Paragraph 8 states: "The following parameters will guide the further negotiation of this tiered formula:

Transcription

1 [Berthelot's comments of the Chair's reference papers on the OTDS, AMS, blue box of 24 May 2006 and green box of 30 May 2006 Solidarité ( 31 May 2006 Committee on Agriculture, Special Session 24 May 2006 Domestic Support Chair's Reference Paper OVERALL REDUCTION IN TRADE-DISTORTING DOMESTIC SUPPORT Background Paragraph 5 of the Hong Kong Ministerial Declaration states, inter alia, that: "On domestic support, there will be three bands for reductions in Final Bound Total AMS and in the overall cut in trade-distorting domestic support, with higher linear cuts in higher bands. In both cases, the Member with the highest level of permitted support will be in the top band, the two Members with the second and third highest levels of support will be in the middle band and all other Members, including all developing country Members, will be in the bottom band. In addition, developed country Members in the lower bands with high relative levels of Final Bound Total AMS will make an additional effort in AMS reduction. We also note that there has been some convergence concerning the reductions in Final Bound Total AMS, the overall cut in trade-distorting domestic support and in both product-specific and non product-specific de minimis limits. Disciplines will be developed to achieve effective cuts in trade-distorting domestic support consistent with the Framework. The overall reduction in trade-distorting domestic support will still need to be made even if the sum of the reductions in Final Bound Total AMS, de minimis and Blue Box payments would otherwise be less than that overall reduction. Developing country Members with no AMS commitments will be exempt from reductions in de minimis and the overall cut in trade-distorting domestic support [...]" Paragraph 7 of the Agreed Framework (Annex A of WT/L/579) states that: "The overall base level of all trade-distorting domestic support, as measured by the Final Bound Total AMS plus permitted de minimis level and the level agreed in paragraph 8 below for Blue Box payments, will be reduced according to a tiered formula. Under this formula, Members having higher levels of trade-distorting domestic support will make greater overall reductions in order to achieve a harmonizing result. As the first instalment of the overall cut, in the first year and throughout the implementation period, the sum of all trade-distorting support will not exceed 80 per cent of the sum of Final Bound Total AMS plus permitted de minimis plus the Blue Box at the level determined in paragraph 15." Paragraph 8 states: "The following parameters will guide the further negotiation of this tiered formula: This commitment will apply as a minimum overall commitment. It will not be applied as a ceiling on reductions of overall trade-distorting domestic support, should the separate and complementary formulae to be developed for Total AMS, de minimis and Blue Box payments imply, when taken together, a deeper cut in overall trade-distorting domestic support for an individual Member. The base for measuring the Blue Box component will be the higher of existing Blue Box payments during a recent representative period to be agreed and the cap established in paragraph 15 below." Paragraph 15 states: "Blue Box support will not exceed 5% of a Member s average total value of agricultural production during an historical period. The historical period will be established in the negotiations. This ceiling will apply to any actual or potential Blue Box user from the beginning of the implementation period. In cases where a Member has placed an exceptionally large percentage of its trade-distorting support in the Blue Box, some flexibility will be provided on a basis to be agreed to ensure that such a Member is not called upon to make a wholly disproportionate cut."

2 Ad memorandum Paragraph 11 of the Hong Kong Ministerial Declaration states, inter alia, that: "[...] Members agree that the objective is that, as an outcome for the negotiations, trade distorting domestic subsidies for cotton production be reduced more ambitiously than under whatever general formula is agreed and that it should be implemented over a shorter period of time than generally applicable. We commit ourselves to give priority in the negotiations to reach such an outcome." Paragraph 6 of the Agreed Framework (Annex A of WT/L/579) states that: "The Doha Ministerial Declaration calls for "substantial reductions in trade-distorting domestic support". With a view to achieving these substantial reductions, the negotiations in this pillar will ensure the following: Special and differential treatment remains an integral component of domestic support. Modalities to be developed will include longer implementation periods and lower reduction coefficients for all types of trade-distorting domestic support and continued access to the provisions under Article 6.2. There will be a strong element of harmonisation in the reductions made by developed Members. Specifically, higher levels of permitted trade-distorting domestic support will be subject to deeper cuts. Each such Member will make a substantial reduction in the overall level of its tradedistorting support from bound levels. As well as this overall commitment, Final Bound Total AMS and permitted de minimis levels will be subject to substantial reductions and, in the case of the Blue Box, will be capped as specified in paragraph 15 in order to ensure results that are coherent with the long-term reform objective. Any clarification or development of rules and conditions to govern trade distorting support will take this into account." Structure for Discussion Introduction 1. The Agreed Framework, which reaffirmed the Doha mandate calling for "substantial reductions in trade-distorting domestic support", established the concept of an overall reduction in trade-distorting domestic support which it defined as the Final Bound Total AMS plus permitted de minimis level and the higher of either Blue Box payments during a recent representative period or 5% of the average total value of agricultural production during an historical period. This overall base level for all trade-distorting domestic support is to be reduced by a tiered formula. 2. There are differences between Members on the function of the cut in overall trade-distorting domestic support. Some look upon this reduction as a sort of residual. Others see the overall reduction as having a more active role and acting as an intrinsic restraint in its own right. Whatever the views of different delegations, the technical task before us is clear: to define those issues that will enable the base level of overall trade-distorting domestic support to be established. We should also seek to narrow the differences concerning the reductions. 3. One initial issue is whether the overall reduction in trade-distorting domestic support should apply to developed Members that do not have AMS commitments. There would appear to be general acceptance that these Members would not be subject to the reduction although they will be subject to the limits to be agreed for de minimis and Blue Box. 1. The components of overall total trade-distorting domestic support 4. The three components of overall trade-distorting domestic support, as stated above, are the Final Bound Total AMS, permitted de minimis and the Blue Box. For the first of these, the Agreed 2

