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WTO:INTERNATIONAL AGRICULTURE AND TRADE December 11, 1998
December 1998, WRS-98-4. 
Approved by the World Agricultural Outlook Board
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INTERNATIONAL AGRICULTURE AND TRADE (World Trade Organization) is published
four times a year by the Economic Research Service, U.S. Department of
Agriculture, Washington, DC 20036-5831. Please note that this release
contains only the text of WORLD TRADE ORGANIZATION: INTERNATIONAL AGRICULTURE
AND TRADE -- tables and graphics are not included.



INTERNATIONAL AGRICULTURE AND TRADE REPORTS

Agriculture in the WTO

Situation and Outlook Series

Contents

Summary
Agriculture in the World Trade Organization--Introduction
Market Access
Domestic Support Commitments: A Preliminary Evaluation
Export Subsidy Commitments: Few Are Binding Yet, But Some Members
Try To Evade Them Implementation of the WTO Agreement on the Application 
of Sanitary and Phytosanitary Measures Biotechnology in Agriculture 
Confronts Agreements in the WTO Improvements in WTO Dispute Settlement
Two of 32 Applicants for WTO Membership Successfully Complete
Accession Negotiations State Trading Enterprises in World Agricultural 
Trade Developing Countries' Issues in the WTO Related to Agriculture
Glossary

List of Tables and Figures


Summary

Uruguay Round Results Set Stage for Further Agricultural Trade
Liberalization

The Uruguay Round of Multilateral Trade Negotiations continued
the process of reducing trade barriers achieved in seven previous
rounds of negotiations. Among the Uruguay Round's most
significant accomplishments were the adoption of new rules
governing agricultural trade policy, the establishment of
disciplines on the use of sanitary and phytosanitary (SPS)
measures, and agreement on a new process for settling trade
disputes. The latest round also created the World Trade
Organization (WTO) to replace the General Agreement on Tariffs
and Trade (GATT) as an institutional framework for overseeing
trade negotiations and adjudicating trade disputes. Agricultural
trade concerns that have come to the fore since the Uruguay
Round, including the use of genetically engineered products in
agricultural trade, state trading, and a large number of
potential new members, illustrate the wide range of issues a new
round may face.

During the 3 years since initial implementation of the Uruguay
Round agreements, the record with respect to agriculture is
mixed. The Uruguay Round's overall impact on agricultural trade
can be considered positive in moving toward several key goals,
including reducing agricultural export subsidies, establishing
new rules for agricultural import policy, and agreeing on
disciplines for sanitary and phytosanitary trade measures. The
Uruguay Round Agreement on Agriculture may also have contributed
to a shift in domestic support of agriculture away from those
practices with the largest potential to affect production, and
therefore, to affect trade flows. However, significant reductions
in most agricultural tariffs will have to await a future round of
negotiations. 

Prior to the Uruguay Round, trade in many agricultural products
was unaffected by the tariff cuts that were made for industrial
products in previous rounds. In the Uruguay Round, participating
countries agreed to convert all non-tariff agricultural trade
barriers to tariffs (a process called "tariffication") and to
reduce them. However, agricultural tariffs remain very high for
some products in some countries, limiting the trade benefits to
be derived from the new rules. To ensure that historical trade
levels were maintained, and to create some new trade
opportunities where trade had been largely precluded by policies,
countries instituted tariff-rate quotas. A tariff-rate quota
applies a lower tariff to imports below a certain quantitative
limit (quota), and permits a higher tariff on imported goods
after the quota has been reached.

The Agreement on Agriculture required countries to reduce outlays
on domestic policies that provide direct economic incentives to
producers to increase resource use or production. All WTO member
countries are meeting their commitments to reduce these outlays,
and most countries reduced this type of support by more than the
required amount. However, support from those domestic policies
considered to have the least effect on production, such as
domestic food aid, has increased from 1986-88 levels. 

In the Agreement on Agriculture, 25 countries that employed
export subsidies agreed to reduce the volume and value of their
subsidized exports over a specified implementation period. To
date, most of these countries have met their commitments,
although some have found ways to circumvent them. The EU is by
far the largest user of export subsidies, accounting for 84
percent of subsidy outlays of the 25 countries in 1995 and 1996. 
Despite substantial progress in reducing export subsidies, rising
world grain supplies and falling world grain prices will make it
difficult for some countries to meet future commitments unless
they adopt policy changes.

The Uruguay Round's SPS Agreement imposed disciplines on the use
of measures to protect human, animal, and plant life and health
from foreign pests, diseases, and contaminants. The Agreement
can be credited with increasing transparency of countries' SPS
regulations and providing improved means for settling SPS-related
trade disputes, including some important cases involving
agricultural products. The Agreement has also spurred regulatory
reforms in some countries. The SPS Agreement and the Agreement on
Technical Barriers to Trade could provide a framework for
disputes over genetically modified organisms (GMOs) brought to
the WTO for arbitration.

Changes made to the multilateral dispute resolution process in
the Uruguay Round may be as important to agricultural trade as
the improvement in the substantive rules governing trade in
agricultural goods. Initial evidence indicates that the WTO
dispute settlement system is a significant improvement over its
GATT predecessor. For example, a single country can no longer
block the formation of a dispute resolution panel, or veto an
adverse ruling by blocking the adoption of a panel report. These
improvements have led to a number of important agricultural trade
cases being adjudicated before the WTO. The outstanding question
for the WTO is whether members whose practices have been
successfully challenged under the new dispute settlement
procedures will live up to their obligations.

Other agriculture-related issues, including a large and diverse
group of potential new WTO members, the challenge of dealing with
state trading enterprises within WTO disciplines, and the issues
particular to developing countries, will shape the agenda for
future agricultural trade liberalization discussions. Thirty-two
countries are currently seeking membership in the 132-member WTO. 
Countries seeking WTO membership accede under conditions
negotiated with WTO members. Acceding countries benefit from WTO
membership through privileged trade status with WTO members, but
may incur adjustment costs in reforming their trade policies and
reducing tariffs to meet WTO requirements. Current WTO members
gain greater access to the markets of acceding countries.

State trading enterprises (STEs), governmental and
nongovernmental entities that have been granted special rights or
privileges through which they can influence trade, continue to be
important to the trade of agricultural commodities because many
countries consider them an appropriate means to meet domestic
agricultural policy objectives. Continuing concerns about the
trade practices of state trading enterprises in some WTO member
countries, and the potential accession of China and other
countries where STEs are prominent, will keep STEs on the WTO
agenda.

Developing countries received special treatment in the Uruguay
Round, including less stringent disciplines in reforming their
trade policies than those that apply to developed countries. In
the next round of multilateral agricultural trade negotiations,
developing countries will continue to have special interests in
the areas of special and differential treatment, export
restraints, price stability, food security, food aid, and stock
policies. As developing countries identify their positions,
coalitions of countries with common trade interests may emerge.

Agriculture in the World Trade Organization--Introduction

The Uruguay Round of Multilateral Trade Negotiations was
completed in 1994 with the signing of the Uruguay Round
Agreements at Marrakesh. The Round produced a number of
important achievements, including replacing the General Agreement
on Tariffs and Trade (GATT) as an institutional framework for
overseeing trade negotiations and adjudicating trade disputes,
with the World Trade Organization, and extending GATT/WTO rules
of trade to new areas such as intellectual property and services. 
Among the most significant accomplishments of the Uruguay Round
was its focus on the treatment of agricultural trade under the
GATT and the resulting new disciplines on agricultural trade
policy.

Until the Uruguay Round, agriculture received special treatment
under GATT trade rules through loopholes, exceptions, and
exemptions from most of the disciplines applying to manufactured
goods. As a result, the GATT allowed countries to use measures
disallowed for other sectors (e.g., export subsidies), and
enabled countries to maintain a multitude of non-tariff barriers
that restricted trade in agricultural products. Participants in
the Uruguay Round continued the GATT's special treatment of
agricultural trade by agreeing to separate disciplines on
agriculture in the Agreement on Agriculture (URAA), but initiated
a process aimed at reducing or limiting the exemptions and
bringing agriculture more fully under GATT disciplines. 

Under the Agreement, countries agreed to substantially reduce
agricultural support and protection by establishing disciplines
in the areas of market access, domestic support, and export
subsidies. Under market access, countries agreed to open markets
by prohibiting non-tariff barriers (including quantitative import
restrictions, variable import levies, discretionary import
licensing, and voluntary export restraints), converting existing
non-tariff barriers to tariffs, and reducing tariffs. URAA
signatory countries also agreed to reduce expenditures on export
subsidies and the quantity of agricultural products exported with
subsidies, and prohibit the introduction of new export subsidies
for agricultural products. Domestic support reductions were
realized through commitments to reduce an aggregate measure of
support (AMS), a numerical measure of the value of most trade
distorting domestic policies. The agreement is implemented over
a 6-year period, 1995-2000.

