I. Introduction

1. Ambassador Crawford Falconer ( New Zealand), Chairman of the Agriculture Negotiations, tabled the second revision of his “Draft Modalities for Agriculture” (TN/AG/W/4/Rev.2) on 19 May 2008. Consultations based on this new draft are due to start in the week of 26 May when the first reactions to the text will be heard. The Chairman would clearly like to see the Agriculture Committee further narrow the remaining points of controversy before the Doha negotiations move to the expected “horizontal process” at senior-official and, at some point, at ministerial levels.

2. There is no question that the new draft represents considerable progress in the negotiations. Whether it is springboard for a final resolution of the agricultural modalities depends on the political inclination to do a deal and defend it in capitals. It is unfortunate that the new text comes out on the new US Farm Bill passed by both Houses of Congress; as one negotiator put it: the “dream” is the Chairman’s text and the reality is the US Farm Bill.

3. Given that the next phase of work will focus on the “hot spots” which Ambassador Falconer has left in square brackets or as options, this note looks first at those provisions and seeks briefly to explain the outstanding differences. The second section looks at provisions where the Chairman has made a judgment in removing square brackets or redrafting based on his consultations. There is little doubt that at least some of these elements will be reopened.

II. The “Penumbra” in the New Text

4. The new draft looks clean. Ambassador Falconer has chosen to eliminate many square brackets from his Rev 1 version. As he points out, this does not mean there are no differences of position on provisions where he has exercised his judgment; it does mean that what he has left as clearly controversial elements are likely to be the new priorities for the “horizontal” process at official and, in principle, later at ministerial levels.

A. The “hot spots” – what the Chairman believes remains to be settled

The Chairman regards the new text as a good basis for the final stretch of the negotiations. The following are the “hot spots”:

i. Domestic support

The tiered reduction formula (Paragraph 3)

5. The options for the basic broad cuts in Overall Trade-Distorting Domestic Support (OTDS) levels remain as they were. This was inevitable while the US is unable to signal a willingness to move substantially on its most recent OTDS offer. This has been implied – but not formally announced – at the top of the USD 13 -16.4 billion range that emerges from application of the 66 per cent or 73 per cent options in the Chairman’s drafts. Major exporters, especially in the G20 group, want the US to go to the bottom of the range, or lower, given current actual spending levels estimated around USD 10 billion a year or even lower. The Farm Bill recently passed by both houses of Congress looks like taking the US in the opposite direction to that required for an ambitious Doha outcome on domestic support. Indeed, with the two votes so overwhelming that the President was unable to sustain a veto of the Bill, assurances by US negotiators that the legislation would be changed if it turns out to be contrary to WTO commitments look hollow.

Product-specific AMS limits (Paragraph 23)

6. This paragraph applies specifically to the US and concerns the base period for calculating product-specific AMS limits. Other members will use the period 1995-2000 (Uruguay Round implementation) for their calculations. The US would use 1995-2004 as the base period (since the 2002 Farm Bill generated high levels of AMS payments in the latter part of that period) but apply it proportionately to the 1995-2000 period. However, this arrangement is still challenged by other Doha participants.

De minimis (Paragraph 30)

7. Again, largely because of the politically-troubled situation with possible US commitments, the key provision concerning reductions in the de minimis limits (either 50 per cent or 60 per cent of the current 5 per cent ceilings) remains unchanged. So also does the choice between immediate implementation of the new limits or a five-year transition.

Product-specific Blue Box limits (Paragraph 42)

8. This paragraph also concerns solely the US. Other members will have product-specific Blue Box limits at the average of such payments during the 1995-2000 period. The US would have limits fixed at either 110 per cent or 120 per cent of averages determined by applying proportionately the maximum possible expenditures under the 2002 Farm Bill to production of the relevant products in the 1995-2000 period.

9. It is probably reasonable to imagine that the various especially favourable conditions drafted for the US (above) would be accepted in the event that Washington agrees finally to a low OTDS limit – nearer USD 13 billion than USD 16.4 billion. Without such agreement, it is difficult to see any accommodation. Unfortunately, the 2008 Farm Bill makes US acquiescence in a lower OTDS commitment less credible and less likely.

