1

1. AGRICULTURE IN THE WTO

Agriculture has traditionally benefited from special arrangements which
sheltered it from the full impact of GATT disciplines. Even today, in the
WTO agricultural policies are covered by a separate agreement that, to a
degree, still shelters it from generally applicable rules.
A variety of political, social, economic and cultural arguments are used to
justify this special treatment. The main justification is the need to guarantee,
over time, stable food supplies in a world of fluctuating harvests and
potential famines.
The scope of the traditional agricultural exception was to some extent
limited by the Uruguay Round agreements; WTO Members agreed upon a
set of principles and disciplines that were designed to help liberalize
international trade in agricultural products.
The Uruguay Round achieved two things in relation to agriculture. It
introduced specific disciplines on market access, domestic support and
export subsidies. At the same time it took away the fig leaf behind which
agriculture had been hiding from the full force of general GATT disciplines.
The Agreement on Agriculture seeks to reduce restrictions on trade in
agricultural products by introducing disciplines to:

increase market access;

reduce domestic support measures;

reduce subsidized exports.

This Module examines each of the three disciplines in turn and the other
provisions of the Agreement on Agriculture.
Other WTO agreements also discipline trade in agricultural products. Those
with the biggest impact on trade in agricultural products are: the GATT
1994; the Agreement on Safeguards or the Safeguards Agreement; the
Agreement on Import Licensing Procedures or the Import Licensing
Agreement; the Agreement on the Application of Sanitary and
Phytosanitary Measures or the SPS Agreement; the Agreement on
Technical Barriers to Trade or the TBT Agreement and, the Agreement on
Trade Related Aspects of Intellectual Property Rights or the TRIPs
Agreement.
These agreements, along with the Agreement on Subsidies and
Countervailing Measures or the SCM Agreement and the Agreement on
Implementation of Article VI of the GATT 1994 or the Antidumping
Agreement are also briefly examined.

2. THE AGREEMENT ON AGRICULTURE

Objectives

2.1

On completion of this section, the reader should be able to describe

the main disciplines that were introduced by the Agreement on
Agriculture on trade in agricultural products and, in particular, the
provisions of the Agreement on Agriculture on market access,
domestic support and export subsidies.

Introduction
The Agreement on Agriculture is one of the key agreements within the WTO
system. Its importance is reflected by its presence as the first Agreement
annexed to the Marrakesh Agreement establishing the WTO.
The Agreement on Agriculture is fairly short, with only 21 Articles and 5
Annexes. The 21 Articles are rather surprisingly divided into 13 Chapters.
This form of the Agreement on Agriculture probably reflects the sensitivity
of the sector and the difficulty in achieving agreement among WTO
Members.
The specific agricultural commitments made by WTO Members are not
found in the Agreement on Agriculture, but in Article II Country
Schedules of the GATT 1994. Both the Agreement on Agriculture and the
Country Schedules must be examined together to understand a WTO
Members commitments on agriculture.
The Agreement on Agriculture applies to agricultural products. Agricultural
products are defined in Annex 1 of the Agreement on Agriculture. This
definition makes reference to the Harmonized System of product
classification. In practice, agricultural products are those within Chapters 1
to 24 of the Harmonized System less fish and fish products, as well as some
specific products which come from the soil. Forestry products are not
included.
The definition of agricultural product covers not only basic agricultural
products such as wheat, milk and live animals, but the products derived from
them such as bread, butter, oil and meat, as well as all processed agricultural
products such as chocolate, yoghurt and sausages. The coverage also
includes wines, spirits and tobacco products, fibres such as cotton, wool and
silk, and raw animal skins destined for leather production.
The Agreement on Agriculture has three main parts: Part III on market
access; Part IV on domestic support (subsidies) and Part V on export
subsidies. Each of these parts are examined in turn.

2.2

Market Access
2.2.1

Introduction

Market access simply means the right which exporters have to access a
foreign market. The WTO agreements allow WTO Members to protect their
markets. In practice market access refers to the ways in which that
protection can be implemented. In the WTO framework it is a legalistic
term indicating the government-imposed conditions under which a product
may enter a country and be released for free circulation within that country
under normal conditions.
The specific border measures to protect markets allowed under the
Agreement on Agriculture are tariffs and tariff rate quotas. A tariff is a
duty or tax. Although there are several different forms of tariffs, the major
ones used in agriculture are ad valorem (calculated as a percentage of the
value of the goods), specific (a unit tax based on quantity) and mixed (a
combination of these two). A tariff rate quota is a specific volume (quota) at
which a product can enter a market at a tariff rate which is different (lower)
than the over- quota tariff.
A tariff is a trade barrier that takes the form of a government tax imposed
on goods (usually imports and occasionally on exports) when they cross
borders. Like internal taxes, a tariff generates revenue for the government of
the importing country.
A tariff rate quota is a quantity of imports or exports within which a lower
tariff applies. A higher tariff applies above the volume of the quota (the
over- quota tariff).

General or specific border measures affecting agricultural products may be

adopted under other WTO agreements such as the SPS or the TBT
Agreements.

2.2.2

Tariffication

Prior to the Uruguay Round, border protection for agricultural products was
not always in the form of tariffs. In addition to tariffs, other non-tariff border
measures were applied. A core element of the Uruguay Round negotiations
was the agreement to convert these other types of border protection
mechanisms into tariffs. This process was called tariffication.
Tariffication is the process of conversion of all non-tariff market protection
measures into the tariff equivalent. The tariff equivalent to a non-tariff
barrier is the difference between the average domestic price and the average
world market price.

The process of tariffication is not straightforward. Economists argue as to

the appropriate methodology. In theory it is simple. The tariff equivalent of
a non- tariff border measure is the difference between the world market price
and the domestic market price for any specific product.
However, it is not easy to determine what is the world market or domestic
market price, how these prices should be measured and over what period
should the measurement take place. It is also not clear to what extent
geographic and transport costs should be taken into consideration.
Article 4 of the Agreement on Agriculture on market access gives no
guidance as to how this process of tariffication should have been undertaken
or how Members schedules of concessions in this area had to be established.
It merely sets out that WTO Members must not revert to those border
measures which had to be converted into ordinary customs duties. All the
details of how market access should be improved were set out in a
provisional document entitled Modalities for the Establishment of Specific
Binding Commitments under the Reform Programme. It was agreed
among negotiators that the legal status of this document should end with the
conclusion of the Round.
The first step required for all Uruguay Round signatories, including the least
developed countries, was to tariffy all of the agricultural tariff lines by
converting all non-tariff border measures to simple tariff equivalents (ad
valorem or specific or both). The second step to be followed was tariff
reduction, for which the Modalities Agreement provided different rules
according to product type (e.g. previously bound or unbound)4 and economic
grouping (e.g. developed, least developed). The Modalities Agreement set
minimum
tariff reduction requirements at two levels the level of
individual tariff lines and the overall averages for all agricultural products
to be implemented over a six-year implementation period commencing in
1995. The tariffication formula requires the developed countries to reduce
tariffs for all agricultural products on average by 36 per cent from the base
tariff rate with a minimum reduction of 15 per cent per tariff line over a six
year period (for the developing countries by two-thirds of that applying to
the developed countries over the 10 year implementation period).
In practice, during the Uruguay Round countries made their own
calculations of the tariffs resulting from tariffication and inscribed them in
their draft country schedules. If another WTO Member did not object to the
figures placed in the draft schedules, by the conclusion of the Uruguay
Round agreements on 15
April 1994, the draft figures were incorporated into the final country
schedules. Once the Uruguay Round was concluded, the Country
Schedules became fixed.