In addition, the Agreement on the Application of Sanitary and
Phytosanitary Measures (SPS Agreement) established rules to
prevent countries from using arbitrary and unjustifiable health
and environmental regulations as disguised barriers to trade. 
And a new process for settling disputes among WTO members, agreed
to during the Uruguay Round, promised improvements in the
resolution of trade disputes. As part of the URAA, member
countries agreed to begin negotiations for a continuation of the
agricultural reform process 1 year before the end of the URAA
implementation period.

The 3 years of implementation since the Agreement's entry into
force in 1995 have provided some evidence from which to evaluate
the impact of the Uruguay Round on agricultural trade. This
report evaluates the progress to date in implementing the various
Uruguay Round agreements and disciplines, and addresses emerging
issues that will have a bearing on agricultural trade in the
context of the WTO. It offers an interim assessment of the
effects of the Round on agricultural trade and considers the
future direction of agriculture in the WTO. Given the
limitations of space, the scope of the report, while attempting
to be comprehensive, is not all-encompassing. Other topics of
importance to agriculture, such as the Agreement on Technical
Barriers to Trade, and tariff reductions in processed products
and agricultural inputs, are not covered.

This report also does not address one of the most important
outcomes of the Round: the expected expansion in world income
and economic activity and its effect on demand for agricultural
products, which could far outweigh the direct effect of
reductions to barriers on agricultural products. And a formal
assessment of the benefits of the URAA itself awaits further
investigation. It is hoped, nonetheless, that a comprehensive
picture will emerge of the institutional and practical
environment in which agricultural trade takes place that will
also provide a perspective from which to anticipate future
agricultural trade negotiations. 

The first three articles ( "Market Access Issues," "WTO Domestic
Support Commitments: A Preliminary Evaluation," and "Export
Subsidy Commitments...") evaluate the implementation of the main
agreements within the URAA. Next, the article on implementation
of the SPS Agreement examines developments since the entry into
force of the agreement and evaluates its record in contributing
to a more liberal trading system. The piece by Kelch et al looks
forward to a possible application of the SPS and TBT Agreements
to a new issue affecting agricultural trade relations--the use of
biotechnology in agricultural production.

The next two articles ("Improvements in WTO Dispute Settlement"
and "...Applicants for WTO Membership...") focus on the changing
institution of the WTO. The article by Brosch looks at the new
dispute settlement mechanism that resulted from the Uruguay Round
and its implication for trade disputes involving agricultural
products. The Ackerman article examines the trade interests of
the large number of new candidates for WTO membership. 

"State Trading Enterprises...." explores the important role that
state trading enterprises continue to play in global agricultural
trade, the WTO disciplines on their operations, and their effect
on implementation of current WTO agreements that may make state
trading an issue in future rounds of multilateral trade
negotiations. "Developing Countries' Issues in the WTO Related
to Agriculture" examines the growing influence of the large group
of WTO members that are developing countries, with a view toward
identifying issues that may be the subject of negotiations in the
next Round.

Market Access

In the seven rounds of GATT negotiations prior to the Uruguay
Round, agricultural tariffs were not included fully in general
tariff negotiations because of concerns for low incomes and
declining employment in agriculture. In the Uruguay Round
Agreement, the rules governing agricultural trade were changed
fundamentally. Members agreed to convert all non-tariff
agricultural barriers (NTBs) to ordinary tariffs (tariffication),
to bind all agricultural tariffs, and to subject them to
reductions. Members also agreed to establish tariff-rate quotas
(TRQs) to preserve historical trade levels and to create some new
trade opportunities in highly protected markets. Some reductions
in agricultural tariffs also were achieved. Nonetheless,
agricultural tariffs remain very high for some politically
sensitive products in some countries, limiting the trade benefits
to be derived from the new rules. Significant disparities also
remain between both commodities and countries and between basic
commodities and their processed products within countries. The
adequacy of rules governing administration of tariff-rate quotas
also remains an issue. 

The Role of Tariffs in Trade and in the GATT

The original preamble to the GATT (1947) sought reciprocal and
mutually advantageous reductions in tariffs and other barriers to
trade and the elimination of discriminatory treatment in
international commerce. It was recognized that expansion of the
trade could increase production, raise living standards, and
encourage full employment through more efficient use of global
resources. A basic GATT principle is that protection of domestic
industries, where deemed politically necessary, should be
provided through the least distorting means, i.e. by customs
tariffs administered without discrimination. Maximum tariff
levels also should be "bound", a guarantee that tariffs cannot
exceed negotiated levels without consultation and compensation
where appropriate.

The traditional focus of the GATT on tariffs reflects the ability
of fixed tariffs to provide protection to domestic production
while preserving essential benefits of markets. Fixed tariffs
allow traders to know reliably what levies they must pay, in
percentage or absolute terms, and assure the right to do business
on those terms, establishing a stable and predictable basis for
international trade. Fixed tariffs also preserve the
transmission of price signals to producers and consumers,
encouraging a more efficient allocation of resources and
increased production, income, and employment. The level of
protection provided by tariffs to any national sector also is
transparent and therefore more susceptible to negotiations among
governments.

Unfortunately, the benefits of a stable tariff regime are not
achieved when bound tariffs are high and tariffs actually applied
are manipulated in response to market conditions. While lower
applied tariffs are more conducive to trade than higher bound
tariffs, varying applied tariffs interfere with global price
transmission and undermine the transparency and predictability of
international trade. Most countries have published national
tariff schedules which do not change arbitrarily. However, when
some countries manipulate applied tariffs to insulate domestic
producers and consumers from the need to adjust to movements in
world prices, the burden of those adjustments is concentrated on
fewer countries, world price instability is increased, and the
global efficiency of resource allocation and global income are
reduced.

Early GATT Rounds Provided Special Treatment for Agriculture

Early GATT rounds successfully reduced the average bound tariff
rate on industrial goods from 40 percent in 1945 to near 6
percent in 1978, following full implementation of the Tokyo
Round. The Uruguay Round further reduced average industrial
tariffs to 4 percent. The story of agricultural tariffs has been
very different. Political concerns for declining agricultural
employment and low incomes impeded negotiations on tariff
reductions and led to several general or country-specific
exemptions that virtually absolved agriculture from most
disciplines applied to industrial trade. The most important
exemption for market access was an exemption in Article XI:2 from
the general prohibition on quantitative trade restrictions.
Agriculture was not fully integrated into general tariff
reduction negotiations during the first seven GATT rounds (table
1).

Before the Uruguay Round, only 58 percent of the agricultural
tariffs of the developed economies were bound in the GATT,
compared with 78 percent of industrial tariffs. Even after the
Uruguay Round, bound agricultural tariffs now average over 40
percent ad valorem, roughly equivalent to the average for
industrial tariffs at the end of World War II. The reduction of
agricultural tariffs remains a large task for negotiators in the
next round. GATT experience with industrial tariffs provides
some options for approaching agricultural tariff negotiations. 
However, that the GATT's success on industrial tariffs took eight
rounds of negotiations over 50 years provides some perspective on
the challenge. The challenge in agriculture remains a special one
because of the continuing strong aversion of important WTO
members to subject agriculture to the same disciplines applied to
other sectors.

The URAA Succeeds in Reforming the Rules for Agriculture

Market access provisions (se"Summary of Uruguay Round...")
of the Uruguay Round Agreement established disciplines on trade
distorting practices while maintaining historical trade volumes
and assuring some increased access to highly protected markets.
Most importantly, NTBs were banned, including quantitative import
restrictions, variable import levies, discretionary import
licensing, non-tariff measures maintained through state trading
enterprises, voluntary export restraints, and similar border 
measures--all measures other than ordinary customs duties. NTBs
could be "tariffied", i.e. converted to ordinary tariffs. All
preexisting and new tariffs were to be bound and subjected to
reductions. The establishment of bindings for all also was an
important achievement of the Uruguay Round, providing a basis for
negotiations in further WTO rounds. To avoid any negative impact
on trade related to tariffication, access quotas equal to
historical trade levels were established to maintain access for
commodities subject to tariffication, or access quotas providing
minimum access opportunities were established where trade had
been minimal. The special exemption under GATT article XI:2,
allowing quantitative restrictions in agricultural trade, was
effectively eliminated. As part of this process, the United
States also agreed to give up its waiver, under which it had
maintained import quotas, and to convert Section 22 quotas to
tariffs.

