange that agriculture should now lie at the heart of two big global powers, of the next year or so.

But so it does; and has the crucial importance of recent proposals by the European Commission to reform the EU's CAP. There is the rub, the Commissions plan will be fought tooth and nail by countries that benefit from the CAP, and this was what they did at Cancun Ministerial by taking a hard line on the issue of subsidies.

Thus, be it trade-liberalization under SAPs or now under WTO, didn't take in account those disparities that had led to an uneven playing field for DCs, like Pakistan, which had been compelled under these arrangements to open the markets unilaterally by doing away with subsidies and scaling down the tariffs, while distortions in the world market remained in place.

Least Developed Countries (LDCs) do not have to reduce tariffs or subsidies the base level for tariff cuts was the bound rate before January 1, 1995; or unbound tariffs, the actual rate charge in September 1986 when U R began. Only the figures for cutting export subsidies appear in the Agreement. The other figures were targets used to calculate countries legally binding "Schedules of commitments. Each country's specific commitments vary according to the out come of negotiation. As a result of those negotiations, several DCs chose to set fixed bound tariff ceilings that do not decline over years.

AMS are considered to have significant effect on the volume of production, both at the production level, and at the level of agricultural sector as a whole. Market price support is a major component of the AMS calculations, that are calculated for each commodity and for non-specific support there is clause in AoA on de minimis exemption, which allows any support for a particular commodity (or non-specific support ) to be excluded from total AMS calculations, if that support is not greater than a given threshold level. Thus, an additional exemption is contained in the provisions of the Agreement, in the following circumstances:

• Where the value of total domestic support, for particular commodity, is not greater than 50% (10 % for developing countries) of the total value of production of that product, then support need not be included

• The same provision applies for non-product specific support. It is provided that its value should not exceed 5% (10% for DCs) of the value of total agricultural production, then; it too may be excluded from the In short, the 10% de minimis commitment for DCs means that as long as price support is less than 10% of the value of production then policy will be in compliant with the AoA.

In the UR, Pakistan submitted details of its domestic support measures, in the various areas specified in the AoA, in its country schedule. The Country Schedules comprised a statement by each Member government, on a commodity by commodity basis, of their positions of each of the areas, under AoA (tariff, NTBs, domestic support and export subsidies), prior to the implementation of the provisions of the Agreement, together with an outline of how the provisions will be achieved.

The process of submission of Schedules followed by their verification ended in April 1999. Once the verification process was complete the Schedules were submitted to GATT. Pakistan's submission covered 11 crops, for which there was market price support program in the base period (1986-88). The total product specific AMS in that period was negative i.e. Rs. 11524 million (US $ 640), with positive AMS only for sugar cane. The total AMS amounted to negative 7.6 percent, of the total value of agricultural production, with wheat, cotton and rice together accounting for most of the negative support. (FAO, 2000).

The total subsidy on farm inputs for the base period was notified as having been Rs. 36252 million ($ 203 million), 43 % of which fell within non-product specific AMS and 57% under SDT.

As regard's the SDT subsidies, where the total outlay was Rs. 2055 million (US $ 116 million) in 1986, 88, 67% was on fertilizer, 32% on credit and 1% on tube wells. In Pakistan's notification, tube well subsidies were justified under the SDT category, as being part of the national strategy for agricultural and rural development. The 74% of the total subsidy on fertilizers that was reported under the SDT category benefited the poor farmers, with land holdings of less than 5 hectares. Thus, on the whole there are hardly any consequences for Pakistan in respect of reduction commitments. The base period product specific AMS was negative (or zero, from the AoA viewpoint) for crops bar sugarcane, which itself was within the de minimis level, as was non-product specific AMS. (FAO, 2000).

C. Export subsidies, taxes and restrictions:

Pakistan did not notify the existence of any export subsidies on agricultural products and accordingly can not resort to them in the future. As regards the entitlement to provide subsidies to reduce the cost of marketing, export and internal transport as well as freight charges on export shipments, it notified relevant expenditure for 1995-96 to 1997-98. These consisted of a 25% subsidy on actual freight paid to exporters on export consignments of fresh fruit and vegetables, amounting to $ 1.7 million in 1995-96, $ 2.3 million for 1996-97 and $ 2.8 million for 1997-98.

Prior to establishment of WTO Pakistan, however, provided (occasional) direct export subsidies. In this regards, export of rice and cotton were subsidized, when export trade was with the public sectors, but the subsidy was abolished when the private sector was permitted to trade in these products (FAO, 2000).

Implementation and Impact of AoA:

As pointed out earlier many DCs including Pakistan implemented Structural Adjustment Programs (SAPs), in conjunction with BWIs loans. The SAPs involved substantial trade liberalization accompanied by fiscal and monetary austerity. As such, effects specific to the implementation of the UR results, and for that matter of AoA, are difficult to identify and distinguish from other events, such as earlier SAPs. For example, as result of SAPs implementation, many DCS, including Pakistan, had very low or zero AMS in 1986-88 base period. Similarly, currently the average applied tariffs in DCs varies from 10 and 20%, which in Pakistan's case are 25%, considerably lower than 20-60% range of decade ago.

Tariffs applied to food stuffs are very close to the general tariffs (CEPAL, December 1997). It is natural, that with subsidies being done away and tariff dismantled, the low-income food deficit countries are concerned that more liberal world agricultural markets will lead to higher import prices or reduce their food aid and reduced food security. Thus the likely impacts of the URAA, on the level and stability of market prices, raised food security concerns among DCs. It is in this context that during URAA many DCs viewed liberalization of world agricultural markets as a threat to their economic well-being and food security. (Valdese and Young, 1998).

An FAO (UN) study concludes, as to what had been the impact of the AoA on the DCs:

• With some exceptions, there was little evidence of the impact of the UR on the volume of trade and level of prices on the world market.

