Food Security Stocks and the Potential Collapse of the Bali Agreement (UPDATED 10/24/14)

Author: Eugenio Diaz-Bonilla

After several days of work, and the usual posturing and drama, members of the WTO closed the Ninth Ministerial Conference on December 7, 2013 with an agreement on the first comprehensive multilateral trade package negotiated within that organization. The Bali Agreement has been part of the process initiated by the Doha Round launched in Doha, Qatar in 2001 as an attempt to complete the unfinished work of the Uruguay Round. Negotiations at Bali almost collapsed because of disagreements about how to build and operate public food security stocks. India was concerned that current WTO rules may lead to challenges to its massive public food distribution system, which under the recently approved expansion could potentially reach 800 million poor people. WTO Members agreed to an interim solution (a “peace clause”) that would protect India and other developing countries in similar positions from related challenges until a permanent solution is found.

A key part of the Bali package was the Agreement on Trade Facilitation (ATF), which was the only new agreement negotiated in Bali. However, for this Agreement to enter into effect (i.e. become a binding commitment to the participating countries), it has to be ratified by two-thirds of WTO Members by July 31, 2015. Additionally, before being sent to the different capitals to start the country-specific ratification process, the final text of the ATF had to be reviewed and approved by the WTO General Council by July 31, 2014. That meeting closed without agreement because India linked the approval to a final resolution of the treatment of public food security stocks under WTO rules; and after several months of consultations failed to solve the impasse, WTO’s Director General Roberto Azevêdo reported to the WTO Members on October 16, 2014 that “this could be the most serious situation that this organization has ever faced.” A new General Council to discuss these issues took place on October 21, and a new round of consultations was extended until October 31.

A collapse in those talks may lead to the unraveling of the whole Bali Package, and may represent a final blow to the relevance of the WTO and the system of international trade rules built around that institution. More importantly, given the intrinsic value of a system of international trade rules as a global public good-- even if not everybody may agree on the appropriate balance of the existing provisions-- plus the current worrying trends in the global economy, the collapse of these negotiations would add an extremely negative factor to the already complicated international conditions.

At IFPRI, we have been working on these trade issues and suggested some possible ways to accommodate the interests of the different parties involved, particularly focusing on the food security problems faced by the poor and vulnerable. A discussion of the economic and legal issues of the dispute can be found in my paper “On Food Security Stocks, Peace Clauses, and Permanent Solutions After Bali.” There I suggest an approach that tries to combine the legal and economic issues at stake, in a way that can be incorporated in negotiating language (as first discussed in the blog I published in Dec 2013 ).

Basically the proposal has two components:

• A) A government’s administered price that is at or below market prices should be rebuttable presumed in compliance with the food stock provisions in Annex 2 Paragraph 3 (considering that the text indicates that the operation of a public food security stock is in compliance with the Green Box if the government buys at market prices). If a Member country decides to challenge such a food security program in another Member country, they will have to show meaningful upward deviations from market prices so defined, which would result in offering "price support" to producers. It should be noted that contrary to the claims of several NGOs, the current WTO text in Annex 2 paragraphs 3 and 4 unambiguously allows developing countries to sell food at subsidized foods from those food security stocks.
• B) There cannot be direct or indirect exports from food security stocks (except if requested by proper UN agencies for humanitarian reasons linked to food crises elsewhere). If they are bona fide food security stocks they must be available for the local population and not used to compete in external markets. Therefore, if exports from public food stocks take place, then the publicly managed stock should no longer be considered as operated for food security reasons, and, therefore, the market price support should then be counted as part of the domestic support that is disciplined under current WTO rules.

There may be variations to Point B, such as that only the part exported may be counted as part of domestic support to be disciplined, but then those exported products may be treated as having been produced under domestic subsidies that are actionable under the Agreement on Subsidies and Countervailing Duties by the countries receiving the exports, but also by third parties affected in their own export markets.

