House of Commons - International Development

Select Committee on International Development Seventh Report

3 AGRICULTURE

World trade in agriculture: A world of subsidies, dumping and barriers

38. Agriculture is the key issue in the current round of WTO negotiations. It is the most distorted sector and it is the most important issue for developing countries.[82] Three quarters of the world's poor live in rural areas. Twenty-seven percent of developing countries' GDP and export earnings come from agriculture. Agriculture provides 50 percent of employment in developing countries,[83] and its importance in LDCs is even more pronounced. It provides employment and livelihoods for more than 60 percent of the labour force of LDCs, and for some countries accounts for more than 70 percent of their exports.[84]

39. Agriculture plays very different social and economic roles in North and South. In many developing countries, especially LDCs, agriculture is the backbone of the economy and the establishment of a prosperous agricultural sector, with a large number of small and medium-sized farms, generating employment and income and a significant internal market, is one of the keys to development and economic growth. Land reforms in Taiwan and South Korea in the immediate post-war years laid the foundations for their subsequent rapid economic development. In contrast agriculture provides a little over one per cent of UK employment and one per cent of GDP.

40. Member states of the EU agreed to limited reform of their Common Agricultural Policy on 26 June 2003. Decoupling, the central principle of reform, aims to sever the link between subsidies and production. The shift of emphasis to rural development (modulation) will see farmers rewarded for the production of environmental goods rather than purely food. Degression will focus support on small farmers (see para 56). Post-reform, farmers will be supported by a single farm payment, conditional on their compliance with environmental and other standards.[85] As part of the reforms, support prices for butter and rice will be reduced. But, the reforms fail to address sugar and make little progress on the dairy sector. Reforms will not start until 2005, or 2007 for countries which prefer delay. France has claimed that the essential principles of the CAP have been preserved.[86] Their may be greater political support for scrapping the CAP if these limited reforms prove to work for farmers, but the watered down agreement will do little to address the distortions in international agriculture.[87] The agreement may provide the EU with some leverage on the USA in negotiations, but the primary test of CAP reform must be its impact on poverty. The massive subsidisation of European agriculture remains, as Baroness Amos put it, "not acceptable."[88]

41. Removing subsidies, ending dumping and reducing barriers to trade would put an end to what Oxfam's Michael Bailey described as the "catalogue of scandalous destruction of livelihoods or missed trade opportunities for developing countries."[89] It would also benefit developed and developing countries enormously. The World Bank estimates that 70 percent of the gains from merchandise trade liberalisation would come from agricultural liberalisation,[90] and that agricultural liberalisation would increase developing countries' exports by between $30 billion and $100 billion per year. For Africa, this could add an extra one percent to GDP growth.[91] As the main stumbling block to progress on other issues,[92] progress on agriculture is crucial for all those - developed as well as developing countries - who wish to see a successful conclusion to the round. As Patricia Hewitt told us: "if we do not deliver significant market opening on agriculture and significant cuts in export subsidies, including the food aid and the American version of export subsidies, then we will not get a round."[93] In our view, the EU has to deliver cuts in domestic subsidies, as well as the export subsidies mentioned by the Secretary of State. It is not evident that the CAP reform agreed by the EU will deliver such significant market opening, although it may, as Baroness Amos revealed, "open the door with respect to negotiations at Cancún."[94]

42. The current system of production subsidies, export subsidies, dumping and barriers leads to farmers in the North producing more food than the market demands. The origins of this state of affairs lie in the power of the farming lobby, primarily in the EU and the USA.[95] Farmers' production costs are subsidised by the taxpayer and consumers pay higher prices for their food than would otherwise be the case. In 2002, total agricultural support in OECD countries amounted to 1.2 percent of GDP,[96] and prices received by OECD farmers were an average of 31 percent above world prices.[97] With the help of export subsidies, excess production is dumped on world markets and developing countries. In the EU, export subsidies are explicit. In the USA, food aid and the system of export credits perform the same function. Dumped food depresses prices and reduces the incentive for Southern farmers to produce and sell their products, either domestically or through export to third countries.[98]The competitiveness of potentially efficient developing country producers is undermined, since they are prevented from using their comparative advantages of cheaper labour, more appropriate climates and lower production costs. Market distortions produce a wasteful warped world in which millions of people are unnecessarily trapped in poverty (see figure 4).