A Country Schedule is a list of specific commitments to provide market

access and national treatment for the products on the terms and conditions
specified in the schedule.5

Many exporting developing countries, which did not, or were not able to
undertake detailed examinations of the drafts, found themselves faced with
prohibitively high tariffs on the products which they intended to export.
Because of the use of a reference period when the difference between the
world market price and the domestic price was wide, tariffication, in many
cases, resulted in high tariffs anyway. In addition, some WTO Members set
lower tariffs on raw materials and higher tariffs on processed agricultural
products so as to protect domestic processing industries. These three side
effects of tariffication are known as dirty tariffication, tariff peaks and
tariff escalation.
However, most of the principal agricultural exporting Members considered
that, even if the process of tariffication resulted in high tariffs, the benefits
of fixing tariffs and removing variable levies outweighed the disadvantages.
Dirty tariffication is the use, during the tariffication process, of
artificially- high domestic prices and artificially-low world market prices in
order to set a particular tariff at a level higher than it should be.
Tariff peaks are considered to be rates set higher than the rates across
the same product group or product sector. For some products, which
governments consider sensitive, tariff rates remain very high.
If a country wants to protect its processing or manufacturing industry, it can
set low tariffs on the imported raw materials used by the industry (cutting
the industrys costs) and set higher tariffs on finished products to protect the
goods produced by its domestic processing industry. This is known as tariff
escalation.

The tariffs agreed at the end of the negotiations were then included in each
WTO Members Country Schedule. The legal status of a WTO Members
Schedule of Concessions was addressed by the Appellate Body in the EC
Computer Equipment case, where it was held that:
() a Schedule is () an integral part of the GATT 1994 () Therefore, the
concessions provided for in that Schedule are part of the terms of the treaty.

As such, the only rules which may be applied in interpreting the meaning of
a concession are the general rules of treaty interpretation set out in the
Vienna Convention.7

In the Canada Dairy dispute, the Appellate Body also recognized

that:
() although Canadas commitment on fluid milk was made
unilaterally, both Canada and the United States understood that this
commitment represented a continuation by Canada of current access
opportunities ().8

The Appellate Body in the Korea Dairy case insisted on the fact that the
WTO agreements are one treaty and therefore all provisions (including the
Country Schedules) ought to be interpreted harmoniously and in an effective
manner, in order to ensure that no clause or provision is reduced to
inutility.
The Panel Report in the Korea Various Measures on Beef dispute
proceeded to a determination of the obligations of the Republic of Korea
under the WTO Agreement as a whole with regard to each measure and
concluded:
Koreas Schedule does not constitute an exception to other GATT
provisions, but rather qualifies Koreas obligations under the WTO
Agreement.

2.2.3

The Prohibition of Non-tariff Measures

Article 4.2 of the Agreement on Agriculture prohibits the use of agriculturespecific non-tariff measures. In particular, Article 4.2 of the Agreement on
Agriculture provides that:
Members shall not maintain, resort to, or revert to any measures of the kind
which have been required to be converted into ordinary customs duties,
except as otherwise provided for in Article 5 and Annex 5.

Article 4.2 of the Agreement on Agriculture has been clarified by the Chile

Price Band System dispute.

The Appellate Body in the Chile Price Band System dispute noted
that:
Article 4.2 of the Agreement on Agriculture should be interpreted in a way
that gives meaning to the use of the present perfect tense in that provision particularly in the light of the fact that most of the other obligations in the
Agreement on Agriculture and in the other covered agreements are
expressed in the present, and not in the present perfect, tense. In general,
requirements expressed in the present perfect tense impose obligations that
came into being in the past, but may continue to apply at present. As used in
Article 4.2, this temporal connotation relates to the date by which Members
had to convert measures covered by Article 4.2 into ordinary customs
duties, as well as to the date from which Members had to refrain from
maintaining, reverting to, or resorting to, measures prohibited by Article
4.2. The conversion into ordinary customs duties of measures within the
meaning of Article 4.2 began during the Uruguay Round multilateral trade
negotiations, because ordinary customs duties that were to compensate
for and replace converted border measures were to be recorded in
Members draft WTO Schedules by the conclusion of those negotiations.
These draft Schedules, in turn, had to be verified before the signing of the
WTO Agreement on 15 April 1994. Thereafter, there was no longer an option
to replace measures covered by Article 4.2 with ordinary customs duties in
excess of the levels of previously bound tariff rates. Moreover, as of the date
of entry into force of the WTO Agreement on 1
January 1995, Members are required not to maintain, revert to, or resort
to measures covered by Article 4.2 of the Agreement on Agriculture.11
If Article 4.2 were to read any measures of the kind which are required to
be converted, this would imply that if a Member -for whatever reason- had
failed, by the end of the Uruguay Round negotiations, to convert a measure
within the meaning of Article 4.2, it could, even today, replace that measure
with ordinary customs duties in excess of bound tariff rates. But, as Chile
and Argentina have agreed, this is clearly not so. It seems to us that Article
4.2 was drafted in the present perfect tense to ensure that measures that
were required to be converted as a result of the Uruguay Round - but were
not converted- could not be maintained, by virtue of that Article, from the
date of the entry into force of the WTO Agreement on 1 January 1995.12

The Panel and the Appellate Body in the Chile Price Band System dispute
did not think that the provisions of Article 4.2 of the Agreement on
Agriculture should be read to include only those specific measures that were
singled out to be converted into ordinary customs duties by negotiating
partners in the course of the Uruguay Round. In particular, the Appellate
Body stated that:
The wording of footnote 1 to the Agreement on Agriculture confirms our
interpretation. The footnote imparts meaning to Article 4.2 by enumerating
examples of measures of the kind which have been required to be
converted, and which Members must not maintain, revert to, or resort to,
from the date

of the entry into force of the WTO Agreement. Specifically, and as both
participants agree, the use of the word include in the footnote indicates
that the list of measures is illustrative, not exhaustive. And, clearly, the
existence of footnote 1 suggests that there will be measures of the kind
which have been required to be converted that were not specifically
identified during the Uruguay Round negotiations. Thus, in our view, the
illustrative nature of this list lends support to our interpretation that the
measures covered by Article 4.2 are not limited only to those that were
actually converted, or were requested to be converted, into ordinary customs
duties during the Uruguay Round.13

Furthermore, the Appellate Body in the Chile Price Band System dispute
noted that:
() Article 4.2 not only prohibits similar border measures from being
applied to some products, or to some shipments of some products with low
transaction values, or the imposition of duties on some products in an
amount beyond the level of a bound tariff rate. Article 4.2 prohibits the
application of such similar border measures to all products in all cases.14

Therefore, the most important commitment undertaken by WTO Members in

the market access area during the Uruguay Round was the comprehensive
tariffication of all border measures.
The non-tariff border measures which were required to be converted into
tariffs are set out in a footnote to Article 4 of the Agreement on Agriculture.
They include:

quantitative import restrictions;

minimum import prices;

variable import levies;

discretionary import licensing;

voluntary export restraints, and

non-tariff measures maintained through state trading enterprises.

A quantitative restriction limits (or puts a quota on) the amount of a

particular commodity that can be imported or exported over a given
period.15
The minimum import price is fixed on the basis of the most favourable
market price for each marketing year.

Variable import levies are complex systems of import surcharge. They are
aimed at ensuring that the price of a product in the domestic market remains
unchanged regardless of price fluctuations in exporting countries.
Discretionary import licensing is the requirement to obtain a permit to
import a product. This normally involves an administrative procedure
requiring the submission of an application or other documentation to the
relevant administrative body as a condition for importing.
Through voluntary export restraints, a country agrees to limit its exports to
another country to an agreed maximum within a certain period.
Agricultural state trading enterprises are enterprises which have been
granted exclusive or special rights, or privileges that are not available to
commercial firms, thus distorting trade in a competitive market.

The prohibition of border protection measures other than tariffs is absolute.