3 Framework is clear it is the Final Bound Total AMS figures which are contained in Members' Schedules. 5. As regards the second and third elements, however, a similar technical question arises in both cases, namely the question of the relevant base periods. First, it is clear that we will need to agree on a base period to establish the base level of the "permitted de minimis". More specifically, the base level of value of production should be established in order to calculate the de minimis entitlement. [The margin of choice is very narrow: the base period cannot extend to years before the Final Bound Total AMS which was reached at the end of 2000 or June 2001 for developed countries and at the end of 2004 or June 2005 for DCs. The more so as the de minimis support disappears and is included in the Final Bound Total AMS when it exceeds its ceiling of 5% for developed countries or 10% for DCs. However, as the Final Bound Total AMS remains fixed once reached end 2000 or June 2001 for developed countries and end of 2004 or of June 2005 for DCs, the base period for de minimis, as for the blue box, could extend till the last notified years. And here the Members should agree that all the overdued notifications should be eliminated before the Doha Round could be signed, which would imply the obligations for the US to notify the years 2002 to 2005 and for the EU the years to On the other hand, it is not desirable to have different base periods for the developed countries and DCs so that, as proposed below by the Chair, il would be preferable to use the same period for both, i.e. from January or June 2001, which would not pose any fundamental problem since even the largest DCs either have no total AMS commitments like China, India or Egypt, or have an applied total AMS nil as Brazil and Turkey (because lower than the de minimis exemption) or almost nil as Mexico (the applied AMS being lower than 1% ot the bound total AMS), Korea and Argentina being exceptions, the first with an applied total AMS of 94% ot the bound total AMS in 2000, last year notified, and Argentina with an applied total AMS of 61% ot the bound total AMS for ] 6. Second, as far as the Blue Box is concerned, we will also need to specify what should be the "recent representative period" with respect to existing Blue Box payments (second bullet of paragraph 8 of the Agreed Framework refers) and to specify the "historical period" with respect to the total value of agricultural production (paragraph 15 refers) so that the Blue Box component can be appropriately determined. So far, I do not detect any disagreement with the proposal made by some delegations that the Uruguay Round implementation period (i.e. the period ) be used as a base period for developed country Members. [But it is totally illogical to have different base periods for each of the three components of the overall trade distorting support (OTDS) so that the period for the blue box should be the same as for the de minimis support and for the capping of the product-specific AMSs, i.e. from the marketing year 2001 or if we agree to have the same base periods for developed and developing countries. On the other hand it is amazing that the Chair does not underline the contradiction between the paragraph 8 and 15 of the Framework agreement: paragraph 8 allows the EU to calculate the reduction from its applied blue box level of 22.2 billion in (or even higher if the period extends on the following years) whereas paragraph 15 implies that the allowed level will be 12.3 billion from the start, the EU having then to cut its applied level of immediately by at least 9.9 billion.] An option of either the period or has been suggested for developing country Members. In addition, there does not appear to be any objection to defining total value of production as the gross value of total production of basic agricultural products at farm gate prices. 7. It has been noted that the choice of a base period for both permitted de minimis and the Blue Box limit probably does not create an major difficulty because both are based on the total value of agricultural production which may not be expected to vary considerably from one year to another. [Indeed but there should still be a contradiction if the base period for both of them would extend to years before the Final Bound Total AMS, i.e. before 2000, since de minimis is part of the total bound AMS.] 3

4 8. As regards the methodology to establish the overall base level, in the early discussions some delegations raised concerns about the possible double-counting between the AMS and the "permitted de minimis" entitlements and a number of proposals were made as to how to prevent this. However, others had countered that this concern would be better addressed indirectly by applying a larger cut. We should further explore this avenue as a possible way towards a solution acceptable to all. [There should not be a problem if the Members were to comply with article 6.4 of the AoA which is absolutely clear in defining the product-specific de minimis (PSdm): "(a) A Member shall not be required to include in the calculation of its Current Total AMS and shall not be required to reduce: (i) productspecific domestic support which would otherwise be required to be included in a Member's calculation of its Current AMS where such support does not exceed 5 per cent of that Member's total value of production of a basic product during the relevant year". This has been underlined by Ivan Roberts: the calculus of the allowed PSdm must be based not on 5% of the production value of all products, as for the non PSdm, but only on 5% of the production value of products without a PS AMS (Ivan Roberts, 2005, WTO Agreement on Agriculture: The Blue Box in the July 2004 Framework Agreement, ABARE ereport, Of course it is quite clear that complying with this rule does not please the EU and