Incoterms_® and Commercial Contracts

Executive Summary

During the GATT era, trade in agricultural products was highly distorted. It was not subject to the GATT disciplines on subsidies, and many governments gave enormous subsidies to their farmers. Although banned by the GATT on industrial goods, quotas were permitted on agricultural products and were quite pervasive, and tariffs were far higher on agricultural than on industrial products. This changed with the WTO Agreement on Agriculture, which imposed disciplines on Members’ border measures and subsidisation of their agricultural sectors, in an effort to bring agricultural trade closer to GATT norms. However, significant distortions of international trade still remain. For instance, many WTO Members retain prohibitively high tariffs on some agricultural products, with market access limited to small amounts of imports under tariff-rate quotas; special safeguards measures continue to inhibit market access; export subsidies and export credits continue to distort international markets; and domestic support measures protect producers from world market signals, boosting production.

This chapter discusses the basic contours of the existing disciplines under the WTO Agreement on Agriculture and explains their practical relevance from the perspective of farmers, traders and policymakers. In particular, it discusses the “three pillars” of the Agreement on Agriculture:

• Market Access: Under the Agreement, Members were required to convert all of their non-tariff measures, such as quotas and variable levies to tariff-equivalents, i.e., the tariff level that would admit the same volume of imports that had entered under the non-tariff measures. The new tariff level was to be reduced by specified amounts (varying between developed and developing countries, with no reduction required for least-developed countries) over a period of time. A special agricultural safeguard allows import duties to be increased temporarily if imports rise or prices fall by specified amounts.
• Export Subsidies: Under the Agreement, Members were permitted to reserve the right to provide export subsidies on agricultural products, and 19 Members have in fact done so. The right to provide export subsidies is limited based on subsidy levels and export quantities in a base period (1986-90), subject to specified reductions. However, in 2015, WTO Members agreed to eliminate export subsidies and to impose tighter disciplines on export credits and export credit guarantees. Under the new rules, the maximum repayment term for such financing is limited to no more than 18 months, and the premiums charged must be risk-based and the programmes self-financing. [Page178:]
• Domestic Support: Domestic support is broken down into three categories, which are commonly called “boxes”. Certain types of support are considered to have no or minimal trade effects (e.g., “decoupled” income support not linked to current production or prices), and are known as “Green Box”. While considered trade distorting, “Blue Box” support requires certain limitations on production. There are no spending limits for these two forms of domestic support. All other domestic support falls into the “Amber Box”, and is subject to limits on the amount of support provided. These limits were based on the 1986-88 base period, subject to specified reductions.

* Christian Lau is a Senior Associate in Sidley Austin LLP’s Geneva office. Colette van der Ven is an Associate in Sidley Austin LLP’s Geneva office. The views expressed in this chapter represent the personal views of the authors, and do not represent the views of Sidley Austin LLP or its clients. This chapter has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

1.0 Introduction

Agriculture has always been one of the most contentious areas of international trade, and the subject of major exceptions to the trade rules. At the behest of business and political interests, the GATT exempted agricultural products from the general disciplines on subsidies. Similarly, in many circumstances the prohibition on quotas and other non-tariff border restrictions under Article XI of the GATT did not apply to agricultural products.

The Uruguay Round WTO Agreement on Agriculture was the first step towards full integration of agricultural trade into the rules of the multilateral trading system. Disciplines on WTO Members now exist in the areas of market access, export subsidies and domestic support subsidies. Tariffs, tariff-rate quotas (TRQs) and a special safeguard mechanism remain the only permitted forms of border measures, while quotas and other non-tariff restrictions are prohibited. Members also agreed to limitations on export subsidies and domestic support subsidies.

Despite these partial reforms, many WTO Members retain prohibitively high tariffs on a large number of agricultural products, with market access limited to relatively small amounts of imports under TRQs. Special agricultural safeguards continue to inhibit market access even where tariff barriers can be overcome. Moreover, permitted levels of export subsidies give those domestic producers fortunate enough to receive them considerable advantages in selling their products abroad. In addition, permitted levels of trade-distorting domestic support subsidies stimulate over-production by helping producers cover their costs of production and by eliminating significant weather- and market-related risks affecting the production of agricultural commodities. As a result, at least for some important agricultural products, significant market distortions remain. Not surprisingly, farmers and their domestic lobbies are making considerable efforts to maintain existing levels of financial assistance (subsidies) they receive for domestic production and for sales abroad, as well as border measures, which collectively protect the profitability of their production.

PROTECTION FOR AGRICULTURE

In 2014, agriculture, and agriculture-related industries contributed only 5.7% to US GDP.¹Yet, the protection and financial assistance that the United States provides its agricultural producers is the envy of many trade associations working in other sectors. For better or worse, the protection afforded agriculture in the United States, and even more so in the European Union, Switzerland, Norway, Japan and Korea, show that well-organised business and political interests can have a profound influence on domestic policies affecting international trade and on international trade rules.

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To strengthen WTO disciplines on agriculture beyond the Uruguay Round results, the Agreement on Agriculture foresaw further negotiations to start in 2000. These negotiations became part of WTO Doha Development Agenda (“Doha Round”) of trade negotiations, where Members aimed to achieve expansion of market access, reduction of domestic support and elimination of export subsidies. Not surprisingly, agriculture has been one of the principal areas of contention in the Doha Round, and one of the main sticking points. Many observers now view the Round as defunct.

While overall negotiations remain stalled at best, the Doha Round resulted in some agreements by WTO Members to modify existing rules on agriculture. Agreements were reached among trade ministers at the 2013 and 2015 WTO Ministerial Conferences in Bali and Nairobi on a phase-out of export subsidies, additional disciplines for the provision of export credits, as well as revised rules on the agricultural safeguard mechanisms and public stockholding programmes.