All border measures other than normal customs duties are no longer
permitted.
In the Chile Price Band System dispute, Chile had argued that the
obligations in Article 4.2 only relate to non-tariff barriers, whereas the PBS
only covers the payment of customs duties.
The Panel and the Appellate Body rejected this position. The Appellate
Body found that:
Thus, the obligation in Article 4.2 not to maintain, resort to, or revert to
any measures of the kind which have been required to be converted into
ordinary customs duties applies from the date of the entry into force of the
WTO Agreement - regardless of whether or not a Member converted any
such measures into ordinary customs duties before the conclusion of the
Uruguay Round. The mere fact that no trading partner of a Member singled
out a specific measure of the kind by the end of the Uruguay Round by
requesting that it be converted into ordinary customs duties, does not mean
that such a measure enjoys immunity from challenge in WTO dispute
settlement. The obligation not [to]
maintain such measures
underscores that Members must not continue to apply measures covered by
Article 4.2 from the date of entry into force of the WTO Agreement.
() Chiles price band system is a measure similar to variable import
levies or minimum import prices within the meaning of Article 4.2 and
footnote 1 of the Agreement on Agriculture. In other words, the fact that the

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duties that result from the application of Chiles price band system take the
same form as ordinary customs duties does not imply that the underlying
measure is consistent with Article 4.2 of the Agreement on Agriculture.19

However, Article 4.2 of the Agreement on Agriculture does not prevent the
use of non-tariff import restrictions consistent with the provisions of the
GATT
1994 or other WTO agreements which are applicable to general trade in
goods (industrial or agricultural). Such trade-restrictive measures include
those maintained under the balance-of-payment provisions (Article XIX of
the GATT
1994), general exceptions (Article XX of the GATT 1994), the SPS
Agreement,
the TBT Agreement, or other general, non-specific WTO
provisions.
Annex 5 to the Agreement on Agriculture provides a major exception with
respect to the general tariffication requirement. Under this provision, the
obligation to convert protective measures into customs duties was deferred
by six years for certain products and in particular rice. The exception no
longer applies.

2.2.4

Tariff Modification

Once tariffs are negotiated, WTO Members agree to bind those tariffs.
This means that WTO Members are not normally allowed to impose import
duties in excess of the bound tariffs inscribed in each countrys Schedule
of Concessions.
The bound level of tariffs can be changed in accordance with the procedure
set out in Article XXVIII of the GATT 1994. As WTO Members are
allowed to apply a lower tariff than the bound level, Article XXVIII is only
invoked when a WTO Member wants to raise the tariff so as to increase
market protection.
A WTO Member may modify or withdraw a concession in a Schedule either
by agreement with the affected countries, or unilaterally. The exporting
WTO Members which might be affected by the modification or withdrawal
of the binding of the tariff have certain rights of negotiation and
compensation. In addition, according to Article XXVIII:2, the WTO
Member changing the tariff must endeavour to maintain a general level of
reciprocal and mutually advantageous concessions not less favourable to
trade than that previously applicable. This means that if a tariff is raised,
some compensation must be given in another sector (i.e., by lowering
another tariff) so as to allow a rebalancing of the levels of trade
concessions.

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2.2.5

Tariff Reductions

WTO Members agreed in the Uruguay Round that once the tariffs were
fixed, they would agree to reduce these tariffs over time, i.e., over six to ten
years starting on the date of the coming into effect of the Marrakesh
Agreement in
1995. The tariff reductions were fixed at the time of the conclusion of the
Uruguay Round and are also set out in each WTO Members Country
Schedule.

Developed country Members agreed to reduce, over a six-year

period beginning in 1995, their tariffs on agricultural products
by
36 per cent on average, with a minimum cut of 15 per cent for
any product.
For developing countries, the cuts are 24 and 10 per cent
respectively, to be implemented over ten years.
Least-developed country Members were required to bind
all agricultural tariffs, but not to undertake tariff
reductions.

The Agreement on Agriculture is an initial attempt at reforming agricultural

trade. WTO Members agreed that the negotiations on agricultural trade
reform would continue and set a date for the recommencement of those
negotiations. The negotiations began in 2000 and have now been
incorporated into the Doha Development Round of negotiations.

2.2.6

Minimum Market Access

It was foreseen that the high tariff levels resulting from the tariffication
process could turn out to be more protective than their non-tariff
predecessors. Negotiators recognized that the use of the 1986 to 1988
reference period would result in prohibitively high tariffs. These high
tariffs were likely to disrupt existing trade.
WTO Members were therefore obliged to ensure that a certain amount of
domestic consumption would continue to be supplied by imports. All WTO
Members agreed to open up their markets to imports for at least 3 per cent of
the domestic consumption in 1995, and for 5 per cent by 2000.
The maintenance of existing trade levels was ensured by means of current
access quotas. In addition, minimum access commitments were created to
allow new import opportunities for products previously covered by a nontariff barrier.
Both these commitments were administered through the
establishment of tariff-rate quotas (TRQs).

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A tariff-rate quota (TRQ) is a two-levelled tariff whereby the tariff rate

charged depends on the volume of imports. A lower (in-quota) tariff is
charged on imports within the quota volume. A higher (over-quota) tariff is
charged on imports in excess of the quota volume.

The value of a quota volume, and the in-quota and over-quota tariffs are
defined in each WTO Members tariff schedules. In a given period, a lower
in- quota tariff is applied to the first number of units of imports and a higher
over- quota tariff is applied to all subsequent imports.
Tariff quotas are not considered quantitative restrictions because, at least in
theory, they do not limit import quantities. One may always import by
paying the over-quota tariff.
TRQs usually generate a quota rent. In fact, the right to import within the
quota results in a profit over and above the profit available in normal trade.
This extra profit results from the fact that the protected market price is
usually higher than the world market price. The necessity to administer the
TRQs is a consequence of the fact that the demand to trade within the quota
is often greater than the supply. The allocation of the TRQs among supply
countries and the distribution of licences to the quota to traders determine
who gets the benefit of this quota rent or super profit.
Quota rent is a profit which results from the difference between the
domestic price and the world price inclusive of the in-quota tariff.

2.2.7

TRQ Administration

The administration of TRQs is of vital importance in that it may heavily

affect trade by exporting countries. Quota administration has a real impact
on trade, as it determines whether a product exported from one country can
gain access to the market of another country at the lower, within-quota tariff.
There are two major sources of rules: the rules governing the administration
of import restrictions and the possible country allocation of the TRQ
(external administration); and the rules governing the import licensing
procedures used to administer the TRQs and to allocate them to traders
(internal administration).
The first set of rules on the external administration of TRQs are contained in
Article XIII of the GATT 1994. The second set of rules on internal
administration are dictated by the Agreement on Import Licensing
Procedures. The two provisions are described in the relevant parts of this
module.

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38 WTO Members currently have a combined total of 1.379 tariff-rate

quotas in their commitments. Of the total, 562 are scheduled to increase
over the relevant implementation period, 812 to remain unchanged and five
to decrease in quantity.

2.2.8

Special Safeguard Measures

In spite of the market access obligations contained in the Agreement on

Agriculture, special safeguard measures may be introduced in respect of
those products for which non-tariff measures have been converted into
ordinary customs duties and have been labelled with the symbol SSG in
WTO Members Country Schedules.
Other safeguard measures are available under the WTO Agreements, namely
the provisions of Article XIX on the Emergency Action on Imports of
Particular Products of the GATT 1994, and the rules of the Agreement on
Safeguards. These mechanisms are described in the relevant parts of this
module.
With respect to special safeguard measures, the relevant provision is Article
5 of the Agreement on Agriculture. Article 5 allows the imposition of an
additional customs duty, over and above the bound customs duty (or
tariffied duty), when the imported product does not reach a predetermined
trigger price, or where the volume of imports passes a trigger volume.
This means that WTO Members may raise their duties on agricultural
products even when the more stringent requirements of Article XIX and the
Agreement on Safeguards are not met. This provision is very detailed and
must be interpreted strictly to ensure that WTO Members do not abuse their
right to invoke exceptions.
The use of the special safeguards provided by Article 5 of the Agreement
on Agriculture requires two preconditions which are set out in the first part
of subparagraph 1:

tariffication (i.e., the conversion into ordinary customs duties of

non-tariff border measures) of the products to which the special
safeguard is to apply;
designation of the product in question with the symbol SSG in
the WTO Members Article II Country Schedule the GATT
1994.