Green Box (Annex B)

10. The Chairman has removed all Green Box square brackets except for one provision concerning decoupled income support. Normally, eligibility for such payments would depend on a series of criteria including an “unchanging historical base period”. While an “exceptional” update is not precluded, the conditions for such updates – which would largely apply to the US at present – are controversial, especially in Washington, and remain in square brackets. Their main intent is to ensure that farmers’ decisions on planting are not affected by changes in direct payments that might be brought about by application of an amended base period. (The Chairman suggests making the same terms – if agreed – applicable to provisions on structural adjustment and regional assistance which, in effect, makes these otherwise clean texts controversial also.)

ii. Market access

The tiered formula (Paragraph 61(d))

11. The Chairman has removed all the optional reduction targets in the tiered formula apart from the cuts that will be imposed on the highest tariffs. Thus, for final bound (out-of-quota) tariffs greater than 75 per cent, the reduction commitment will be either 66 per cent or 73 per cent. This is likely to remain a highly contentious issue and is closely tied to the outcome of the complex mechanisms proposed for special products.

Sensitive products (Paragraphs 71 – 76 etc.)

12. Two square brackets remain in these paragraphs but they hide the most extensive unresolved area of technical detail left in the negotiations. It happens also to be the one on the basis of which many agricultural product exporters would primarily judge a final Doha package. On the face of it the two outstanding points at issue appear straightforward: first, whether developed countries should have the right to designate 4 per cent or 6 per cent of their agricultural tariff lines as “sensitive products”; second, whether the expansion of sensitive product tariff quotas should provide new access opportunities for no less than 4 per cent or 6 per cent of domestic consumption. The real problem lies in the definition of the words “domestic consumption”; this is the issue on which a core group [note 1] of six members have been working for many weeks and on which further movement in the agricultural negotiations has been waiting.

13. In practical terms, these members have sought to define domestic consumption in different ways for different products in a manner that brings protective comfort to some and modest potential export gains to others. They appear currently to be a long way from convincing other participants; notably, on one side, those seeking maximum protection for sensitive products, and, on the other, those exporters seeking maximum new market opportunity. The present state of play is reflected in Annex C in the second of the two options (the first was present in the same form in the earlier draft while the second is claimed by the six to be a development of the alternative provided by the Chairman in that same February draft).

14. Thus, Paragraph 3 of Annex C allows “partial designation” as “sensitive” of a limited number of HS six-digit tariff lines within one agricultural product. Where such a designation is made the methodology for determining the appropriate tariff quota expansion is contained in the Excel file attachments (A to G). The crux of the methodology is found in Attachment D (and its notes) where the treatment of several products is set out as hypothetical examples. The six authors of this very complex set of calculations provided an explanation [note 2] in a Room E note on April 4. A further attempt at explanation of partial designation now appears in the Chairman’s text as Attachment Ai (Page 73).  

15. The product lines so far identified as potentially “sensitive” for one member or another are listed in Attachment A. However, footnote 2 of Annex C notes that the list may be further adjusted – particularly for developing country members that have not so far had an opportunity to consider their own potential sensitive products. Paragraph 8 (a) stipulates that whichever approach is adopted the resultants calculations must be made available to all members “at the time of the adoption of these Modalities” in order that they can know precisely what tariff quota expansion will be set were a particular product subsequently be declared sensitive.

16. Paragraph 9 reflects a further difference in approach; namely between a requirement to schedule a single in-tariff quota for each product category and the scheduling of all detailed sub-allocations of tariff quotas that are generated by the provisions in the attachments.

Tariff simplification (Paragraph 99)

17. A number of developed members – the EU and Switzerland, for instance ‑ with a high proportion of specific duties and other complex bound tariffs in their schedules remain unwilling to commit to 100 per cent transformation to ad valorem rates. Nevertheless, the Chairman has chosen to eliminate the 90 per cent option that was included in his February draft.

