Mains 2016: Farm Subsidies and WTO – Issues and Way Ahead

Farm Subsidies and WTO

WTO Functions

Ensure all countries benefit from world trade.
Reducing barriers to international trade – both tariff barriers and non-tariff barriers.
Getting the members to Enter into multilateral trade agreements.
Providing forum for negotiation and dispute settlement for the members.
Cooperating with UN, World and IMF for a global economic policy

WTO has many categories of agreement like agreements for goods , services , property rights etc.

Under agreement for goods category there is Agreement on Agriculture category.

Agreement on Agriculture has 3 heads –

Market Access
Export subsidies
Domestic Agriculture Subsidy

WTO classifies Domestic Agricultural subsidies into three categories:

Green box- these subsidies cause minimum distortion and does not affect the trade balance.
Blue box- these subsidies that does not increase with increase in production.
Amber box -Subsidies that distort trade balance like subsidies on fertilizers, seeds, power and irrigation.They encourage excessive production,making the country’s products cheaper than others in international markets.

WTO Issue-

Per the original Agreement on agriculture (AoA), the developed and developing countries have to keep their Amber box subsidies within De-minimus level i.e. 5% and 10% of their agriculture production in 1986-88 respectively.
India opposed this base year and limits, because it would make the implementation of food security programs for the poor and MSP for the farmers impossible.
India wants the subsidy computation methodology to reflect current international prices not 1986.
Hence, as a measure of temporary relief, in 2013 Bali summit a “peace clause” for the AoA was enacted.

Salient features of Peace Clause:

No member, can drag any developing country to Dispute settlement mechanism of WTO, for violation of de-minimus limits in AoA.
Provided that the said developing country is paying subsidies for staple food crops for public stock-holding program or For food security purpose.

Providing annual information of its food security Program to WTO.
Permanent solution will be taken no later than 11th ministerial conference i.e. at December 2017.

Problem with the Peace Clause–

India’s worry was that if the clause expired before a permanent solution was in place, food security programmes and policies to protect farmers, such as Minimum Support Prices, would face unwanted uncertainty.
The clause also required full disclosure of MSPs and annual procurement for food security programmes, which the Government fears would leave India open to questioning by other countries on domestic matters.

So, The new government in Nov 2014 , managed to get a ‘new’ peace clause which was signed between India and US.

It allowed countries such as India to continue to freely procure and stock grains for the public distribution system even if subsidies resulting from these breach limits under the WTO’s Agreement on Agriculture (AoA).
It is ‘open ended ‘ until a permanent solution to the issue of farm subsidies linked to national food security is arrived at.

Farm Subsidies in India-

Various type of subsidies provided by india to its farmers include:

Input subsidy, power subsidy, fertilizer subsidy, seed subsidy, irrigation subsidy, credit subsidy.

Recently, US has questioned India at the WTO on its move to increase minimum support prices (MSPs) for Kharif crops in the current year.

India said that its main objective for increasing MSP for pulses and oil-seeds was:

To cover the increasing gap between the demand and domestic supply of these crops.
leguminous pulses have environmental benefits as they consume less water and reduce soil degradation.
MSPs are intended to reduce distress sales by poor farmers.

Why India needs to Subsidize its farmers–

India is basically an agrarian economy with over 50% of population directly or indirectly attached to agriculture though it doesn’t contributes very high in GDP .
One third of population lives below the poverty line or near it.
The developed nations see India as a huge market for food-grains and other products.
Indian democracy relies heavily on farmers , to keep them happy is also politically motivated.
There is a threat of dumping by countries producing a particular product in huge quantities.
Large size of population is employed in agriculture . If they drop out of agriculture, some other mean should be there to absorb them instead it would lead to heavy unemployment.

Facts-

China’s farm subsidies go to the tune of $100 billion. Though it provides less than $100 as subsidy per farmer annually while the US provides more than $20,000 per farmer annually.
US provides more than $150 billion of subsidies under the Green Box
India was blocking the Trade facilitation Agreement of WTO , as a bargaining chip until a permanent solution to the subsidy and public stocking issue was not reached . The TFA was approved by cabinet this year in Feb.

Nairobi 2015-

India wanted an agreement on a Special Safeguard Mechanism (SSM) and a permanent solution on public stock-holding for food security.

SSM –

A trade remedy, important for developing countries
Will allow developing countries to temporarily hike duties to counter sudden import surges and price fall due to the heavily subsidized agricultural imports.

Takeaways from Nairobi Declaration–

Developed Members have to immediately eliminate their remaining scheduled export subsidy entitlements.
Developing country Members will eliminate their export subsidy entitlements by the end of 2018.
The members of the global trade body agreed on a commitment for giving the developing nations a right to take recourse to Special Safeguard Mechanism to protect their farmers
Phasing out export subsidies on cotton immediately for developed nations, and after January 2017 for developing nations.
The Bali and the General Council’s November 2014 decision on public stock-holding which gives protection to farmers was reaffirmed.
An LDC (Least Developed Countries) package, was also agreed all the members, which would include duty-free, quota-free market access for LDCs, the LDC services waiver (to ensure preferences to LDCs in services trade) and preferential rules of origin.

Way Ahead-

US and its supporters want a finite number of deliverable in which they themselves do not have to undertake any fresh commitments . while the countries like India which are heavily dependent on agriculture and least developed countries which are at much disadvantage find themselves bargaining for some leverages in the present system which can easily be skewed in their disadvantage.

It is required for these countries to stand together for their legitimate demands while at the same time not jeopardize world trade which can be for there own development.

Without world consensus such negotiations are difficult to come by leading to alternative agreements like TPP etc.