If these two preconditions are met, a WTO Member may invoke the special
safeguard clause, according to Article 5.1(a) and 5.1(b) of the Agreement
on Agriculture, where either:

the volume of imports of that product exceeds a trigger level

which relates to the existing market access opportunity as set out
in Article
5.4; or

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the price of the imports of that product, as determined on the

basis of the c.i.f. import price of the shipment concerned falls
below a trigger price equal to the average 1986-1988 reference
price for the product concerned.

There are therefore two alternative grounds for invoking the special
safeguard provision: surges in the volume of imports and falling import
prices. However, not every rise in the volume or every fall in the price of
imports entitles countries to resort to Article 5. In each case, there are set
threshold levels, which are called volume triggers or price triggers.
Article 5.8 of the Agreement on Agriculture provides
that:
Where measures are taken in conformity with paragraphs 1 through 7
above, Members undertake not to have recourse, in respect of such
measures, to the provisions of paragraphs 1(a) and 3 of Article XIX of the
GATT 1994 or paragraph 2 of Article 8 of the Agreement on Safeguards.

Thus, a WTO Member may choose between the special safeguard measures
under Article 5 of the Agreement on Agriculture or the general safeguards
under the GATT 1994 Article XIX in accordance with the implementation
requirements of the Agreement on Safeguards. However, if a WTO Member
chooses to introduce special safeguards, it cannot have recourse to general
safeguard measures.
The special safeguards provisions for agriculture differ from the general
safeguards. In agriculture, unlike with normal safeguards:

higher safeguard duties can be triggered automatically when

import volumes rise above a certain level, or if prices fall below
a certain level; and
it is not necessary to demonstrate that serious injury is being
caused to the domestic industry.

The special agricultural safeguards can only be used on products that were
tariffied. These amount to less than 20 per cent of all agricultural products.
But they cannot be used on imports within the tariff quotas, and they can
only be used if the WTO Member reserved the right to do so in its Schedule
of agricultural commitments. This might explain why, in practice, the
special agricultural safeguards have been used only in relatively few cases.
The two special safeguards mechanisms (i.e., price and volume safeguards)
may not be invoked concurrently. They are available to WTO Members for
use for the duration of the agricultural reform process as determined under
Article 20 of the Agreement on Agriculture. The Agreement on Agriculture
does not specify how long the reform process will (or should) last.

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38 WTO Members currently have reserved the right to use a combined

total of 6,072 special safeguards on agricultural products.

2.2.8.1 Import Price Trigger

The price safeguard provisions are set out in Articles 5.1 (b) and 5.5 of the
Agriculture Agreement. Article 5.1(b) provides specific conditions for
special safeguard provisions related to price in addition to the two general
conditions of Article 5.1. If the market entry price (expressed in terms of
domestic currency) falls below a trigger price, the provisions of Article 5.5
come into play and an additional duty may be applicable to the shipment in
question.
The Appellate Body in the EC Poultry case clarified the interpretation of
the terms of Article 5.1(b):
In the light of our construction of the preceding phrase the price at which
imports of the product may enter the customs territory of the Member
granting the concession, we conclude that the phrase as determined on
the basis of the c.i.f. import price of the shipment concerned in Article
5.1(b) refers simply to the c.i.f. price without customs duties and taxes. There
is no definition of the term c.i.f. import price in the Agreement on
Agriculture or in any of the other covered agreements. However, in
customary usage in international trade, the c.i.f. import price does not
include any taxes, customs duties, or other charges that may be imposed on
a product by a Member upon entry into its customs territory. We think it
significant also that ordinary customs duties are not mentioned as a
component of the relevant import price in the text of Article 5.1(b). Article
5.1(b) does not state that the relevant import price is the c.i.f. price plus
ordinary customs duties. Accordingly, to read the inclusion of customs
duties into the definition of the c.i.f. import price in Article 5.1(b) would
require us to read words into the text of that provision that simply are not
there.25

To satisfy the specific conditions, it is necessary to determine the price at

which the product enters the customs territory. The text of Article 5.1(b)
gives no exact measure of the market entry price. It merely provides that it
is to be determined on the basis of the c.i.f. import price. Article 5.1(b)
defines the price of the product on which price safeguards are triggered as
equal to the average 1986 to 1988 reference price for the product
concerned.
The amount of permissible additional duty in price-triggered cases depends
on the degree to which the actual import price falls below the trigger price.
Article 5.5 provides a formula which enables the importing country to
progressively increase its additional duties in proportion to the extent of
price decline.

16

2.2.8.2 Import Volume Trigger

As with price safeguards, volume special safeguards have their legal basis in
Article 5 of the Agreement on Agriculture. Article 5.1(a) provides that a
special additional duty may be imposed if the annual volume of imports of
the product exceeds a trigger level. Article 5.4 provides that the volume
trigger level is to be calculated on the basis of imports as a percentage of
domestic consumption (last three years of available data), a figure referred
to as market access opportunities. This figure gives a base trigger level.
In broad terms, the higher the share of imports in domestic production, the
lower the trigger level. For example, where the shares of imports is less than
10 per cent of domestic consumption for the three preceding years, the base
trigger amount is set at 125 per cent. In contrast, where the shares are greater
than 30 per cent, the base trigger level is 105 per cent.

2.2.9

Dispute Settlement
In the dispute EC Poultry (WT/DS69)27 Brazil complained about the
allocation of an EC tariff-rate quota for frozen poultry meat and the use by
the EC of a special safeguard measure under the Agreement on
Agriculture. The dispute involved the interpretation of the ECs tariff
schedule and its relationship with a separate bilateral agreement between
the EC and Brazil, which provided for a global annual duty-free tariff-rate
quota for frozen poultry meat. Brazil argued that as a result of the
agreement, the tariff-rate quota should be allocated exclusively to Brazil and
not shared on an MFN basis with other WTO Members. The WTO Panel
found, and the Appellate Body upheld, the Panels finding that the
agreement was not part of WTO law and therefore could not be applied
directly as law in WTO dispute resolution. Further, the Appellate Body
interpreted the relevant EC Tariff Schedule. As the EC was bound by its
tariff schedule which provided for MFN non- discriminatory treatment,
Brazil could not seek preferential treatment on the basis of tariff
concessions negotiated bilaterally. The Appellate Body also found that the
ECs administration of this tariff quota did not violate the WTO
Agreement on Import Licensing Procedures. Finally, the Appellate Body
interpreted the special safeguard provision in Article 5 of the Agreement on
Agriculture. It decided that the calculation of the import price, which
determines whether to apply the special safeguard measure, must not
include custom duties. It further found that the EC could not use
representative price to determine the c.i.f. import price of an individual
shipment.
The Panel in Chile Price Band System (WT/DS207)28 examined a
complaint brought by Argentina concerning Chiles price band system,
which imposed

17

variable tariffs on imports of wheat, wheat flour, edible vegetable oils and
sugar. Under the Chilean price band system, additional duties were imposed
on imported commodities if market prices in markets of concern to Chile
fell below an administratively-administered price band. Chile argued
that the scope of application of Article 4.2 was limited to measures which
had actually been converted or requested to be converted into customs
duties during the Uruguay Round - which had not happened in the case of
price band systems. The Appellate Body did not agree with this view. It
found that the scope of the measures covered by Article 4.2 was not limited
to those described by Chile, but that the language of Article 4.2 was intended
to cover a broad category of measures. The Appellate Body found support
for its interpretation in Article 5.1 and footnote 1 to Art. 4.2. The Appellate
Body addressed the question whether the PBS was a border measure similar
to a variable import levy and minimum import prices within the
meaning of footnote 1 to Article 4.2 of the Agreement on Agriculture. In
order to determine similarity, the Appellate Body used what it called an
empirical approach: do two or more things have likeness or resemblance
sufficient to be similar to each other? It then compared the Chilean PBS
with the two measures and noted similar features as to a lack of
transparency and the possible effect of impeding the transmission of
international price developments to the domestic market. Though
recognizing certain dissimilarities, the Appellate Body regarded the
similarities to be sufficient to qualify the PBS as a similar border
measure within the meaning of footnote 1 to Article 4.2. Therefore, the
WTO Appellate Body upheld the Panels finding that Chiles price band
system is a border measure that is similar to variable import levies and
minimum import prices.