Figure 4: World trade in agriculture (pre-liberalisation)

Data source: Committee's own

43. The evidence we received cited numerous examples of the impact of these policies. These included: the devastation caused to the Jamaican dairy sector by the dumping of skimmed milk powder by the EU;[99] the inability of India to compete with subsidised European milk products for exports to the Middle East and the Mediterranean;[100] small farmers being forced out of the sugar business in South Africa as a result of the EU's sugar regime and its effect on world prices;[101] the deleterious impact on cotton producers in Benin, Burkina Faso, Chad and Mali of heavily subsidised US cotton exports; and, the inability of Ethiopian producers to compete with subsidised US corn exports to Yemen.[102] Dumping and unfair competition for markets also makes investment in developing countries less attractive by limiting the potential returns, and - as growth in agricultural exports would have spin-off benefits for other sectors - causing damage beyond the agricultural sector itself.[103] The recently agreed CAP reform will not tackle directly export subsidies,[104] and will fall far short of stopping the dumping of EU surpluses.

Figure 5: The EU's Common Agricultural Policy and its external effects

Data source: Committee's own

44. Agriculture in the EU and USA is protected within its domestic markets by tariffs, quotas and standards which keep out cheaper imports. The average agricultural tariff around the EU is 19 percent (peak of 260%); for the USA it is 5 percent (peak of 350%).[105] As the then Secretary of State for International Development, Clare Short, explained, the average bound tariff imposed by OECD countries for agricultural products is 60 percent, twelve times that for industrial products.[106] Especially high tariffs (tariff peaks) on products of particular export interest to developing countries such as beef, sugar and rice, and tariffs which increase as agricultural outputs are processed (tariff escalation), ensure that developing countries' exports to the developed world are restricted. Additionally, tariffs which developing countries themselves maintain restrict South-South trade and regional integration, and result in lost potential gains of between $140 and $390 billion per year.[107]

45. Overall, the consequences for developing countries of policies such as those pursued by the EU are fewer exports, less incentive to produce and to invest, lower growth, and less poverty reduction (see figure 5). Northern subsidies and protectionism do benefit some developing countries. Net Food-Importing Developing Countries (NFIDCs) are able to buy cheap food, and exporters from those countries which have preferential access to Northern markets—such as members of the African, Caribbean and Pacific (ACP) Group—receive high prices for their produce. These can be important benefits for the countries concerned, but overall there is no doubt that the agricultural policies pursued by the EU, the USA and other developed countries are seriously harmful to developing countries' interests. Despite the claims made by the Agriculture Ministers of Austria, Belgium, France, Ireland, Luxembourg, Portugal and Spain in September 2002, the CAP is certainly not something we can be proud of.[108] In what amounts to Special and Differential Treatment for developed countries, the North subsidises its agriculture and is protected in this practice until the end of 2003 by a Peace Clause which prevents other countries challenging the system through the WTO.

A development-friendly outcome

46. Paragraphs 13 and 14 of the Doha Ministerial Declaration reaffirmed the commitment of WTO members "to establish a fair and market-oriented trading system through a programme of fundamental reform." Members committed themselves, "without prejudging the outcome", to comprehensive negotiations aimed at: substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and, substantial reductions in trade-distorting domestic support. In addition, the declaration emphasised that SDT should be integral to the agreement, and that developing countries must be enabled to meet their needs, particularly as regards food security and rural development. Ministers also took note of non-trade concerns around environmental protection, food security, animal welfare and rural development. A 31 March deadline was set for "modalities" (a framework for negotiations), with countries' comprehensive draft commitments to be ready by Cancún.[109] The deadline has been missed. Discussions continue around a draft agreement on modalities issued by Stuart Harbinson, the Chairman of the WTO Special Session of the Committee on Agriculture (see paras 72-76). In its memo, the UK Government committed itself to working for agricultural reform within the EU, in part so that the EU is able to make a proposal at the WTO which will offer developing countries better access to the EU market and to wider world markets.[110] The coming months will show whether the 26 June CAP reform package succeeds in unblocking the Doha negotiations.

Figure 6: World trade in agriculture (post-liberalisation)

Data source: Committee's own

47. For the WTO's members simply to honour their Doha commitments on agriculture would be a major step towards securing a development-friendly outcome. By making agriculture more responsive to market signals and less trade-distorting, such an outcome would reduce significantly North-South dumping of agricultural produce, and pave the way for increased South-North and South-South export of agricultural goods (see figure 6). The priority is to reduce and reform domestic support. In the absence of domestic support, there would be no need for export subsidies or tariff barriers, and no excess food to be dumped on Southern markets. For an outcome to be truly development-friendly, attention must also be paid to the fate of those developing countries which benefit from the existing system, and to the spin-off effects of rapid agricultural liberalisation.[111] For instance, were the sugar market to be liberalised, inefficient ACP producers who currently enjoy preferential access into the EU's market would lose out. Brazil and South Africa, which have the capacity to increase their exports rapidly, rather than LDC sugar producers, would capture large shares of the market (see paras 63-69). The poor in Brazil and South Africa are no-less deserving than the poor elsewhere, but the developmental benefits of agricultural liberalisation ought perhaps to spread more evenly.