This chapter discusses the basic contours of the existing disciplines in the Agreement on Agriculture, and explains how they matter to farmers, traders and policy makers. Market access issues are examined first, followed by export subsidies, export credits, and all forms of domestic support subsidies.

The importance of the existing disciplines is illustrated by the fact that the Agreement on Agriculture was invoked in 81 out of the 524 disputes that Members brought to the WTO through 1 April 2017. These disputes concerned a wide range of products, including bananas, sugar, cotton, corn, wheat, rice, beef and dairy products. The importance of these disciplines can also be gleaned from the fact that agricultural policy setting – for example in the form of the periodically revised US farm bills or the European Union’s Common Agricultural Policy – generally take place with reference to the framework set by the WTO rules on agriculture.

2.0 Market Access

The Agreement on Agriculture provides various tools through which Members may, under certain conditions, legitimately regulate market access: through the imposition of tariffs; by providing for tariff-rate-quotas (TRQs); or through the imposition of a special agricultural safeguard (generally referred to as “SSG”). This section provides a brief overview of the disciplines under the Agreement on Agriculture governing these market access restrictions, highlighting, where relevant, how Members have implemented these disciplines.

2.1 Border Measures

Under the Uruguay Round Agreement on Agriculture, Members agreed to convert all non-tariff barriers, such as quotas and variable levies (which were used extensively by the European Union), into tariffs – a process called tariffication. The resulting tariff was included in a Member’s schedule of tariff concessions and bound at that level, meaning that the Member could not impose tariffs in excess of the bound level. In practice, however, Members apply a tariff-only regime to less than 20% of all agricultural products.²For other products, non-tariff barriers were converted into a combination of import tariffs and TRQs, as discussed in Section 2.2 below.

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DIRTY TARIFFICATION

The idea behind the tariffication process was quite simple. The tariff that would replace the set of non-tariff measures was to be based on the difference during a representative period between the domestic price of the product in question and an international reference price, which in theory reflected the protective effect of the measure. In practice, however, by using dubious data a number of developed countries, in particular Canada and the European Union (and to a lesser extent the United States), calculated tariff levels that far exceeded those that might have been justified in light of the data.³This was known as “dirty tariffication”.

Members additionally agreed to reduce those newly established tariff levels over time: developed country Members agreed to reduce tariffs over a six-year period by an average of 36%, with a minimum reduction of 15% for each product; developing countries agreed to reduce tariffs over a ten-year period by an average of 24%, with a minimum reduction of 10% for each product. Least-developed countries were not required to make tariff reduction commitments.

While tariffication has increased transparency, a number of market access challenges remain. Indeed, one of the main market-access issues in the Doha Round is the exceptionally high tariffs on selected products, called “tariff peaks”. Another issue is the practice of tariff escalation, whereby Members apply higher duties on semiprocessed and finished products than on raw materials, resulting in protection for their domestic processing industries.⁴

TARIFF ESCALATION

Trade in cocoa beans and chocolate provides a good illustration of tariff escalation. The European Union, for example, has a zero duty on cocoa beans, but a 7.7% duty on cocoa butter, fat and oil, and an 8% duty on cocoa powder.⁵Likewise, Japan has a bound rate on unprocessed cocoa beans of zero, but a 10% rate on cocoa paste and a 29.8% duty on cocoa powder containing sugar. The United States similarly does not levy a tariff on cocoa beans, but imposes a duty of 0.52 cents/kg for cocoa powder, with no added sugar, and up to 52.8 cents/kg for imported products containing cocoa butter.⁶This means that the tariff structure of the European Union, Japan and the United States discourages cocoa-producing countries from exporting processed cocoa.

While significant market access barriers remain, in particular with respect to certain agricultural commodities that Members consider sensitive to their trade interests, it is important to note that for some Members, market access barriers that remain under the Agreement on Agriculture may be alleviated through free trade agreements or preferential trade arrangements (see the tip box at the end of Section 2.2).

2.2 Tariff-Rate Quotas

For certain agricultural products, the tariffs that resulted from the tariffication process were so high that no imports could take place.⁷For example, the import tariff on rice imposed by Japan subsequent to the Uruguay Round tariffication amounted to US$2,943 per ton⁸(the ad valorem equivalent of several hundred percent), essentially preventing imported rice from entering the Japanese market. To ensure continued market access in situations where tariffication resulted in such prohibitively high tariffs, the Uruguay Round on Agriculture required Members to provide tariff-rate[Page181:]quotas (TRQs) to offer at least some degree of market access. A TRQ is a two-level tariff whereby the rate charged is raised after imports reach a given volume. Products imported within the quota are charged a lower tariff (or none at all); imports above the quota incur a higher tariff.⁹Out-of-quota tariffs are often prohibitively high, and out-of-quota imports are therefore generally negligible.

Since the commodity price in a market protected by a TRQ tends to exceed world market prices significantly, the right to import under a TRQ is very valuable, resulting in rent-seeking. The available rent can go to either the importer or the exporter, or be split between both, depending on the specific regulatory regime and their respective negotiating power.

Businesses seeking to export agricultural goods should first assess tariff and TRQ rates in the destination country. If a product is subject to a TRQ, businesses should examine how the TRQ is allocated (see text box below) and whether there is any chance of receiving part of the in-quota allocation. Often there is little or no chance. Businesses seeking to export to Norway, Iceland, the European Union, Colombia, Venezuela, South Africa and the United States should pay particular attention to TRQs, as these Members have reserved the right to apply a large number of TRQs to agricultural commodities.