The URAA Achieves Some Reductions of Protection and Increases in
Trade

The rules and principles governing agricultural market access and
other agricultural and trade policies were rewritten radically in
the Uruguay Round. Some reductions in tariffs also were
achieved, providing tangible increases in some agricultural trade
flows. However, for more politically sensitive trade flows, many
member countries endeavored, in the details of the agreement, to
limit the implications of the new rules for those sensitive
sectors, limiting reduction in effective protection or increases
in trade. The sectors that are sensitive vary among member
countries, but dairy and sugar are sensitive in most developed
countries. Member countries agreed to principles and some
specific parameters for tariffication, tariff reductions, and the
establishment of tariff-rate quotas that were provided as
guidelines. However, the guidelines had no legal status and,
overall, were sufficiently general to allow members considerable
latitude in their implementation. Members were legally committed
only to whatever provisions they included in the schedule of
commitments which each member provided for inclusion in the final
agreement, regardless of correspondence with the guidelines. 
The new Uruguay Round rules are the important initial step
towards more significant expansion of agricultural trade through
further tightening of the disciplines combined with credible
enforcement.

The guidelines for tariffication directed countries to establish
a tariff equivalent to the effective gap between domestic and
world prices that had resulted from application of NTBs in a
specified base period. Some countries exaggerated measures of
domestic prices or understated measures of world prices,
increasing the apparent gap between domestic and world prices and
increasing the new tariff established. This practice, aptly
known as "dirty tariffication," was most commonly employed where
support for domestic production was most politically sensitive. 

The base period chosen, 1986-88, was a time of very high
protection levels, contributing further to the setting of high
tariffs under tariffication. Other very high tariffs resulted
from ceiling bindings by many developing countries in cases where
tariffs had not previously been bound. In many cases, these new
bindings were significantly above applied rates. Many
agricultural tariffs did not result from tariffication but
existed before the Uruguay Round, but dirty tariffication and
new ceiling bindings resulted in some cases in new bound tariffs
that provided greater protection than had previously existed. A
World Bank study has estimated that the final bound agricultural
tariff rates after implementation of the Uruguay Round will be
below the level of protection estimated to have existed prior to
round for only 13.5 percent of world agricultural trade . 
(Finger, etc., 1996).

The guidelines for tariff reduction commitments also provided
considerable flexibility that allowed actual cuts in protection
to be minimized for more sensitive sectors. Members agreed to
reduce all preexisting and newly created tariffs by an average of
36 percent, but no less than 15 percent for any tariff, a modest
reduction given the level of agricultural tariffs. New tariffs
created through tariffication were subject to the same
reductions, but in those cases where dirty tariffication had
established tariffs providing greater protection than the NTBs
they replaced, subsequent reductions were less meaningful than
the nominal percentage reduction. The requirement for reductions
of 36 percent, on a simple average basis, had limited
significance. The tariffs most critical for protection of
domestic agriculture generally are only a subset of the total. 
By making rather large cuts in tariffs for commodities that do
not compete with domestic production or large percentage cuts in
tariffs that already were very low, the 36 percent average
reduction could be achieved with minimal cuts in politically
sensitive tariffs. For example, reducing a 3-percent tariff to 1
percent is a 67-percent cut, which combines with a 15-percent cut
on an important commodity for a 41-percent average reduction. 
Achieving the required 36 percent average also could be assisted
by relatively large reductions for tariffs newly established
through dirty tariffication at very high levels, allowing
relatively large percentage reductions without meaningful loss of
protection.

Very large tariffs, particularly those very much larger than
necessary to protect the difference in domestic and world prices,
are often called "megatariffs". The base tariffs presented in
figure 1 and the bound tariffs in figure 2 include individual
country tariffs that are greater than 100 percent. Where
megatariffs exist, it is common for tariffs actually applied to
be less, sometimes much less, than bound tariffs. It is expected
generally that larger tariffs were reduced by smaller percentages
since it is political sensitivity that leads to both high tariffs
and a reluctance to reduce them. The data presented in Figure 1
demonstrates a strong bias towards smaller reductions for higher
tariffs, particularly for megatariffs above 100 percent. 1/ In
many of the cases in which high tariffs are to be reduced by a
large percentage, the final bound tariffs will still be
significantly higher than current tariffs actually applied. Thus
these reductions, while large, will have no impact on trade. 
Figure 2 presents current or most recent data available for
selected countries' applied and bound tariffs for wheat,
demonstrating the extent to which applied tariff rates are below
the scheduled bound tariffs after partial Uruguay Round
implementation. (Integrated Database/WTO and TRAINS
Database/UNCTAD)

1/ Figure 1 presents tariffs from WTO country schedules for
wheat, barley, maize, and sorghum at the 4-digit level for
Argentina, Australia, Canada, Chile, Colombia, Czech Republic,
Ecuador, Egypt, European Union, Hungary, India, Indonesia, Japan,
Malaysia, Mexico, New Zealand, Philippines, South Korea,
Thailand, and Venezuela. Specific tariffs were converted to ad
valorem equivalents using national import unit values for 1995.

Do Tariff Rate Quotas Establish Access Opportunities ?

Recognizing that tariffication would not necessarily guarantee
increased trade and that "dirty tariffication" actually could
increase protection, members agreed to establish quotas to
maintain historical trade levels or to increase trade where
historical trade had been minimal. The guidelines provided for
tariff-rate-quotas (TRQs) equal to the amount of imports in a
recent historical period or a minimum percentage of consumption
in that period, whichever was larger. These quotas are called
tariff-rate quotas (TRQs) because a within-quota tariff lower
than the bound rate is applied to imports up to the quota amount. 
Imports beyond the quota amount incur a higher bound
most-favored-nation (MFN) rate.

The guidelines adopted for tariff-rate quotas, like those for
tariffication and tariff reductions, provided considerable
latitude in the calculation of specific commitments, including
quota volumes, and the setting of within-quota tariff rates. 
Some countries calculated the quota at a broad level of product
aggregation, such as "meat" or "dairy products," and then
allocated the total TRQ among the components of the aggregates,
perhaps arbitrarily. Quotas of individual commodities could be
set to minimize the effect on sensitive commodities. In some
cases, the aggregate quotas were not allocated to individual
commodities, leaving flexibility to allocate quantities based on
market conditions. Specific requirements for the allocation of
quotas was not specified, and allocation and administration of
TRQs remains an issue, particularly concerning adherence to the
MFN principle, which would forbid discrimination against imports
from any WTO member country. The guidelines called for TRQs to
be established for all tariffied commodities, but they were not
established in all cases. To generate the full quota volume of
trade, the within-quota tariff must be less than the gap between
the domestic and world price that results after implementation of
the TRQ, allowing profitable trade for the full quota amount. 
Quotas may not be filled or trade may not result if the within-
quota tariff is too high. Trade also will not result if domestic
prices are not above world price levels, even with a zero
within-quota tariff.

The URAA also established special safeguard provisions for
products subject to tariffication, which allow countries to
temporarily apply higher tariff rates in response to sudden
import surges or drops in prices. The safeguards are triggered
if the volume of imports exceeds the average of the previous
three years by a certain percentage (which differs depending on
the imports' proportion of consumption) or if the price of the
imported product drops at least ten percent below the base period
world reference price.

What Remains for the Next Round 

Despite its significant achievements, the URAA would have to be
considered only the first stage in reforming world agricultural
markets. Agricultural tariffs still average over 40 percent, and
high bound tariffs allow some countries to continue imposition of 
lower applied tariffs which may be adjusted in response to
changes in market conditions. It is the unfortunate legacy of
dirty tariffication in the Uruguay Round that current high bound
tariffs may allow some countries to accept reductions in bound
rates in the next WTO round without actually reducing protection
or increasing trade. Further reductions in bound tariffs in the
next round can significantly increase agricultural trade if
applied tariffs also are reduced. Another important issue in the
next round will be the effectiveness of disciplines on the use of
the special safeguard provisions to prevent circumvention of
tariff cuts.

Other issues relate to disparities among tariffs. Differences in
tariffs among commodities or countries are referred to as "tariff
dispersion". For example, tariffs for oilseeds generally are much
lower than those for grains, and average tariffs for some
countries are much higher than the average for other countries. 
Another important disparity is between tariffs for primary and
processed products. Tariffs for processed products commonly
increase, or escalate, above tariffs for primary products. Such
"tariff escalation" can be a significant bias against trade in
processed products. Studies have demonstrated that sectors with
relatively low tariffs can still have high rates of protection on
value added products. (Yeats)

Approaches to Negotiated Tariff Reductions

The experience of past GATT rounds in reducing industrial tariffs
provides some options for approaching agricultural tariff
negotiations. Most early industrial tariff reductions were
achieved through bilateral negotiations in which countries made
requests or offers to major trading partners. The results were
multilateralized through the (MFN) principle. Request-and-offer
negotiations do not systematically address the problems of tariff
escalation or tariff dispersion among countries or commodities
nor do they assure that very high tariffs will be reduced at all.

