ICTSD Analysis - Unpacking Lamy’s July 2008 Farm Trade Package

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In July, WTO Members came close to accepting a compromise on the most divisive numbers in the farm negotiations proposed by Director-General Pascal Lamy. With the notable exception of the special safeguard mechanism, the ‘package’ might be resurrected when the talks pick up in September.
It should be pointed out from the start that the figures in the Lamy ‘package’ concerned only the most contentious points, and would not have altered other provisions of the 10 July agricultural modalities draft that served as the basis for negotiations at the Geneva ministerial meeting.
Domestic Support
The Lamy compromise would have required the United States to lower its maximum permitted overall trade-distorting support (OTDS) by 70 percent and the European Union by 80 percent. While these reductions would not have resulted in ‘effective cuts’ to actual spending, they would have provided a significant guarantee against future backtracking.
For the US, the proposed deal would have meant a reduction from US$48.2 billion a year to US$14.5 billion at the end of the Doha Round implementation period. Although the new ceiling would have represented nearly twice the level of projected (and current) outlays, the US stressed that its OTDS level had exceeded US$15 billion in seven out of the last ten years.
The EU would have had to cut bound OTDS from –110 billion to –22 billion. ICTSD projections suggest that the bloc’s applied OTDS will decrease from –29 billion to –25 billion over the same time period. The EU would thus have needed to shave –3 billion from the amount it would otherwise spend in 2013/14.
Market Access
A number of countries see increased market access as a necessary counterweight to continued high levels of domestic support. However, ICTSD research1 shows that although developed country tariffs would have decreased under the Lamy proposal, key products of export interest to developing countries would have continued to face significant import duties.
For the US, the average applied trade-weighted import tariff would have fallen from 7.9 to 3.5 percent. Tariffs on products likely to be designated as sensitive would have dropped from 50.4 to 29.3 percent. These products include important developing country export commodities, such as processed dairy, beef, sugar, chocolate, tobacco goods and frozen orange juice.
The overall EU outcomes are largely similar, although the specific figures and products differ. While average trade-weighted agricultural tariffs would have decreased from 23.4 to 9.5 percent, sugar, cereals, meat and dairy would still have faced high import barriers, especially since they are likely to be designated as sensitive.
Tariff Reduction Formula and Tariff Caps
The cut required for developed country import duties in the top tier of the Doha Round tariff reduction formula has been one of the major points of contention in the farm talks. Lamy proposed that tariffs over 75 percent be cut by 70 percent.
Exporters have long sought to constrain unusually high tariffs with a ‘tariff cap’, a measure opposed by import-sensitive countries. Pascal Lamy suggested capping developed country farm tariffs at 100 percent. This limitation would not have applied to sensitive products, and Iceland, Japan, Norway and Switzerland would have been allowed to exceed the cap for an additional 1 percent of non-sensitive tariff lines.
ICTSD analysis of tariff data from UNCTAD shows that Japan could have exempted all tariff lines facing the 100-percent tariff cap, including the 800- percent duty on rice, which would have been reduced significantly under the proposed 70-percent cut in the highest tariff tier.
Due to their more numerous tariff peaks, the other three countries eligible for the exception could have exempted only a part of their highest tariffs from cuts (see table below).
No increased market access would have been required for non-sensitive products exempted from the tariff cap, although the four countries would have had to expand import quotas to 4.5 percent of domestic consumption for all products designated as sensitive.
Under the 1-percent exemption, no new market access would have been be provided for the most protected Japanese tariff lines. The other three countries would also have been able to maintain their current high bound tariffs for the products of greatest interest to them. However, the mandatory quota expansion for all sensitive products associated with the exception would have provided some new export opportunities.
Sensitive Products
All WTO Members may protect a share of their farm products from full formula cuts by designating them as ‘sensitive’. Under the Lamy compromise, developed countries would have been able to shield 4 percent of their agricultural tariff lines in this way. The limit would have been increased to 6 percent for those among them with more than 30 percent of tariff lines above 75 percent.
Countries opting for the smallest possible sensitive product tariff cut – one-third of what would otherwise be required by the formula – would have had to provide compensatory market access by expanding the im-port quota for any product designated as sensitive by at least 4 percent of domestic consumption .
For agricultural exporters, cereals, dairy products, eggs, meats and sweeteners figure prominently in a list of prospective sensitive products compiled for an ICTSD study. Under the Lamy proposal, developing country producers of these goods would not have gained the market access they were seeking.