US since it would reduce much their PSdm. It should reduce it even more dramatically if they were to comply with the correct notification of their largest input subsidies their subsidies to feed grains fed to animals within the EU and US domestic markets which would confer PS AMSs to all their animal products (meats, dairy products, eggs), so that their PSdm would shrink much. On a total agricultural production value of billion in (last notified marketing year), the agricultural production value of the products without a PS AMS was billion, and therefore the allowed PSdm was 5% of that value, i.e. 6.7 billion. But taking into account the feedstuffs subsidies gives a PS AMS to the production of pigmeat (production value of 25.6 billion), poultry and eggs ( 17.3 billion) and milk ( 40.1 billion) and the actual allowed PSdm falls at 2.7 billion (5% of 53 billion). For a US total agricultural production value of $198.5 billion in 2001 (last notified year), the production value of products without a PS AMS was of $75.8 billion so that the PSdm was of $3.8 billion. But the huge subsidies going to animal products give PS AMSs to the production of animal products which up to now did not have one: beef (production value of $29.3 billion in 2001), pork ($11.4 billion), poultry and eggs ($24.0 billion), sheep and lamb ($298 million). Only dairy had already a PS AMS through its market price support. This adds $65.0 billion to the production value of products with a PS AMS in 2001, so that the production value of products without a PS AMS shrinks to $10.7 billion, meaning that the allowed PSdm slumps to $537 million.] The tiered formula 2. Thresholds 9. The Agreed Framework and the Hong Kong Ministerial Declaration require that Final Bound Total AMS should be reduced by a tiered formula with three tiers. The Member with the highest level of permitted support should be in the top tier, the next two Members in the middle tier and all other Members, including all developing countries, in the bottom tier. What this means is that the European Communities is in the top tier, the United States and Japan in the middle tier and all other Members in the bottom tier. 3. Reduction 10. As regards the depth of cuts in each band, Members are still far apart with respect to the cuts proposed for the lowest tier. In the top and the middle bands, there are smaller divergences but bridging these gaps is not any easier. So far this year, there has not been any further progress and it is time to narrow differences further, bearing in mind the information in the table which I first prepared for my report to the TNC in JOB(05)/306 of 23 November 2005 (later distributed as TN/AG/21 and as Annex A to the Hong Kong Ministerial Declaration WT/MIN(05)/DEC). 4

5 Tiers Cuts 1 31%-70% 2 53%-75% 3 70%-80% On the issue of staging, we will need to ensure that the overall trade-distorting support does not exceed, throughout the implementation period, 80 per cent of the base level stipulated in the last sentence of paragraph 7 of the Agreed Framework. Some have also called for "front-loading" of the cuts as they consider that "water" would be built into the base level of the overall trade-distorting domestic support. Others countered that if "water" is to be addressed here, front-loading should apply to other pillars as well. 12. With respect to special and differential treatment elements, it has been proposed that it would involve longer implementation period and a lower reduction rate than the cut for developed countries in the lowest band. Others have suggested that the cut for developing country Members should be less than two thirds of the developed country cut in the lowest tier. 5. Cotton 13. The Agreed Framework and the Hong Kong Ministerial Declaration have given us a mandate to address cotton ambitiously, expeditiously and specifically, within the agriculture negotiations in relation to all trade-distorting policies affecting the sector. This reference paper addresses only the overall reduction in trade-distorting domestic support element of that mandate. The other elements have been or will be addressed in the relevant reference papers. 14. A specific proposal has been tabled by the Co-Sponsors of the Sectoral Initiative in Favour of Cotton on how to achieve a more ambitious reduction for cotton in relation to the general result of the agriculture negotiations on domestic support. 1 In that proposal, the Co-Sponsors noted that "ambitious, expeditious and specific" treatment for cotton applies to the overall cut, as well as, covering AMS, de minimis and Blue Box. 15. Operationalization of the term "more ambitious" according to the method described by the Co- Sponsors will be based on the values of support for cotton during the Uruguay Round implementation period, i.e. the six-year period from 1995 to With regard to "implement[ation] over a shorter period of time", the Co-Sponsors have proposed that the time period for the reduction of domestic support for cotton shall be one third of the period agreed upon for the reduction of domestic support in agriculture in general. 16. Clearly, this issue will need to be addressed urgently and is, of course, intimately related to the basic approaches referred to above regarding overall cuts. [The Chair forgets to underline the fundamental ambiguity in this issue. Clearly the C4 is interested in the reduction of the applied domestic support to cotton but paragraph 6 of the Framework Agreement states without ambiguity that the reduction of the OTDS and of its threee components concerns their allowed support levels and not their applied support levels, knowing that there is no allowed PS support, therefore not more for cotton. The only provision of the Framework Agreement on the applied domestic supports, confirmed by the Hong Kong Declaration, relates to the PS AMSs therefore also that of cotton which will have to be capped at the level of a base period to be decided, but there is no obligation to reduce them as long as the allowed total AMS will be higher and the reduction could then be ascribed to other products than cotton provided the applied total AMS stay within the limits of the allowed total AMS. And the same works for the reduction of the other two components of the allowed OTDS (de minimis and blue box) which is not obliged to bear on a specific product such as cotton. Which means that Members should take the qualificative "specifically" in its broadest possible extension and should depart from the framework of reductions foreseen by the Framework Agreement and the HK Declaration in order to program a reduction of the applied OTDS for cotton. However an explicit endorsement by the Sub-Committee on cotton is necessary, which should be confirmed by the General Council. 1 TN/AG/SCC/GEN/4 refers. 5