In order to achieve broader liberalization, the Kennedy Round
(sixth round) began with participants agreeing to an overall
linear tariff-cutting formula of 50 percent. Specific exceptions
were then negotiated. This approach provided an initial major
step forward, followed by minor steps backward. Agriculture was
exempted from this across-the-board approach, however. One
advantage of an across-the-board linear cut is that it results in
automatic reciprocity. A large across-the-board linear cut in
agricultural tariffs such as the 50-percent cut proposed during
the Kennedy Round would significantly reduce agricultural
tariffs. However, a linear cut might not reduce some megatariffs
enough to stimulate trade. A linear or constant percentage
formula for tariff reductions also does not address the issues of
tariff dispersion or tariff escalation.

In the Tokyo Round, the across-the-board reduction approach, with
some exceptions, was continued. However, considerable debate
surrounded the formula to be used. Eventually, a compromise
formula, the Swiss formula (see box "Tariff Reduction Formulas"),
was employed. By reducing higher tariffs by greater percentages,
all disparities among tariffs were reduced. Larger reductions
for higher tariffs also address the problem presented when very
high bound rates allow lower applied tariffs, often involving
reduced price transmission.

Expanding Access Quotas

Lowering tariffs is not the only way to increase trade. For
commodities subject to TRQs, expanding the quotas might have a
more immediate impact on trade. As Josling points out, at some
point increasing the quota would make the high above-quota bound
tariffs irrelevant (Josling, 1998). Of course, this would only
be true in those cases where the TRQ was being administered so as
to attract the guaranteed access quantity. In fact, the
administration of TRQs has been among the most contentious issues
resulting from the implementation of the URAA.

GATT article XIII provides two criteria for judging whether
tariff quotas are being properly administered: 1) quota fill and
2) distribution of trade. TRQs should allow imports up to the
quota amount if market conditions permit. If countries establish
within-quota tariffs that are larger than the price gap between
domestic and world prices that results after imposition of the
TRQ, the quota is unlikely to be filled because trade is not
profitable. Of course, if demand is not significant, quotas also
will not fill. If a within-quota tariff is smaller than that
price gap and the quota is not fully used, the TRQ may have been
inappropriately administered. The distribution of trade
criteria is related to the GATT principle of nondiscrimination,
which asserts that trade shares should be determined by the
relative efficiency of suppliers and not by alternative,
discriminatory criteria. Some countries, however, have counted
previously negotiated bilateral commitments against their TRQs,
or have agreed to side deals negotiated outside of the MTN
setting.

In spite of the problems associated with TRQs, they still, in
principle, provide more market access than the NTBs they
replaced, particularly when compared with absolute quotas. Under
an absolute quota it is legally impossible to import more than
the quota amount. Under a TRQ, imports can exceed the quota
amount as long as the market is willing to incur the tariff
applied on quantities in excess of the quota. Likewise, in spite
of the problems associated with tariffication, tariffs are a
transparent instrument of protection compared with NTBs, which
tend to insulate markets and adversely affect the workings of the
marketplace. The move towards a tariffs-only approach to
agricultural trade should lead to more efficient and stable
global markets.

Conclusions

The greatest success of the URAA in the area of market access was
in rewriting the rules governing agricultural trade rather than
in achieving large reductions in protection. The tariffication
of all non-tariff barriers was a truly significant achievement; 
however, it was carried out in a manner that allowed some member
countries to minimize reductions in (or even increase) import
protection for their agricultural sectors.

The tariff bindings and reductions agreed to by some countries
did not reduce protection or facilitate increased trade for
politically sensitive commodities. As a result, protection of
agricultural markets from imports remains high on average. 
Moreover, this protection remains highly variable, with much
higher tariffs on some commodities and with higher average
tariffs in some countries. For most industrial countries, even
after reductions, the ad valorem measure of final bound tariffs
in agriculture will remain higher than the average rate of
protection for agriculture in 1982-93 (Ingco). While bound
tariffs tend to overstate levels of protection because many
countries apply tariffs that are well below bound rates, it is
bound tariffs that have been negotiated in the past and most
likely will be negotiated during the next WTO round.

Having undergone the processes of tariffication, binding new and
existing tariffs, and successfully negotiating modest initial
goals to reduce these tariffs, the agricultural sector is now
well positioned for further trade liberalization. The next round
will have to further reduce tariffs, particularly the
megatariffs, to secure important additional gains from trade. 
Fortunately, the experience of past rounds offers some ideas
about how this can be done. For commodities subjected to TRQs,
an option, or perhaps a complement, to reducing tariffs is to
expand quotas. At the same time, however, the upcoming
negotiations will have to examine whether some TRQ administration
methods are inherently likely to result in underfilling of quotas
or in a discriminatory distribution of trade and, if so, whether
disciplines should be established.

BEGIN BOX 1

Summary of Uruguay Round Agreement on Agriculture Market Access
Provisions

Tariffication, Tariff Bindings, and Reductions

o Non-tariff barriers to be converted to tariff equivalents
(tariffication) equal to the difference between internal and
external prices existing in the base period.

o All tariffs to be bound (i.e., cannot be increased without
notification and compensation).

o Reduce existing and new tariffs by 36 percent, on a simple
average (unweighted) basis, in equal installments over 6 years. 

o Reduce tariffs for each item by a minimum of 15 percent.

Minimum and Current Access

o Minimum access import opportunities to be provided for
products subject to tariffication with imports below 5 percent of
domestic consumption in the base period.

o Countries must agree to maintain current access opportunities
equivalent to those existing in the base period. Current access
import opportunities (for example under quotas or voluntary
export restraints) to be provided for products subject to
tariffication with imports exceeding 5 percent of domestic
consumption in the base period. 

o To ensure that these access opportunities can be met,
countries will establish tariff-rate quotas, with the access
amounts subject to a low duty and imports above that amount
subject to the tariff established through tariffication.

o Increase minimum access quotas from 3 percent of domestic
consumption to 5 percent over implementation period.

Safeguards, Exceptions, and Special and Differential Treatment

o Special temporary agricultural safeguard mechanism put in
place for products subject to tariffication. Imposed if increase
in volume of imports or drop in price of imports exceeds certain
trigger levels.

o Special treatment allows countries, under certain conditions,
to postpone tariffication up to the end of the implementation
period as long as minimum access opportunities are provided.

o Developing countries allowed the flexibility of ceiling
bindings, longer implementation periods (10 years) and lower
reduction commitments in tariffs (24 percent average reductions
with 10 percent minimum). Least developed countries subject to
tariffication and binding but exempt from reduction commitments.

Base Period, Implementation Period

o Base period: 1986-88. Implementation: 6 years, beginning in
1995 (10 years for developing countries). 
END BOX 1

BEGIN BOX 2 (includes figure 3)
Tariff Reduction Formulas

To harmonize tariff structures by having the highest tariffs
experience the greatest cuts, alternative tariff cutting formulas
were proposed during the Tokyo Round that produced distinctly
different outcomes. Figure 3 shows the beginning (ti) and ending
(tn) tariffs under some of those formulas. The formula, its
parameters, and the implementation period would be subject to
negotiation.

As an alternative to a straight linear cut (the dotted line in
figure 3), one proposal called for linear reduction with an
additional "harmonization" adjustment (term b). In this case, an
even deeper cut could be applied than in a straight linear
formula, since the linear reduction would be partially
compensated for by the harmonization term:

(1) tn = a*ti + b. 

The dashed line in figure 3 represents the case where a = .25 and
b = 10. In the case of initially low tariffs, the new tariffs
are higher than what would result from a straight linear cut. In
the case of initially high tariffs the opposite would result. 
Note, however, that this approach would actually raise lower
tariffs (where ti < b/(1-a)). In this case, the second term might
be dropped or the formula only applied on higher tariffs (where
ti > b/(1-a)).

As an alternative to (1), a harmonization formula designed to
achieve even deeper cuts in high tariff rates was considered. 

(2) tn = ti - (ti2/100) 

The problem with this formula is that it was meant to deal with
what were considered high tariffs in the manufacturing sector,
i.e. tariffs over 20 percent. For tariffs over 50 percent, the
cuts accelerate until the formula yields a new tariff of zero for
an initial tariff of 100 percent.

In the end, the Swiss formula, which places an upper bound on all
tariffs, was generally applied:

(3) tn = (a*ti ) / (a+ti ), where a = the upper bound on all
new tariffs.

The maximum tariff level allowed after the cuts would be
negotiated. Using this formula and setting a=25 (as in figure
3), an initial tariff of 25 percent would be reduced by 50
percent while a tariff of 100 percent would be reduced by 80
percent.
END BOX 2

References 

Baldwin, Robert E. "Multilateral Liberalization," in The Uruguay
Round: A Handbook on the Multilateral Trade Negotiations. Finger,
J. Michael and Andrzej Olechowski, ed., World Bank, Washington,
DC, 1987.

Chattin, Barbara and Robert Wise. "Agriculture Trade Policy and
GATT Negotiations," in Agricultural-Food Policy Review - U.S.
Agricultural Policies in a Changing World. USDA, Economic
Research Service, AER 620, Washington, DC, Nov. 1989.