Bound in-quota tariffs (Paragraph 103)

18. Along with the complex issues surrounding the volume expansion of tariff quotas comes the question of reducing the tariffs within quotas. Here the Chairman now proposes two options, neither one containing square brackets. The first applies a lesser reduction to tariff lines within an existing tariff rate quota that are declared sensitive to those that are not so declared. In the latter case, the reduction would be as applicable under the basic tiered formula to the out-of-quota tariff. In the former case, the cut would be as indicated in the tiered formula but reduced by between 2.5 and 10 percentage points dependent on which band of the tiered formula applies. These reductions would be increased by one-third for developing countries. For developed members, current in-quota rates at 10 per cent or less would be reduced to zero.

19. The second option applies, for developed members, a single reduction to the in-quota tariff irrespective of whether individual tariff lines are declared sensitive or not. Where the existing in-quota tariff is above 5 per cent it will be reduced to 5 per cent or take the same reduction rate as applies to the out-of-quota tariff – whichever cuts most. Current in-quota tariffs below 5 per cent would be cut to zero.

Special agricultural safeguard (SSG) (Paragraphs 115-116)

20. There is still no closure on the proposal by many members that the SSG should be eliminated for developed countries. The Chairman now simply offers an option for elimination and another for a reduction of eligible tariff lines to 1.5 per cent of those scheduled. For developing countries he provides, in square brackets, a proposed restriction of SSG applicability to 3 per cent of tariff lines. Otherwise, application would remain open to all tariff lines.

Special products (Paragraphs 118-120)

21. On both special products and the special safeguard mechanism, the Chairman makes clear that there remain very wide divergences among members. Nevertheless, he has cleaned up and simplified the texts, taking out some “fine distinctions” in the earlier draft. The alternatives are now fairly clear:

• Self designation of special products - based on indicators in Annex F – either to a maximum 20 per cent and a minimum 8 per cent of tariff lines or a simple 8 per cent entitlement of tariff lines.
• Within the entitlement either 40 per cent of declared tariff lines eligible for no cut or none. On the remaining declared tariff lines there would be an overall average cut of 15 per cent, with a minimum 12 per cent and a maximum 20 per cent.

22. Footnote 17 contains amended conditions under which sensitive product entitlement may be carried over to augment the special product entitlement.

23. Conditions for small and vulnerable economies (SVEs) remain essentially unchanged. Those for recently-acceded members (RAMs) have been simplified, providing for a maximum tariff line entitlement one-tenth greater than that applying generally (Paragraph 118) with the level of applicable cuts reduced by a further 2 ad valorem points.

Special Safeguard Mechanism (SSM) (Paragraphs 121-133)

24. Among many differences outstanding is the number of products – 3 or 8 –on which the SSM may be invoked in any 12-month period and the number of six-digit tariff lines that may be covered within each product – 4 or 8 (Footnote 19). Already this relatively restricted number of products has drawn protests, including from India. In Paragraph 127, which seeks to avoid simultaneous application of the SSM and other trade defence instruments, the Chairman has removed reference to antidumping and countervailing measures. In other words, an SSM action may coexist with an antidumping or countervailing duty on the same product.

25. With respect to the volume-based SSM, Paragraph 124 now provides two options, not one. The first option is that contained in the February draft but with square brackets removed. In each case the figures chosen are those that represented the more protective alternative in the earlier text – i.e. lower thresholds for SSM activation and higher additional duties. The second option effectively represents a lighter approach; the thresholds are higher and the additional duties are lower. This option also contains some special provisions (essentially Paragraph 133 of the February text) to enable l east- d eveloped countries (LDCs) more easily to make use of the SSM, notably where application of the additional duty stipulated would be insufficient to make a difference.

26. The text on the price-based SSM is as it was. Duration options for the volume-based SSM have been removed; the Chairman has fixed on a maximum 12-month period unless the product is seasonal in which case the measure must be removed within 6 months. Paragraph 131 also sets out more-detailed conditions for assessing imports for a second consecutive period of SSM action.

Trade in tropical and diversification products (Paragraphs 134 – 135)

27. The Chairman makes clear that the consultations among members most directly interested by this dossier are continuing and that he has merely reproduced the provisions in the February draft. He has, in fact, changed the presentation of the target reductions but not their substance.