6 The C4 was not well advised to propose to apply the reduction from the base period when the US average cotton AMS has been of $623 million against $2.1 billion for the period, of which $2.8 billion in Happily for them, as we have shown, the base period cannot overlap the years before the end of the Final Total AMS and should begin at the earliest the 1 st January Now paragraph 11 of the HK Declaration requires that "trade distorting domestic subsidies for cotton production be reduced more ambitiously than under whatever general formula is agreed" and paragraph 8 adds that "This commitment will apply as a minimum overall commitment". The first thing to do is to build on the Appellate Body ruling on cotton of 3 March 2005 which has judged that the "production flexibility contracts payments" and the "direct payments" which have replaced them in 2002 cannot be in the green box since cotton producers were not (and are not) allowed to grow fruits and vegetables and wild rice, and thus are in the cotton AMS and should be added to the previous notified figures. Of course the counter-cyclical payments should be added in any case, even if the US could put them in the new blue box, since the blue box is part of the OTDS. We should also remember that paragraph 3 of the Framework Agreement states that "The reforms in all three pillars form an interconnected whole and must be approached in a balanced and equitable manner", which invites to bring together the pillar "domestic support" and the pillar "export competition", and to adopt a "specific" approach to interpret the "trade distorting domestic subsidies" to cotton. Clearly what is worrying the West African cotton producers are not all the domestic subsidies received by their US colleagues or by the part of the STEP 2 payments going to the US textile producers but only the subsidies going to the exported cotton. When the Hong Kong Declaration (paragraph 11) states that "All forms of export subsidies for cotton will be eliminated by developed countries in 2006", the words "all forms" allow to consider as such domestic subsidies benefiting to exported products, so much so as we can rely on the rulings of the WTO Appellate Body, not only that of 4 April 2005 on US cotton but also those of 3 December 2001 and 20 December 2002 on Dairy Products of Canada. The December 2001 ruling (paragraph 148) states: "The distinction between the domestic support and export subsidies disciplines in the Agreement on Agriculture would also be eroded if a WTO Member were entitled to use domestic support, without limit, to provide support for exports of agricultural products (paragraph 91) The potential for WTO Members to export their agricultural production is preserved, provided that any export-destined sales by a producer at below the total cost of production are not financed by virtue of governmental action (paragraph 92)". And the Appellate Body ruling of December 2002 repeats (paragraph 148): "If governmental action in support of the domestic market could be applied to subsidize export sales, without respecting the commitments Members made to limit the level of export subsidies, the value of these commitments would be undermined. Article 9.1(c) addresses this possibility by bringing, in some circumstances, governmental action in the domestic market within the scope of the "export subsidies" disciplines of Article 3.3". Now, since 65.8% of the US cotton production from 2001 to 2005 has been exported on average, the same share of the cotton domestic subsidies should be considered as export subsidies or, for that matter, as trade-distorting cotton subsidies, to which should be added the formal cotton export subsidies. In 2005 the total subsidies to the exported cotton have reached $3.362 billion: the total cotton subsidies have reached $4.692 billion they have never been so large, of which $266 million in formal export subsidies (the STEP 2 subsidies going to exporters plus the subsidy component of the credit guarantees to exported cotton) and $4.426 billion in domestic subsidies, of which 69.95% or $3.096 billion are actual export subsidies since 69.95% of the production have been exported. Which implies that the formal export subsidies to be eliminated the 1 st August 2006 would account for only 7.9% of the total US export subsidies to cotton! We understand quite well the struggle of the C4 to reduce the tradedistorting domestic subssidies. However its proposal suffers from the confusion made between the reduction of all domestic trade-distorting subsidies and that going only to the exported cotton. In that 6

7 sense, even if the Appellate Body as rules that all STEP 2 subsidies should be eliminated, there is fundamentally no reason to eliminate the major part of them going to domestic cotton users. ] 6. Monitoring and surveillance 17. It is generally accepted that appropriate monitoring and surveillance procedures to monitor domestic support commitments will need to be established. One suggestion is for a new Subcommittee on Monitoring and Surveillance to undertake various tasks comprising of a review of notifications, peer review, assessment and evaluation, reporting and surveillance. Another proposal is to enhance the existing format of notifications (for example, to include data on Current Overall Trade- Distorting Support) and ensure timely submissions, including by means of a penalty in Current Total AMS for Members with overdue notifications. Also, in addition to a regular review of notifications by the Committee on Agriculture, in-depth examinations of each Member's notifications (both Table DS:1 and Table DS:2) would be carried out on a rolling basis, with the three Members with the highest amounts of support being reviewed every year. [Indeed this issue is the most important one of the Round. What would be the utility to sign a new AoA if it does not include the mechanisms that would prevent the reproduction of the massive cheatings of the most important Members acknowledged up to now? Beyond the usefulness of a new Sub-committee on Monitoring and Surveillance advocated by the G-20, one should not escape to revise the role of the WTO Secretariat. Willy nilly for most Members the Secretariat is viewed as an interpreter of the WTO law when it produces its numerous reports and notes on most aspects of each trade sector, particularly on agriculture. In trying to stick to its alleged neutral role, the Secretariat confines itself in repeating what the most influential Members are saying, even when they are lying or, to be more diplomatic, when they take a