Food and Agriculture Organization. "Impact of the Uruguay Round
on Agriculture - Methodological Approach and Assumptions." 
ESC/M/95/1, Rome, Apr.1995.

Finger, J. MICHAEL and Andrzej Olechowski, ed. The Uruguay Round:
A Handbook on the Multilateral Trade Negotiations. World Bank,
Washington, DC, 1987.

Finger, J. MICHAEL, Merlinda D. Ingco and Ulrich Reincke. The
Uruguay Round: Statistics on Tariff Concessions Given and
Received. World Bank, Washington, DC, 1996.

Ingco, Merlinda. "Agricultural Liberalization in the Uruguay
Round." World Bank Working Paper No. 1500, World Bank,
Washington, DC, 1995.

Josling, Timothy. Agricultural Trade Policy: Completing the
Reform. Institute for International Economics, Washington, DC,
1998. 

Josling, Timothy and Stefan Tangermann. "The Significance of
Tariffication in the Uruguay Round Agreement on Agriculture."
Paper for the North American Agricultural Policy Research
Consortium Workshop, Vancouver, Canada, May 14, 1994.

Laird, Samuel and Alexander Yeats. "Tariff-cutting Formulas
-- and Complications," in The Uruguay Round: A Handbook on the
Multilateral Trade Negotiations. Finger, J. MICHAEL and Andrzej
Olechowski, ed., World Bank, Washington, DC, 1987.

Yeutter, Clayton. Testimony for the Committee on Finance,
Subcommittee on International Trade. United States Senate, May
14, 1986.

Yeats, Alexander. "The Escalation of Trade Barriers", in The
Uruguay Round: A Handbook on the Multilateral Trade Negotiations.
Finger, J. MICHAEL and Andrzej Olechowski, ed., World Bank,
Washington, DC, 1987.

WTO Domestic Support Commitments: A Preliminary Evaluation

WTO Domestic Support Commitments: A Preliminary Evaluation

Changes in the mix of domestic agricultural support policies in
WTO member countries between 1986-88 and 1995 suggest that
related effects on production and trade may have been reduced. 
All member countries are meeting their URAA commitments to reduce
support from those domestic agricultural policies deemed to have
the largest effect on production ("amber policies"), and
reductions in most countries greatly exceed their commitments. 
Domestic support from those policies thought to have the least
effect on production ("green box policies") has increased from
1986-88 levels. 

Introduction

In an unprecedented act, WTO member countries agreed to
discipline some domestic policies, as 
well as trade policies, as part of the Uruguay Round Agreement on
Agriculture (URAA). 1/ 
Other domestic policies were exempt from any disciplines. The
"disciplining" of domestic policies is being accomplished by
requiring countries to control and gradually reduce expenditures
(or support levels) on the targeted, non-exempt policies. At
stake is the successful accomplishment of the WTO's long term
goals--to reduce support and protection of agriculture and
establish a fair and market-oriented agricultural trading system,
while having regard for certain non-trade concerns of individual
countries.

1/ Trade policies, in this paper, refer to the set of policies
designed specifically to affect trade flows and prices through
use of import quotas, tariffs, and export subsidies. Domestic
policies include all other agricultural policies within a country
that aim to influence internal farm and rural incomes, resource
use, production, consumption of agricultural products, or
environmental impacts of farming.

This article presents preliminary analysis of the structure of
domestic agricultural policy that has arisen under the URAA. 
Changes in measures of support for different policies are
evaluated in terms of their potential implications for market
orientation and trade.

Countries Agree To Reduce Domestic Support

Some limitations on domestic support were thought to be essential
for the successful achievement of WTO's trade goals aimed at
establishment of "a fair and market-oriented agricultural
trading system....and correcting and preventing restrictions and
distortions in world agricultural markets." And yet, individual
countries reserve the right and may be obligated by the
electorate to use domestic support policies to pursue various
national policy objectives.

All domestic policies whose provisions are restricted to
agricultural producers and/or landowners are likely to have some
effect on production, and, thus, on trade. And domestic policy
objectives often are the motivation for many trade policies,
since, by directly influencing imports and exports, trade
policies can be used to facilitate domestic price and income
goals. For a trade agreement to be reached in a world wide
context, therefore, individual countries had to be willing to
trade off some aspects of domestic policy in favor of
facilitating world market goals. In the final URAA, these trade
-offs involve the methods of implementing domestic policy, rather
than the domestic policy goals themselves.

In discussions leading up to the URAA, domestic policies were
segregated into categories to indicate the relative acceptability
of the policies (see box: "Domestic Policy Categories in the
[URAA]..."). In the final agreement, domestic policies deemed to
have the largest effect on production and trade (amber box
policies) are to be disciplined by requiring limitations or
gradual reductions in related support levels. Policies presumed
to have the least effect (no more than "minimal trade-distorting
effects") on production and trade (green box policies) are
exempt from any disciplines. How to tell whether or not effects
of specific policies are more than "minimally trade distorting"
is an issue yet to be definitively addressed by WTO guidelines.

In general, the domestic policies considered to have the largest
effects on production and trade are those that provide direct
economic incentives to producers to increase or decrease current
resource use or current production, since such changes affect
supplies available for export, and the demand for imports. These
incentives are known as "coupled" incentives because of the
direct link to current production. Examples are administered
price supports, input subsidies, and direct per unit payments. 
Payments and other incentives not directly linked to inputs or
production may, therefore, be termed "decoupled." When support is
decoupled, farmers base production decisions on expected market
returns, not on expected government support.

The URAA green box includes a direct payments category called
"decoupled income support," where eligibility is "determined by
clearly-defined criteria such as income, status as a producer or
landowner, factor use or production level in a defined and fixed
base period." "The amount of such [decoupled] payments in a
given year shall not be related to, or based on, the type or
volume of production (including livestock units) undertaken by
the producers in any year after the base period." Neither shall
the amount of such payments be "related to, or based
on...prices....[or]...factors of production employed in any year
after the base period." "No production shall be required in
order to receive such payments." (Paragraph 6, Annex 2).

Based on the above URAA definition, coupled support, therefore,
might be considered to be support that is related to, or based on
production, resource use, or prices in some year after the base
period, especially if that year is the current year.

To accommodate the EU and the United States and to bring the
negotiations to a conclusion, countries agreed to redefine some
amber box "payments under production-limiting programmes" as
exempt "blue box" policies if they met specific criteria (see the
criteria in the box: "Domestic Policy Categories in the
[URAA]..."). Examples of 1995 blue box policies are the former
U.S. deficiency payments and the EU compensatory payments. 2/

2/ EU compensatory payments are payments made to producers for
area sown to grains, oilseeds, or protein crops ("arable crops"). 
These payments were established to compensate producers for the
loss of income caused by the reduction of intervention, or
support prices after 1992. Payments are based on fixed,
historical yield in each region, and the total area eligible to
receive compensatory payments is also fixed. Producers with an
area planted to arable crops sufficient to produce more than 92
tons of grain must set aside part of their area in order to
receive compensatory payments.

In identifying potentially exempt green box policies, the URAA
accommodates the political need for individual countries to be
able to use policies related to issues of equity (e.g., food
security and aid to the needy), market failure (e.g.,
environmental programs), and the absence, or inadequacies of risk
markets (e.g., insurance and income safety net programs). The
Agreement therefore includes a suggestive list of the types of
green box programs that may be considered exempt, as long as they
meet certain specific criteria, including the one fundamental
criteria that they be, at most, minimally trade distorting
(figure 4, table 3). The term, minimally trade distorting,
however, is not defined in the URAA.

Aggregate measure of support. Support levels from amber box
policies are quantified, according to the URAA, by calculating an
aggregate measure of support (AMS) for each country. 3/ Support
reduction commitments were implemented by 28 countries agreeing
to keep their annual AMSs from exceeding specified upper limits,
or "ceilings" that decline over time relative to their level in
the base years 1986-88. Other member countries agreed, in
effect, to not increase support above the level in the base year. 
The final decision about who would actually make support
reduction commitments was, itself, worked out during the
negotiations. Ratification of the URAA text also implies
acceptance of the individual country commitments, as submitted.

3/ The AMS combines estimated support levels from all non-exempt
policies for all commodities into one overall measure. Non-
exempt policies in the AMS include commodity-specific market
price supports based on administered prices, non-exempt direct
government payments to producers, and other commodity-specific
transfers, plus non-commodity specific measures of support
received by producers, such as capital, input, and insurance
price subsidies (see table 2 for U.S. examples). As a domestic
measure, the AMS excludes export subsidies and impacts of import
restrictions not also tied to domestic administered price
programs.

In addition to the exemption from disciplines for green and blue
box policies, other exemptions were also granted that reduced the
level of some countries' AMS. Developing countries received
"special and differential" exemptions for certain input and
investment subsidies based on the principle that developing
countries need to be allowed some flexibility to generate
economic development through subsidized agricultural development. 
Also exempt were individual measures of amber box subsidies that
were considered too small to count, resulting in the "de minimis
exemption" (table 3).