The state of play: Progress, or the lack of it

48. The 31 March deadline for agreeing modalities for agriculture has passed. Progress with the negotiations has been painfully slow, held up by disagreements between the EU and the USA, and complicated by the diversity of developing countries' interests (see figure 2).[112] As Ambassador Ransford Smith explained to us, there are at least three major interest groups within the developing countries group, not to mention different interest groups within countries. There are the efficient agricultural exporters who favour rapid and extensive liberalisation of agriculture (e.g. Brazil, South Africa, Argentina). Then there are the preference-receiving countries who have an interest in the EU maintaining its protectionist policies and its subsidy regimes (e.g. Fiji, Guyana, Mauritius). Finally, there are the large rural agrarian countries who are interested in market access, but are also keen to defend their own small farmers and agricultural sectors through high tariffs (e.g. Argentina, Indonesia, Philippines).[113]

THE EU AND THE USA: "TWO BALD MEN SQUABBLING OVER A COMB"

49. Progress on agriculture would produce enormous benefits for many developing countries, but has been stalled primarily by the stubbornness of the EU and the USA. In Brussels and Washington in March we heard contrasting accounts of which party was the main stumbling block to progress on agriculture. In Washington, our attention was drawn to the damaging effects of the EU's export subsidies. In Brussels, we were reminded that the USA's system of export credits and their abuse of food aid act as implicit export subsidies. Whilst acknowledging that the USA had made an ambitious proposal on agriculture at the WTO,[114] EU Commissioners emphasised that that whereas the EU was moving in the direction of reducing trade-distorting support, admittedly from a higher starting point, the USA was moving in the opposite direction and under the new Farm Act would be likely to continue to do so[115] (see paras 55-57 on types of domestic support). The EU claims that its recent agreement on CAP reform will put the ball of agricultural reform back in the USA's court.

50. The level of domestic support provided to a country's agricultural sector can be measured in a number of ways. Depending upon the measure used—the Aggregate Measure of Support, the Producer Support Equivalent—and whether the issue is total support, support per farmer, or support per hectare, both the EU or the USA can be cast as the villain in distorting agricultural production and markets. The OECD has made good progress with developing a framework to enable comparison of different forms of support.[116] Such work is essential background for negotiations and may clarify the positions of the EU and the USA, but we share the view of Rob Davies, Chairman of the South African National Assembly's Committee on Trade and Industry, who described efforts made by the EU and the USA to blame each other for the stalemate in agriculture as "two bald men squabbling over a comb"[117] Such disputes are a distraction. If there is to be a development-friendly outcome on agriculture, both the USA and the EU must set binding deadlines to reduce and in time eliminate the trade-distorting support they provide to their farmers, and to eliminate all forms of export subsidies.

The EU, CAP reform and the WTO

51. Substantial reform of the Common Agricultural Policy could provide benefits of the order of $25-$40 billion to developing countries,[118] and is crucial to progress on agriculture at the WTO. The EU's agriculture Commissioner (Franz Fischler), not the Trade Commissioner (Pascal Lamy), handles WTO negotiations on agriculture. This indicates the importance of the relationship between CAP reform and WTO negotiations, as well as the power of agriculture within the EU. The EU can meet its current WTO commitments without CAP reform,[119] and the EU is not the only country which is guilty of distorting markets, but the EU has been seen widely as the principal obstacle to progress on agriculture. It is as yet unclear whether this will change now that limited CAP reform has been agreed. We are not in the business of apportioning blame to the EU or the USA, but as a Committee of the national Parliament of an EU member state the focus of our advocacy is UK and EU policy.

52. The relationship between CAP reform and the WTO's negotiations on agriculture is complex. For Franz Fischler, CAP reform is the priority; his hope is that progress on CAP will be accelerated by the demands of the WTO. For Pascal Lamy, a successful WTO round is the priority; his hope is that CAP reform will give the EU more negotiating capital at the WTO, enabling WTO members to reach agreement on agriculture, and in turn on the round as a whole.[120] This complex interplay between CAP reform and WTO negotiations has stalled progress. We hope that the recent agreement to limited if significant reform of the CAP will inject fresh momentum. The interplay could lead to further progress if the EU's non-agricultural interest groups continue to exert pressure on the EU to actually deliver CAP reform so as to ensure a successful conclusion to the wider round.[121] Whatever the interplay, there can be no denying that CAP reform has important international dimensions, which should not be neglected in discussions on reform proposals. We share the disappointment felt by DFID, and the Lords' Committee on European Union, that the Commission has paid insufficient attention to the developmental impacts of CAP and CAP reform proposals,[122] and trust that the Government has been doing its utmost to encourage its European partners to take seriously the external impacts of domestic policies.