large liberty in interpreting the WTO rules. For example, in the Secretariat's Note on the Summary report of the meeting of the Committee on agriculture held on 27 January 2006, "The United States enquired whether the Secretariat had taken any steps to assist developing countries to fulfil their notification obligations. The Chairman pointed out that the Secretariat was at (developed and developing) Members' disposal to help them prepare their notifications. In addition, a training module specifically dedicated to notification obligations under the Committee on Agriculture was an integral part of all technical assistance activities carried out by the Secretariat." (G/AG/R/45, 13 April 2006, paragraph 15). However the priority should be, to the contrary, to assist the big players in notifying correctly their agricultural supports in order to prevent them to circumvent their commitments. It is useless to care about the correct notifications of DCs when the largest among them, Brazil and India, do not even reach their de minimis levels of allowed domestic trade-distorting supports and when consequently their applied total AMS is nil (and India has not even a total AMS commitment). In the Secretariat Report of 23 June 2004 on the EU Trade Policy Review (TPR), we read: "The EC has generally met its notification obligations; this has contributed to the transparency of its trade regime" (WT/TPR/S/136): this WTO statement is not true, for many reasons. First because the EU and US notifications on domestic support have been undue for 4 years, since the last EU notification was made the 4 November 2004 for the marketing year and the last US notification the 11 March 2004 for the 2000 and 2001 marketing years, when the rule is to notify them at most 6 months after the end of the marketing year (G/AG/2 of 30 June 1995). How then can we explain that the EU and US manage to transfer to OECD, within this same time span, all their agricultural expenditures of the past year so that OECD can publish its annual report on "Agricultural policies in OECD countries, monitoring and evaluation"? But, beyond this formal violation of the WTO law, more important is the violation of its substance, due to the EU and US massive cheatings in their agricultural domestic supports. Particularly through putting the most important inputs for animal products either in the green box (the US flexibility contract 7

8 payments and direct payments to feedstuffs) or in the blue box (the EU direct payments to COP cereals, oilseeds and pulses fed to EU animals, before their transfer to the alleged green SFP), in contradiction with AoA Article 6.2 which exempt only DCs from notifying in their amber box the "agricultural input subsidies generally available to low-income or resource poor producers". The WTO Secretariat goes on in the last EU TPR of 23 June 2004: "The reformed CAP has greater market orientation and lower market distortions than the current CAP, mainly because of the significant decoupling of payments from production... A single farm payment scheme (SFPS) will replace most of the premia (direct aid payments to farmers) currently offered. The new scheme will no longer be linked to what a farmer produces (it will be "decoupled")... A major aim of the SFPS is to allow farmers to become more market oriented. Management decisions, formerly influenced by what the CAP offered in subsidies, may now be taken on the basis of market requirements" (WT/TPR/S/136). In endorsing the EU cunning communication, the Secretariat lets the other Members accredit what is a huge myth: far from being driven by a market orientation, the new CAP is moving far away from it since the EU agricultural prices are less and less market prices, being more and more below the average production costs. So that the EU agri-food products are sold at prices much "less than their normal value" and are not the prices that would prevail "in the ordinary course of trade". In other words, the EU agricultural sector is no longer that of a "market economy" and the EU agri-food products could be prosecuted at the WTO using the procedure used by the EU itself against "non marlet economies". Besides the SFP is not fully decoupled as the Appellate Body has shown for the US direct payments and for other reasons. The WTO executive who has prepared this EU TPR report has confirmed to me that the WTO analysis was based only on the information the EU Commission agreed to pass on to the WTO, a statement that can be enlarged to all other Members. The EU and US overdues are particularly harmful for the other Members since there is no retroactivity of sanctions against their past massive cheatings and their correlative dumping. Not only the Peace Clause had already prevented complaints against them until 2004, their overdued notifications have allowed them to go on. In the meantime they have been able to change their agricultural policies, and the EU particularly to supposedly "green" its direct payments, so that it is more difficult to prosecute them. Yet Article 11.3 of the Antidumping agreement could still allow some action: "Any definitive anti-dumping duty shall be terminated on a date not later than five years from its imposition... unless the authorities determine, in a review initiated before that date... that the expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury". However for this to happen the EU and US should notify the subsidies granted in the last marketing years. To conclude on what was said above on this issue of monitoring and surveillance, the Members should agree two points: 1) That all the overdued notifications should be eliminated before the Doha Round could be signed, which would imply the obligations for the US to notify the years 2002 to 2005 and for the EU the years to ) That the Secretariat should be entitled with the obligation to remember to Members the correct interpretation of the AoA rules, including the case law of the Appellate Body precedents.] 8