Support Reduced from Amber Box (AMS) and Blue Box Policies 4/

4/ This analysis uses unpublished information from the WTO and
data from country notifications to the WTO for 1995. (Data for
1996 are incomplete as of November 1998). Membership in the WTO
requires that countries annually provide information on
commitments, changes in policies and support, and other matters
related to outstanding trade agreements--a process called
"notification." In the initial WTO agreement, 26 countries made
AMS reduction commitments. Two additional countries made
commitments upon accession to the WTO. As of May 1998, 24
countries had notified the WTO for 1995. These 24 countries
accounted for 99 percent of total support for the 28 AMS
countries in the base period.

Support reduction commitments more than met. All countries
reporting their 1995 AMS to the WTO have met their support
reduction commitments. Most of these countries have, in fact,
exceeded their support reduction commitments by a large margin
(table 4, and see text box for amber box policy commitments).

Effects of domestic policies on trade likely reduced. Support
from policies with the greatest potential to effect production
and trade has decreased significantly since the URAA base period. 
The total value of the 1995 AMS for the first 24 countries who
notified--$115 billion--is equal to only about 57 percent of the
AMS level in the 1986-88 base period for these countries. The
blue box payments, however, were excluded from the AMS in 1995
(based on Article 6 of the URAA) even though they were included
in the base year AMS. Combining the 1995 blue box payments with
the reported AMS, for purposes of comparison, increases the 1995
support level to 73 percent of the base.

AMS and blue box policies affect production. Policies included
in the current AMS tend to raise production because such benefits
are usually "coupled" with production, meaning that increases in
production will likely bring about increases in the policy
benefits and vice versa. The effect of such a support policy on
producers is to encourage them to increase output to maximize
profits. Payments for exempt blue box policies compensate
producers for foregone income. Blue box payments received in
excess of foregone income from program compliance immediately
increase producer wealth, lead to expectations of future
windfalls, and may encourage expanded production, especially if
any production limitations are subsequently relaxed.

Support concentrated in three countries. The European Union,
Japan, and the United States are by far the largest providers of
amber support in absolute terms, accounting for about 90 percent
of the total AMS for the 24 countries that reported an AMS as of
June 1998. These results reflect the size of these countries' 
agricultural sectors, and the rate of subsidization in these
countries, both of which are affected by unique circumstances in
1995, such as weather and demand factors (figure 5). The 1995
rate of subsidy, per dollar of output from amber plus blue box
policies, was about 30 percent in EU and Japan, and 7 percent in
the United States. 5/ The blue box payments were relatively
large for the EU and United States, while Japan reported no blue
box payments (table 3). Although these support indicators are
not measures of trade distortion, per se, the combination of a
high rate of subsidy and a large amount of subsidy for both the
EU and Japan emphasizes the potential for these countries to
effect world trade.

5/ The subsidy rate is the value of support divided by the value
of production at domestic market prices, as reported to the WTO. 
For Japan, the value of "gross agricultural output" for 1994 was
the divisor, based on data from the Statistics of Agricultural
Income, Ministry of Agriculture, Forestry, and Fisheries.

Policy changes have occurred. Several countries have undertaken
policy changes from 1986-88 through 1996, relying less on market
price support and more on direct payments and green box policies. 
For example, reforms of the European Union's Common Agricultural
Policy during 1992 to 1995 reduced support prices and increased
its reliance on direct payments. The EU total support from AMS-
plus-blue box payments in 1995 was 15 percent below the base
period level of support. Japan has held its administered prices
constant or reduced them since 1986-88, and its AMS decreased 29
percent.

The United States also made important reforms under two major
Farm Acts in 1990 and in 1996. The U.S. AMS-plus-blue box
payments declined 42 percent from the base period through 1995
and were down again in 1996. However, total support in the
United States increased from the base level through 1995, due to
increased green box expenditures (largely domestic food
assistance programs). Acreage reduction programs were eliminated
in 1996. Producers now have 100 percent flexibility to plant for
the market. And the blue box deficiency payments, applicable for
the last time in 1995, have been replaced by decoupled production
flexibility contract payments. These new payments, which are
reported in the green box, are the main source of direct
payments after 1995, and their inclusion in 1996 caused total
green box support to increase from 1995 to 1996.

Increased Support Observed from Green Box and Other Exempt
Policies

Support from green box policies, those presumed to have the
smallest potential effects on production and trade, increased 54
percent from 1986-88 to 1995, while AMS changes suggest that
support from policies thought to have the greatest potential
effects on production and trade decreased in many countries. 
Actual effects of reported green box policies on production and
world trade depend on the total amount of subsidy channeled
through the particular policies and on the way in which the
subsidies are provided by each policy. The URAA provisions
establishing criteria for which policies may be considered green
box policies focus attention on the way that policies are
implemented, but do not explicitly limit the amount of the
subsidy. 

All WTO-exempt policies provide some sort of subsidy, or
assistance to agriculture, otherwise they would not need to be
granted exemption status. Most of the expenditures on green box
policies, worldwide, went for domestic food aid, infrastructure
services, other general government service programs, and
investment aids for structurally disadvantaged producers (figure
4). Of 19 countries reporting green box data both in the base
and in 1995, 16 notified an increase in green box expenditures in
nominal terms since the base. Most of this increase was
concentrated in three countries--the United States, EU, and Japan
(figure 5). The 1995 value of green box policies ($127 billion)
was greater than the total reported for the amber box AMS ($115
billion).

Production effects of green box policies. Green box policies are
presumed to have the smallest effects on production and trade,
and are, in fact, required to have "no, or at most, minimal"
effects on trade and also "shall not have the effect of providing
price support to producers." Although these overall requirements
for the green box remain vague, the specific criteria for
decoupled payments (detailed above) suggests that, at least,
these payments would have no direct effect on current production
decisions. However, any policy that transfers income to
producers could conceivably have some effect on production by
increasing wealth and reducing the risk of financial failure. 
Some specific policies that otherwise meet the URAA green box
criteria could have significant positive effects on production if
financed with a large enough total amount of government
expenditure.

Domestic food aid was the single largest category of green
support in 1995, totaling $40 billion, most of which was spent by
the United States. U.S. food aid increased $18 billion from the
base to 1995 because of increases in the Food Stamp Program.

Other green box expenditures include a variety of different types
of programs with unique approaches to providing benefits to
producers and the rural economy. Each has its own potential to
affect production. Government service programs affecting
"infrastructures" ($28 billion) and "other general government
service" activities ($25 billion) provide information,
inspections, and other kinds of assistance to agriculture in
general, but do not directly subsidize producers or specific
commodities' production. The cost of constructing irrigation and
electricity distribution facilities, roads, and other production-
cost influencing structures in rural areas, however, are reduced
because of the infrastructure policies. Investment aids (e.g.,
farm credit subsidies or grants) to structurally disadvantaged
producers ($12 billion) are designed to increase production and
income of some producers, but the effect may be minimal if the
criteria for the eligibility is sufficiently limited to a small
enough share of the total farm sector. The other ten categories
of support are not yet very important, quantitatively, averaging
about $2 billion each, worldwide (figure 4).

Implications for the WTO

Most countries have been able to reduce their amber support
levels much more than required under the URAA, suggesting that it
might not be too hard, politically, and/or economically, for some
further reductions in the AMS ceiling to be made in future trade
negotiations. However, a dozen countries, including Japan and
the EU, still have support levels in 1995 equal to at least 60
percent of their commitment ceiling, so the extent of future
reductions may be limited. The EU would be particularly affected
by much larger reductions in support ceilings if the blue box
exemptions were denied in the future. The 1995 AMS for the
United States was only 27 percent of its commitment ceiling, and
U.S. blue box policies no longer exist, so it might be relatively
easy to make significant future reductions in the AMS ceiling
level in this country. AMS commitments are on an aggregate
basis, however, so if future commitments were commodity specific,
it might be more difficult to make significant additional
reductions beyond that agreed to already.

Changes in the mix of domestic policies in WTO countries over
time, involving moving from reliance on amber policies and toward
more reliance on green policies, suggest that related effects on
production and trade may also have become smaller. However,
complementary reforms in trade policies must also take place to
guarantee increased world market orientation. That is, trade
policies can increase domestic prices regardless of domestic
support levels. So, reducing domestic support alone is not
sufficient to guarantee reduced effects on trade.

If green box expenditures continue to increase in importance, the
particular green box programs being used need to be evaluated to
guarantee that they really meet both the fundamental criteria for
the green box as well as the policy-specific criteria. A problem
of interpretation arises in implementing the URAA because of the
undefined fundamental criteria for the green box that the
reported programs be no more than minimally distorting of
production and trade. Consequently, some programs reported in
the green box could satisfy the policy-specific criteria for
being green and yet also could have "significant" production
effects with great enough financing and program participation.