53. Domestic rather than developmental factors drive CAP reform. The main pressure for change comes from EU consumers, taxpayers and producers.[123] A UK family of four spends an extra £10 per week as a result of the CAP, about half through higher food prices and half through higher taxes to support EU farmers.[124] As the WTO's Director-General suggested to us, progress on agricultural reform in the EU and other developed countries might be accelerated if the debate focused more on consumers and taxpayers.[125] The European agro-food industry—with British Sugar as a notable exception—also has significant interests in CAP reform.[126] Environmental concerns and the EU's wish to move towards a sustainable model of agriculture, which balances food production with environmental stewardship, and which does not provide incentives for the unsustainable exploitation of natural resources, are a related driver of CAP reform.

54. EU enlargement and budgetary pressures are the second major driver of CAP reform. The CAP costs the EU around $50 billion, or 50% of the EU's total budget. If the CAP were simply extended to another ten countries, it would bankrupt the EU. The Franco-German compromise in November 2002 froze the CAP budget until 2013; we assume that the UK was unable to amass enough support to secure a cut. This compromise makes substantial cuts in CAP spending unlikely. But a financial ceiling which falls in real terms, combined with the addition of ten new EU member states, each demanding their share of the CAP, may exert some limited downward pressure on the extent to which farmers' production is subsidised.[127]

MULTIFUNCTIONALITY, DECOUPLING AND (DEGRESSIVE) MODULATION

55. The Mid-Term Review's proposals for CAP reform were for a 55 percent reduction in trade-distorting domestic support, a 45 percent reduction in export subsidies, and a 36 percent reduction in tariffs. Though seemingly radical, these reductions are measured from the existing ceilings rather than from actual amounts paid, and, as they refer to average reductions, may not produce benefits as regards products which are important to developing countries.[128] These proposals, and the modified version of them agreed at the end of June, would re-orient rather than reduce agricultural support. The purpose of CAP reform is not primarily to reduce support for agriculture, but rather to reduce the level of support which is defined as "trade-distorting".[129] The EU's starting point for CAP reform is the notion that the agricultural sector fulfils several functions (multifunctionality), including both the production of agricultural goods, and the production of public goods such as landscape amenity.[130] The view of some within the EU, particularly the farm lobby, is that farmers should be paid to provide these valuable public goods. What matters, as Franz Fischler emphasised, is how such support is provided, and how trade-distorting it is.[131] Our view is that farmers who deliver identifiable and measurable amenity and environmental benefits should indeed be supported.

56. Central to the recently-agreed CAP reform are the notions of decoupling and degressive modulation. Decoupling is about severing, or weakening, the link between agricultural support and production. The idea is that farm incomes can and should be supplemented in ways that do not support or stimulate production. Degressive modulation is a way of decoupling support, reducing support provided to the largest farms which currently receive 80 percent of CAP funds (degressivity) and instead using these funds to encourage small farmers to undertake rural development and environmental measures (modulation). In WTO terms, CAP reform will shift the balance of domestic agricultural support from the Amber Box (production-boosting and trade-distorting support, including price support) and to some extent the Blue Box (production-limiting support provided on the basis of farm size), towards the Green Box (at most minimally trade-distorting). Under the existing WTO Agreement on Agriculture, members are committed to reducing their Amber Box support, but there are no limits or reduction commitments for Green Box support. The Blue Box is not subject to reduction commitments, but is not used by many countries as it was designed specifically for the EU. The developmental question is, what will be the impact of a shift to Green Box support on production, trade and developing countries?

57. From a developmental perspective, the technicalities of whether support to agriculture might be provided in a manner which is defined as "minimally trade-distorting" is a distraction from the requirement to reduce the overall level of support which the EU and other developed countries provide to their agricultural sectors. The OECD, whilst introducing the concept of degrees of decoupling, concludes that: "The key point is that while a reorientation of support is itself significant, the effects are stronger if there is also a reduction in the overall level of support."[132] Indeed the suspicion in some quarters is that the notion of a Green Box was introduced during the Uruguay Round so that the USA and the EU could continue to provide domestic agricultural support, away from the prying eyes of WTO disciplines. The WTO estimates that $78 billion per year of agricultural support is provided through Green Box measures.[133] Seventy-eight billion dollars of subsidies cannot fail to distort production and trade.

58. We understand that the politics of CAP reform are complex, and welcome the recent agreement. The agreement—albeit a watered down version of the Commission's proposals—and the notion of decoupling which is central to it, are important steps towards the ending of subsidies. But Green Box subsidies, although classified as "minimally trade-distorting", will continue to distort production and trade.[134] Rural development payments may be less distorting than price support or direct payments, but they still enable farmers to shelter from the winds of market forces, at the expense of farmers in developing countries.