Under the Agreement on Agriculture, 43 WTO Members¹⁰reserved the right to impose a total of 1,425 TRQs.¹¹The agricultural products that are most often subject to TRQs include cereals, dairy products, meat products, fruit and vegetables, oilcakes and oilseeds as well as sugar.¹²

The administration of TRQs is governed, in part, by Article XIII of the GATT, which provides that, “in applying import restrictions to any product, Members shall aim at a distribution of trade in such a product approaching as closely as possible the shares which the various Members might be expected to obtain in the absence of such restrictions”. This provision can be used to ensure that exporters from a particular country have access to a portion of the TRQ that broadly resembles their share in world trade in the product at issue. However, given the difficulties in determining the market share that a Member would hold absent the market access restrictions, this provision may be of practical importance only where a Member’s quota allocation differs significantly from general trade patterns. This was the case in EC – Bananas III (Article 21.5 – Ecuador), where the Appellate Body held that allocating the TRQ allotment exclusively to a group of African, Caribbean, and Pacific (“ACP”) countries, without reserving shares to non-ACP suppliers, could not be considered an allocation that closely reflects what Members’ market shares would have been in the absence of the European Union market access restrictions.¹³

TRQ administration procedures are also governed by the Agreement on Import Licensing (discussed in Chapter Two, Section 5.3.1), which lays down disciplines on the issuance of import licenses that give specific importers and exporters access to the TRQ. Principal methods used to provide importers access to quotas include allocation of import licenses to importers on a first-come, first-served basis; according to historical shares; to state trading entities only; through auctioning; and on the basis of bilateral agreements between Members.¹⁴

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DIFFERENT TRQ ADMINISTRATIVE SYSTEMS AND THEIR IMPLICATIONS FOR IMPORTERS

First-come, first-served allocation: Imports are charged an in-quota rate of duty on a first-come, first-served basis, until the tariff quota is filled. No country-specific allocation exists. This may cause problems for potential importers and exporters given the uncertainty as to whether in-quota tariffs are still available for a particular transaction.

Historical shares: Import shares are allocated, or licenses issued, mainly based on the share of particular traders in previous years. This can make it difficult for new exporters to gain market access. Under Article XIII:4 of the GATT, a Member with a substantial market-supplying interest could, therefore, request the importing Member to adjust the allocation of the TRQ shares.

State trading entities: Import shares are allocated, or licenses issued, mainly to a state trading entity, which imports the product concerned. That makes it virtually impossible for other importers to access the quota.

Auctioning: Import shares are allocated, or licenses issued, on the basis of an auctioning system, i.e., through competitive bids. This creates an additional cost for the importer/exporter, but produces revenue for the Member administering the programme. This will require the importer/exporter to find out the times at which auctions take place, and whether it complies with any requirements to participate.

Bilateral Free Trade Agreements: As noted above, allocations of quota shares can be obtained under specific quotas reserved for a trading partner under a bilateral free trade agreement (FTA). Sometimes, such bilateral agreements also grant quota-free access, obviating the need to obtain quota shares to import. For instance, under NAFTA, the United States provides Mexico (after a 14-year implementation period) duty-free and quota-free access for sugar, which was previously regulated by a TRQ.¹⁵Reducing and/or eliminating TRQ-based import restrictions is also an important goal of the Trans-Pacific Partnership (TPP) agreement, from which the United States withdrew in January 2017.

Thus, FTAs constitute a key vehicle through which parties can gain additional market access beyond that provided under restrictive TRQs. FTA negotiations often result in increased, yet still very limited, market access for products that are sensitive to an importing party.

To import under a within-quota tariff, an importer or its agent must usually present a certificate to the relevant customs official, which is due upon entry of the good into the territory of the importing Member. Certificate requirements or procedures differ between Members, and sometimes also between products. Importers or their agents interested in applying for import licenses or certificates should access the relevant governmental website to find out the specific requirements.

Although intended to provide for enhanced market access in specified quantities, TRQs in general remain underutilised. This is the result of a number of factors, including complicated and non-transparent administration methods, outdated quota[Page183:]allocations, weak import demand and high in-quota tariffs. The underutilisation of TRQs is the subject of the Understanding on TRQ Administration (agreed to at the 2013 Bali Ministerial), which requires Members with persistently underutilised TRQs to provide unencumbered TRQ access, either by administering TRQs on a first-come, first-served basis, or by issuing import licenses for each request, up to the quota limit.¹⁶

As noted above, exporters should check whether they can benefit from preferential tariffs, or duty-free access, under bilateral or plurilateral free trade agreements between the importing and exporting country, or under tariff preference programmes that developed countries unilaterally grant developing countries. (See Chapter 2, Section 4.2.)

The proliferation of free trade agreements in the last decade has resulted in market access being increasingly determined through bilateral and plurilateral frameworks, going beyond what is required by the WTO. Two examples of major free trade agreements, also known as “mega-regionals” are the still unratified Trans-Pacific Partnership (TPP) agreement (from which the United States withdrew in January 2017), and the currently dormant negotiation of a Transatlantic Trade and Investment Partnership (TTIP) agreement. Should the TPP be ratified and the TTIP be concluded, agricultural tariffs on exports of food and agricultural products would be greatly reduced for trade between the participants. Since agricultural tariffs often remain high, this would significantly increase market access, yet only as between the participants in these agreements.

Exporters from developing countries may also be eligible to receive preferential market access under trade preference regimes. For instance, a number of major developed (including the EU) and transitional economies provide least developed countries with Duty Free and Quota Free (DFQF) market access for all or almost all products. Moreover, a number of trade preferences programmes, such as the US African Growth and Opportunity Act (AGOA) and the EU, US, Japan, and Canada’s respective Generalised System of Preference programmes (GSP), enable exporters from developing countries to obtain preferential market access for a select number of agricultural commodities. In these situations, exporters can bypass market access restrictions imposed by tariffs and TRQs. Thus, exporters should verify whether they are eligible for preferential market access.