18

3. AGRICULTURAL SUBSIDIES
3.1

Introduction
The Agreement on Agriculture seeks to ensure that agricultural trade is not
distorted through the use of subsidies.
Agricultural support measures are classified as belonging to two major
groups:

domestic support and general support; and

export subsidies.

One of the main features of the Agreement on Agriculture is to allow WTO

Members to use subsidies in derogation from the SCM Agreement. A key
objective of the Agreement on Agriculture is also to discipline and reduce all
subsidies, while at the same time leaving scope for governments to design
effective agricultural policies.
Export subsidies are regulated by means of Articles 8, 9, 10 and 11.
Domestic subsidies are regulated by means of Articles 6 and 7 along with
Annexes 2, 3 and 4.

3.2

Domestic Support
In WTO non-legal terminology, domestic subsidies to agricultural products
are identified by special boxes which are given the colours of traffic
lights: Green meaning permitted because they have no, or minimal,
distortive effect on trade; Amber meaning possibly legal or illegal
because of their trade- distortive nature; and Blue meaning possibly tradedistorting but permitted as the measures are linked to production limitation
programmes.

3.2.1

Amber Box
Measures

All domestic support measures which do not correspond to the exceptional

arrangements known as the Green and Blue boxes, are considered to
distort production and trade and therefore fall into the Amber Box
category. Green Box measures are set out in Annex 2 to the Agreement on
Agriculture. Blue Box measures are defined in Article 6.5.
Amber Box support measures are not prohibited but are subject to
reduction commitments.
3.2.1.1 Reduction Commitments
The domestic support reduction commitments of each WTO Member are

19

contained in Section I, Part IV of its Schedules of Concessions. In the

Uruguay Round, WTO Members undertook to discipline trade-distorting
domestic support to agriculture by capping it at 1986-88 average levels, and
reducing it by 20 per cent over six years up to 2000 for developed country
Members or by 13 per cent over 10 years up to 2004 for developing country
Members.
Domestic support reduction concerns total agriculture spending and not
commodity-by-commodity reductions. In other words, WTO Members have
not undertaken to reduce the support granted to each product or product
category by 20 per cent. Thus, under the Agreement on Agriculture, WTO
Members which save on subsidies in one agricultural sector can increase
domestic subsidies in another sector so long as the total subsidization does
not exceed the overall ceiling on subsidisation to which a WTO Member has
committed itself in the country schedule.
The maximum levels of domestic support are bound in the WTO, and 30
WTO Members have made commitments to reduce their trade-distorting
domestic supports in the Amber Box.
In the case of WTO Members with no scheduled reduction commitments,
the level of domestic support not covered by one or another of the
exception categories must not exceed the specified de minimis levels (5 per
cent of the value of production for developed countries and 10 per cent of
the value of production for developing countries).
Least developed countries are not required to make any reductions.
Part IV of a WTO Members Schedule of Commitments lists its Annual
Bound Commitment Levels for each of the years of the implementation
period (which ended in 2000), and the Final Bound Commitment Level for
all subsequent years. The Commitments take the form of reductions in the
Total Aggregate Measurement of Support (AMS). A WTO Member is in
compliance with its domestic support reduction commitments in any year if
its Current Total AMS does not exceed the corresponding Commitment
Level.
3.2.1.2 Aggregate Measurement of Support
The reduction commitments are expressed in terms of an aggregate measure
of support which combines estimated support levels from all non-exempt
policies for all commodities into one overall spending.
The Aggregate Measurement of Support (AMS) was developed to
quantify trade-distorting support. Rules for calculating the AMS are shown
in Annex3.
Aggregate Measurement of Support is a monetary expression of the size of
annual transfers provided for a specific agricultural product in favour of
the

20

producers of that product, or non-product-specific support provided in

favour of agricultural producers in general.

Even though the reduction commitments are applicable generally over all
agricultural commodities, the calculation of AMS is made on the basis of the
spending on specific commodities during a reference period. The two basic
criteria for valuing support are its effect on prices and its cost to the
government. Both budgetary outlays (i.e., the money spent by governments
to support a product) and revenue foregone by governments or their agents,
whether at national or sub-national level, are included in the AMS
calculation.
Annex 3 of the Agreement on Agriculture provides that three types of
support are to be included in the calculation:

market price support measures, the most important type of non

exempt measures can be provided either through administered
prices (involving transfers from consumers) or through certain
types of direct payments from governments, and is calculated
on the basis of the gap between a fixed external reference price
and the applied domestic administered price multiplied by the
quantity of production eligible to receive the applied
administered price;
non-exempt direct payments and other subsidies that are
dependent on a price gap, and are calculated by using either the
price gap multiplied by the volume of production concerned, or
by using budgetary outlays;
any other subsidy not exempted from the reduction commitments.
Non-product-specific support is calculated separately for
each individual product and is included in the Total AMS
only if it exceeds the applicable de minimis level.

The Appellate Body in the Korea - Various Measures on Beef dispute

confirmed that the AMS calculation rules contained in Annex 3 of the
Agreement on Agriculture are directly linked to Article 6 of the Agreement
on Agriculture.
3.2.1.3 Total Aggregate Measurement of Support
Having calculated the AMS by product, the next step is to calculate the
Total
Aggregate Measurement of Support.

21

Total Aggregate Measurement of Support is the sum of all domestic

support provided in favour of agricultural producers, calculated as the sum
of all AMS and equivalent measurement of support (EMS) for agricultural
products.

Part IV of the Schedules of Commitments specifies each WTO Members

Annual Bound Commitments, which are constituted by a Base Total AMS
(support provided during the base period 1986-88), a Current Total AMS
(commitments during any year of the implementation period) and its Final
Bound Commitments, which is the continuation of the Current Total AMS in
all years after the end of the implementation period.
In any year of the implementation period, the Current Total AMS value of
non-exempt measures must not exceed the scheduled Total AMS limit as
specified in each WTO Members Schedule for that year. In other words,
domestic support exceeding the reduction commitments levels is prohibited.
3.2.1.4 Equivalent Measurement of Support
Rules for calculating the Equivalent Measurement of Support (EMS) are
set out in Annex 4 of the Agreement on Agriculture. These rules are used
when it is not practicable to calculate a product-specific AMS by using the
methodology set out in Annex 3.
Equivalent measurement of support is a fall-back concept employed when
AMS cannot be used. It is defined as the annual level of support, expressed
in monetary terms, provided to producers of a specific agricultural product
through the application of one or more support measures, which cannot be
calculated in accordance to the AMS methodology.

For example, this can be the case for market price support measures which
cannot be calculated by applying the AMS method, because no external
reference price can be determined. In that case, an equivalent measurement
of support will be calculated.

3.2.2

Exempted Measures

Domestic support measures which are exempted from reduction

commitments are defined in Article 6 and in Annex 2 of the Agreement on
Agriculture. Exempted measures are excluded from the AMS calculation.
WTO Members must claim and justify the benefit of the exemption. In the
absence of such a claim, all domestic support programmes are automatically
considered as Amber Box measures and counted in the calculation of the
WTO Members total AMS. In other words, whatever support is not
specifically excluded from reduction commitments is presumed to be
included.