Long-standing preferences and preference erosion (Paragraphs 136 – 137)

28. On this issue, the existing differences between the preference-receiving countries and other developing countries (in particular the Latin American countries) remain.

iii. Export competition

Schedule for eliminating export subsidies (Paragraph 145)

29. Although the manner in which budgetary outlays will be eliminated (Paragraph 145(a) appears to be settled), that for quantity commitments remains in square brackets and could still prove highly controversial. Two options are presented (as in the February draft). The first requires elimination in equal annual instalments from whatever levels are currently scheduled. The second would permit a continuity of subsidized export volumes through the entire implementation period (until end 2013) either at the current actually applied level (which is historically low or absent for almost all developed countries and products) or at the bound levels reduced by 20 per cent if they prove even lower. This second option would appear to provide some extra comfort to exporters receiving subsidies in the event that market conditions turn down during the later years of the implementation period – which, according to some forecasts, may be the case. However, they would have to accept an abrupt jump to zero at the end of the final year of implementation.

Export credits, guarantees and insurance programmes (Annex J)

30. The remaining point of controversy in this text concerns self-financing of export credit guarantee, insurance and reinsurance programmes (Paragraph 3(b)). In order to be regarded as self-financing, the premiums paid must be adequate to cover operating costs and losses over a rolling period of either 4 or 5 years. Thus, the length of the rolling period remains to be settled. For developing countries, the Chairman sets the self-financing reference period at 50 per cent longer than that agreed for developed members (Paragraph 4(b)). The Chairman has taken into consideration the special situation of the LDCs and the net-food importing developing countries (NFIDCs).

State trading enterprises (Annex K)

31. One highly controversial provision remains in square brackets (Paragraph 3(a)(iv)). This would require the export monopoly powers of agricultural STEs to be eliminated by 2013.

International food aid (Annex L)

32. Again a single, but highly controversial, provision remains to be resolved. This concerns the monetisation of in-kind food aid – where food aid shipments are sold on local markets to raise cash for aid operations. Although many aid NGOs as well as the EU and other WTO members oppose this form of food aid as wasteful and potentially damaging to local farmers, the US still makes substantial use of it and argues, among other things, that Congress would not necessarily make available equivalent funds were it to be abandoned. Hence the disputed text in Paragraph 12. Either the monetisation of food aid would be prohibited or it would be permissible under particular circumstances. Two options for the conditions would link monetisation transactions either to the raising of cash to pay for transportation and delivery within LDCs or NFIDCs or to finance delivery and the procurement of agricultural inputs for low-income or resource-poor producers.

33. As the Chairman points out, while he has drastically reduced the number of square brackets to a group of “hot spots”, the choices he has made in cleaning up the text will not necessarily be uncontroversial. It may well be that participants will choose to reopen issues on which Ambassador Falconer has made a judgment. The following section seeks to identify the more significant areas where he has removed square brackets or redrafted his February 2008 text based on the many hours of consultation that have passed since then.

B. The “cooler spots” – where the Chairman has made a choice

i. Domestic support

Tiered reduction formula implementation (Paragraph 15)

34. For developed countries in the top two tiers, the Chairman confirms a 25 per cent reduction on the first day of implementation.

Product-specific Blue Box limits (Paragraphs 46-48)

35. Paragraph 46 applies to developed members that wish to schedule product-specific blue box commitments where none exist and where there was no current AMS support during the base period for the product concerned. This applies to members with direct payments meeting the terms of Paragraph 35(a). The February draft contained a provision requiring any such member, taking advantage of the entitlement, to make an equivalent value reduction in its Total AMS commitment to compensate. This provision has been removed by the Chairman.

36. Paragraphs 48 and 49 in the February text provided additional penalties for overspending on product-specific Blue Box support or overall Blue Box commitments. These two provisions have been removed. Broadly, additional and easier use of the Blue Box appears to have been facilitated in the revision.

Cotton (Paragraphs 55-56)

37. Although the cotton text is, and was, without square brackets, it remains controversial, particularly for the US. Indeed, the new Farm Bill, passed by Congress in May, would appear to make it more, not less, difficult to achieve differentially favourable treatment for cotton.