2.3 The Special Agricultural Safeguard

In addition to tariffs and TRQs, the Agreement on Agriculture enables Members to regulate market access through use of a special agricultural safeguard (generally referred to as “SSG”). Upon using an SSG, Members may temporarily increase import duties beyond bound tariff rates. Members may do so in response to either surges in imports or decreases in price beyond specified trigger levels – which could have negative effects on local production. The SSG can be used only with respect to products that, prior to the Uruguay Round, were subject to non-tariff barriers (and hence were tariffied) and that are not subject to TRQs. Moreover, it can be used only if the Member reserved the right to do so in its schedule of concessions. According to the WTO, a total of 38 Members have reserved the right to use an SSG , on a combined 6,072 agricultural products.¹⁷

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USE OF SPECIAL AGRICULTURAL SAFEGUARDS

Developed countries have, and continue to use the SSG widely as a protective mechanism. Historical data compiled by the WTO shows that, between 1995 and 2001, Members used the SSG a total of 256 times.¹⁸Recent notifications show that the SSG continues to be used dozens of times per year.¹⁹

In contrast to safeguards on non-agricultural products (see Chapter Six, Section 3.0), the SSG under the Agreement on Agriculture may be triggered automatically when imports increase or prices fall beyond specified levels. There is therefore no requirement for Members to impose the safeguard only after an investigation is initiated at the request of industry; nor is it necessary to demonstrate that a domestic industry is being harmed.²⁰Examples of the use of the SSG (by the United States) are provided in Appendix A.

Businesses may find it useful to monitor trade volumes and prices for products subject to an SSG. Volume statistics will inform businesses whether there is a risk that their transaction could result in import volumes that trigger a safeguard for subsequent imports by the same or other businesses. Similarly, in negotiating prices for import transactions, businesses should consider whether the prices agreed may result in the trigger of the SSG. In each case, there is room for the strategic use of sales transactions to trigger, or avoid triggering, the SSG.

2.4 Developing Countries and the Special Safeguard Mechanism

Since many developing Members did not reserve the right to use the SSG, the Doha Round negotiations consider the right for developing countries to self-designate a Special Safeguard Mechanism (SSM). To this end, the 2005 Hong Kong Ministerial Declaration provided that:

[d]eveloping country Members will also have the right to have recourse to a Special Safeguard Mechanism based on import quantity and price triggers, with precise arrangements to be further defined. Special Products and the Special Safeguard Mechanism shall be an integral part of the modalities and the outcome of negotiations in agriculture.

The 2015 Nairobi Decision on a Special Safeguard Mechanism for Developing Country Members reaffirmed the goal to negotiate a right for developing countries to an SSM, as agreed in the Hong Kong Ministerial Declaration, and directed Members to undertaken the relevant negotiations in the Committee on Agriculture.

Businesses exporting agricultural goods to developing countries will need to monitor the status of the negotiations on an SSM for developing countries.

3.0 Export Subsidies

3.1 Introduction

Export subsidies have long been an instrument used by WTO Members to stimulate sales of agricultural commodities into the world market. Such subsidies permit exports to take place even where the exports would not otherwise have been competitive, and may also stimulate excess production well beyond domestic consumption capacity.

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Export subsidies depress the prices of the exported products in the world market and in individual import markets, making it more difficult for both the importing country’s domestic producers and other unsubsidised or less-subsidised exporters to compete.²¹

In light of their recognised trade-distorting nature, WTO Members agreed in the Uruguay Round to prohibit export subsidies for non-agricultural products, under Article 3.1(a) of the Agreement on Subsidies and Countervailing Measures (SCM Agreement). In the case of agricultural products, however, WTO Members’ export subsidies are exempted from this prohibition as long as they conform to scheduled export subsidy commitments under the Agreement on Agriculture.²²These scheduled commitments – made both in terms of export quantities and budgetary outlays for an agricultural commodity – are based on, and limited to, quantities of subsidised exports and amounts of budgetary outlays of an exporting Member during a base period (1986-90), and were subject to specified reductions.

Nineteen WTO Members, including both developed and developing Members, have retained the right to provide export subsidies on a number of agricultural products.²³However, as a result of higher commodity prices and budget constraints, most of these Members were providing fewer export subsidies at the time of writing this chapter (April 2017) than they would be entitled to in line with their reduction commitments. Indeed, some Members, including the United States and the European Union, were providing no or very few agricultural export subsidies (see Appendix B). However, other Members, including India, have recently (re-) introduced or increased export subsidies.

Under the 2015 Nairobi Ministerial Decision on Export Competition, discussed in Section 3.5 below, Members (other than least developed countries) agreed to eliminate their export subsidies. This development is important, even for Members with export subsidy entitlements that were not then providing export subsidies, because they will now be precluded from reintroducing export subsidies, for example in response to falling world market prices.

3.2 Definition of Export Subsidy

Article 9.1 of the Agreement on Agriculture includes a broad definition of “export subsidies” that are subject to reduction commitments. In addition to typical export subsidies – i.e., direct payments by the government to exporters, the disposal of goods at less than the comparable price for products sold domestically, and the provision of transport services for export shipments at prices lower than the price charged for domestic shipments – the Agreement on Agriculture also covers indirect export subsidies, for example where a price support regime requires that excess production be exported at much lower than the world market price (Article 9.1(c)). Moreover, under Article 10.1, export subsidies that are not specifically defined in Article 9.1 may not be used to circumvent export subsidy reduction commitments.

3.3 Challenges to Export Subsidies

WTO Members have challenged several export subsidy regimes in WTO dispute settlement. For example, in Canada – Dairy,²⁴ Canada was found to provide export subsidies in excess of its reduction commitment because its price support system for milk required that any excess production be exported at prices much below the domestic support price. Likewise, in EC – Sugar,²⁵ the European Union was found to exceed its export subsidy reduction commitments by requiring that excess sugar production resulting from its price support regime for sugar beets and sugar cane be exported at low prices.26 Finally, in US – Cotton,27 the United States was found to provide export subsidies for cotton without having scheduled the right to do so.