22

Any measure not shown to satisfy the conditions for exemption under
Annex
2 or Article 6 of the Agreement on Agriculture is required to be included in
the calculation of the current total AMS for the year in question.
3.2.2.1 Green Box Exemption
Annex 2 of the Agreement on Agriculture sets out general criteria and
conditions for exemption to the commitment to reduce domestic subsidies.
Measures which fall within the terms of Annex 2 are known as the Green
Box. Green Box support measures are considered economically neutral.
Therefore, the WTO does not impose any financial limitation to this type of
domestic support.
The subsidies falling under this category are non-actionable (in other words,
immune from challenge) by virtue of Article 13 of the Agreement on
Agriculture (the Due Restraint or peace clause provision). In particular,
the domestic support measures that fully conform to the provisions of
Annex 2 to the Agreement on Agriculture are considered non-actionable
subsidies for purposes of countervailing duties during the implementation
period of the Agreement on Agriculture (defined, for purposes of the peace
clause, as the nine-year period commencing in 1995).
The fundamental requirement to qualify for a Green Box exemption is that
support measures should have no, or at most minimal, distorting effects on
trade or production.
Accordingly, all measures for which exemption is claimed must conform to
the following basic general criteria:

the support must be provided through a publicly funded

government programme, not involving a transfer from
consumers and;
the support may not have the effect of providing price support
to producers.

Annex 2 provides a non-exhaustive list of domestic support measures for

which WTO Members may claim exemption from reduction commitments.
Depending on the nature of the particular policy under consideration, the
support measure must further fulfil policy-specific criteria set out in detail in
the Annex.

General applicable government programmes

First of all, there are government programmes which provide services or

benefits to agriculture or the rural community. They include pest and
disease controls, support for training and information, infrastructure (such
as, water, electricity supply, etc.) or research programmes. To guarantee the
economic neutrality of this aid, it is added that these programmes do not
involve direct payments to producers or processors.

23

Domestic food aid programmes

A second type of aid is made up of domestic food aid programmes for

people in need, provided that products are brought from producers at
market prices. Aid for public storage of agricultural products for food
security purposes is classified in the same group.

Direct payments

A third category of Green Box aid is represented by direct payments. The

Agreement on Agriculture permits an unlimited number of different forms of
direct payments made to agricultural producers to be exempted from
reduction commitments. A first series of direct payments consists of aid for
developing agricultural structures: retirement programmes, granted on
conditions that the land is no longer in use within three years following the
granting of aid; aid encouraging producers to cease their activities
permanently or to change over to non-agricultural activities, provided that
the producers totally and permanently retire from production; or
investment aid for producers undergoing objectively demonstrated
structural disadvantages.
De-coupled income support measures (i.e., measures which are not related to
current levels of production or prices) are also classified in the Green Box.
In order to benefit from this possibility, the amounts paid shall not be related
to the quantities produced or the process charged and, eligibility for this type
of aid must be determined by criteria that are not directly related to
production such as income or status of a producer. When this support takes
the form of income insurance, it can be classified in the Green Box
provided that it is granted to a producer who has suffered an income loss
which exceeds, in a given year, 30 per cent of average gross income and
that this aid does not compensate for more than 70 per cent of the income
loss.

Environmental aid and regional assistance

Environmental aid and regional assistance for farmers in disadvantaged

regions is included in the Green Box. Each disadvantaged region must be
a clearly designated contiguous geographical area with a definable
economic and administrative identity, considered as disadvantaged on the
basis of neutral and objective criteria clearly spelt out in law or regulation
and indicating that the regions difficulties arise out of more than temporary
circumstances. The amount of payment for environmental aid should
correspond to the extra costs involved in complying with government
programmes of environmental protection.

24

Relief from natural disasters

Payments for relief from natural disasters are also included in the Green
Box. These payments are allowed only if producers show a production
loss that exceeds 30 per cent of the average of production and will
compensate for not more than the total cost of replacing production loss.
Article 7.1 of the Agreement on Agriculture provides that WTO Members
are under an obligation to ensure that all Green Box measures are
maintained in conformity with the conditions set out under Annex 2. Any
measure not shown to satisfy the conditions for exemption is required,
under Article 7.2 of the Agreement on Agriculture, to be included in the
calculation of the current total AMS for the year in question.
3.2.2.2 Blue Box Measures
The Blue Box exemption category is contained in Article 6.5 of the
Agreement on Agriculture. It covers any support measure that would
normally be in the Amber Box, but which is placed in the Blue Box if
the support also requires farmers to limit their production.
Therefore, Article 6.5 of the Agreement on Agriculture exempts from
reduction commitments certain direct payments to farmers which are tied to
production- limiting programmes.
The following
fulfilled:

criteria

must

be

payments are directly paid out from the government budget to

the producers;
payments are conditional upon some form of productionlimiting requirement imposed on the recipient of the support,
which include:
payments based on fixed area and yields, or
payments made on 85 per cent or less of the base level
of production;
livestock payments made on a fixed number of head.

At present, there are no limits on spending for Blue Box

subsidies.
Blue Box subsidies are considered to be possibly trade-distorting but
permitted under the Agreement on Agriculture. This means that they are not
immune from challenge through WTO dispute settlement proceedings or
under unilateral and multilateral remedies.
3.2.2.3 Developmental Measures
Article 6.2 of the Agreement on Agriculture exempts from reduction
commitments measures of assistance designed to encourage agricultural and

25

rural development, which are an integral part of the development

programmes of developing countries.
Developmental measures are:

investment subsidies which are generally available to

agriculture in developing countries;
agricultural input subsidies generally available to low-income
or resource-poor producers;
domestic support to producers to encourage diversification
from growing illicit narcotic crops.

3.2.2.4 De Minimis Support

WTO Members are not obliged to include de minimis support in their Current
Total AMS.
De minimis support is defined as:

product-specific domestic support not exceeding 5 per cent of

the WTO Members total value of production of the
agricultural product in question during the relevant year;
non-product-specific domestic support which is less than 5
per cent of the value of the WTO Members total agricultural
production.

In the case of developing countries, the de minimis threshold is 10 per cent.

26

4.MARKET ACCESS BARRIERS

Agricultural protection and subsidies account for about twothirds of the trade distortion caused by government policies.
And most of the distor- tion traceable to agricultural policies
is generated by import barriers. For
that reason, negotiating wider market access in agriculture is
critical
to the success of the Doha Round.1
The World Trade Organization (WTO) Agriculture Framework
Agreement of
July 2004 calls for significant tariff cuts using a tiered formula that
imposes larger percentage cuts in higher tariffs. (See table 1 for a
summary of all of the provisions.) This proposed approach is a vast
improvement over the average-cut formula applied in the Uruguay
Round Agreement on Agriculture, which allows countries to meet
their commitments through large proportional reductions in tariffs
that were already low and small reductions in high tariffs.
The new formula still will require substantial cuts in tariffs
before meaningful trade liberalization is realized. This is because of
the prevalence in agriculture of tariff peaks (a small number of
tariff lines protect the bulk of domestic production), binding
overhang (bound tariffs are above applied tariffs), water in the
tariff (tariff reductions initially have no impact), and tariff
escalation (higher tariffs on processed raw materials). Furthermore,
the Framework Agreement contains
a Sensitive Product
designation that would allow some commodities to escape the
full extent of tariff cuts in exchange for an expansion of tariff rate
quotas (TRQs).
A fundamental requirement for success in any trade negotiation
is balance between flexibility and discipline. There must be
enough flexibility to accommodate the unique needs of each
member, and enough discipline to yield the gains in export market
opportunities that are the raison dtre of trade negotiations. The
tiered formula appears to strike a balance between discipline and
flexibility by creating bands that allow for progressive tariff cuts.
But Sensitive Products may introduce flexibility at the cost of
the discipline needed to widen market access. The level of trade
liberalization realized, therefore, will depend critically on key
details, such as the level of tariff cuts in each tier, the maximum
tariff level to be negotiated, reductions in tariff escalation, and the
requirement for an overall cut in average tariffs.

