WTO SUBSIDY - ECONOMY
News: Citing inflation and WTO subsidy limit, NITI, Commerce red-flagged MSP hike
What's in the news?
● From concerns on inflation to advice on meeting WTO obligations and suggestions to address labour shortages and rising wages, key Central government ministries and departments had conveyed apprehensions to the Union Ministry of Agriculture and Farmers’ Welfare on its proposal to hike the minimum support price (MSP) for kharif crops in the 2023-24 season.
Important provisions of Agreement on Agriculture:
● The Agreement on Agriculture mentions that it will apply to agricultural products.
● The term Agricultural products not only cover the basic products such as wheat, milk and live animals but also covers the derived products such as bread, butter, oil and the processed products such as chocolate, yogurt, wines, spirits and tobacco products, fibres such as cotton, wool and silk etc.
● The Agreement on Agriculture has three major pillars such as
○ Market access
○ Domestic support (subsidies)
○ Export subsidies/competition
● The Agriculture Committee oversees the implementation of the Agreement.
○ The committee is made up of WTO members and usually meets three or four times a year.
● The commitment under the agreement is based on special and differential treatment (Giving flexible and different timeline for Developing and Least Developed Countries in implementing the terms)
● The Agreement also has a Special Safeguard Mechanism (SSM).
○ SSM means there is an option available for countries to impose additional temporary duties on imports when there is a surge in imports at a lower price.
1. Market Access:
● Market access means the right which exporters have to access a foreign market.
● In simple terms, this provision calls for access to imported agricultural goods in the member countries.
● Market Access includes provisions on tariffication, tariff reduction and trade facilitation in agriculture.
● Tariffication:
○ Tariffication is the process of conversion of all non-tariff market protection measures such as quotas, sanitary requirements, licences etc into the tariff equivalents.
● Tariff reduction:
○ After the tariffication, the tariff reduction provision mentions the amount of tariff reduction required from countries.
○ Developed countries have to reduce tariffs by 36% from tariffication with the minimum rate of tariff reduction of 15% for each item over a 6-year period.
○ But the developing countries were required to reduce tariffs by 24% from tariffication over the next 10 years.
○ Least-developed country members were required to bind all agricultural tariffs, but not to undertake tariff reductions.
○ Tariff concessions for imports to be maintained at 1986-1988 level at least (‘existing’ market access).
● Trade facilitation:
○ This provision called for a certain percentage of agricultural products to be met from the imported agricultural products in domestic consumption.
○ Developed Countries must provide access to at least 5% of imported agricultural products in domestic consumption by the year 2000.
○ Developing countries have to provide the same but by the year 2004 only.
○ Least developed countries are exempted from this provision.
2. Domestic support:
● Domestic support refers to the government subsidies that guarantee Minimum Price (or Input subsidies) which are provided at the domestic level either directly or product-specific or both.
● Domestic Subsidies are generally categorized into 3 boxes such as
● Green Box Subsidies:
○ These are the subsidies that don’t distort free trade or distort the free trade at a very minimal or negligible level.
○ Examples: Publicly funded government programmes including expenditure on agriculture research and development, agricultural training, subsidies under environmental programmes etc.
○ Green box subsidies are non–price supportive thus are exempted from the calculation of Aggregate Market Support (AMS).
● Blue Box Subsidies:
○ Blue box subsidies are direct payments under production limiting programmes.
○ According to the WTO, the Blue Box is the “amber box subsidy with conditions” attached.
○ The Blue box subsidies aim towards limiting production, by imposing production quotas or requiring farmers to set aside part of their land.
○ Blue Box subsidies are also exempted from calculation of AMS.
● Amber Box Subsidies:
○ These are the subsidies that are trade-distorting in nature and need to be curbed at any cost.
○ The Amber Box contains the category of domestic subsidy that is scheduled to reduce based on the formula called “Aggregate Measure of Support” (AMS).
○ The AMS is the amount of money spent by governments on agricultural production, except the money spent in the Blue Box, Green Box and ‘de minimis’ level.
○ AMS = Total amount of money spent in agricultural production – total amount of blue, green box subsidies – De minimis level prescribed in AoA.
■ The minimum level prescribed in AoA towards product specific and non-product specific (Amber box) subsides. For Developed countries the de minimis level is 5% and for developing countries it is 10%.
● Special and Differential Box subsidies:
○ It does not apply to developed countries but is applicable to developing and least developed countries.
○ These are the subsidies provided by the government to encourage agricultural and rural development activities in the country.
3. Export subsidies:
● Export subsidies are special incentives provided by governments to encourage increased foreign sales.
● These may be in cash or in kind.
● These subsidies include
○ Cash payments
○ Disposal of government stocks at below-market prices
○ Subsidies financed by producers or processors as a result of government actions such as assessments
○ Marketing subsidies
○ Transportation and freight subsidies
○ Subsidies for commodities contingent on their incorporation in exported products.
● Export subsidies gradually have to be reduced to 36% of the value and 21% over a volume in the six years 1995-2000, compared with the reference period of 1986-1988, for developed countries and for developing countries it was fixed 24% and 14% respectively over the period of 10 years.
Peace Clause:
● Developed countries criticised the developing and LDC’s food security programmes (public stock holding programmes) as a trade distorting subsidy. Since the negotiation went on among countries a temporary peace clause was introduced in Bali Package 2013.
● The ‘peace clause’ said that no country would be legally barred from food security programmes even if the subsidy breached the limits specified in the WTO agreement on agriculture.
● This ‘peace clause’ was expected to be in force for four years until 2017, by the time a permanent solution to the problem was found.
Challenges:
● India has always faced pressure from developed nations, including the US, EU and Canada, to reduce the subsidy it gives to farmers.
● WTO rules deal strictly with product-specific support to producers (as given by India) but they do not discourage “green box” subsidies.
● India has fought for dropping the distinction between green box and other subsidies.
● Peace Clause only includes the government programmes started before 2013 and the Indian government wants programmes started after 2013 to be included as well.
WAY FORWARD:
● India is a significant member of the WTO and is often regarded as the developing and underdeveloped world's leader.
● As a result, there is a slim chance that anything seriously detrimental to India's interests can be enforced unilaterally.
● India stands to benefit from many topics being negotiated at the forum if it engages with various interest groups constructively while protecting its developmental priorities.
● The WTO provides a venue for such developing countries to band together and exert pressure on wealthier countries.
● Move from MSP to income-based support:
○ Arguably, India can move away from price-based support in the form of MSP to income-based support, which will not be trade-distorting under the AoA provided the income support is not linked to production.
● Supplement price-based support with income-based support:
○ Alternatively, one can supplement price-based support (keeping the de minimis limit in mind) with an income- based support policy.
The Government needs to engage with the farmers and create an affable environment to convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.