BEGIN BOX
Domestic Policy Categories in the Uruguay Round Trade Agreement
on Agriculture 1/

Amber box policies
($115 billion)
These were the domestic policies presumed to have the largest
potential effects on production and trade. The base period level
of amber support (1986-88 for most countries) was "bound" for all
countries, meaning that this level was established as an initial
absolute upper limit for support. Twenty-eight countries,
including most of the major agricultural producers and/or
traders, also agreed to phase down the level of support provided
through these amber policies (as measured by the AMS) over a
specified period of time. Developed countries agreed to a 20
percent reduction in amber support over a 6-year period, relative
to the base level of support, while developing countries agreed
to a 13-percent reduction over a 10-year period and least
developed countries agreed to not increase support beyond the
base period level.

Green box policies
($127 billion)
These policies were considered to have the smallest potential
effects on production and trade. "Green" means that countries
could "go ahead" with these policies, that is, they are exempt
from support reduction commitments.

Blue box policies
($35 billion)
For the 1995-2000 notifications, amber box payments related to
production limiting programs can be placed in a special,
temporary exemption category called the "blue box," if the amount
of payments are based on fixed area and fixed yields, or a fixed
number of livestock, or if they are based on no more than 85
percent of the base level of production. Any such payments in
the base period are included in the base level of support (AMS). 
(See Article 6, paragraph 5 of the URAA.)

Special and differential exemptions
($4 billion)
Certain domestic investment and input subsidies of developing and
least developed countries are exempt from support reduction
commitments (see Valdes and Young article in this report).

De minimis exemptions
($5 billion)
Another category of excludable support is termed "de minimis, and
is based on the notion that expenditures below a certain
threshold (defined as 5 % of the value of production for
developed countries and 10 % for developing countries ) are
sufficiently benign that they do not have to be included in the
AMS calculation.

Total support
($286 billion)
Total value of the above support categories.

1/ Support data shown is for 1995, as reported to the WTO by
individual countries. Based on unpublished information from the
WTO.
END BOX

Export Subsidy Commitments: Few Are Binding Yet, But Some Members
Try To Evade Them 

In the Uruguay Round of the GATT, 25 countries that employed
export subsidies agreed to reduce the volume and value of their
subsidized exports over the period 1995/96 to 2000/01. To date,
most of these countries have met their commitments, although some
have devised schemes to circumvent them. The EU, by far the
largest export subsidizer, holds an 84-percent share of 1995 and
1996 subsidy outlays for the 25 countries since it relies on
export subsidies to bridge the gap between high domestic support
prices and lower world prices. Despite substantial progress in
reducing export subsidies, rising world grain supplies and
falling world grain prices could require some countries to adopt
policy changes in order to meet their future commitments. [Susan
E. Leetmaa (sleetmaa@econ.ag.gov) and Karen Z. Ackerman
(ackerman@econ.ag.gov)]

Introduction

The URAA imposed meaningful disciplines on agricultural export
subsidies for the first time (see box "The Uruguay Round
Agreement on Agriculture and Export Subsidies"). Prior to URAA
implementation, export subsidies significantly distorted
agricultural trade. During the late 1980s, the United States and
EU engaged in a "subsidy war" in which both countries battled to
undercut each other's prices in wheat export markets. Over the
decade, U.S. market share declined while EU market share
increased dramatically. Other exporters such as Argentina,
Australia and Canada advocated the elimination of export
subsidies which they argued increased pressure on their national
treasuries and pushed them out of some export markets.

Experience with Export Subsidy Commitments

Each year, WTO members are required to notify the WTO Committee
on Agriculture concerning the volume of their subsidized exports,
their expenditures on export subsidies, and the volume of their
unsubsidized exports, by commodity, as specified in their country
schedules. As of July 1, 1998, most countries' notifications had
been received for 1995 (1995/96 for some countries) and 1996
(1996/97), the first 2 years of URAA implementation. Of the 25
members with export subsidy commitments, all but one have
submitted notifications for 1995 (Colombia) and 1996 (Mexico).

Based on the available WTO notifications, high world grain prices
kept countries' use of export subsidies well below their WTO
commitments in both 1995 and 1996. The EU, typically the largest
user, even imposed taxes on grain exports. These events were
unforeseen at the time the URAA was being negotiated. Now that
world grain prices have fallen, however, meeting commitments for
these goods may become more difficult.

Of the 25 countries that have export subsidy commitments in their
WTO schedules, the EU by far employs the most export subsidies
(figure 6). The EU accounted for nearly 84 percent of the $7.6
billion of export subsidies notified to the WTO for 1995 and $8.4
billion reported for 1996 (as of July 1, 1998). Based on which
volume commitments were nearly filled in both 1995 and 1996, it
appears that the EU is most reliant on subsidies for cheese,
other milk products, bovine meats, olive oil, poultry, and fresh
fruit and vegetables. In years of low world prices, the EU would
also be reliant on subsidies for grain exports as well.

In contrast, the United States ranked ninth overall in export
subsidy expenditures in 1995. The United States allocated
roughly 80 percent of its less than $26 million in export subsidy
expenditures to dairy products (mostly skim milk powder) and the
remainder to poultry meat. U.S. expenditures increased to $121
million in 1996. All U.S. subsidies were for dairy products, of
which nearly 80 percent went toward exports of skim milk powder.

Only four countries exceeded one or more of their value
commitments in 1995, and two did in 1996 (see table 5). The
largest expenditure overrun in percentage terms was by Cyprus for
Halloumi cheese in 1995 (405 percent of its value commitment of
$195,000 and 189 percent of its volume commitment of 986 tons). 
In 1996 Cyprus fully filled both its volume and value commitments
for Halloumi cheese. For Cyprus to meet its cumulative
commitments by the 2000/01 deadline, it will need to severely
limit export subsidies for Halloumi cheese in the years prior to
2000/01.

South Africa, the second largest user of export subsidies in 1995
and 1996, exceeded its expenditures on subsidies for cocoa and
its volume commitments for wine in those years. However, the
South African government terminated its export subsidy program in
July 1997. 

In all other cases where countries exceeded their commitments in
1995, their export subsidies were well below their commitments
for 1996. Thus, for the time being, they have met, or are at
least close to meeting their requirements for the export subsidy
implementation period under the URAA.

In 1996, the EU, Poland, and South Africa exceeded their volume
commitments. The EU and Poland both claim that they can carry
over unused portions of their 1995 commitments to make up for
their overrun in 1996. Because the countries were far below
their commitments in 1995/96, they argued that they have the
ability to apply the additional amount not used in 1995/96 to any
of the years up to 1999/00. Others argue that flexibility
provisions in the agreement are meant only to deal with
situations where a country exceeds its limits and has to pay
back--not as an opportunity for countries to "bank" unused
subsidies.

In 1995 and 1996, grains accounted for the largest volume of
subsidized exports (see table 6), though they were far below
commitment levels because world grain prices were high
(especially in 1995). Fruits and vegetables, other milk
products, beef, and sugar (in 1996) accounted for most of the
remaining subsidized exports. These products, along with
oilseeds and vegetable oils, have been allotted the largest
permitted quantities in the countries' WTO export subsidy
schedules. In terms of volume commitments, those that have come
closest to being filled are other milk products, cheese, and
bovine meats. Due to high prices, oilseed allotments were barely
used in 1995 and only slightly more in 1996.

Implementation Issues

Very few countries have changed their policies substantially to
conform with their export subsidy commitments or to plan for
reduced commitments in the future. The most notable reforms are
to South Africa's and Canada's export subsidies. South Africa
ended its subsidy program in 1997 and Canada terminated its rail
subsidy for exported commodities in 1995. The EU has to reduce
its internal prices to avoid exceeding its export subsidy
commitments in future years, particularly when the Central and
East European countries join the EU-15. Of concern to many WTO
members are export subsidy waivers and circumventions that
undermine the substantial export subsidy disciplines of the URAA. 
The EU and Canada instituted export marketing policies that allow
them to circumvent their export subsidy commitments. Hungary
obtained a waiver from its export subsidy commitments, which it
argues were miscalculated.

EU's export subsidy commitments and enlargement drive CAP reform: 
Ten Central and Eastern European (CEE) countries have applied for
membership in the EU. The application of the CAP mechanisms to
the CEE countries would be very costly to the EU. It would also
increase prices and stimulate agricultural production in the CEE
countries, increasing their reliance on export subsidies. The EU
is close to meeting its WTO commitments on the permitted volume
and value of export subsidies. If the CEE's accession forces the
EU to subsidize the exports of many commodities, the EU would
certainly exceed its export subsidy constraints. Thus, the EU
has proposed the Agenda 2000 reforms of its CAP, further reducing
price support to farmers and reducing the associated need for
export subsidies. However, the Agenda 2000 proposals have not
been widely embraced by the EU member countries, who ultimately
will have to vote whether to adopt the reforms.