27

Table 1. Summary of the market access provisions of the

WTO Framework Agreement on Agriculture
Tariff cuts Substantial improvement in market access through
tariff reductions from bound rates.
Single approach for all countries: tiered formula to
ensure progressivity. Types of commitments
within bands and number of bands to be
Tariff rate Reduce in-quota tariffs and improve
quotas
administration (as part of balance of
Safeguards Future of special agricultural safeguard (SSG)
under negotiation.
Special and Proportionately less tariff reductions for
differential developing countries, with longer
treatment for implementation period.
developing Developing countries may designate special products
Tariff escalation reduced by formula to be agreed
Other
Source: Josling (2005).

Background

Although developing countries have almost doubled their share of

world trade in
manufactures over the last two decades, their share in agricultural
trade has remained about 30 percent. During the 1990s, the growth
of developing-country agricultural exports to
industrial
countries slowed as exports to other developing countries
accelerated. Todays middle-income countries have managed to
increase their global market share, principally by entering other
developing countries markets and by aggressively diversifying
into nontraditional exports, such as seafood products, fruits,
vegetables, cut flowers, and processed foods. Growth of these
nontraditional exports, which generally have low protection, has
outpaced growth of traditional commodities by three to one (figure
1). Meanwhile, many low-income countries have had less success;
their share of world agricultural trade has declined.
These trade patterns reflect the structure of global protection.
Although the conversion of nontariff barriers to tariffs during the
Uruguay Round was an important step forward, import protection
in agriculture remains high, nontransparent, and antidevelopment.
Average agricultural tariffs remain much higher than
manufacturing tariffs, which average less than 4 percent and are
about 10 percent of what they were 60 years ago. The average
agricultural tariff is 62 percent, by contrast, with high variation
among countries and commodities. In addition, about 50 percent of
domestic production in countries belonging to the Organization
for Economic

28

Cooperation and Development (OECD) is protected by TRQs.

Studies show that preferences to developing countries barely begin
to compensate for these high levels of protection (Brenton and
Ikezuki 2005).
Widespread use of specific tariffs in developed countries
(whic h make up two-thirds of their agricultural tariffs) obscure
actual levels of protection, because specific duties are generally
higher than the simpler and more transparent ad valorem tariffs that
are generally used in developing countries (figure 2). The use of
specific tariffs causes a bias against developing countries
because it results in higher tariffs on lower-priced imports. Even
more important are the cyclical implications of such tariff
structures: as world price go down, specific tariffs go up when
expressed in percentage terms. While conversion of specific tariffs
into ad valorem form would be desirable in principle, it would
raise many of the dangers that emerged in the conversion of
nontariff barriers into tariffs during the Uruguay Round. To avoid
another round of dirty tariffication through large, covert increases
in protection, it will be important during the conversion of specific
tariffs to include in the modalities governing the negotiations a
provision to ensure that a transparent approach is followed
(similar to paragraph 9 of the Harbinson Draft).2

Figure 1. Developing country exports have surged in

nontraditional products with low protection
Composition of developing countries exports, percent
60
50
40
30

1981

1991
2001

20
10
0
Tropic al
P roduc t s

Tem perat e
P roduc t s

S eafood, Fruit s
, V eget able s
and Flowers

Other
P roc es sed
P roduc t s

Figure 2. Specific duties hide high protection

Percent
70
60
Average Ad Valorem
Tariff Equivalent

50
40
30

Average Ad Valorem
Tariff

20
10
0
A us tralia

US

EU

Jordan

Source: World Bank 2003.

Tariffs are typically higher for processed raw materials

(figure 3). By discouraging diversification into value-added and
processed productsareas in which trade is expanding rapidly
such escalation punishes investors in developing countries who
seek to add value to production for export. It also help s acco unt
for developing coun tries g en erally po or pen etration
of developed-country markets in processed foods.
Two other key features of agricultural tariffs are the large
difference between bound and applied rates and their extremely
high peaks. The first feature, known as binding overhang (figure
4), means that a larger reduction in bound rates must be made
before applied rates change. High peaks result in large differences
between average rates and maximum tariff rates (called tariff
dispersion) in developed countries (table 2), compared with
developing countries, which are characterized by low tariff
dispersion. Developing countries have higher average agricultural
tariffs than industrial countries, but the level of protection in
developed countries is higher than average tariffs (figure 5)
because of the prevalence of tariff peaks: just a few tariff lines
protect most of domestic production in high- income countries.
One consequence of those peaks is that most of the economic
welfare cost of global agricultural distortions is accounted for by a
small number of commodities. Rice and beef alone are responsible
for the bulk of that cost, with
sugar, oilseeds and other livestock products accounting for another quarter
(table

3).

Figure 3. Tariffs escalate for final products

Average tariffs, percent
60
50
50
Final

40
40

Intermediate
Intermediate

30
Raw
Raw

20
20
10
0
0

QU
D
QU A
AD

C
C anad
anad aa

Jap
Jap an
an

UUSS

EU
EU

LarLar
g g e Ot herOt her Lo w erLo
e
d i d d l Me id d l
wM
eri M
MInco
i dd
mel e
d
l e me Inco me
Inco
e Inco Inco Cme
o unt ri C
Inco
me
es
o unt ri es
me
CCo ount
o unt
untririeses CCo
unt riri es
es

Source: World Bank 2003.

Table 2. Tarfiff Peaks and Variance in Selected Countries (percent)

Country or Group
Canada
Japan
United States

Average Tariff
4.1
10.9

Maximum Tariff
238.0
50.0

Standard Deviation
13.5
10.1

9.9

350.0

European Union

19.0

506.3

27.3

Republic of Korea

39.9

917.0

107.9

Brazil

13.2

55.0

5.6

Costa Rica

14.2

154.0

18.0

Morocco

67.4

376.5

70.6

Indonesia

8.9

170.0

25.6

Malawi

16.5

25.0

8.5

Togo

15.6

20.0

6.1

Uganda

13.6

15.0

3.2

Sou rce: Ak soy 2005 .

26.5

Tariff
rate
quotas
Tariff rate quotas (TRQs) on imports, implemented in the
Uruguay
Round Agreement
on Agriculture for sectors in which nontariff barriers were converted
into tariffs, are a complicating factor. Countries agreed to allocate
quotas for imports up to 5 percent of domestic consumption
(minimum access quotas) and to safeguard current levels of
access if imports exceeded 5 percent of consumption (current
access quotas). Countries were to permit imports under the quota
at lower tariffs (called the in-quota tariff), whereas imports over
the quota would face the higher MFN tariff. In-quota tariffs,
unlike over-quota tariffs, were neither bound nor reduced
in the Agreement on Agriculture. The average over-quota bound
tariff of
115 percent is substantially higher than both the average in-quota
tariff and the average tariff for all of agriculture, both of which are
59 percent.
But TRQs are the source of a host of potential problems. First,
because they protect about 50 percent of OECD agricultural
production, it would be unwise to allow all the products they
protect to be deemed Sensitive Products, as was suggested in some
proposals before the July 2004 Framework Agreement. Second,
many quotas are not filled, suggesting that reductions in over-quota
tariffs may have less impact than might otherwise be expected.
Actual problems with TRQs are evident, as well. The first-come,
first-served approach to their administration (used by many
countries), for example, sometimes causes imports to be rushed
and
domestic prices to fall. Import licenses allocated on demand allow
high-cost firms to operate, while licenses allocated on the basis of
historical shares fail to ensure competition. Some state trading
enterprises have been known to import low-quality products for
animal feed to fulfill their obligations yet continue to protect their
domestic farmers. More problems abound from a plethora of
additional regulations. For example, seasonal licenses, time limits,
limits per firm, and a domestic purchase requirement all impose
extra costs on importing firms. These and several other regulations
were found (de Gorter and Klianga 2005) to affect over $30 billion
in trade. For these reasons, it is doubtful that the path to wider
market access in agriculture lies through TRQs.