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3.4 Agricultural Subsidies and the Agreement on Subsidies and Countervailing Measures

In addition to the Agreement on Agriculture’s limitations on the amount of budgetary outlays and the volume of subsidised exports, agricultural export subsidies (like all subsidies) are also subject to the actionable subsidy disciplines under the SCM Agreement.²⁸These disciplines apply to all agricultural export subsidies, and can be used to challenge such subsidies where they cause adverse effects to the trade interests of other Members. For example, in US – Cotton, US export subsidies for cotton were found to cause adverse effects in the form of significantly suppressed world market cotton prices. While that dispute covered export subsidies that were also inconsistent with the export subsidy disciplines in the Agreement on Agriculture, it is important to note that, under the SCM Agreement, Members may challenge trade effects caused by export subsidies even if they are provided in conformity with the Agreement on Agriculture. To do so, however, they must show adverse effects. In contrast, an export subsidy on industrial goods can be challenged as a prohibited subsidy without the need to show adverse effects.

3.5 The Nairobi Decision on Export Competition

The WTO’s 2015 Nairobi Ministerial adopted a Decision on Export Competition,²⁹in which Members committed to eliminate agricultural export subsidies. This Decision provides that developed country Members are to eliminate most of their remaining scheduled export subsidy entitlements as of the date of adoption of the Decision (December 2015), and that the remainder be eliminated by the end of 2020. Developing country Members are to eliminate their export subsidy entitlements by the end of 2018, with the exception of marketing and transport costs for agricultural exports, which are to be eliminated by the end of 2023. It is not clear whether a WTO Member could challenge, in WTO dispute settlement, the failure by one Member to eliminate its export subsidies where the subsidising Member has not modified its schedule to reflect the Nairobi Decision. In this respect, it is important to note that several Members have indicated that they intend to modify their schedules.

MODIFICATION OF SCHEDULE TO REFLECT THE NAIROBI DECISION

Australia, Canada, Switzerland, Norway, Colombia and Uruguay stated in a WTO Agricultural Committee Meeting on 9 March 2016 that they would modify their schedules to eliminate their export subsidy entitlements.³⁰Similarly, the European Union explained at the same committee meeting that some modifications to its schedule may be necessary, and that it was open to discussing the best approach to implementation of the Nairobi Decision.³¹

In contrast, US officials have signalled that the United States does not intend to modify its schedule to eliminate its export subsidy entitlements. Instead, they consider that, since the United States had already eliminated all agricultural export subsidies (see the most recent US export subsidies notification in Appendix B), no further action is required to implement the Nairobi Decision on Export Competition.³²This approach does not provide certainty to other Members as to whether they could challenge, in WTO dispute settlement, a decision by the United States to reintroduce export subsidies, for example in response to falling commodity prices.

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Agricultural producers whose domestic market share risks being undermined due to the import of products that benefit from export subsidies will need to pay particular attention to the implementation of the Decision on Export Competition, especially by the developing countries that have maintained the right to apply export subsidies through 2023.

3.6 Export Credits and Export Credit Guarantees

Obtaining financing for export transactions can often be difficult for importers from developing and least developed countries. This is especially so in the case of agricultural commodities, where the imported products are consumed rapidly and, therefore cannot serve as collateral for a loan. State-supported export credits or export credit guarantees, typically provided by developed countries with strong credit ratings, can facilitate export transactions where financing is an issue. Yet, these programmes also cause significant market distortions.

The availability of state-supported export financing (typically for exports from developed countries), poses problems for competing agri-business exporters, particularly from developing countries. Exporters that can rely on their home state to support exports through export credits or export credit guarantees generally have an important competitive advantage over exporters that cannot offer such financing. Yet, only governments with vast financial resources and strong credit ratings are capable of providing significant amounts of export financing. This means that the associated competitive advantages accrue mostly to developed country exporters, which are often in competition with developing country exporters. On the other hand, export financing may help developing countries import agricultural commodities that they would otherwise have been unable to import.

USE OF EXPORT GUARANTEES BY THE UNITED STATES

Certain developed country WTO Members, notably the United States, offer large amounts of export credit guarantees to support the export of agricultural commodities. For example, the US Department of Agriculture is obliged to make available, under its General Sales Manager (GSM) 102 programme, US$5.5 billion in export credit guarantees to finance US agricultural commodity exports.

Under GSM 102, the United States guarantees repayment of 98% of the principal and a portion of interest on a loan extended by a US financial institution to a foreign bank. That foreign bank, in turn, finances the importer’s purchase of US agricultural commodities. With the availability of a GSM 102 export credit guarantee, the foreign bank will secure the backing of the US government and will be able to borrow from a US bank on conditions that resemble those available to the US government itself. Since the availability of the export credit guarantee hinges on the underlying export transaction taking place, the foreign bank will pass on a portion of the better conditions to the importer so as to unlock the availability of financing. The importer, in turn, can obtain financing and also pay a better price for the US agricultural commodity.

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While the terms of export financing for industrial goods are disciplined by the OECD Arrangement on Officially Supported Export Credits, until recently, no similar rules existed for agricultural products. Indeed, the Agreement on Agriculture provides in Article 10.2 that “Members undertake to work toward the development of internationally agreed disciplines to govern the provision of export credits, export credit guarantees or insurance programmes”.

