Policy seminar: Prospects for reforming agricultural support as WTO MC12 approaches

The COVID-19 pandemic has disrupted trade of food and farm products, and the agricultural sector is under immense pressure to overcome trade barriers while also responding to climate change. With ongoing tensions between major economies and with current structural impacts in trade and food security, the upcoming (and now twice-postponed due to the pandemic) 12th WTO Ministerial Conference is necessary to provide an opportunity to address and reform agricultural domestic support and to update the global trade book.

A Nov. 30 IFPRI policy seminar focused on the prospects for reforming the domestic support policies that have been at the heart of agricultural negotiations since they began in 2000. IFPRI Senior Research Coordinator and moderator Valeria Piñeiro noted domestic support levels around the world remain high and have risen in recent years—which stimulates production but also distorts trade.

The Uruguay Round of global trade negotiations helped bring discipline to agriculture in general, and particularly to agricultural subsidies by capping support levels and by encouraging countries to move away from trade-distorting forms of support. Still, many exemptions and loopholes remain in this framework, allowing WTO members to provide more support than originally envisioned, IFPRI Senior Research Fellow Joseph Glauber said.

Countries’ use of domestic support varies relative to the value of agricultural production. For example, between 2001-2008, domestic subsidy levels in developed countries including those of the European Union, the United States, and Japan significantly decreased and leveled off, while emerging economies like India, Brazil, and China increased support.

If countries were to maximize their domestic support entitlements on agricultural markets, trade- distorting support would exceed $1.3 trillion by 2030—5.5 times the level under the baseline scenario, according to a recent IFPRI study. In this projection, agricultural production increases by 6% on average across the board over the baseline and global prices drop by 8%. While farm income increases significantly, a greater share comes from taxpayers.

Currently, such farm spending as a proportion to GDP is usually less than 1%, but maximizing all entitlements hurts high-income countries far less than low-income countries such as those of Africa South of Sahara, whose domestic support spending would be costly and unsustainable.

“There is truth to the old African adage – when the elephants dance, it is the grass that suffers, that is, the weak get hurt in conflicts between the powerful; for some countries can afford greater domestic support spending, but ones that cannot are harmed the most,” Glauber added.

In contrast to the Uruguay Round, the Doha Round made developing countries a main component of its agenda. The policy of overall trade-distorting support (OTDS) was first introduced during the Doha Round as a cap on the total amount of money developing countries can give to farmers to help level the playing field with high-income countries.

One value of OTDS is to “reduce the risk of any subsidy war or any significant increase in subsidies,” said IFPRI Senior Research Fellow David Laborde. Applied to the $1.3 trillion scenario, OTDS reduces the potential subsidy increase by $800 billion.

OECD Division Head Lee Ann Jackson stressed the importance of changing current trade rules to establish fairness between countries in order to complement the objectives of the recent UN Food Systems Summit, creating better agri-trade opportunities. Building trust and increasing predictability for all actors along the value chain, especially in light of COVID-19 crisis and other shocks, is of paramount importance, she emphasized, as trade is critical for the effective functioning of food systems and connecting consumers to products.

“Changing the rules could address fairness issues, as the existing rules are capturing historical frameworks from decades ago … Changing the rules would also create more predictability by removing policy space and decrease the potential of subsidy wars,” Jackson said.

The issue of domestic support has thus far eluded consensus, but a new approach is important, as the norm established during the Uruguay Round differs greatly from today’s reality. “During this time, significant changes in agricultural policy have been implemented by both developed and developing countries, with increasing support to producers fronted by emerging economies like India, China, Indonesia, Turkey and Thailand,” said Nelson Illescas, Director of the Argentina-based Institute for International Agricultural Negotiations (Fundación INAI).

In addition, many countries increased their domestic support packages in 2020 as trade disputes unfolded involving the U.S. and China, and during the African swine flu and the COVID-19 pandemic. “OTDS is a good way to move forward … [and] … countries need to establish a global limit and need to define its nature, whether it will be fixed or a floating limit, and what kind of aid should be applied to the cap of the reduction,” Illescas added.

There is also a growing shift from reducing to repurposing agricultural subsidies. That discussion is “central to the food systems transformation debate and is very important going forward,” concluded IFPRI Director General Johan Swinnen, stressing that the WTO negotiations must be vital in the debate.

Swati Malhotra is a Communications Specialist with IFPRI's Markets, Trade, and Institutions Division (MTID).