Ed Barton, LLM, CPA, CFA

Some Attempts At Liberalization of Trade – Necessities

Introduction

Necessities, such as food and clothing, have often been the targets of protectionist trade policies.  Often driven by security concerns, maintaining self-sufficiency in these areas was a priority of many nations.  The WTO and the 1994 GATT began to address these areas, providing temporary and provisional safeguards to transition to more liberal trade areas.

The Doha Round in 2001 pressed on developing countries to liberalize these areas so that developing nations could more easily enter the stream of international trade.  While Article 20 of GATT provided for religious and health, and safety reasons, this is not permitted to be used as a restraint of trade methodology.

Agriculture

Challenges during the Doha Round included agricultural subsidies offered by developed nations, particularly the EU.  While the EU was a major driver to the Doha (Development) Round of GATT talks, they wanted to ensure that these traditionally protected industries retained their preeminent position within the trade environment.

Additionally, as Genetically Modified Food (such as golden rice) began to move mainstream, nations used GMO restrictions as a health concern to block trade in GMO foods under Article 20 of the GATT.  While no scientific basis for a health restriction on GMOs has yet been found, it is being invoked by the EU and opposed by the US, Canada, and Argentina on scientific grounds. The SPS (Sanitary and Phytosanitary Agreement) and TBT (Technical Barriers to Trade) Agreements were developed to help define processes and goals for moving past these trade tactics – and it remains an issue.

Since the Uruguay Round, the developed countries have moved slowly to lift tariffs and subsidies.  The US, for example, continues to provide agricultural subsidies of over $25 billion annually.  The US and EU have tied the reduction of tariffs to “fair trade” elements, such as sustainable farming techniques, environmental protection, and food security measures under the WTO SPS Agreement as reasons to slow liberalization with developing nations.

The GATT 1947 Treaty, Article 11, provided a carve-out of many areas of agriculture, making the original GATT rules predominantly applicable to manufactured goods.  Article 16 provides a carve-out for “primary products,” often interpreted as agricultural goods.  So, while the period from 1947 to 1994 saw significant liberalization of industrial trade, agricultural trade remained distorted. In fact, it became more so as decolonization created new dynamics in international trade around developing nations looking to trade their way into development sing their natural resources – including agriculture. The failure of the 1947 GATT led many of the newly independent nations not to join the agreement and was one of the significant pressures driving the Uruguay Round.

Punta del Este Declaration

In 1986, at the start of the Uruguay Round, the contracting parties made the Punta del Este Declaration, calling on agricultural trade reform.  It was a modest effort to begin to address agricultural trade issues.  The goals were threefold:

  • Improve market access through the removal of trade barriers
  • Improve the competitive environment through the reduction of subsidies
  • Minimize the effects of sanitary and phytosanitary regulations have on restraint of trade

The declaration brought agriculture squarely within the realm of the GATT.  It was also seen as a major nod to developing countries, which would rely on agriculture as a significant domestic resource to enter international trade and develop themselves out of poverty. The developing countries were also able to “trade” the agricultural elements with the developed countries, which wanted access to services.  In essence, agriculture got traded for GATS. It also provided an incentive for nations that previously would not join the GATT. It was largely for industrialized nations to join and create a truly international trade framework as agriculture and services were now in scope.

1994 Agreement on Agriculture

The Uruguay Round and the Punta del Este Declaration was the 1994 WTO Agreement on Agriculture (AOA).  The AOA contains three primary provisions:

  • Reductions in farm export subsidies
  • Increases in market access
  • Reductions in domestic producer subsidies

Fundamentally, the objectives were that developing countries should export their agricultural goods to developed countries, and the developed countries need to phase out farm subsidies.  Balancing against these goals was the stated need to maintain environmental sustainability and food security from the perspective of the developed nation. Article 6 of the AOA regulated domestic subsidies, and Article 9 of the AOA regulates export subsidies. The standard WTO principles of National Treatment and Non-Discrimination are the primary principles in effect here as well.

The AOA was implemented over a 6-10 year period, beginning in 1996. Article 15 provided for differential and preferential treatment for developing nations who were signatories.

The AOA committed to begin negotiations on the details around implementation by 2000, and the negotiations began timely in that year.  The culmination of those actions would be part of the Doha Round.

Doha Round, Cancun, and Agricultural Reform

126 members negotiated on agricultural trade reform before the Doha Round in 2001.  Doha reinforced that the desire was to continue the principles outlined in the AOA and continue to provide some advantage to developing nations considering food security and environmental concerns.

In 2003, the nations met again to make progress and agreed to proceed along these lines at the Ministerial Conference of the WTO in Cancun 2003.

