29 July 2018 Food subsidies and WTO

Today's Editorial

29 July 2018
Food subsidies and WTO

Source: By Biswajit Dhar: The Financial Express

Recently the United States (US) submitted a document in the World Trading Organization (WTO) questioning the compatibility of India’s agricultural subsidies with the relevant provisions of the Agreement on Agriculture (AoA). The document targets the minimum support price (MSP) granted to wheat and rice, the two key food crops. The US’ contention is that the MSP of these two crops (market price support, according to AoA), are well above the limits set by the AoA.

This is the most serious challenge to India’s subsidies’ regime, coming after the AoA provisions related “public stockholding (PSH) for food security purposes”, almost derailed the implementation of the National Food Security Act. India has been able to obtain a temporary respite on this front; in the three Ministerial Conferences held subsequently, in Bali, Nairobi and Buenos Aires, India was assured that no WTO member would initiate a dispute against India, even if its commitments on limiting subsidies are breached.

The main contention of the US is that market price support that India provides to rice was consistently above 70% of the value of agricultural production since 2010-11 and above 60% for wheat during the same period. These levels of subsides, claims the US, were way above the 10% limit imposed on India by the AoA. Although, in the past, there have been veiled attacks by the US on India’s subsidies regime, this is the first time that it has quite literally taken the gloves off. Targeting India is the latest in the long list of unfair trade practices that the Trump administration has adopted over the past few months, beginning with the increase in steel and aluminium tariffs, which, incidentally, also targeted India.

Interestingly, an affront on India’s farm subsidies provides an opportunity to expose the malafides of the US, as also the illogicality of the subsidies’ regime of the AoA. The AoA was crafted primarily by the US and the members of the European Union (EU), to serve their interests, while developing countries like India were reduced to mere bystanders.

Although the WTO abhors the use of subsidies, it allows this instrument of trade policy to be used for agriculture. The subsidies regime included in the AoA has three forms of subsidies, ranging from those that were considered “non-distorting” or “minimally distorting” (the “Green Box” and “Blue Box” subsidies), to those that seriously “distorted” markets (the “Amber Box” subsidies).
The only thing that differentiates the subsidies is that, while there is no limit on the spending on the former set of subsidies, spending on the latter form of subsidies has to be limited to 10% of the value of agricultural production for the developing countries, and 5% for the developed countries. Significantly, the AoA provides no means to assess the impacts of these forms of subsidies on the market.

An important facet of the subsidies regime of the AoA was that developing countries were relying more on the so-called “distorting” forms of subsidies, both when the regime was introduced in 1995 and in the years thereafter, while the US and the EU used more of the “non-distorting” categories of subsidies. Subsidies provided by WTO members are calculated with reference to international prices, assumed to be the competitive prices. In the negotiations leading to the adoption of the AoA, international prices of each individual commodity during 1986-88 were agreed to as the fixed external reference price (ERP). Thus, the market price support has to be the difference between the current MSP and the international prices of 1986-88.

What does it mean for India? India’s MSP for common varieties of rice, which was $112 per tonne, had increased to $334 per tonne in 2014-15; all this while, the external reference price remained static at $263 per tonne. Comparing India’s current MSP with the ERP that is three-decades old is simply illogical, but the US insists on perpetuating a patently absurd system of assessing the levels of farm subsidies merely because it can be used as an instrument to threaten developing countries. When this is their objective, economic logic is the biggest victim.

India and other developing countries have consistently argued that either the base period for determining the ERP must be brought up to a more recent set of years, or the ERP must be inflation adjusted. Both these arguments have been rejected by the US simply because it has shifted most of its farm subsidies into the so-called Green Box subsidies, the spending on which can be limitless. As a result, the US has increased its farm subsidies from about $61 billion in 1995 to $139 billion in 2015, or a nearly 128% increase in two decades. With 88% of its 2015 farm subsidies in the Green Box, the US has ensured that no WTO member can complain against its subsidy programmes.

At this point we would like to revert back to assess the veracity of the charges levelled by the US against India’s farm subsidies. As mentioned earlier, the document tabled by the US maintains that India has increased its market price support to very high levels. The figures given by the US misrepresent the reality on at least three counts. The US has calculated India’s market price support in Indian Rupees, whereas India has been reporting the same in USD. Consequently, India’s figures are much smaller because of the consistent depreciation of the Indian Rupee. The US insists that the market price support must be reported in the domestic currency, which is an erroneous reading of the AoA provisions.
A second misrepresentation in the US document is that it provides subsidies’ data for several Indian states. There is no such requirement in the AoA—subsidy numbers are presented for the country as a whole. And, a third misrepresentation is the argument that India has breached the 10% limit for individual crops; the correct interpretation is that the spending limit is on all forms of subsidies taken together, including subsidies on fertilisers, and power, amongst others.

A final point that must be made is that the US is targeting subsidies that India gives to an overwhelmingly large share of small and marginal farmers. India’s subsidies therefore protect the livelihoods of small farmers, which should, in fact, be allowed to increase if agriculture faces a crisis akin to what it is facing now.

In sharp contrast, the US has been subsidising its corporate agriculture to capture global markets, which is evident from the table below. For example, India is the largest producer of rice, but an overwhelmingly large share of its production is for its domestic market.