9 Committee on Agriculture, Special Session 24 May 2006 Domestic Support Chair's Reference Paper AGGREGATE MEASUREMENT OF SUPPORT (AMS) AND DE MINIMIS Background Paragraph 5 of the Hong Kong Ministerial Declaration states, inter alia, that: "On domestic support, there will be three bands for reductions in Final Bound Total AMS and in the overall cut in trade-distorting domestic support, with higher linear cuts in higher bands. In both cases, the Member with the highest level of permitted support will be in the top band, the two Members with the second and third highest levels of support will be in the middle band and all other Members, including all developing country Members, will be in the bottom band. In addition, developed country Members in the lower bands with high relative levels of Final Bound Total AMS will make an additional effort in AMS reduction. We also note that there has been some convergence concerning the reductions in Final Bound Total AMS, the overall cut in trade-distorting domestic support and in both product-specific and non product-specific de minimis limits. Disciplines will be developed to achieve effective cuts in trade-distorting domestic support consistent with the Framework. The overall reduction in trade-distorting domestic support will still need to be made even if the sum of the reductions in Final Bound Total AMS, de minimis and Blue Box payments would otherwise be less than that overall reduction. Developing country Members with no AMS commitments will be exempt from reductions in de minimis and the overall cut in trade-distorting domestic support [...]" Paragraph 9 of the Agreed Framework (Annex A of WT/L/579) states that: "To achieve reductions with a harmonizing effect: Final Bound Total AMS will be reduced substantially, using a tiered approach. Members having higher Total AMS will make greater reductions. To prevent circumvention of the objective of the Agreement through transfers of unchanged domestic support between different support categories, product-specific AMSs will be capped at their respective average levels according to a methodology to be agreed. Substantial reductions in Final Bound Total AMS will result in reductions of some product-specific support." Paragraph 10 states: "Members may make greater than formula reductions in order to achieve the required level of cut in overall trade-distorting domestic support." Paragraph 11 states: "Reductions in de minimis will be negotiated taking into account the principle of special and differential treatment. Developing countries that allocate almost all de minimis support for subsistence and resource-poor farmers will be exempt." Paragraph 12 states: "Members may make greater than formula reductions in order to achieve the required level of cut in overall trade-distorting domestic support." Ad memorandum Paragraph 11 of the Hong Kong Ministerial Declaration states, inter alia, that: "[...] Members agree that the objective is that, as an outcome for the negotiations, trade distorting domestic subsidies for cotton production be reduced more ambitiously than under whatever general formula is agreed and that it should be implemented over a shorter period of time than generally applicable. We commit ourselves to give priority in the negotiations to reach such an outcome." Paragraph 6 of the Agreed Framework (Annex A of WT/L/579) states that: "The Doha Ministerial Declaration calls for "substantial reductions in trade-distorting domestic support". With a view to achieving these substantial reductions, the negotiations in this pillar will ensure the following: Special and differential treatment remains an integral component of domestic support. Modalities to be developed will include longer implementation periods and lower reduction 9

10 coefficients for all types of trade-distorting domestic support and continued access to the provisions under Article 6.2. There will be a strong element of harmonisation in the reductions made by developed Members. Specifically, higher levels of permitted trade-distorting domestic support will be subject to deeper cuts. Each such Member will make a substantial reduction in the overall level of its tradedistorting support from bound levels. As well as this overall commitment, Final Bound Total AMS and permitted de minimis levels will be subject to substantial reductions and, in the case of the Blue Box, will be capped as specified in paragraph 15 in order to ensure results that are coherent with the long-term reform objective. Any clarification or development of rules and conditions to govern trade distorting support will take this into account." Paragraph 7 states: "The overall base level of all trade-distorting domestic support, as measured by the Final Bound Total AMS plus permitted de minimis level and the level agreed in paragraph 8 below for Blue Box payments, will be reduced according to a tiered formula. Under this formula, Members having higher levels of trade-distorting domestic support will make greater overall reductions in order to achieve a harmonizing result. As the first instalment of the overall cut, in the first year and throughout the implementation period, the sum of all trade-distorting support will not exceed 80 per cent of the sum of Final Bound Total AMS plus permitted de minimis plus the Blue Box at the level determined in paragraph 15." Structure for Discussion Introduction 1. This reference paper addresses three issues related to the Amber Box reductions in Final Bound Total AMS, the establishment of product-specific AMS caps and reductions in de minimis. Other issues relating to domestic support, that is, the Blue Box, the overall reduction in tradedistorting domestic support and the review and clarification of the Green Box are addressed in separate reference papers. Clearly, the modalities will have to address these and a host of other issues before they can be considered complete. 2. Difficult political decisions are needed to decide the cuts in Final Bound Total AMS, the product-specific AMS caps and reductions in de minimis. In the areas under consideration in this reference paper, there has been a considerable degree of convergence through Members' proposals. We should remind ourselves that this is no small thing. AMS measures are the most trade-distorting and presumably this should constitute a particularly valuable part of our work. In fact, we are in the zone of cutting the highest of these entitlements by something between 60 and 83%. That is not to underestimate the divisions that remain, but we need now to close the gaps to get to final convergence. [Far from being "the most trade-distorting measures", 94% of the EU total AMS and 40% of the US total AMS in their last notified marketing years ( and 2001) are fake market price supports and the box-shifting from the AMS to the blue and green boxes is increasing trade distorsions. Indeed they consist of PS AMSs linked to administered prices, which have no effect by themselves on the domestic price but their subsitution by blue or green subsidies has allowed the EU and US to increase their actual subsidies. Thus the elimination the 1 st July 2002 of the EU intervention price of beef has allowed the EU to reduce its total AMS by 24.5% or 9.7 billion from one day to the other, without any impact on the market price the producer price has increased by 7.4% in 2002, 0.9% in 2003, 5.2% in 2004 and 8% in 2005 or on farmers' income since the elimination of the intervention price was more than offset by increased direct payments, from 2.9 billion in 1999 to 6.0 billion in And this despite the collapse of intervention stocks from 222,500 t at the end of 2001 to 213 t at the end of 2003, because other factors have played to increase the price: lower production linked to milk quotas and maintenance of high tariffs (66% on boneless fresh or chilled meat, 100% on boneless frozen meat and 16.6% on canned meat). 10