The tiered approach of the Framework Agreement ensures

some degree of harmonization of national systems of agricultural
tariffs (although much less than could be achieved using a Swiss
formula that not only reduces higher tariffs more than lower tariffs
but also has a common maximum tariff for all countries). But the
tiered formula poses some critical design issuesamong them the
placement of the bands, the depth of cuts, and the presence or
absence of a tariff cap. Recognizing these issues, the G-20 proposal
of July 8, 2005, proposes a tariff cap of 100 percent for developed
countries and 150 percent for developing countries. Scenarios
analyzed by the World Bank (Jean, Laborde and Martin 2005) show
that only formulas that bring about very deep cuts in bound rates
will have a substantial impact on average applied tariffs and hence
on market access, particularly when allowance is made for some
degree of slippage from designations of Sensitive and Special
Products. A progressive tariff reduction formula that imposed cuts
of 45, 70, and
75 percent in bound tariffs in developed countries would reduce the
average tariffs facing developing countries from 15 percent to 10
percentan important gain in market access, but only one-third of
the way to complete liberalization.
The need to limit the number of tariff lines for Sensitive
Products is also recognized in the G-20 proposal. The scenario
analysis of the World Bank found extraordinary sensitivity of the
results to self-selected Sensitive and Special Products. For
example, if 2 percent of tariff lines are excluded from reductions as
Sensitive Products and a further 2 percent as Special Products in
developing
Table 3. Commodity contributions to global welfare cost of
food and agricultural subsidies and tariffs
Share of total welfare cost of
protection (percent)
Rice
Beef and sheep meat
Sugar
Oilseeds
Pork and poultry
Dairy products
Coarse grains
Wheat
Other processed food
Total

35
18
8
7
6
5
5
4
12
100

Source: Unpublish ed GTAP mod el resu lt s b y K. An d erson and E. Valen zu ela, World Bank

Figure 4. Bound tariffs exceed applied rates

Bound and applied tariffs on agriculture, percent
120
120

(153%)

100
100
80

Bound

60

Applied

40
20
0
U co
i
US A C
A

on kye
EAN ni
anadaS

U Tur

re

b
T

A
SS
-

A
a

er
apan ndi

EF ksi t J

Ko

agh

Figure 5. Border protection and average tariffs for

selected countries
Border protection and average tariffs for selected countries, percent
140
140
120
120
Market price support

100
100
80
80

Average Tariffs

60
40
20
00
Japan
Japan
Turkey

EU
EU

Norw ay
ay Canada
Canada
Norw

US
US

Hungar yy Mex
Mex ic
ic o
o
Hungar

Turkey

Proposed cut
10
0
1
0
0
90
80
80

USA

G-20
G-20

7
700

EU
EU

6
600
50
40
30

G-10
G-10

2
200
10
0
0
0

10 20
20
10

30
30

40 50
50
40

60 70
70
60

80 90
90 100
100 1
1 10
10 1
12
20
0 13
13 0
0 140
140 1
15
50
80

Initial Tariff (AVE)

Source: Marcos Jank, Institute for International Trade Negotiations (ICONE), 2005.

Figure 7. Bands and Cuts for Developing Countries: Proposals

Proposed cut
77 00
60
60

USA
USA

55 00

EU

44 00

G-20

33 00
20

G-10

10
0
0 10
15

20

30

40

50

60

70 80

9 0 1 0 0 1 1 0 120 13 0 1 40 1 5 0

Initial Tariff (AVE)

Source: Marcos Jank, Institute for International Trade Negotiations (ICONE), 2005.

countries, the liberalization of applied duties is reduced by twothirds overall and much more in Canada, Japan, and Republic of
Korea. The cut in applied tariffs falls even moreby 80 percent. A
tariff cap would help reduce the losses to liberalization resulting
from designations of Sensitive and Special Products,
particularly by bringing about substantial reductions on cereals.
Clearly, if the Doha Round is to be successful in increasing market
access, it will be important to ensure (a) that only a small share of
products is accorded special treatment, (b) that substantial
reductions in protection are made even on these products, or (c)
that the number of products is restricted in a more meaningful way
than by restricting the number of tariff lines.
Another design issue related to the simple tiered formula is the
discontinuities between bands that can result from a system of
higher cuts for tariffs in bands with higher tariff rates. Assume, for
example, a tariff threshold of 90 percent. If there were a 10
percentage point difference between the rates of cut, tariffs just
over that threshold would end up nearly 10 percentage points below
tariffs at the threshold. One possible solution to this problem is to
implement a tiered formula similar to that of a progressive income
tax, whereby higher marginal rates of reduction are made on tariffs
in higher tariff bands. Another possibility is a rate of cut that
increases with the height of the tariff.
Recent reform proposals by the U.S. (2005), the G-20 (2005), the EU (2005)
and the
G-10 (2005) have elaborated considerably on the Framework.
These proposals specify tiered formulas for tariff reduction with
maximum reduction rates in industrial countries of 90 percent, 75
percent, 60 percent and 45 percent respectively. In developing
countries, the cuts are smaller, and increases in cuts take place from
higher tariff levels. The relationship between the proposed cuts is
shown in figures 6 and 7. The proposals also differ crucially in
the number of sensitive products allowed; the U.S. proposed
1 percent of tariff lines, the EU has proposed 8 percent and the G10
has proposed 10 or 15 percent. Jean, Laborde and Martin (2005)
show that even 2 percent of sensitive products can almost
eliminate the market access gains resulting form a tiered formula.

Policy
options
If governments wish to promote development through increased
market access, they have several options:

Limit the number of tariff lines in the Sensitive and Special

Product categories.
Research shows that placing just 2 percent of tariff lines in those
categories
can eviscerate the benefits of trade liberalization.
Impose a tariff cap at the 100 percent level suggested by the G20 to overcome the effects of tariff peaks, binding overhang,
and gaps between applied tariffs
and the protection actually provided.

Impose an overall reduction in average tariffs to ensure that the tiered approach
is effective and as a further guard against the adverse effects of the Sensitive and
Special Product categories.
Build progressivity into every tariff band to ensure reduction in
tariff escalation and avoid discontinuities or overlap between
tariffs in the bands.
Convert all specific tariffs into ad valorem equivalents using a
transparent methodology that will not allow a clandestine
increase in protection.
Encourage full participation by developing countries, especially as
Special
Products designations could reduce their liberalization substantially.
Require reductions in in-quota tariffs, or eliminate them
altogether. In-quota tariffs can put a significant brake on the
trade liberalizing effects of quota
expansion.
Increase minimum access quotas from 5 percent to 10 percent
of domestic consumption in the base year.
Expand current access quotas, which account for 58 percent of
trade under TRQs. Because minimum access quotas frequently
go unfilled, an expansion in current access quotas may be more
effective.
Do not leave to importing countries the choice of whether to
reduce over- quota tariffs or expand quotas. Research shows
that the minimum trade expansion under each scenario is far
less than either the tariff reduction or quota expansion scenario
alone, so governments wishing to protect farmers can do so
more easily if given the choice.
Switch all TRQs to applied tariffs with no limits on imports,
or require the licenses to be auctioned. Quota underfill frequently
indicates potential problems with administration methods.
Phase out TRQ regulations such as time limits, past trading
performance, limits per firm, seasonal quotas, and domestic
purchase requirements because they impose costs on importing
firms and may contribute to high rates of underfilled quotas.