59. At long last some progress has been made on CAP reform. But the UK must continue to exert pressure on its European partners—particularly France—to live up to the letter and the spirit of their WTO commitments, to reduce all agricultural support rather than only that which is defined as production and trade-distorting. Fifteen or twenty-five members of the European Union must not allow the fate of their Common agricultural policy to be determined by President Chirac, and sealed in horse-trading between France and Germany. In addition, the UK must insist, when the EU finally does reduce the amount of trade-distorting support it provides to agriculture, that the reductions include products of export interest to developing countries. The UK and the EU should, within the EU and the WTO respectively, be pressing for discussions on capping the Green Box, as proposed by a number of developing countries.

THE CHIRAC PROPOSAL

60. President Chirac's proposal for a trade initiative to benefit sub-Saharan Africa includes three elements: a moratorium on export subsidies, including export credits and food aid, for products exported to sub-Saharan Africa; a preferential trade regime; and, a range of mechanisms which might be used to address volatility and vulnerability in commodity markets. The Chirac proposal represents a welcome recognition that export subsidies harm developing countries. But temporary bilateral agreements focused on Africa, to the exclusion of the rest of the world's poor, are not the best way to tackle distortions in agricultural markets.[135]

The losers from agricultural liberalisation

61. Two main groups of countries will lose out from agricultural liberalisation, at least in the short to medium term. The first group are those countries which will see their preferential access to profitable markets eroded. The second group are the Net Food-Importing Developing Countries (NFIDCs) which currently benefit from the depressed prices which the developed world's subsidy regimes produce.

PREFERENCE HOLDERS: BANANAS AND SUGAR

62. Preference erosion takes place when countries which enjoy preferential market access see the value of these preferences reduced as other countries gain enhanced market access. As a result, the initial preference holders, depending upon how competitive their export industries are without the preferences, will lose markets for their exports.[136] Preference erosion is not unique to the WTO, but multilateral liberalisation through the WTO clearly threatens countries such as the ACP countries. For example, in the early 1990s the regime which granted the exporters of Caribbean bananas - the Caribbean producers and the European transporters—preferential access to the EU market was challenged by the USA and Latin American banana-exporters at the request of Chiquita, and deemed contrary to WTO disciplines.[137] The EU has been ordered to reform drastically its banana regime to make it WTO-compliant, a result which by eroding the preferences of relatively inefficient Caribbean producers, has handed much of the EU banana market to Latin American producers.

63. Sugar, a product which provides a case study in the complexities of agricultural liberalisation, is also of export interest to several Caribbean countries. Currently, the EU's sugar regime—a combination of high EU prices, tariffs, and export subsidies—ensures that although it costs $660 to produce a tonne of white sugar in the EU compared with around $280 in Brazil, Colombia, Guatemala, Malawi and Zambia, EU producers have a 40 percent share of the white sugar export market. This is economic nonsense. But it nevertheless benefits sugar producers in ACP countries, most crucially in countries such as Barbados, Trinidad and Jamaica where production costs are similar to those in the EU. Without preferential access to the EU's "extremely closed regime",[138] they would not be in the sugar business. Preferences are very important for some countries, but, as Oxfam notes in its report on "The great EU sugar scam", 80 percent of the value of the preferences goes to only five countries (Fiji, Guyana, Jamaica, Mauritius and Swaziland), and only a handful of ACP beneficiaries are LDCs (Democratic Republic of the Congo, Madagascar, Malawi, Tanzania, Zambia).[139] The regime produces developmental benefits for some countries, but it also restricts non-ACP producers' access to EU markets, dumps sugar in developing countries, depresses world prices for sugar, and undermines the potential for developing countries to export products containing sugar. The net effect is seriously to harm developing countries.

64. As a result of intensive lobbying, which was exposed recently by Clare Short,[140] and powerful alliances between European and ACP sugar interests, the EU's sugar regime is not included in current CAP reform proposals, despite its disastrous developmental consequences.[141] But a mid-term review of the EU-ACP sugar protocol is scheduled for this year. There are various pressures for reform, including EU enlargement, and a WTO challenge to the regime by Brazil and Australia. The main pressure comes, however, from the progressive extension of the EU's Everything But Arms agreement to sugar. Under this agreement, LDCs will enjoy duty and quota-free access to the EU market. Maintaining a high guaranteed internal price for sugar in the face of increasing imports from LDC countries would be very costly for the EU. Therefore, serious reform is on the cards, with a cut in EU sugar prices the most likely result.[142]

