Lecture 25
The Economics of Food Markets
Alan Matthews

• To ensure you have sufficient understanding of the issues in the Doha
Round agricultural negotiations to be able to follow the debate

• WTO agricultural backgrounder
• ICTSD www.ictsd.org
and www.agtradepolicy.org
• World Bank Trade Notes
• FAO briefs
• EU DG Trade and USTR websites
• Anania et al. Agricultural Policy Reform and the WTO

• Third WTO Ministerial Meeting in Seattle in November
1999 failed to launch comprehensive negotiations
• Article 20 negotiations:
– Analysis and Exchange
– the EU’s Comprehensive Negotiating Proposal , December 2000
• Doha Mandate, November 2001
• EU’s Specific Drafting Input, January 2003
• Harbinson Modalities, Feb/March 2003
• Adoption of the Fischler Reforms, June 2003
• EU/US Joint Initiative, August 2003
• Cancún Ministerial, September 2003 Derbez draft

• EU’s offer to eliminate export subsidies,
May 2004
• Framework Agreement, July 2004
• Paris May 2005 agreement on AVEs
• Dalien July 2005 G20 proposal on market access
• Zurich Oct 2005 proposals on market access
• Hong Kong Ministerial, December 2005

• New deadline of April 2006 to reach agreement on modalities
• Chairman Falconer’s reference papers
April-June 2006
• July 2006 Suspension of Doha Round
• January/Feb 2007 Revival of negotiations
• Chairman’s draft modalities July 2007
• Chairman’s revised draft modalities
February 2008

• Negotiating process
– Special Committee on Agriculture
– ‘Green Room’
– WTO Ministerial Council meetings
• Developed countries
– US, EU
– Cairns Group
– G-10
• Developing countries
– G-20
– G-90
– G-33

• Market access
• Export subsidies
• Domestic support
• Non-trade concerns
• Special and differential treatment (S&DT) for developing countries

• High bound tariffs remained in agriculture after
URAA – 62% on average
• Tariff-cutting approaches
– Request and offer vs formula approach
– Linear vs harmonising formulae
– Cocktail formulae
• Principles suggested
– Progressivity, flexibility, proportionality, and effective market access
– Latter raises the question of ‘binding or tariff overhang’

• The tiers (how many? Which thresholds?)
– G20 proposal at Dalien accepted as basis for discussion
• The tariff reduction formula within each tier
– Linear cut, progressive linear cut, Swiss formula, Uruguay Round approach (allows for flexibility)
• Sensitive products
– How many, and what treatment?
• Crucial – the overall level of ambition

• Specific and mixed tariffs have to converted into AVE’s to know into which tier they fall
• AVE conversion is straightforward for some tariff lines;
Members use the 'unit value' method in these cases, basing the conversion on notified import values in the
WTO Integrated Database (IDB) and import volumes.
• Complications arise where preferences or tariff quotas are involved. In such cases, import prices often differ significantly from the world prices compiled in the UN commodity trade statistics (ComTrade) database.
• Agricultural exporters wanted conversion based on the lower world prices, which would lead to higher AVEs, and eventually, steeper tariff cuts.

• Banded (or tiered) formula, where higher bands would be subject to a higher average reduction
• Blended formula, where tariffs are reduced according to a mix of three approaches: the
Uruguay Round approach, the Swiss formula, and cutting tariffs to zero.
• Harbinson proposed using UR formula within each band
• Options for flexibility – UR formula, sensitive products

• T
1
= a T
0
/( a +T
0
)
• With parameter a of 140, a tariff of 350% is reduced to 100%
• With parameter a of 60, tariff reduced to
51.2%
• With parameter a of 16, tariff reduced to
15.3%

Figure 1: Comparison of UR formula
1)
, Swiss formula
2)
and Harbinson proposal
3)
180
160
140
120
100
80
60
40
20
0
0 50 100 150 initial t ariff rat es
200 250
UR Formula Swiss Formula Harbinson proposal
1) A uniform cut of 36% is assumed for the UR formula. 2) A value of 25 is assumed for the coefficient of the Swiss formula 3) The highest possible values for developed countries are assumed within each band of the Harbinson-Proposal.
Source: Own calculations, FAL.