11 Furthermore, once eliminated the EU's intervention price on bovine meat, and consequently the AMS on bovine meat which represented 47,5% of the the billion of production value of bovine meat in much above the de minimis ceiling of 5% of that value, this elimination has created a new de minimis support for bovine meat of 1,033 billion. The way the AMS linked to an intervention price is computed corresponds to a theoretical market price support, not to an actual price support, the more so as the world reference prices of were very low. Thus this type of AMS is much larger than the cost of the compensating blue or green subsidies, so that the EU and US have a huge interest in replacing their PS AMSs linked to administered prices by subsidies since this lowers their total coupled support, the more so when they are in the blue or green boxes: the elimination of the 9.7 billion of the EU bovine meat AMS linked to its intervention price has been replaced by 3 billion of direct payments and the elimination of the 5.8 billion of its sugar AMS linked to its intervention price will be replaced the by a direct payment to sugar beet growers of 1.5 billion. Even if the share of PS AMSs linked to administered prices in the US PS AMSs is much lower than in the EU (40.4% in 2001, last year notified, for dairy, sugar and peanut), the dairy products AMS has remained the largest component of the US PS AMS, with $4.5 billion in However the high prices of US dairy products are not linked to their administered prices much lower than market prices and therefore never activated but to the high level of import protection. AMSs linked to administered prices should therefore be eliminated altogether since they have allowed developed countries to look like reducing their coupled supports when they have not but have increased instead their decoupled subsidies. Since paragraph 9 of the Framework Agreement states that "productspecific AMSs will be capped at their respective average levels according to a methodology to be agreed", they should be eliminated when they are linked to administered prices (or equivalent prices). Only the subsidy component of the total AMS should be kept. Indeed, according to the year retained for capping the PS AMSs, the EU could increase more or less greatly its overall domestic coupled supports since its specific AMSs have decreased from 43.7 billion notified for to about 30 billion the 1 st July 2002 and will be of about 19.7 billion in That is why FAO has asked to eliminate the market price support component of AMS: "AMS should be defined as only that support that is financed by the taxpayer, in other words, the budgetary expenditure on support. Consumer financed payments should be omitted from the calculation to avoid double counting with border support" (FAO, Domestic support: trade related issues and the empirical evidence, FAO Trade Policy Technical Notes on issues related to the WTO negotiations on agriculture, n 5, 2005).] 7. Final Bound Total AMS 8. Thresholds 3. The Agreed Framework and the Hong Kong Ministerial Declaration require that Final Bound Total AMS should be reduced by a tiered formula with three tiers. The Member with the highest level of permitted support should be in the top tier, the next two Members in the middle tier and all other Members, including all developing country Members, in the bottom tier. What this means is that the European Communities (with a Final Bound Total AMS of billion) is in the top tier, the United States ($ billion) and Japan ( 3,972.9 billion) in the middle tier and all other Members with AMS commitments in the bottom tier. 9. Reduction in Final Bound Total AMS 4. There has been a considerable degree of progress on the actual reductions that should apply in each of the three tiers. However, so far this year, there has not been any further progress and we must now narrow differences, noting the following table which I first prepared for my report to the TNC in JOB(05)/306 of 23 November 2005 (later distributed as TN/AG/21 and as Annex A to the Hong Kong Ministerial Declaration WT/MIN(05)/DEC)

12 Tiers Cuts % % % Exactly what these reductions would mean to the Current Total AMS has been raised and can be derived from Members' notifications and Secretariat background documents like TN/AG/S/4 and TN/AG/S/13. Some of the heaviest users, in both absolute and relative terms, of Amber Box support have not, however, submitted notifications for some years now. [Indeed and the Members should demand that at least the OECD countries communicate their notifications before the next General Council meeting, an easy task for them since they have already transmitted the same data to OECD!] 6. As we embark on working towards convergence on AMS cuts, we also need to set out modalities as to the additional effort in AMS reduction to be undertaken by the developed country Members in the lower tiers with Final Bound Total AMS levels that are high relative to the total value of agricultural production. Details are yet to be settled, although it was already signalled that the extent of additional effort would reflect the size of cuts and outcomes in the other pillars. 7. While the issue of exchange rate fluctuations and inflation as they relate to AMS commitments has been raised, many consider that these situations are already addressed by the existing provisions in Article 18.4 of the Agreement on Agriculture. If Members consider that anything above and beyond the existing Article 18.4 is needed, we would need to define what it would be. 8. As regards special and differential treatment for developing country Members, some Members have suggested that the cuts would be less than two thirds of the developed Members' cut along with a longer implementation period. 12. Product-specific AMS caps 9. The Agreed Framework states that product-specific AMSs are to be capped at their respective average levels according to a methodology to be agreed. In the discussions that have taken place so far on the methodology the focus has been on the average product-specific AMS support provided during a base period. Following requests from some Members, the Secretariat produced a background note (TN/AG/S/15/Rev.1) which summarises the information provided by Members in their notifications on domestic support. 