TCS Daily

Give War a Chance

By Michael Standaert - December 29, 2003 12:00 AM

For developing countries opposed to agricultural subsidies in Europe and the U.S., due restraint may be about to end.

The World Trade Organization "Peace Clause", which protects countries with agricultural subsidies from challenges to those handouts, is set to expire at the end of 2003. Without Article 13 of "due restraint", a free-for-all of challenges to agricultural subsidies could be filed at the WTO, mainly from developing nations wanting to flex their newly acquired muscle.


"I am sure that the expiration of the Peace Clause will generate a lot of disputes," says Ricardo Paredes, economic officer at the Peruvian Vice Ministry of Foreign Trade and National Bureau of Multilateral Affairs and International Trade Negotiations. "Especially from countries with a strong export interest like the Cairns countries."


Some countries in the 17-member Cairns Group, which maintains little or no agricultural protection and subsidies, declared earlier this year that the group would use the expiration of the Peace Clause to leverage reduction of subsidies in the U.S. and EU.


Paredes was one of the trade representatives from the Peruvian government at the September WTO talks in Cancun. Those meetings collapsed without the possible extension of the nine-year-old Peace Clause ever being discussed in great detail. But Paredes sees the threat of possible legal tangles and challenges to agricultural subsidies as a possible benefit to reform in the developed world, especially regarding export subsidies. "I think that this probable situation would pressure to U.S. and EU to revive the process and try to avoid the disputes with negotiations and commitments in other areas or agricultural pillars," he says.


"Peru has a strong commitment with the multilateral trading system and trade liberalization," Paredes says. "In this sense, we are looking for the elimination of export subsidies, a strong reduction (with a view to their elimination) in domestic support and an important reduction in tariffs, specially, developed countries' tariffs."


This is the end...


Richard Steinberg of the UCLA School of Law and Timothy Josling of the European Forum, Institute for International Studies conclude that when the Peace Clause expires, many commodity-specific European Community and U.S. agricultural subsidies will be especially vulnerable to legal challenges under articles of the WTO Agreement. Their study, "When the Peace Ends: The Vulnerability of EC and US Agricultural Subsidies to WTO Legal Challenge", from the Journal of International Law spells this out, along with much more. The study says non-subsidizing developing countries will have a huge bargaining tool against the U.S. and EU in demanding reductions to subsidies.


The former WTO Agreement on Agriculture has allowed the U.S. and EU to maintain subsidies at around $150 billion per year. However, when the Peace Clause expires, those subsidies that cause "serious prejudice" to countries which do not subsidize could be out on the killing floor. Though the 2002 U.S. Farm Bill falls under that cap, many subsidies could be up for challenge.


Paredes says that at Cancun his government hoped to discuss some of these issues as well as the extension of the Peace Clause, similar to proposals by India that the clause be retained only for developing countries to free some subsidies from countervailing duties. "In the case of agriculture and taking into consideration the principle of special and differential treatment, Peru was looking for the establishment of basket of 'special products' [with little or no tariff reduction] and a special safeguard only for developing countries," he said of Peru's position in Cancun.


The World Bank estimates that eliminating agricultural subsidies and tariffs worldwide could increase income in developing countries by $350 billion, possibly lifting 144 million people out of poverty by 2015.


But who's going to lose?


William Albrecht, Professor of Economics at the University of Iowa, says that although he thinks the U.S. does want to move in the direction of liberalizing agricultural trade and eliminating subsidies, barriers like the Farm Bill stand in the way at the present time. "I think the US really wants to go ahead," Albrecht says. "I'm not sure how we would do it. We have the Farm Bill. It's the law. We can't stop that. We could reach an agreement that would reach effect when the Farm Bill expires."


He also warns that a free-for-all in launching challenges to subsidies could backfire for developing countries. "If nothing happens, they are bigger losers than we are," Albrecht says. "We're rich. Big deal, we'll be that much richer. But they are poor. It's a big deal if they don't get rich."


Albrecht and Paredes both point out that the difficulties of achieving consensus among so many nations in the WTO process is one major hurdle in worldwide agricultural trade liberalization.


"It is really difficult to obtain consensus between 146 countries, especially when a considerable number of them do not participate actively in the Geneva process or have the same level of commitment with the negotiations," says Paredes. "But, as we talk about negotiations, the main actors should analyze first which is the 'price' or 'necessary trade off' that those countries need to revive the process, instead of changing to rules to make the things easier for them."


Albrecht adds, "I do think that it is critical to the U.S. and critical for the rest of the world to keep on the path toward further trade liberalization. I think you can stand still, but you can't go back. If this [Cancun] collapse turns out to be comparatively positive by getting the U.S. to do something, it is worthwhile."


Paredes points out that it is too soon to tell what the damage of Cancun has been. "We were very conscious that Cancun was going to be a very complicated meeting because of all the deadlines lost in the Geneva period and the sensitivity of the issues," he says. "Even though, we were confident at Saturday evening, we really thought that there was going to be a satisfactory ending of the meeting. Unfortunately and surprisingly, it was not. We share the opinion of the countries that wanted to move forward, but we think that it is too soon to evaluate how damage the overall process is."


Like many analysts post-Cancun, Paredes agrees that bilateral and regional trade negotiations have taken on a special importance due to the difficulty of consensus building in the WTO. "I am convinced that the best thing that developing countries receives from WTO is the prevention of unilateralism from developed countries, because of the legal and enforceable trading system it represents," Paredes says. "It is obvious that Cancun opens a path towards regionalism and bilateralism, but, we have to wait and see the reaction of the major players to be sure that this trend consolidates."


As far as blocs of developing countries pressuring the developed world's agricultural subsidies, Albrecht sees this as a positive, to an extent. "It is helpful over the long haul that the developing countries can put pressure on the EU and US," Albrecht says. "But still, that could backfire and derail the whole thing."


It remains to be seen whether or not the legal apparatus of the WTO will be used to its full extent for the first time in its history to challenge EC and U.S. agricultural subsidies. What is surely in store is a huge increase in paperwork and headaches for WTO and individual states legal teams.

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