Inside US Trade | Vol. 19, No. 22
U.S. officials last week rejected a European Union proposal that would subject domestic farm support meant to shield farmers from price fluctuations to the same reduction commitments that apply to agricultural export subsidies. In a May 21-23 series of informal agriculture negotiations in the World Trade Organization, the U.S. indicated that it could not agree to the EU proposal that domestic supports and export subsidies be treated equally, and asked why U.S. programs that compensate farmers for decreases in commodity prices should be singled out for additional reductions when WTO limits already cover the broad topic of domestic support.
The EU proposal targets the $8 billion U.S. Marketing Loan and Loan Deficiency Payment programs, although it does not mention them by name. These programs, or similar countercyclical programs, are likely to be included in a future farm bill in the U.S. Congress (Inside U.S. Trade, May 25, p.14).
The EU effort to equate the trade-distorting effect of its export subsidies with U.S. countercyclical programs is viewed by some trade officials as an effort to deflect the spotlight from export subsidies in any new negotiations that take place. But Cairns Group countries, which have called for reductions in U.S. domestic support programs and elimination of export subsidies, have not risen to the bait. Countries like New Zealand, for example, have questioned the rationale for the EU proposal, saying that it would have to back up its claim that countercyclical programs had the same distorting effect on trade. But the EU proposal did garner support from some Eastern European countries, according to trade officials.
The EU argues there is an imbalance in how the two programs are treated. EU export subsidies are subject to commodity specific reduction commitments for both volume of exports and budgetary outlays. The countercyclical program is subject to less severe restrictions covering all trade distorting domestic support, which has allowed the U.S. to increase, not decrease, its outlays for this program.
The EU proposal was one focus of last week's informal negotiations, which also featured discussion of different methods for tariff-rate quota administration, possible penalties for countries whose negotiated TRQs are not filled, and alternative formulas for tariff reductions.
On tariff-rate quotas, the EU and Japan disputed whether it was a problem that some TRQs are not being filled. The EU and Japan hold that TRQs constitute market access opportunities, not commitments to purchase a set amount of goods. The issue should be handled by clarifying the allocation methods allowed for TRQs, not imposing penalties on countries whose quotas are not filled by actual exports, they said.
In contrast, the U.S. and Cairns Group countries argued last week that importing countries should be penalized when TRQs are under-filled. Specifically, the U.S. suggested that in-quota tariffs should be reduced where the fill-rate is too low, and Argentina suggested that the Agriculture Committee set up a watch list of countries whose TRQs are chronically under-filled. Argentina suggested that offending countries could be penalized by having the unfilled portion of the TRQ carried over and added to the TRQ for the following year, and that under-filled quotas could also be reallocated to new suppliers.
While countries maintained there was no single best way to administer TRQs, they differed on whether countries were within their rights to auction import licenses. Under an auction system, suppliers or importers bid for licenses, so the "rent" on the quota, the extra profit available because of the limited supply, is transferred from importers to the importing governments in the form of bids for import licenses.
Some Cairns countries objected to the auction system, saying the charge for licenses amounts to an additional tariff and could violate tariff bindings. In cases where the license charges are transferred to producer groups in the importing countries, there is a potential violation of domestic support commitments, these countries said.
But other members like Switzerland and the EU say auctioning is a legitimate system for TRQ allocation and argue negotiators should clarify that it is allowed under WTO rules, which currently do not address the issue. They want countries to agree on what allocation methods are acceptable based on principles of transparency and availability to all potential sellers. The EU disputes that the auction price constitutes an additional tax, and disputes whether quota rent by right should go to importers, according a trade official. It argues that if there are no minimum bids and the auctions are conducted transparently, it is an efficient allocation system. Switzerland and Korea are among the countries that use this system.
The U.S. was skeptical of the auctioning system, but disagreed that negotiators should spell out whether or not it was WTO compatible, source said.
The discussion on possible formulas for farm tariff reductions pitted Australia's formula, which targets the highest tariffs, against an EU proposal calling for average reductions across tariff lines. The Australian formula couples a reduction of an agreed percentage with more substantial reductions for higher tariffs. In addition, TRQs would be expanded and in-quota tariffs reduced, and flexibility in market access commitments would be allowed for developing countries.
The EU proposed a repeat of the Uruguay Round formula with an average percentage across tariff lines that would reduce all tariffs by a minimum of 15 percent. It argued that this was a simpler system that was easier to negotiate. The average percentage also leads to greater reductions in higher tariffs. But Australia argued this system would not have enough of an impact on the highest tariffs.
The U.S. also supported a nonlinear approach that targeted higher tariffs, but did not provide any specific details. Some developing countries reiterated their position that, absent reductions in developed countries trade-distorting subsidies, they should not have to reduce tariffs. In particular, small island nations and those dependent on single exports also maintained that unilateral preferences granted their exports should be maintained.
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