• There was little evidence of much change in world price instability.

• And by contrast, a part of the increased food import bills of the least developed countries (LDCs) and Net Food Importing Developing Countries (NFI DCs), as we have seen above in case of Pakistan, the two groups of countries mentioned in the Marrakech Ministerial Decision, referred to above, on measures concerning the possible negative effects of the reform program on LDCs and NFIDCs- could be attributed directly or indirectly to the UR related policy changes (Sharma, 2000).

Thus, the NFIDCs along with LDCs have been recognized as a special group among DCs that may be adversely affected by the process of liberalization of trade in agriculture under WTO. The NFIDCs, in particular, have certain features that distinguish them from other DCs, in terms of their dependence on food imports, insufficient food production, and level of malnutrition and balance of payment difficulties.

FAO models, for example, predicted that the implementation of AoA would bring about higher food imports that will grow by 62% in value terms for DCs as a whole, and by 15% of this increase would be due to AoA. The experience in the post-UR, as also confirmed by FAO study findings referred to above, thus for has confirmed many of these predictions, as illustrated below:

• The international prices have exhibited remarkable instability. The rice hike of 1995-96 was exceptional and comparable to the deviations during the world food crises in the early 70s. This instability in fact can be ascribed to the reduction of public stock holdings in the big producer countries. FAO estimates that private stocks will only replace about 40% of the reduction in public stock holdings.

• The 1995-96 price hike substantially increased the cereal import bills of the NFIDCs. The cost of cereal import of NFIDCs increased by 68% between 1993-94 and 1995-96.

• The longer - term trend in food aid level have shown a significant decline - the food aid comprised only 2% of total cereal imports by NFIDCs in 1997-98.

• The value of imports under subsidies, which accounted for as much as 46% of the total cereal import bills for the NFIDCs in 1994-95, has dropped to virtually nil since 1995-96.

• In the marketing year 1997-98, 5 of the 18 NFIDCs experienced food shortage and required emergency assistance (Kaukab, 2000). The participants of FAO Symposium on Agriculture, Trade and Food Security maintained that, in so far as empirical evidence was available, it indicated relatively minor quantitative effects for most of the DCs studied. However the qualitative effects have been significant.

The spirit of the AoA has profoundly altered the approach, government are taking towards agricultural trade policies, rural development and food security. (FAO, 2000). Specific observations included:

• For many DCs implementation of AoA has been less difficult than expected, thanks largely to domestic SAPs carried in 1980s, which anticipated the market -oriented trade reforms embodied in AoA.

• Several countries faced a situation, where the opening of the borders has resulted in rising food imports, whereas agricultural exports were still stagnating.

In the context of food security, as defined in 1996 World Food Summit (1996) "When all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active healthy life," a large number of DCs perceive liberalizing agricultural markets as threat to their ability to achieve this objectives. There is concern that LDCs and NFIDCs in particular will struggle to be able to afford the expected price increase for major agricultural staples such as rice and maize. Such price increase could be expected as liberalization would increase market access and import demand, while export supplies from countries with high support would be lessened (ABARE, 2000).

Other concerns in this regard are summarized below:

• The AoA is threatening and undermining sustainable agriculture, agricultural biodiversity and rights of small farmers and communities, particularly in the South. The shift in focus from producing food crops (to high value crops) in order to profit from export may also have serious implications for agricultural biodiversity. The resultant, intensive use, because of this shift, of herbicides and pesticides has a devastating impact on fragile ecosystems, biological diversity and human and animal health. The right of small farmers and communities, who for millennia have lived symbolically with biological diversity are seriously being threatened (Third World Network, 1999).

• For most of the DCS, except for Cairn Group members, Non-Trade Concerns (NTCs) involve issues of food security and rural employment; given that agriculture is the largest sector of rural employment. They do not accept the US or Cairn Group views that freeing the markets would facilitate imports that would provide food security.

• It will be dangerous for DCS to depend on imported food, as their foreign exchange position is often not comfortable, and the provision of food for the population is essential.

• Many developing countries have a large number of small farmers, who see farming activity will not be able to stand up to large scale of international competition. They need protection, otherwise there will be large-scale unemployment and spread of poverty in these countries.

• The implications for rural poverty and food insecurity in the South are enormous. Exposing rural producers to global markets under these circumstances poses a powerful threat to rural livelihood.

• Trade liberalizations will create many losers, but there will also be some winners. Among them will be the corporate giants, which control 3/4th of world trade in cereals. These companies depend upon (subsidized) access to surpluses in Europe and North America and upon access to 3rd world markets to sell these surpluses. There is confluence of elite interest here, corporations want access to northern surpluses for export to developing countries, southern governments want access to cheap food for cities and northern governments need dumping outlets.

• There is more hunger in the world today than ever before, with around one billion people living on inadequate diets. Whatever happens to the global food supply that number is set to increase because of the very nature of the market economy: when access to food depends upon money, poorer people are inevitably excluded from food markets and, by extension, from global food trade. International trade cannot change this in any meaningful way, since it responds to market signals rather than human needs but it can further compound the problem.

The surpluses generated by the capital-intensive food systems of the North have a highly destructive effect on the food systems of the South, destroying livelihoods, depressing markets and undermining investment in agriculture. These, in turn, reinforce the very structures of poverty behind global food insecurity, eroding the capacity to grow their own food or to purchase it (Third World Network, 1999).

Whereas, the aforementioned quantitative and qualitative impact of AoA on NFIDCs can be extrapolated to an NFIDC like Pakistan, a summary on these parameters, making a specific reference to Pakistan, will be presented later through these columns.

(The writer is national coordinator WTO in Pakistan Agriculture Research Council, Islamabad - Pakistan)