65. There will be winners and losers from liberalisation. The fate of a country's sugar exporters will be determined by what happens to the world price of sugar post-liberalisation, and whether the exporters are able to produce at that price; in short, whether they are efficient and competitive. The losers will be inefficient ACP producers in places such as Barbados, Côte d'Ivoire, Jamaica, Madagascar, St. Kitts and Trinidad, as well as EU sugar beet producers and processors such as British Sugar. The winners will be competitive producers; efficient producers such as Australia, Brazil and South Africa, and perhaps some LDCs such as Mozambique, Malawi and Zambia which, with the assistance of preferential access under the EU's Everything But Arms Agreement, may be able to capture sufficient market share.[143]

66. Jean-Claude Tyack, representing the ACP London Sugar Group, expressed his fundamental disagreement with the liberalisation paradigm which, in his view, prioritises winners and neglects the legitimate development needs of many of the ACP sugar exporting countries.[144] His argument was that the preferential access which the ACP countries currently enjoy enables their sugar sectors to survive, and that this provides multiple social, environmental and developmental benefits for small, vulnerable and poor countries. In their appeal to "multifunctionality", the ACP deliberately echo the EU's position on domestic agricultural support under the CAP. They argue that if the EU can use multifunctionality to justify its agricultural support, then the ACP countries can too. There are clear parallels, but we are not persuaded in either case that multifunctional objectives are best pursued through production and trade-distorting support which is at the expense of other poor countries. This is not the most efficient or the fairest way of transferring resources and sustaining livelihoods. Indeed, few ACP countries have successfully increased their exports and achieved significant levels of economic growth on the basis of their preferential market access. The ACP share of total EU imports in fact declined from seven percent in 1976 to 2.8 percent in 2000.[145]

67. Nevertheless, rapid liberalisation poses its own problems. The market is likely to become dominated by the most efficient producer, Brazil, to the exclusion of the poorer developing countries who one might wish to see gain from reform.[146] For this reason, Jean-Claude Tyack suggested as an alternative a more managed market, involving the use of fixed quotas.[147] We are not technical experts in the complexities of the world sugar market, but trust that in considering its options the EU is examining all the alternatives rather than blindly putting its faith in "untrammelled free trade".[148]

68. A further set of issues concerns the treatment of likely losers from liberalisation. The EU has certain moral, historical and legal responsibilities to its ACP partners. The WTO requires that if the EU expands it must compensate other WTO members for loss of preferences. In much the same way, the WTO should require that the EU consults adequately and compensates appropriately those countries whose preferences are eroded.[149] In the case of sugar, preference losers should also be provided with assistance to either become more efficient sugar producers or to diversify into other areas of economic activity. It must however be recognised that few of the small and vulnerable countries affected have a portfolio of activities into which they can diversify.

69. The case of sugar illustrates a point which we believe should be adopted as a general principle of trade liberalisation; the poor should not pay for the poorest. In the case of sugar, full liberalisation is preferable, but if there is only partial reform it should be managed so that market share is redistributed to efficient producers in poor countries at the expense of inefficient EU producers rather than solely at the expense of inefficient ACP producers. If development as well as liberalisation is to be a multilateral endeavour, sharing the short term costs of adjustment, or "burden-sharing", must become a reality rather than simply rhetoric.[150] Poor and vulnerable countries should not bear the burden of agricultural reform in the North. But whilst the needs of preference-holders must not be neglected, such concerns do not excuse the continued use of distorting agricultural policies by the EU, the USA and other developed countries.[151]

NET FOOD IMPORTING DEVELOPING COUNTRIES AND FOOD SECURITY CONCERNS

70. The second group to lose from agricultural liberalisation in the North is the Net Food-Importing Developing Countries (NFIDCs), a group of 23 countries including: Barbados, Egypt, Jamaica, Kenya, Morocco, Pakistan and Venezuela. These countries benefit from the current regime because they are able to purchase their food requirements more cheaply as a result of dumping and the depression of world prices. Liberalisation will, at least until efficient producers respond to higher prices, make their food more expensive.[152] On the positive side, NFIDCs ought to benefit from liberalisation which enables them to trade their non-food exports across South-South borders. In the meantime, WTO members must honour the commitments made in the Marrakesh Decision, and restated at Doha, to help the NFIDCs as well as the LDCs to maintain their food security whilst world agricultural markets adjust.