Coming out of Doha and Cancun, the emphasis remained on:

  • Regulating the scale and nature of agricultural subsidies
  • Export dumping of agricultural products
  • Impact of dumping on developing countries

While the US and many of the developing countries were supportive of this approach, the EU and Japan, Norway, and Korea looked to maintain the status quo and emphasized domestic production and sustainable and environmental protections over the reduction of subsidies.  These nations are also some of the largest subsidizers of agriculture globally. In the meantime, the US has moved away from multilateral agreements under the WTO umbrella and focused on a regional and bilateral agreement.

Negotiations during this round also included discussions of tariff reductions – where the average tariff scheme exceeded 60% at the time.

Regulatory Categories

The WTO classifies subsidies in a series of “boxes” – or categories – describing their permissibility within the WTO framework.

Red – forbidden

Amber – Reduced – includes all domestic support measures that distort production and trade.

Green – Permitted

Blue – Exempted

S&D – Developing country exceptions

The green box contains those regulations or subsidies that may distort trade somewhat but are not designed to do so, such as environmental subsidies.  The challenge here, as noted above, is when these subsidies significantly distort trade.

Food Safety and Security and other Non-Trade Factors

Article 14 of the AOA established the framework for the Agreement on Sanitary and Phytosanitary Measures (SPS).  The agreement serves as an enabling agreement for the implementation of WHO and FAO of the UN. These measures include food inspections, quarantines, requiring products to come from a disease-free area, requiring specific treatment of processing of products, specifying pesticide levels and types.  The SPS allows member states to set their own standards, but the standards must be based on science and not designed to restrain trade. The dynamic balance exists between the need to maintain a safe food supply, the pressure that special interests or big businesses may have to maintain lower standards, and the desire of some countries to be overcautious to both serve safety and economic interests.

In addition to SPS standards, there are other areas of permitted regulation under Article 20 of the AOA.  These include:

  • Environmental Factors
  • Structural Adjustment
  • Rural Development
  • Poverty Alleviation

These areas combined with being some of the most problematic areas of negotiation during Doha – as the ability to agree on definitions was challenged. The primary questions revolved around whether the signatories could provide subsidies to support agriculture to distort trade but support these desired outcomes. On the other side, adherence to higher standards in these areas and animal welfare standards impose high costs on agricultural production, which creates a differential that should be compensated for one way or another (similar requirements or subsidy) by the emerging nations.

Since Cancun, there has been little real progress made in this area.  In Hong Kong (2006), Conferences suspended the Doha Round, with a call for revival several years later in Bali (2013).

Where are we at with Agricultural Reforms Today (2017)?

The trade liberalizers and the protectionists continue to disagree over a path forward.  A new wave of populism and nationalism in the US and UK, the vote by the UK to leave the EU, and calls for EU weakening by a significant minority in France make progress iffy over the next several years.  The liberal agenda includes:

  • Making agriculture a market-oriented trade environment
  • Phasing out export subsidies
  • Strengthening discipline on domestic subsidies
  • Eliminating “blue box” exceptions in the regulatory scheme
  • Reviewing and tightening the “green box” permissive regulations and subsidies
  • Securing reductions in tariffs
  • Expanding tariff-rate quotas
  • Tightening the SPS and its exceptions

In contrast, the populist/nationalist camp is focused on (or emphasizes as legitimate reasons to restrain trade):

  • Maintaining and strengthening food security measures
  • Environmental protectionism and preservation of rural landscape
  • Food safety and quality
  • Animal welfare

A middle, pragmatic approach is needed to bridge the gaps.  The US has taken the lead in attempting this pragmatic approach to trade, but the 2016 election cycle changed the globalist view of the US, and it remains to be seen as to how progress gets made.

Textiles

Unlike agriculture, the textile elements coming out of Doha saw relatively quick and effective implementation.  The 1947 GATT exempted the textile area, and this continued in the 1994 GATT.  Most agreements in this area were covered under the Multifiber Agreement (MFA).  The MFA allowed for discrimination as well as protectionist policies to ensure that domestic industries were not damaged.

The Uruguay Round implemented the Agreement on Textiles and Clothing (ATC), which called for a 10 year implementation period to be fully in effect by 2005.  Trade-in is now covered under the WTO framework, with most of the tariffs and other trade restraints removed.  This has caused significant disruption in some areas of the US that were formerly major textile producers.  However, over the last 10 years, since full implementation, many of these elements have improved, and the shocks to the system have worked through.

The textile successes gave some hope that the Doha round and WTO have not failed. That progress continues to be made in many trade areas – the challenges of the agricultural initiatives aside.

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