AGRICULTURAL subsidies are at present arguably the most serious issue in international trade. Not only have they caused a split between developed and developing countries and thus stalked implementation of the Doha Development Agenda (DDA), but are also causing friction in relations among developed countries, notably France and the UK.

A subsidy is a financial contribution made by a government body, which confers a benefit on one or more enterprise or industry. A financial contribution may be in the form of direct transfer of funds such as grants or loans or potential direct transfer of funds or liabilities including loan guarantees.

In case the government revenue that otherwise is due is foregone, it also constitutes a financial contribution. Secondly, the financial contribution must come from the government, national, state or local, if it is to constitute a subsidy. In case the financial contribution is provided by an NGO, it will not be regarded as a subsidy.

Thirdly, the financial contribution must confer a benefit on the recipient firm or industry. For instance, if government credit is provided on terms and conditions similar to those on which a private institution makes loans, the credit provided by the government will not be considered a subsidy. The government, however, will be deemed to subsidise a firm if it charges a lower interest rate than that charged by private lenders.

A subsidy is regarded as an unfair trade practice, because it distorts trade. In the context of the WTO, distortion occurs if the quantities of goods produced and exchanged or their prices are higher or lower than they would be if conditions of competition prevailed. Government support or subsidization ensures higher prices to farmers than they would get otherwise.

The higher prices, according to the law of supply, stimulate higher production. In order to dispose of the surplus production in international market, the government provides export subsidies, which makes agricultural products more price competitive than they would be otherwise. Cheaper exports depress international market prices and price out producers/exporters of those countries which do not provide export subsidies. In this way, agricultural subsidies distort international farm trade.

International farm trade is governed by the ‘Agreement on Agriculture (AA), which aims at fully integrating the agriculture sector within the GATT/WTO system. The agreement divides subsidies into two types: export subsidies and domestic subsidies. Export subsidies aim at enabling farmers to sell their products in export markets by making their exports more competitive than they would be otherwise, and are considered the most trade distorting of all subsidies.

While GATT rules revised by the ‘agreement on subsidies and countervailing measures’ (SCM) prohibit export subsidies on industrial products, export subsidies on agricultural products have been allowed under Article 9.1 of the ‘AA’ provided members commit themselves to reducing both the amount of subsidies and the quantity of subsidized exports.

The article contains a list of these subsidies, which include direct subsidies contingent upon export performance as well as subsidies to reduce the cost of export marketing and shipment. Taking 1986-90 as base year, developed countries had agreed to slash export subsidies by 36 per in six years, while developing countries agreed to cut export subsidies by 24 per cent in 10 years. Least developed countries (LDCs) were not required to reduce export subsidies.

As for domestic support or subsidies, it is agreed that they should not adversely affect export competition or market access. Domestic subsidies are further classified into subsidies which distort trade and those which do not. The subsidies which have the effect of distorting trade have to be reduced, while subsidies which do not have such effect are declared exempt from reduction. The latter type of subsidies are also called Green box subsidies.

The fundamental condition for subsidies to qualify for the Green box is that have little trade distorting or production or price related effect. Such subsidies include public service programmes—food security, research and raining, advisory, inspection, infrastructural and marketing services—as well as certain types of direct payments subject to the condition that they do not affect the type or volume of production. These include income support and insurance measures, and payments made under environmental, regional assistance and natural disaster relief programmes.

Unlike ‘green box’ subsidies, ‘blue box’ subsidies are production specific direct payments. But still they are exempted from reduction commitments because they are made under “production limiting programmes” subject to the conditions that the payments are based on fixed areas or yields, are made on the 85 per cent or less of the base level of production and in case of the livestock are made on a fixed number of head.

All other domestic support measures which have a direct impact on price or production and thus distort trade have to be reduced. They are also referred to as Amber box subsidies. The sum total of these measures is called the ‘aggregate measure of support’ (AMS). Developed countries had committed to reducing their AMS by 20 per cent in six years, while developing countries undertook to cut them by 10 per cent in 10 years. LDCs were not required to reduce their AMS.

Even in case of non-exempt domestic support, they need not be reduced if they are below de minimis level, which is defined as the percentage of the value of a product produced. It is five per cent in case of developed countries, and 10 per cent for developing countries.