Many observers interpreted this provision to mean that, until the conclusion of such disciplines, Members would be free to provide export financing without any disciplines. However, in US – Cotton, the WTO Appellate Body ruled that the general disciplines on export subsidies in the Agreement on Agriculture and in the SCM Agreement apply to agricultural export credits and export credit guarantees. WTO Members may, therefore, provide such financing on subsidised terms only where they have scheduled, under the Agreement on Agriculture, the right to provide export subsidies for the product at issue. Otherwise, export credits and export credit guarantees must be offered on terms consistent with those available on the market. Yet, financing on market-based terms will often fail to overcome the shortage of trade financing on the market, given that market-based conditions are often not economically viable for the importer.

As in the area of industrial goods, some WTO Members are reluctant to challenge export financing programmes, despite the resulting market distortions. In US – Cotton, Brazil took a different view, successfully challenging the US GSM 102 export credit guarantee programme. As a result, the United States agreed to some enhanced disciplines on the operation of its GSM 102 that limit the programme’s market distortions. These additional disciplines are not dissimilar to those that apply to industrial goods under the above-mentioned OECD Arrangement on Officially Supported Export Credits, although premium rates may be lower than those that apply for industrial goods.³³Nonetheless, access to GSM 102 export credit guarantees from the US government will continue to provide US exporters of agricultural commodities a competitive advantage over other exporters, and will continue to benefit importers of US agricultural commodities.

As part of the 2015 Nairobi Ministerial Declaration, and as foreseen in Article 10.2 of the Agreement on Agriculture, WTO Members have agreed on a set of additional disciplines for agricultural export financing.

THE NAIROBI DECISION ON EXPORT COMPETITION

The Nairobi Decision directs WTO Members to provide any form of export financing support, including export credits, export credit guarantees and insurance programmes, consistent with the following requirements:

• The maximum repayment term of any such financing is 18 months; and
• Premiums must be charged that are risk-based and sufficient for the government programme to be self-financing and to cover its long-term operating costs and losses.³⁴

The new disciplines under the Nairobi Decision apply cumulatively with the prohibition on export subsidies – i.e., they do not replace the requirement made clear in US – Cotton that such export financing be made available only consistent with market terms (unless the Member has scheduled the right to provide export subsidies). Thus, they provide useful additional disciplines on the terms of the financing and the rates to be charged.

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Unlike the Nairobi Decision to eliminate export subsidies, which as discussed above appears to require modifications to Members’ schedules in order to be subject to WTO dispute settlement, the Nairobi Decision on export financing is arguably incorporated automatically into the Agreement on Agriculture, and thus subject to enforcement through WTO dispute settlement. Indeed, the Nairobi Decision constitutes a set of internationally agreed disciplines under Article 10.2 of the Agreement on Agriculture, which require that Members provide export financing “only in conformity therewith.”

Businesses that face competitive disadvantages as a result of state-supported export financing on terms that are inconsistent with either the export subsidy disciplines of the Agreement on Agriculture, or the Nairobi Decision, may now lobby their governments to challenge such inconsistencies, including in WTO dispute settlement.

4.0 Domestic Support

Most WTO Members provide at least some subsidies to their domestic agricultural sectors, assisting farmers against the vagaries of weather and pests, and the impact of price swings that characterise markets for agricultural commodities. Overall, these subsidies amount to hundreds of billions of dollars every year – with the European Union, the United States, and other industrialised countries being the major subsidisers. These subsidies result in significant market distortions that negatively affect unsubsidised (or less subsidised) farmers, mostly in developing countries.

The WTO Agreement on Agriculture uses the term “domestic support” for farm subsidies that are not linked to exports. Its disciplines on domestic support start from the fact that the type and nature of domestic support subsidies provided by WTO Members differ dramatically in terms of their: (i) type, (ii) amount, and (iii) degree of protection from market forces that they afford farmers. This means that different WTO Members’ domestic support subsidies will differ in terms of their actual or potential production- and trade-distorting effects. Reflecting the variety of WTO Members’ domestic support subsidies, the Agreement on Agriculture classifies domestic support measures based on their presumed trade-distorting nature into three boxes: “green box”, “blue box” and “amber box” support, with different disciplines applying to each box.

The categorisation of subsidies into the different boxes is relevant primarily for purposes of determining a Member’s compliance with its domestic support reduction commitments, calculated as its “Aggregate Measurement of Support”. It bears emphasizing, however, that all domestic support subsidies, irrespective of the box they fall into, may be challenged in WTO dispute settlement as “actionable subsidies” that are inconsistent with the SCM Agreement where a Member can demonstrate that these subsidies cause significant market distortions.

4.1 Green Box

Green box support is defined in Annex 2 of the Agreement on Agriculture and is presumed to have “no, or at most minimal, trade distorting effects”.³⁵Provided that a domestic support measure conforms to the requirements set forth for each form of “green box” support, it is exempt from reduction commitments. That means that under the Agreement on Agriculture, WTO Members are free to provide subsidies that comply with the “green box” criteria without any limitations on the amount of support provided.

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TYPES OF GREEN BOX SUPPORT

The most important examples of “green box” support are direct payments to farmers that are: (i) based on production in a historic and fixed reference period, and (ii) not linked to current production or prices. This type of support is known as “decoupled” support, and is presumed not to create an incentive to over-produce. Other examples include disaster relief and domestic food aid, environmental programmes (e.g., payments for adherence to land conservation requirements), and general services (e.g., research, training and pest control measures).

The “green box” also covers public stockholding programmes that are operated solely for food security purposes, rather than as a form of price support for farmers. These programmes resulted in much debate during the Doha Round negotiations, as India and other Members attempted to broaden the carve-out for public stockholding programmes. The concern that such programmes may result in significant market distortions led many WTO Members, in particular the United States, to oppose this modification of the rules.