Aims of a development box

To protect developing countries' domestic food production, particularly of key staple foods;
To sustain the employment, food security and livelihoods of the rural poor;
To allow developing country governments more flexibility to provide support to small farmers; and
To protect low income, resource poor farmers against the dumping of subsidised imports and from damaging fluctuations in import prices and quantities.[153]

71. Addressing other food security concerns has been the objective of developing country proposals for a so-called "Development Box" to be included within a revised WTO Agreement on Agriculture. The overall intention is to minimise the negative impact of agricultural trade liberalisation on rural poverty and to promote food security in developing countries. A Development Box would primarily benefit ex-preference countries and NFIDCs, but many other developing countries are also arguing for a Development Box, reflecting their experience that many of the worst impacts of agricultural liberalisation have been on their own small farmers even though their commercial farmers may have gained. CAFOD argues that WTO members' acceptance of the need to minimise the negative effects of agricultural trade liberalisation, and of the importance of placing food security and development needs at the heart of the negotiating process, should be seen as a fundamental shift in the approach to designing trade rules.[154] It remains to be seen whether this will be the case, but we urge the Government to continue in its efforts both to promote rules and instruments such as strategic or Special Products and the Special Safeguard Mechanism, and to provide aid and other assistance, to enable developing countries to safeguard their food security needs,[155] and—particularly whilst the North stalls on agricultural liberalisation—to protect themselves from dumping.

The Harbinson Draft

72. Prior to the 31 March 2003 deadline for modalities, and in an effort to stimulate progress, the Chairman of the WTO Special Session of the Committee on Agriculture, Stuart Harbinson, produced what has become known as the Harbinson Draft (hereafter, Harbinson). This paper is a suggested framework of modalities—commitments on market access, domestic support and export competition—and was an attempt to bridge the gap between the diverse positions held by WTO members[156] (see figure 7). On market access, Harbinson tries steer a middle course between the EU's proposal for a simple Uruguay Round type reduction of tariffs, and the insistence of many members, including the USA and the Cairns Group on a more aggressive approach to tackling tariff peaks. Under Harbinson's proposals: goods with the highest tariffs should see the largest tariff cuts; there is an attempt to deal with tariff peaks and escalation; and developing countries are required to undertake less substantial and slower tariff reductions than developed countries. Harbinson also introduces the notion of strategic or Special Products for developing countries, in relation to which required tariff cuts would be much smaller. These products are those which are crucial for food security, rural development or livelihood concerns. And he suggests that developing countries might be allowed to make more use of the Special Safeguard Mechanism so that they can erect temporary barriers to protect themselves from sudden influxes of imports of particular products which threaten domestic production.

73. On developed countries' domestic support, Harbinson proposes substantial (60 percent) reductions in Amber Box support, offers two alternative approaches to limiting the use of the Blue Box (capping and reducing by 50 percent in 5 years, or immediate elimination), and slightly stricter eligibility criteria for Green Box support. On export competition, Harbinson proposes the reduction and eventual elimination of export subsidies 9 years from the conclusion of the round, some new rules on export credits, and some tightening of disciplines on food aid. LDCs are not required to make any changes to their policies on market access, domestic support, or export subsidies.

Figure 7: The Harbinson Draft, proposed modalities

Market Access
Tariffs	Present level	Average cut	Minimum cut per tariff line	Time period
Developed countries	Over 90%	60%	45%	5 years
	15-90%	45%	35%	5 years
	Under 15%	40%	25%	5 years
Developing countries	Over 120%	40%	30%	10 years
	60-120%	35%	25%	10 years
	20-60%	30%	20%	10 years
	Under 20%	25%	15%	10 years
Domestic Support: Amber Box (trade-distorting subsidies)
Developed countries: Reduce by 60 percent over five years
Developing countries: Reduce by 40 percent over ten years
Domestic Support: Green Box (at most minimally trade-distorting support)
Developed countries: No reductions/spending ceiling, but stricter eligibility criteria possible
Developing countries: Maintain at least present flexibility under the Agreement on agriculture
Domestic Support: Blue Box (direct payments under production-limiting programmes)[157]
Developed countries: Capped and bound, reduce by 50 percent over five years
Developing countries: Reduce by 33% over ten years
Export Competition: Subsidies[158]
Developed countries: Phase out 50 percent within five years, the rest within nine years
Developing countries: Phase out 50 percent within ten years, the rest within twelve years
Data source: BRIDGES Monthly Trade Digest, Volume 7, no. 3, p.5.

74. Given the diverse views of WTO members, it is not surprising that the Harbinson Draft attracted criticism from all parties to the negotiations.[159] It was variously described as, lacking ambition, too ambitious, and paying insufficient attention to the needs of developing countries.[160] For the USA and the Cairns Group, Harbinson is not ambitious enough in its proposals for tariff reductions and the elimination of export subsidies. For the EU, Harbinson is unbalanced in that it aims for the elimination of export subsidies, but does little to discipline export credits, and leaves loopholes for the abuse of food aid.[161] From the point of view of developing countries, Harbinson fails to take their particular concerns—be they preference erosion, food security, or market access—sufficiently into account. Stuart Harbinson himself explained to us that the Doha Ministerial Declaration did not say "Do everything possible for developing countries and do nothing for developed countries", but he insisted that, "there is a lot for developing countries in my paper".[162] The Harbinson draft attempts to mediate between the interests of the EU and the USA. As such, it says much about the nature of WTO negotiations, even in what is billed as a "Development Round".