Formula: P d
= P
0
( 1 + 0.64 t ) for developed countries or P d
0.76 t ) for developing countries
= P
0
( 1 +

Measuring the level of ambition
Illustration of binding (tariff) overhang
Bound tariff pre-Doha
50% cut
Bound tariff post-Doha
• Binding (tariff overhang is where a cut in bound tariffs would have no effect in cutting current applied tariff rates – no increase in effective market access
Bound tariff
Applied tariff

• “Average of the tariff cuts” vs “Cuts in the average tariff”
• Former is measured as the average of all individual percentage cuts
• Latter is the comparison of the average tariff level pre- and post- negotiations
• Former was the method used in the Uruguay
Round..
• .. but has no economic meaning because a high average cut can by obtained by cutting many low tariffs by a large amount (100%)

Product Initial tariff
A 100
Cut
60
Final tariff
Cut in average tariff
40
B
C
Average
10
10
40
20
20
33.3
8
8
18.7
53.3

EU
Average tariff before cuts
28
Average tariff after cuts
15
Cut in the average tariff
47
Average of tariff cuts
39
US
Canada
15
21
8
10
48
52
37
38
Japan
Brazil
India
61
37
116
20
26
72
66
301
38
40
30
36

July 2004 Framework Agreement
• “Without undermining the overall objective of the tiered approach, Members may designate an appropriate number, to be negotiated, of tariff lines to be treated as sensitive, taking account of existing commitments for these products.
• The principle of ‘substantial improvement’ will apply to each product.
• ‘Substantial improvement’ will be achieved through combinations of tariff quota commitments and tariff reductions applying to each product. However, balance in this negotiation will be found only if the final negotiated result also reflects the sensitivity of the product concerned.

• How many tariff lines allowed sensitive?
• What should be allowed deviation from the tariff cutting formula (20%? 50%? Sliding scale 40-60%?)
• How should the corresponding TRQ increase be calculated
– As percentage of domestic consumption
– Expansion based on existing TRQs
– Expansion based on current imports

• Should there be a tariff cap?
• Future of Special Safeguard mechanism (SSG)
• Should specific tariffs be forbidden?
• Administration of TRQs
• Tariff escalation
• Tropical products
• Preferences and preference erosion

• Recall that a TRQ has three elements – quota, in-quota tariff, out-ofquota tariff
• Increase minimum access or reduce in-quota tariff
• Effect depends on whether TRQ is binding
• TRQ administration judged on quota fill and bias in the distribution of trade
• (auctions, first come first served, historic shares, applied quotas)

• AMS trade-distorting support: how much reduction? Reduction method – should support be reduced by a given amount or to a particular level? Limit product-specific support?
• De minimis – what to do about it?
• Blue Box – eliminate it or discipline it?
• Green Box – should criteria be tightened?
Should additional measures be allowed, e.g. non-trade concerns

• Export subsidies – various roads possible to full elimination (by commodity, by tightening value and volume constraints)
• Export credits – discipline by rules, or by constraining government outlays?
• Food aid – is food aid a form of subsidised export?
• Exporting State Trading Enterprises – issues over government guarantees, monopolistic and monopsonistic powers, ability to price discriminate, price pooling

• Two phase process, leading to complete liberalisation
• Elimination of export subsidies within 5 years
• Use of harmonising tariff reduction formula to ensure maximum tariff is 25%
• Expansion of TRQs
• Limit AMS to 5% of value of agricultural production and eliminate Blue Box
• Limited SDT for developing countries

• Continuation of UR formula for tariff reductions
(36% on average with 15% minimum)
• 55% cut in AMS subsidies over 6 years
• Reduction in export subsidy expenditure by 45% and elimination for specific products
• SDT for developing countries, including free access for the least developed countries
• Emphasised non-trade concerns such as food labelling, animal welfare, geographical indications and precautionary principle in the agricultural negotiations

• Cutting high tariffs more than low tariffs using a banded approach
• Suggested using UR formula within each band
• Introduced formula to tackle tariff escalation
• Proposed doubling TRQs
• Elimination of export subsidies over 10 years with parallelism on export credits, food aid and export STEs
• 60% reduction in AMS over 5 years
• Either moving Blue Box into AMS or capping Blue Box and reducing by half over 5 years
• Revisiting Green Box but making environmental and animal welfare payments eligible

Current tariff level
Average cut Minimum cut
< 15%
15% - 90%
>90%
40%
50%
60%
25%
35%
45%

• Followed the failure at Cancun and the
Lamy/Fischler letter offering to conditionally eliminate export subsidies
• Pre-modalities document – set out principles to guide the negotiations but contains no figures and little structure

• Progress in the Ministerial Declaration
– End date for export subsidies (with parallel disciplines to be agreed by 30 April 06)
– Some clarity on the modalities for domestic support reductions
– Minimal progress on market access
– Duty free and quota free access for least developed countries
– Compromise on the cotton initiative
– Aid for trade package

• Export competition disciplines essentially agreed after
Hong Kong
• EU to accept G20 proposal on market access (54% cut in average tariff compared to own proposal of 39%)
– Mandelson Davos speech “ready to add more than 10 percentage points”
• US to bring domestic support down by around 70% to
$15 billion and accept product-specific caps (compared to own proposal of 53% cut in OTDS implying non-green support of $23 billion).
• Messy details on tariff caps, sensitive products, special agricultural safeguards, Special Products and Special
Safeguard Mechanism