Green Box (Annex B)

38. Many square brackets have been removed from Annex B and much of the text is simplified.

• Public stockholding for food security (Footnote 5 in Annex 2 of the AoA): the text returns to a simple requirement to account for non-commercial acquisitions in the member’s AMS.
• Structural adjustment assistance provided through investment aids: the terms under which the base period can be updated for decoupled income support (see A5 above) should be considered as applicable under this provision also.
• Payments under regional assistance programmes: the terms under which the base period can be updated for decoupled income support (see A5 above) should be considered as applicable under this provision also.

  ii. Market access

  The tiered formula (Paragraph 62-63)

39. As noted above, the most difficult, upper, tier remains in question. However, the Chairman largely split the difference in the lower three tiers. Thus, reduction in the lowest band will be 50 per cent; in the second, 57 per cent; and in the third, 64 per cent (nearer the top than the bottom of the February range). In Paragraph 63 he confirms an average 54 per cent cut for developed members – a provision highly criticised when he introduced it into the February text, especially by the EU which claims never to have agreed such a figure.

Recently-acceded members (Paragraph 67)

40. The level of entitlement for RAMs to moderate cuts under the tiered formula has been improved to 10 ad valorem points for tariffs in the top two bands and reduced to 5 ad valorem points for those in the bottom two bands.

Sensitive products, tariff quota expansion (Paragraphs 75-77)

41. As noted above, the arrangements for calculating tariff quota expansion for sensitive products is still in question and likely to remain a focus of the negotiations. However, the Chairman has clarified two important related provisions. Paragraph 75 concerns members with more than 30 per cent of their tariffs in the top band which make use of the flexibility in Paragraph 71 to increase by 2 per cent their number of sensitive products. In so doing, they will need to ensure that an additional 0.5 per cent of domestic consumption beyond what would otherwise be required would be achieved for the additional products. Further, where a developed member wishes to retain more than 4 per cent of its tariff lines (not just the dutiable lines as suggested in the February draft) at levels above 100 per cent ad valorem, then tariff quotas for all its sensitive products must be expanded by an additional 0.5 per cent of domestic consumption.

42. Paragraph 76 concerns existing tariff quotas that already represent a significant proportion of domestic consumption. Where the existing quota is higher than 10 per cent of domestic consumption the required expansion of the tariff quota will be 0.5 per cent less than that otherwise required (i.e. 0.5 per cent less than the percentage that will eventually be agreed in Paragraph 74). Where the existing quota is at least 30 per cent of domestic consumption the expansion requirement will be 1 per cent less than otherwise required.

43. Paragraph 77 sets out new conditions for the treatment of sensitive product tariff quotas by developing countries. These countries, which will be required to expand tariff quotas by two-thirds of the requirement for developed members, need not include self-consumption of subsistence products in their calculations of domestic consumption. However, the new text offers two further options: either the member concerned takes the full formula cut but with an implementation period three years longer than otherwise; or, it takes a smaller deviation from the formula cut for up to two-thirds of its sensitive product entitlement. Under either of these options there would be no requirement to expand the tariff quota although the tariff reduction would need to be implemented two years earlier than otherwise.

C. Other issues that the Chairman left behind

44. Two issues remain without text: differential export taxes and geographical indications. The former may become more pressing in the light of the present food crisis, but is seldom mentioned. On the other hand, the EU and other proponents of new provisions on GIs – the register and extension to products in addition to wines and spirits – have recently stepped up their rhetoric on the need for results. Indeed, if their statements are taken seriously it seems unlikely that Brussels (or some EU member states) will swallow any settlement on general modalities without an understanding on GIs.

45. The third “other issue” is export prohibitions and restrictions (Paragraphs 154-160). The Chairman has not amended the February 2008 text which follows a longstanding G20 proposal. However, in recent weeks a much tougher proposal has been tabled by Switzerland and Japan. This includes reference to a committee of experts to resolve differences on proposed measures through binding judgments. The initiative was provoked by numerous export bans/restrictions put in place over recent months as a response to high global food prices and local shortages. It is not clear whether the Chairman has ignored the proposal first because as he put it, he had received it after the bell had rung and second, perhaps because he does not believe it can command any kind of consensus or because it is not being pressed by its proponents.

Acronyms

Note 1: The EU, US, Australia, Japan, Canada and Brazil. (return to text)

Note 2: "Possible Partial Designation Modalities for Sensitive Products” Informal Explanatory Notes. (return to text)