Trade in agriculture accounts for only six per cent of total merchandise trade. Notwithstanding its low share, agriculture occupies a pre-eminent position in international trade negotiations. This is for two reasons:

One, food being the primary human need, every country wants food safety. Food deficiency can have serious social and political consequences. Two, being a labour intensive sector, agriculture is a major source of employment. Developing countries by and large depend a lot on the agricultural sector directly or indirectly for income and employment generation and export earnings.

They, therefore, are desperate to safeguard the interests of their farm sectors, which are endangered by protectionist policies of the industrial nations. These countries dole out nearly $1 billion a day subsidies to their farmers, which comes to more than $300 a year.

In Japan, subsidy per cow is $2555, while in case of the USA and the European Union it is $1057 and $803 respectively. Expenditure on farm subsidies account for 46 per cent of total EU budget. The lion’s share goes to France. The USA provides $19 billion annually in subsidies to its farmers. And one-third of total US agriculture produce is exported.

These subsidies, which make the farm products of industrial countries price competitive and thus increase their production according to the law of demand and supply, have a two-fold effect on developing countries.

One, agricultural exports from developing countries being priced out by cheaper farm products of developed countries cannot compete with them in export markets.

Two, the cheap products are dumped into the markets of developing countries and affect the domestic farm products. For instance, the USA in the guise of food aid dumps cheap food products into developing countries’ markets. Because of these subsidies, poor countries lose $24 billion a year.

Under Article 20 of the ‘AA’ , the members committed themselves to fundamental reforms for establishing “a fair and market-oriented” agricultural trading system. It is obvious that the grant of the subsidies is heavily loaded against developing countries, who by virtue of their severe resource constraints cannot bestow such boons on their farmers. Therefore, understandably, at the top these reforms has been the elimination of export subsidies and a drastic cut in trade distorting domestic subsidies.

The commitment was re-affirmed in the Doha declaration of 2001 wherein the members undertook to increase market access, phase out export subsidies and substantially reduce trade distorting domestic support or subsidies However, the reform process could not get along owing to the reluctance of developed countries to slash trade distorting farm subsidies. It was this reluctance that rocked the Cancun ministerial conference in 2003.

In July 2004 at Geneva, developed countries agreed to eliminate farm subsidies and export credit guarantees with repayment period longer than six months” by the end date to be agreed.” Members also re-affirmed their commitment to make substantial” reduction in trade distorting domestic support. It was also decided that the higher the level of trade distorting domestic support, the greater would be the reductions. Final bound total aggregate measure of support as well as de minimis levels would be substantially brought down.

Blue box subsidies would be legitimate subject to the condition that the same would not be more than five per cent of a country’s average value of total production during “a historical period”. The historical period was to be worked out in future negotiations.

The agreement also provided for reviewing the Green box criteria to remove the production and trade related effects of such domestic support. Even after nearly one year, developed countries are shying away from honouring their commitment.

At present, the three important voices on the issue are represented by the USA, EU, and G-20. Both the US and EU want a long timeframe for elimination of export subsidies, particularly for sensitive sectors like cotton (for Washington) and sugar and beef (for Brussels).

G-20, the voice of developing countries including China, Brazil, India and Pakistan, want export subsidies to be removed at the earliest. The USA, which is the major provider of export credit programmes, wants greater flexibility on the issue. On the other hand, the EU and G-20 want the disciplines on export credit to be precise. Regarding domestic support, the USA has reservations about Amber box and de minimis support.

The EU, though willing to reduce Amber box subsidies, would like to undertake reduction commitments relative to the total value of farm production. By contrast, the G-20 is calling for reduction in trade distorting subsidies on the basis of members’ bound levels. Both the US and the EU are also opposed to capping and reduction of product specific AMS. G-20, however, would like capping and reduction of product-specific AMS.

Elimination/reduction of trade distorting subsidies holds the key to the success of the multilateral trading system in general and DDA in particular. The slow progress on the issue is thus alarming. After the conclusion of the Geneva agreement, the then EU trade commissioner and now DG WTO Pascal Lamy had predicted that the present Doha round could be completed by the end of 2005 when the next ministerial conference commences at Hong Kong. However, at the moment this is almost out of the question.