In the December 2013 blog I suggested the following language in relation to Point B:
"Products bought under the food security stock provision by developing countries can be utilized only for domestic consumption purposes linked to food security concerns. Any export from those food security stocks is prohibited and may be subject to appropriate countervailing measures under the Agreement on Subsidies and Countervailing Measures, as applicable. Also, such exports will automatically render purchases of those products not part of a food security program, and will have to be compared with the reference prices, and counted against the AMS, as applicable. The only exception to exports will be if the country with food security stocks is asked by the appropriate United Nations agency to release into world markets part of the accumulated stocks due to a global, regional or national food security emergency"

From what I heard in my recent trip to the WTO, the conversations appear affected by high levels of crossed emotions and distrust. India, which saw the domestic programs of the US and the EU protected under carefully crafted language incorporated during the Uruguay Round in the Agreement on Agriculture, considers it grossly unfair that it has to redesign a crucial domestic program, one that is not breaking the economic threshold for trade-distortion (if operated at or below current market prices). Also, India seems to believe that the fact that its public food distribution system has avoided domestic food crises in more than half a century and is currently feeding between 600 to 800 million of poor people is a significant contribution to world’s food security, and the country should be praised for it and not forced to change the system to fit current WTO rules.

On the other hand, I heard WTO delegates complaining that India wants a free hand to do as it pleases, violating the current WTO disciplines and also noting that the country has become the main rice exporter in the last years (although there is a debate over whether that is rice from the public stocks or other higher-quality rice). In fact, India, has climbed the ranks of net agricultural exporter in general: besides rice, it has become the second exporter of beef in volume (after Brazil, and displacing Australia) and the second exporter of cotton (after the US).

More generally, as I discuss in the paper, the structure of the world economy and of the agricultural markets has changed dramatically in the last decade or so. Besides the issue of currently higher food prices, a significant change is the important advances of developing countries (particularly large ones) in overall incomes, agricultural production, exports, and imports, and domestic support to agriculture.

These changes have led to two very different narratives which, if they do not converge somehow, will make very difficult to resolve the world’s trade issues, particularly regarding agriculture.

On the one hand, developing countries see industrialized countries enjoying productive advantages in farm size, land, water, climate, infrastructure, R&D, credit conditions, and the like and ask, legitimately, why those countries should be allowed to have the levels of protection and distorting subsidies that they have under the AoA. Many developing countries see their own producers (who, as a general rule, are clearly poorer, farm significantly smaller areas, struggle with water and climate constraints, and suffer from weak infrastructure and lack of R&D and credit support) and conclude that there are glaring imbalances in the AoA that benefit industrialized countries and negatively affect developing ones.

On the other hand, industrialized countries look at developing countries’ advances in production and trade (while their own shares decrease), the expansion of agricultural support in key emerging countries, the sheer number of farmers in those countries, and all the potential policy space already existent in the current AoA for developing countries and worry not only about their current and future access to the markets of those countries, but also, eventually, about exports from the largest emerging economies potentially displacing production in their own domestic markets. Therefore, they cling to the advantages granted to them under the AoA. For instance, in what I consider a very myopic decision, they blocked the acceptance of the prohibition of agricultural export subsidies (which is already the WTO norm for non-agricultural products), a topic that had been prioritized during the 2005 Hong Kong Ministerial Declaration and was requested by a group of developing countries as part of the Bali deliverables.

Although, in my view, the narrative from the point of view of the developing countries is more accurate, these countries also need to acknowledge their larger share in the world economy and in agricultural production, and the systemic effects they have as a consequence of that fact. Their larger presence in the global market also brings responsibilities. WTO negotiations, and, in general, global governance rights and responsibilities, need a more realistic dialogue than what seems to be taking place now.

Still, I believe that the main responsibility for the current impasse lies with the industrialized countries. As noted at the beginning, a collapse of the Bali Agreement would not only compromise the future of the WTO and the international trade system (a crucial global public good for all countries), but will also add another layer of uncertainty to an already very fragile world economy. The suggestions presented here try to contribute to the dialogue and work needed to avoid such collapse.