Even if the Agenda 2000 proposals pass in their current form,
they do not tackle the issue of reliance on export subsidies for
all products. Comparing the bound rate in 2000/01 to subsidized
expenditures in 1995 and 1996, one can see where the EU may have
problems meeting its commitments in the future (see table 7). 
Expenditures for many commodities were far above the final bound
levels. Even with the Agenda 2000 reforms, the EU may still have
difficulty meeting its WTO expenditure commitments for wine, and
fruits and vegetables.

The EU subsidizes dairy product components: Clearly, some of the
export subsidy limits have been binding. For example, the EU has
started to export some processed cheese claiming that it is an
amalgamation of butter, skim milk powder, and natural cheese, and
then counting export subsidies on the processed cheese against
subsidies for the three component products. This leads the EU to
subsidize more cheese than was agreed upon in the URAA.

The EU claims that this is possible through a modified version of
the "Inward Processing Relief" (IPR) system. Traditionally under
the IPR, third country products are imported tariff-free,
processed in the EU, and then re-exported without a subsidy. 
Neither finished products nor components of the finished product
benefit from an export subsidy. However, beginning in February
1997, new rules implemented by the EU recast traditional inward
processing to allow the use of export subsidies for components of
processed cheese. According to Eurostat, the EU exported about
3,000 metric tons of processed cheese using this scheme in
1995/96. Processed cheese exports treated in this way jumped to
17,000 tons in 1996/97 and to an estimated 65,000-70,000 tons in
1997/98.

The Commission argues that "inward processing" increases third
country exports to the EU. Non-subsidized components from third
countries (such as New Zealand powdered milk) may be used to
produce the cheese. Nevertheless, non-EU cheese manufacturers
fear that the EU will be able to undercut their prices by
allocating its export subsidies this way. Additionally, there is
the fear that an EU policy of transferring subsidies from one
product category to another could spread to other agricultural
products, such as using grain export subsidies to produce low
cost poultry. This would weaken the WTO's export subsidy
commitments, which depend on specific commodity definitions.

Canada establishes a two-tier price system for milk: Prior to
August 1, 1995, the Canadian government assessed a levy on dairy
producers to fund subsidized exports of surplus dairy products. 
On that date, the Canadian government initiated a two-tier price
system that prices milk cheaper to processors when used in the
export of manufactured dairy products than when used
domestically. Canada represents only about 1 percent of global
trade in dairy products, but its dairy exports have grown
significantly in recent years.

New Zealand and the United States have complained to the WTO that
Canada's milk pricing system allows it to circumvent its export
subsidy commitments. Canada has notified to the WTO only those
dairy product exports that have been subsidized with funds
obtained from producer levies.

Hungary also had problems meeting original obligations: In
September 1997 Hungary submitted a request to the WTO's Council
for Trade in Goods for a waiver from its export subsidy
obligations. Hungary alleged that its base period export
subsidies were not calculated correctly, due to trade conducted
in non-convertible currencies and other ad-hoc arrangements that
were unknown by the administrative body estimating Hungary's base
subsidies. Consequently, Hungary argued that its base outlay
level was set at $423 million when it should have been set at $1
billion. Hungary claimed that its export subsidy schedule did
not permit subsidies to a level that would maintain Hungarian
market share of its agricultural exports. Hungary argued that
preserving its level of agricultural exports is critical to a
country in a transition period and requested that revised
commitments be put in place until January 1, 2002, when the
country would agree to comply with its original export subsidy
limits.

On October 22, 1997 the WTO agreed to grant Hungary the requested
waiver and set revised export subsidy commitments, based on
Hungary's request. Hungary's government is required to submit
annual reports on the waiver's anniversary date that explain how
it has applied the waiver. The annual notice is supplementary to
Hungary's export subsidy notification.

New Disciplines on Agricultural Export Credit Guarantees Under
Negotiation in the OECD

Most major exporting nations guarantee commercial credit for
sales of agricultural products, and, in some cases, insure sales
on special terms if the sales are viewed to be in the exporting
country's "national interest." Exporting nations offer to
guarantee private bank loans with competitive (commercial)
interest rates, loan terms (more than 6 months to as much as 10
years), and, in some cases, freight coverage. Export credit
guarantees expand importers' demand for agricultural products
when importers have difficulty obtaining foreign exchange. 
Credit guarantees can help stabilize economies in crisis by
allowing countries to continue importing agricultural products
and obtain inputs such as cotton and hides for export industries.

Export credit guarantees are grounds for competition among
exporters. As export price subsidies are reduced under the URAA,
the competitive aspects of credit guarantees have come under
increasing scrutiny. Uruguay Round negotiators agreed to
continue talks in the Organization for Economic Cooperation and
Development (OECD) to establish disciplines on agricultural
export credit guarantees, but major exporters have not yet
reached an agreement.

Future Talks May Focus on Further Subsidy Reductions

For the next round of WTO talks on agriculture, the United States
and the Cairns Group are calling for the complete elimination of
export subsidies and for rules to prevent circumvention of export
subsidy commitments. In the Cairns Group's opinion, "it is
essential that the 1999 negotiations ensure the early, total
elimination and prohibition of all forms" of export subsidies. 
The Cairns Group also is pushing negotiators in the OECD to apply
to agricultural credit guarantees the same international laws
that govern government-guaranteed export credits for manufactured
goods. The Cairns Group's pleas for subsidy elimination may gain
credence if importing countries' difficulties in obtaining credit
incite major exporters to step up their competition for those
markets with larger export subsidies and generous credit terms.

Another high-profile issue is whether the URAA definition of an
export subsidy already covers all export marketing practices that
could be considered export subsidies or whether additional
refinements in the definition are needed to restrict some of the
current subsidy circumventions. Decreasing world grain prices
and deteriorating economic conditions in key importing countries
will spur further debates on the conditions under which
international food aid may be exempted from export subsidy
restrictions.

Conclusions

Prior to the URAA, export subsidies were an important policy tool
in agricultural trade, particularly for trade in grains and dairy
products. In signing the URAA, countries that employed export
subsidies agreed to reduce the volume and value of their
subsidized exports over the period 1995/96 to 2000/01. To date,
most of the 25 countries that agreed to reduce their export
subsidies have met their commitments.

In 1995 and 1996, grains accounted for the largest volume of
subsidized exports, but because grain prices were high,
subsidized exports of grains were far below both volume and value
commitment levels, though they increased in 1996. In terms of
volume commitments, those that have come closest to being filled
are other milk products, cheese, and bovine meats. Again, due to
high prices, the grain and oilseed volume and value allotments
were barely used in 1995 and only slightly more in 1996.

Very few countries have changed their policies substantially to
conform with their export subsidy commitments or to plan for
reduced commitments in the future. The EU, by far the largest
export subsidizer, continues to rely on export subsidies to
bridge the gap between high domestic support prices and lower
world prices. The enlargement of the EU's Common Agricultural
Policy (CAP) to some of the Central European countries enhances
pressures to reduce domestic agricultural prices in the EU and
avoid excessive levels of export subsidies.

Some countries did change their policies to "conform" to their
URAA export subsidy commitments. The countries appear to have
implemented practices that allow them to circumvent those
commitments and undermine the substantial export subsidy
disciplines of the URAA. In the eyes of their trading partners,
the EU and Canada's export marketing policies for dairy products
allow them to circumvent their export subsidy commitments.

For the upcoming multilateral negotiations, the United States and
the Cairns Group of countries are calling for the complete
elimination of agricultural export subsidies and for rules to
prevent the circumvention of export subsidy commitments. Their
call to eliminate subsidies may gain credence if importing
countries' market conditions and financial problems encourage
major exporters to compete for those markets with larger export
subsidies and generous credit terms. Deteriorating economic
conditions in key importing countries also will spur further
debates on the conditions under which international food aid may
be exempted from export subsidy restrictions.

BEGIN BOX
The Uruguay Round Agreement on Agriculture and Export Subsidies

The Uruguay Round Agreement on Agriculture (URAA) imposes
disciplines on agricultural export subsidies for the first time
and begins to reduce the use of export subsidies in agricultural
trade. GATT contracting parties agreed to:

o reduce the volume of subsidized exports by 21 percent over 6
years from a 1986-90 base period level (14 percent over a 10-year
period for developing countries), and

o reduce the value of export subsidies by 36 percent over 6
years from a 1986-90 base period level (24 percent over 10 years
for developing countries).

Twenty-five members of the WTO are committed to reduce their
export subsidies. Countries' WTO export subsidy schedules
specify how much of each commodity can be exported with subsidy,
and permitted subsidy expenditures for each commodity. Under the
agreement, countries may not initiate subsidies for commodities
that are not in th