Agri-businesses in the European Union and the United States (among other Members) have historically lobbied for and benefitted from large subsidies that fall into the “green box”. Such support may serve a wide variety of domestic political interests (including environmental and social). However, agri-businesses and their lobbies have also come to realise that “green box” support is much less effective in providing safety net support where prices or yields drop, and have shifted their attention back to seeking more effective, and hence production- and trade-distorting, support, for example in the form of target price and insurance-based subsidies.

4.2 Blue Box

“Blue box” support is a hybrid between “amber box” and “green box” support. It consists of direct payments to farmers that fail to conform to the criteria for no, or minimally trade-distorting “green box” support, and are, therefore, presumed to be trade-distorting. However, “blue box” support is considered to be less trade-distorting than “amber box” support because: (i) it must embody limitations on production, and (ii) payments must be based on (a) fixed area and yields, (b) no more than 85% of a base level of production, or (c) a fixed number of livestock. Domestic support subsidies that conform to the “blue box” requirements are exempt from reduction commitments (Article 6.5).

The blue box category was included in the Agreement on Agriculture to exempt from reduction commitments certain EU subsidy programmes that did not fall within the “green box” exemption. It was created as a “fix” to end an impasse between the United States and the European Union during the Uruguay Round negotiations. While the European Union has since greatly reduced its “blue box” support, the United States, which historically did not use that box, has attempted, in the context of the Doha Round, to broaden the scope of the “blue box” to cover some of its own “nongreen box” support.

4.3 Amber Box

Finally, all agricultural support that does not fall within the “green box” or “blue box” is classified as “amber box” support. It is presumed to be production- and tradedistorting, and is subject to Uruguay Round reduction commitments that, today, after the end of the implementation period, come in the form of a fixed overall cap for each[Page191:]WTO Member, the so-called “Aggregate Measurement of Support” or “AMS”. The overall cap for each country is based on the amount of support it provided during a base period (1986-88), and is subject to reduction commitments. For example, the European Union’s AMS cap for “amber box” currently amounts of EUR 72.3 billion per year, while it is US$19.1 billion per year for the United States. This cap applies in the aggregate, i.e., to all “amber box” support provided by that WTO Member, irrespective of whether the Member focuses such support on only a subset of agricultural commodities or makes it available evenly to all of its agricultural production.

AMBER BOX SUBSIDIES

Amber box subsidies include price support regimes that regulate prices and production amounts, systems of target or minimum prices for agricultural commodities, highly subsidised insurance schemes and other forms of protections for farmers against low yields, low revenues or low profits. Such subsidies may be applicable to one or several agricultural commodities (such as US marketing loan subsidies that set price floors for a small number of commodities, which in turn make up the bulk of US exports of agricultural commodities) or could be widely available to many agricultural commodities (such as subsidised yield or revenue insurance in the United States).

Working through their governments, agri-businesses in the United States and Europe played an important role in shaping the amber box subsidies currently applied and continue to benefit financially from amber box support. These agri-businesses should continue to monitor developments in the WTO, as they have much to lose if negotiations continue and, as a result, amber box support is scaled back.

The actual AMS provided by a Member in a given year is calculated by applying a complex set of rules (Article 6, 7 and Annexes 3 and 4). For example, “amber box” support is divided into product-specific and non-product-specific support. So-called de minimis exemptions exclude from the AMS calculation support that, across all relevant support programmes, amounts to less than 5% of the value of an agricultural commodity (for product-specific support), or less than 5% of the value of all agricultural commodities (for non-product-specific support). For developing countries, the de minimis exemption is 10% and for China, it is 8.5%. Where support exceeds these levels, the entirety of the support will count towards the AMS limit. These complex calculation rules, and the uncertainties regarding their application, give subsidizing Members some leeway in notifying the support granted in a manner that makes it appear consistent with their “amber box” reduction commitments.

4.4 Assessment of the Disciplines on Domestic Support in the Agreement on Agriculture

Despite progress made in the Uruguay Round negotiations that resulted in multilateral disciplines for agricultural domestic support, the disciplines in the Agreement on Agriculture suffer from significant shortcomings. For example, Members that provided large amounts of domestic support prior to completion of the Uruguay Round, notably the European Union and the United States, have retained very high AMS caps. As noted above, the European Union’s AMS cap is EUR 72.3 billion per year, giving it a huge amount of flexibility to support its farm sector in a manner that distorts the domestic agricultural markets in the European Union and international agricultural markets.

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Moreover, the imposition of an overall AMS cap has also proven ineffective as a means to limit market distortions. In particular, the absence of any product-specific AMS caps – the introduction of which has been discussed in the Doha Round negotiations – is a critical gap. This means that Members may focus their allowable support on those commodities that are most widely traded, or for which prices are affected by often erratic movements in world markets. Indeed, as long as they remain within total AMS limits, Members can also shift amber box support from one commodity to another, as may be needed, without fear of being challenged. This flexibility also means that there are no effective limitations in the Agreement on Agriculture to prevent Members from granting disproportionate support to one or several commodities, with the effect of greatly increased production of that commodity. As a result, such subsidies may significantly distort trade in that commodity, and may seriously harm farmers in other, often developing countries.

Finally, it appears that Members generally design their agricultural subsidy schemes to be consistent with their AMS caps, based on current market projections. However, when prices drop below projections and result in much larger subsidy payments than anticipated, domestic political interests (in particular agri-business interests) often compel a Member not to adjust its policies so as to limit subsidy payments and to stay within its AMS cap for the year. Instead, Members let their “amber box” payments in support of their farmers exceed the annual AMS cap, and use the complex AMS calculation rules to provide notifications that avoid disclosure of an AMS in excess of the reduction commitment. For example, Members may claim that their amber box support is actually green box support. Moreover, most Members significantly delay their notification of domestic support. In some cases, delays are in excess of five years. This further complicates the ability of other Members to monitor AMS compliance.