75. As regards dumping, 10 to 12 years to eliminate export subsidies is too long. There should be a complete ban on the use of export subsidies, and the abusive use of export credits and food aid, from day one of an Agreement on Agriculture. As regards domestic support, a 60 percent reduction in Amber Box support is, given its baseline of low 1999-2001 prices, less ambitious than it sounds. Additionally, Harbinson would leave major loopholes in terms of Blue Box, and particularly Green Box, support. As regards the room for developing countries to protect themselves from dumping, the concept of Special Products is helpful, but, if they are products which are crucial for food security and rural livelihoods, they should not be subject to any reduction commitments. Similarly, the extension of the Special Safeguards Mechanism is welcome, but the extent to which developing countries will be able to use it remains unclear.

76. Harbinson fails to address fundamental questions about the sequencing of agricultural liberalisation. It does not make sense for developing countries to be forced to reduce tariffs more quickly than developed countries reduce their domestic support and export subsidies. As Ambassador Ransford Smith put it, on this issue, Harbinson is "out of whack."[163] We urge the UK Government, through the EU, to do its utmost to ensure that developing countries are not forced to open up their markets until developed countries eliminate the practices which lead to dumping. There may be value in considering a "balancing mechanism" which would allow developing countries to protect their domestic markets in the event that distortions caused by domestic and export subsidies are not eliminated.[164] Finally, if this is to be a genuine development round, it seems to us that the implementation schedule for reducing tariffs should be based not on politically negotiated and somewhat arbitrary time-frames but on clear developmental indicators.

Conclusions

77. Any agreement on agriculture must, at a minimum, pass two developmental tests; will it stop dumping, and will it allow developing countries to protect themselves from any continuation of dumping? On both counts, despite making some progress, the Harbinson draft fails,[165] as will the CAP reform agreed recently. A development-friendly outcome on agriculture must pass these tests, must not make the poor pay for the poorest, and must:

Reduce tariffs and tackle tariff peaks and escalation.

b) Extend duty-free and quota-free access to all LDC exports into all developed countries.

c) Ensure that tariff barriers are not replaced by other protectionist barriers.

d) Include binding timetables to reduce and in time eliminate domestic support and export subsidies of all types.

e) Compensate and assist current preference holders and ensure the food security of the NFIDCs and LDCs.

78. Transforming world agricultural trade is a complex challenge. But huge benefits would be gained by both the developed and developing world simply by the implementation of sensible policies. A world where millions of people—rich and poor—pay to subsidise sugar production in Europe when it can be grown much more efficiently elsewhere is an inefficient and unfair world. The savings made from reform could and should be invested in development in much more profitable ways. Indeed the Government should make a commitment to transfer a proportion of any savings from CAP reform to its development budget so that the losers from agricultural liberalisation can be helped to move into other activities.

79. The CAP reform agreed by the European Union is welcome but will do little to end the dumping of subsidised production.[166] The EU must re-orient the support it provides to farmers, doing its utmost to eliminate the distortions caused by billions of euros of support. To treat CAP reform as primarily a domestic issue is far too short-sighted. As CAP is reformed and agriculture liberalised, preference holders must be compensated and assisted to move into new lines of activity. In the interim, the CAP reform agreed must be translated into greater flexibility at the WTO.

80. The UK has a reputation for international development of which the Government is rightly proud. It ought not to allow this to be overshadowed by what might be perceived by many in developing countries as its continuing acquiescence to a European agricultural regime which devastates livelihoods and hinders international development. As well as implementing quickly the CAP reform agreed, the UK must continue to exert pressure on its European partners - particularly France - to deliver real development-friendly CAP reform,

82 Ev 251 [ActionAid memorandum] Back

83 Clare Short, The dangers to Doha-see footnote 12. Back

84 Second LDC Trade Ministers Meeting, Dhaka declaration, 2 June 2003, p. 4, para 1. Available at http://www.sdnbd.org/sdi/issues/economy/ldc_dhaka/ Back

85 HC Deb, 26 June 2003, col 1220 Back

86 HC Deb, 26 June 2003, col 1223 Back

87 Oxfam, EU CAP reforms a disaster for the poor, 26 June 2003. Back

88 Q 514 [Valerie Amos, Secretary of State for International Development] Back

89 Q 56 [Michael Bailey, Oxfam] Back

90 Ev 3, para 10 [HMG memo] Back

91 Clare Short, The dangers to Doha-see footnote 12. Back

92 Q 51 [Michael Bailey, Oxfam] Back

93 Q 118 [Patricia Hewitt, Secretary of State for Trade and Industry] Back