In December 2015, the World Trade Organization reached an agreement on the Nairobi Package, the latest set of rules governing global trade. The agreement represents some progress on several major agricultural and food issues that have held up previous negotiations, including export subsidies, food aid, public stockholding for food security purposes, special safeguard measures for Least Developed Countries (LDCs), and the global cotton trade. The question remains, however, how this agreement will impact food and agricultural trade, rural development and food security, as well as how it will inform future multilateral and regional trade negotiations.
These questions form the basis for a new book from the International Centre for Trade and Sustainable Development (ICTSD), Evaluating Nairobi: What Does the Outcome Mean for Trade in Food and Farm Goods, and for a dialogue of the same name held last week in Geneva. Two chapters were contributed by IFPRI authors: one on export competition by Eugenio Díaz-Bonilla (with Jonathan Hepburn) and another on public food stocks by Joseph Glauber.
The dialogue was co-hosted by ICTSD and IFPRI and featured speakers from both organizations, as well as a representative from the Federation of Free Farmers Cooperatives Inc. (FFFCI) and an independent consultant. The event featured two sessions: Reviewing the Export Competitions and Cotton Decisions and Outcomes on the SSM and Public Stockholding: Charting a Way Forward. Each session was followed by a closed-door discussion (watch the webcast of the two sessions).
In terms of export subsidies, both the book and the presentations highlight the fact that the use of subsidies has actually declined significantly since the 1990s, when the European Union alone spent more than 10 billion euros a year to subsidize agricultural exports. Still, as global commodity prices fall, countries may have been tempted to utilize these policies again in order to dispose of production surpluses; doing so would have significant negative impacts on global food prices, agricultural investment, rural labor wages, and ultimately poverty reduction and food security (as discussed in Laborde and Díaz-Bonilla, 2015.). Thus, the agreement in Nairobi to freeze and eventually phase out export subsidies altogether represents a significant achievement that will help protect poor populations around the world.
Eugenio Diaz-Bonilla of IFPRI discussed the issue of export subsidies and export competition after Nairobi. He emphasized that while the agreement calls for developed countries to have immediately ended their export subsidy policies (as of January 1, 2016), several developed countries (namely, Canada, the EU, Norway, and Switzerland) were granted until 2020 to phase out subsidies on exports of processed foods, dairy, and swine meat; similarly, the EU was given until 2017 to phase out export subsidies on sugar. In addition, developing countries were given until 2018 to phase out their export subsidies, with five additional years (until 2023) to phase out subsidies covering transportation and marketing costs. Finally, an additional footnote to the agreement allows developing countries to maintain export subsidies until 2022 for products included in one of that country’s three most recent export subsidy notifications submitted to the WTO’s Committee on Agriculture.
If global commodity prices continue to decline, as Diaz-Bonilla forecasts, these longer transitional periods mean that export subsidies could continue to have an impact on agricultural production in middle- and low-income countries, harming poor producers and slowing poverty reduction and economic development in these areas. He recommends continued careful monitoring of countries’ reporting of subsidies to the WTO to ensure that these programs are indeed being phased out in a timely manner and to minimize their negative impact on vulnerable populations.
He also discussed other issues covered under the topic of export competition, including export credit and guarantees, food aid, and state trading enterprises.
The issue of public stockholding of staple foods for countries’ domestic food security purposes has long been a stumbling block in WTO negotiations. Several developing countries, most notably India, have argued that the WTO’s existing farm subsidy rules constrain their ability to purchase food from domestic producers at administered prices in order to ensure food security during times of shock and food crisis, while other countries fear that stocks nominally procured for food security purposes may end up being exported and distorting global trade.
The issue almost ground the 2013 WTO Bali Ministerial to a halt; the talks were saved by a “peace clause” that allowed developing countries to continue their food stockpiling programs until a permanent solution is found at the 11th Ministerial Conference in 2017. The Nairobi Package reaffirmed this commitment to finding a permanent solution, emphasizing that the WTO’s Committee on Agriculture will conduct dedicated negotiations to resolve the issue during next year’s Ministerial.
Joseph Glauber of IFPRI discussed this issue of public food stocks, stating that falling global commodity prices could impact the ease with which a permanent solution is reached, as well as what form this solution will take. Minimum support levels for staple food production in many developing countries, including India and China, have remained high despite declining world prices, meaning that domestic prices in these countries are higher than global prices. This discrepancy could potentially distort agricultural production and further drive down global prices, says Glauber.
The question becomes how to accommodate public stockholding programs that are truly designed for food security purposes while still requiring countries to abide by the WTO’s domestic agricultural support obligations. Glauber discusses several options to resolve this, a number of which have been put forward by WTO members:
- Increase de minimis percentage for developing countries: This strategy would provide developing countries more policy space within which to design food security programs like public stockholding; however, Glauber points out that the major flaw in this strategy is that the percentage applies to all forms of domestic support and could be considered distortionary. Thus, it is unlikely that WTO member states would agree to such an increase.
- Update the reporting base period: The current base period for calculating appropriate price support levels is 1986-1988; however, this period represents a time when global agricultural prices were very low. Using a more recent period could produce a more representative measure of price supports. Critics of this strategy caution that support could be under-estimated if prices fall below the levels seen in the new base period.
- Allow the Fixed External Reference Price to move with prices: One way in which to do this would be to update the current 1986-1988 reference price average using a price index; however, this could also result in support being under-estimated if prices start to decline.
- Calculate price supports in a “neutral” currency such as USD or Standard Drawing Rights (SDR): This option could reduce price inflation caused by devaluations in more volatile currencies.
- Restrict eligible production: Limiting the amount of domestic production that a government can purchase for a public stockholding program can prevent countries from underreporting their domestic price support levels; in theory, this can help ensure that distortionary price support policies are not disguised as public stockholding programs. However, determining how to set such a limit is likely to be politically difficult.
- Set administrative prices lower than market prices: Under the current WTO Agreement on Agriculture, purchases of food at market prices do not count as price support; however, many countries announce their administered prices in advance in order to ensure adequate supplies for food stocks. One solution would be to announce administered prices that are set below market prices. Glauber points out, however, that countries will need to be cautious in determining how much below market prices administered prices should be set because support prices can provide floors for producers.
- Exempt Least Developed Countries from including expenditures for public stockholding programs in their AMS calculations: Regional emergency food reserves and public food stocks in LDCs do not represent significant price support or distortions; thus, these programs could easily be removed from these countries’ reporting obligations in order to ensure that food security is protected.
- Make the interim solution permanent: This final option, which Glauber calls “the most obvious, in one sense”, is to make the interim solution set forth by the Bali Ministerial into a permanent decision. This would enable all developing countries to establish public stockholding programs for food security purposes, but would require annual detailed notifications regarding such programs to ensure that they are not distortionary.
As Ricardo Melendez-Ortiz, Chief Executive of ICTSD, pointed out in his closing remarks, WTO members are gearing up for the 2017 Ministerial, making this a pivotal moment to engage in discussions about these issues and the impact of the Nairobi Package.