Agri-business interests can benefit from the fact that some WTO Members game the system by classifying domestic support measures so as to appear to remain within their AMS cap. For example, the European Union classifies its direct payments to farmers as “green box” support, even though they contain the same type of limitation on farmers’ production decisions that caused the Appellate Body in US – Cotton to classify similar US direct payments as “amber box”. No Member has challenged the European Union’s misclassification.

Moreover, for years, the United States classified its crop insurance subsidies, which are based on product-specific insurance policies, as non-product specific support, facilitating its compliance with its AMS cap of US$19.1 billion. With a recent overhaul of US farm policy, the United States has begun to classify the same crop insurance subsidies as product-specific, again facilitating its compliance with its AMS cap.36

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CHALLENGES TO US AMS COMMITMENTS

Both Brazil and Canada challenged US violations of its AMS commitment (US – Agricultural Subsidies),³⁷in part on the basis of misclassifications by the United States of crop insurance and other domestic support measures. Ultimately, they did not pursue their challenge in light of increasing prices and decreasing subsidy payments as well as the ongoing Doha Round negotiations. However, the data clearly showed that the United States had exceeded its AMS for a number of years when its domestic support programmes were properly accounted for.

In an attempt to address the many remaining distortions of agricultural markets through subsidisation, Members attempted to negotiate clarifications in the Doha Round to the definitions of the various boxes, as well as reductions in the AMS caps and the introduction of product-specific caps on domestic support. These productspecific caps could limit the production- and trade-distorting effects of domestic support for particular products. With the Doha Round negotiations stalled, however, no progress has been made on these issues.

Nonetheless, the multilateral negotiations in the context of the Doha Round are the only forum suitable to address domestic support issues and their effect on the world market. This is because, contrary to market access commitments that apply to bilateral trade between the FTA partners, disciplines on domestic support in an FTA would benefit all other WTO Members. For that reason, Members are hesitant to address domestic support measures in the context of bilateral or even plurilateral agreements. Indeed, none of the many free trade agreements addresses domestic support, nor do the previously discussed mega-regional agreements. In other words, there is no current forum, other than the stalled Doha Round negotiations, that provides Members with a formal opportunity to discuss enhanced disciplines on domestic support.

CHANGES OVER TIME

Overall, the Agreement on Agriculture leaves WTO Members significant room to respond to pressure from their agri-business interests for support of farmers generally, and at times of low prices or yields in particular. Nonetheless, through its rules on the classification of domestic support and the AMS cap, the Agreement on Agriculture does impose some limits on a Member’s freedom to design its farm policy, particularly in the case of many developing country Members, which aside from funding constraints, also have a low AMS cap. Even for Members with higher AMS caps, the influence of the Agreement on Agriculture in domestic policy-making is evident from, for example, the references to these disciplines in the context of discussions leading to the periodically renewed US farm bills or the periodic revisions to the European Union’s common agricultural policy. Indeed, over time, both US and EU farm policy have tended to become less production- and trade-distorting.

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4.5 Additional Disciplines in the Agreement on Subsidies and Countervailing Measures

Without the prospect of addressing market distortions caused by domestic support through the negotiation of enhanced disciplines on domestic support in the Doha Round, Members may resort to an alternative avenue – recourse to WTO dispute settlement under the Agreement on Subsidies and Countervailing Measures. As mentioned above, agricultural domestic support subsidies are covered not only by the Agreement on Agriculture, but also by the SCM Agreement. Under the SCM Agreement, which is discussed in more detail in Chapter Five, Member may not grant or maintain subsidies, including agricultural subsidies, which cause adverse effects to the interests of other Members. A temporary “peace clause” in Article 13 of the Agreement on Agriculture, which exempted domestic support subsidies that complied with the agreed limits from challenge under the SCM Agreement, expired in 2002.³⁸

Accordingly, Members are now free to challenge domestic support subsidies under the SCM Agreement, irrespective of their conformity with the reduction commitments under the Agreement on Agriculture. The SCM Agreement’s disciplines are most relevant in the context of trade effects caused by “amber box” or “blue box” support. Yet, these disciplines could also be used to challenge market effects of “green box” support – for example, where the large amount of such support causes actual trade effects despite the fact that these forms of support are considered less tradedistorting.

In lobbying for or against various agricultural support programmes, agribusiness must now be mindful that many types of programmes are subject to review under both the Agreement on Agriculture and the SCM Agreement. Depending on their interests, businesses can work with Member governments to structure support schemes that comply with both agreements, or to challenge schemes that are not compliant.

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CASES

In US – Cotton, Brazil used the SCM Agreement’s disciplines to challenge subsidisation of US cotton producers, demonstrating that the challenged US subsidies had significantly suppressed world market prices. The United States settled the dispute through a combination of some reforms to its cotton subsidy regime, and by providing approximately US$700 million in compensation payments, some of which went to the Brazilian cotton industry.

Similarly, Brazil recently launched a dispute (Thailand – Sugar),³⁹claiming that Thailand’s domestic support for sugar causes serious prejudice to Brazil’s interests.

In 2007, Canada claimed that US subsidies for corn resulted in significant suppression of corn prices in the Canadian market (US – Agricultural Subsidies). Canada discontinued the dispute when prices for agricultural commodities rose significantly, and US subsidy payments dried up.

Appendix A

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Appendix B

UNITED STATES AND EUROPEAN UNION: EXPORT SUBSIDY NOTIFICATIONS

The column “annual commitment levels” indicates the outlay and quantity of export subsidies that the United States and the European Union may provide consistent with their reduction commitments. The column “subsidised exports” indicates the actual outlay and quantity of export subsidies.

Both notifications indicate that the United States and the European Union currently apply no export subsidies with respect to most products for which they reserved the right to use export subsidies. With respect to sugar and poultry meat, the European Union does maintain export subsidies, yet significantly below its reduction commitments.⁴²

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