Brazilian sugar cane, Thai manioc (cassava), and Chinese onions, raw silk and garlic would have been significantly affected because the three countries’ exports of these products represent more than 50 percent of the world total. In addition, sensitive product protection is likely to limit market access for developing countries whose exports are concentrated in very few tariff lines, such as groundnuts in Gambia and husked rice in Guyana.
Special Products
Developing countries alone will be able to designate some tariff lines as special products (SPs), exempting them entirely or in part from reductions for food security, livelihood and rural development reasons. The number of SPs has been highly controversial since negotiations began, as has the extent to which they should undertake tariff cuts, if at all.
Lamy proposed allowing developing countries to designate 12 percent of their farm tariff lines as ‘special’, with an average cut of 11 percent.
Based on findings in fourteen ICTSD country studies, the average number of tariff lines likely to be designated as ‘special’ is slightly under 11 percent, although the figure varies widely (from 3 to 26 percent) from country to country. Additional flexibilities available to small and vulnerable economies and recently acceded Members could help address at least some of the concerns of those countries that might otherwise need more SP tariff lines than the 12 percent suggested by Lamy.
Only 5 percent of all agricultural tariff lines could have been totally exempt from cuts. In order to achieve the 11-percent average reduction required by the Lamy compromise, a country opting to exempt the full 5 percent would have had to cut tariffs on the remaining 7 percent of agricultural tariff lines designated as ‘special’ by roughly 18.9 percent.
ICTSD findings on the difference between domestic and international prices suggest that some developing countries, especially those with low bound tariffs, would benefit from exempting certain SPs from any cuts. Although the exact number of products varies a great deal depending on the country’s tariff structure, rice, chicken, corn and onions are among those most likely to need a full exemption from cuts since their import duties are most often equal to existing bound tariffs, or even higher.
The Special Safeguard Mechanism
Many blamed the collapse of the July ministerial meeting on an impasse over the extent to which developing countries could temporarily raise import tariffs under the Special Safeguard Mechanism (SSM) – intended to protect farmers against sudden import surges or price drops.
Lamy’s compromise proposal was that tariffs could not exceed current bound levels unless imports surged more than 40 percent above the preceding three-year average. In such cases, developing countries would be allowed to surpass their current bound tariffs by 15 percent, or 15 percentage points, whichever would be the greater. The draft modalities text circulated on 10 July by the chair of the agriculture negotiations would also have given least-developed countries and small, vulnerable economies greater flexibility.
Countries such as China, Côte d’Ivoire and the Philippines, which have low bound tariffs and a large number of Special Products, are among those most likely to need to impose safeguard duties that exceed currently bound levels. However, the US reportedly expressed concern that the SSM would allow countries such as China to increase dramatically, in relative terms, their tariffs on some products. For instance, Chinese soybean duties – currently bound at 3 percent – could have increased to 18 percent under Lamy’s SSM proposal.
Analysis of bound and applied rates suggests that India might not be a major beneficiary of an SSM provision allowing tariff increases above bound levels, since the difference between many of its applied and bound tariffs is substantial for most products. Exceptions include a few highly sensitive products such as rice, where bound and applied rates are the same.
Under the Lamy proposal, safeguard duties would be allowed to exceed current bound rates for only 2.5 percent of tariff lines in a given year. Based on ICTSD simulations carried out for six countries, import surges exceeding three-year averages by 40 percent occur about 10 percent of the time. The 2.5 percent annual tariff line limitation could diminish the SSM’s effectiveness even when the high volume-trigger is surpassed.
For exporters, only a volume-based SSM trigger would actually curtail market access. Price-based triggers and remedies would impose additional duties equivalent to only 85 percent of the price decline. Under such a scenario, imports would still be cheaper than domestic products, and would continue to reflect demand.
The capacity to track and collect data on import volumes in real time is a prerequisite for the effective application of a volume trigger-based SSM. However, most developing countries lack this ability. They might be better served by a system that compensates for price fluctuations rather than increases in import volumes (see page 3).
Cotton: the Missing Piece of the Puzzle
The Lamy ‘package’ only covered the ‘headline’ numbers that threatened to block all progress at the Geneva mini-ministerial. Among the issues of vital importance to the poorest WTO Members, the proposal did not address the establishment of product-specific caps for domestic subsidies, or how to respond to the Hong Kong mandate that cotton subsidies be reduced faster and more steeply than those on other agricultural products (see page 2).
endnote
1 See ICTSD (2008) studies by Jean et al; Blandford et al; Ibanez et al; Bernabe; and Montemayor at http://www.ictsd.net/programmes/agriculture