13. Base period 10. Two alternative base periods have been suggested for the product-specific AMS caps 1995 to 2000 (or the possibility of choosing 1995 to 2004 for developing countries) and 1999 to Selection of a particular base period will have a considerable impact on some Members, particularly those countries that have undergone major changes in support policies. To give one extreme example, for one particular Member, the alternative base periods would mean a difference of 160% for AMS support for one product, for another Member it would mean the difference between a substantial amount of AMS support for a product and no AMS support. We can, of course, go on endlessly debating this until one side surrenders. Alternatively, we need some practical solution. One such approach that has been suggested is to use the period except in cases where support was introduced after the year [As already explained above, chosing the period is not permitted by the Framework Agreement since the Final Bound Total AMS was only reached at the end of December 2000 or June 2001 for developed countries so that the reduction of this Final Bound Total AMS can only start from those levels in January or July It would be contradictory to use a different base period to cap the PS AMSs since the total AMS is made of the sum of PS AMSs and the non PS AMS. Furthermore the idea of capping the PS AMSs came with the intent of using an average of years to levelling out the high variations from one year to the other, largely due to changes in world prices and production levels. Using a period of several years to level out these variations would still be possible in demanding that developed countries, particularly the EU and US, would notify promptly their domestic supports from 2002 to 2005, which does not pose any practical problem as seen above but is only a matter of political will in order not to show how large their box-shifting has been since 2002.] 12

13 11. Concerning support that is at or below de minimis levels during the base period it seems to be reasonably widely accepted that the cap would still be the de minimis level or some other percentage of the value of production of that product. 14. Other 12. Some Members have taken the view that the effectiveness of product-specific caps is to be linked to the effectiveness of the Blue Box criteria which are to be developed and to the need to ensure that non-product-specific support is not used to circumvent the product-specific caps commitments. [They are right since the US has abused of the NPS AMS in putting there actual PS subsidies: 1) First the Market loss assistance payments (MLPs), the precursor of the counter-cyclical payments (CCPs) that the US would like to put in the new blue box: Even though MLPs and CCPs are not linked to the current production so that farmers can grow which crop they want, they are computed on a product-specific basis. All the parameters to compute them are product-specific: the payment rate (gap between the target price and the direct payment rate plus the higher of commodity price or loan rate), the payment acres (85 percent of base acres), and the payment yield. According to article 1 of the AoA, "Aggregate Measurement of Support" and "AMS" mean the annual level of support provided for an agricultural product in favour of the producers of the basic agricultural product or non-product-specific support provided in favour of agricultural producers in general" whereas the French version writes "du soutien autre que par produit accordé en faveur des producteurs agricoles en général". The French definition which is as legally binding as the English and Spanish versions is more restrictive because "soutien autre que par produit" means more explicitly that the subsidy is not given to a product or group of products, whatever they are, but "in favour of agricultural producers in general". Indeed the CCPs are granted only to farmers having grown in the base period a limited number of "grains": wheat, corn, grain sorghum, barley, oats, rice, soybean, other oilseeds, upland cotton. The US false interpretation rests on a mix-up between product specificity and decoupling. To put MLPs and CCPs in the NPS AMS because they are not tied to current production of any specific product is an argument of decoupling. If decoupling is the appropriate concept to classify subsidies in the green box and not in the amber box, it is of no use to tell if they should be placed in the product specific AMSs or non product specific AMS. MLPs were rightly put in the amber box because they were granted to compensate farmers for the slump in agricultural prices. But decoupling is of no use to know in which part of the AMS MLPs should have been put. Like PFC payments, MLPs and CCPs are specific because they are linked to soils growing a restricted number of grains and which type of grains would be grown each year could change only to a narrow extent, given climatic and rotational constraints. As Daniel de la Torre Ugarte puts it, in the middle West, "if farmers do not grow soybean and corn, they will grow corn and soybean!" (statement made the 27 May 2004 at the WTO Symposium on "Multilateralism at the crossroads"). MLPs and CCPs are specific because the increased current production of each specific crop has reduced its specific price, which explains the necessity of these payments. 2) But also the subsidies on agricultural insurances: each insurance policy is crop-specific, area-specific and farmer-specific so that the subsidy to that crop insurance is clearly specific itself. Daniel Sumner has been able to identify at $19 per acre the national average insurance subsidy on cotton in 2002, which is the best evidence that insurance subsidies are specific and that it is possible to do the same calculus for the other crops (more details are available in J. Berthelot, The king is naked, 7 November 2005 (in the Solidarité and WTO websites). 13. As regards implementation, and we have not discussed this in detail, Members will need to decide whether the product-specific caps are to be applied from the start of implementation or would they need to be phased in. The phasing in could, for example, be done in tandem with the staging of AMS commitments. [If the Members have decided to cap the PS AMSs it is clearly to apply them from the start. However, as explained in "The king is naked" and "The empty promise of the EU", capping or binding all the PS AMSs at their applied level of an agreed period will create a new bound "base total AMS" as long as the 13