Some Issues on Agreement on Agriculture and Food Security [Expert View]


Food security is a very sensitive issue. India believes that trade liberalization in agriculture has lead to a rise in process, switching of farmers from cereal crops to cash crops leading to food shortage on macroeconomic level. Uruguay Round produced first Memorandum in the agricultural sector which was a significant step towards a fair competition and less distorted sector. Agriculture will always remain a key issue in WTO. Under the GATT Agreement on Agriculture was subjected to Soft discipline as compared to Industrial products. The EU had implemented huge subsidies to protect the interest of its own farmers and it has also depressed the food prices globally.
In developing countries agriculture is not only of great economic relevance but also, a social and political concern in India and this issue needs to be addressed up in the ongoing negotiations on agriculture. India is one of the developing countries where the factors discussed above are applicable and thus the need of the hour is to negotiate on agriculture and discuss this matter before other issues which developed countries want to negotiate. The FAO defines Food security as the access and availability of food  to people physically as well as economically, available at all the times to them so as to live an active, healthy life without having any risk to loss of such access and food is directly connected with the livelihood of people in developing countries. The developing countries are self-sufficient in producing their food requirements to satisfy their population in spite of the constraints they have been facing by the developed countries like USA, EU.

Agreement on Agriculture and Food Security

Issue 1: Whether Article 3.3 of the Agreement on agriculture is consistent with footnote 1 or not.

In the EC sugar subsidies case the  primary issue for consideration was whether Article 3.3 of the Agreement on agriculture is consistent with footnote 1 or not.
The court was of the view that the intention of the drafter was to mention ‘budgetary outlays’ and quantities together as both section 9.2(b)(iii) and 9(b)(iv) use those words. Based on the same logic the European Communities argued that the use of the word ‘and’ in both the section only denotes the existence of the commitment but the member countries are not obliged to schedule it.[1] However, this plea was rejected by the Court. The court observed that in order to interpret both section 9.1 and 3.3, the requirement is that export subsidies are to be expressed in terms of both budgetary outlays and quantities in pursuant of fulfilment of the ‘long-term objective’ of the WTO which is to provide for ‘substantial progressive reduction in agricultural support and protection’. Thus, the fourth paragraph expresses that commitment of WTO is to achieve binding commitment’ in export commitment. If an export subsidy is allowed to specify only one commitment which the member chooses it would weaken the disciples of export subsidy.
Now, the second argument by the European communities was with regard to the modalities paper which was referred to in two ways. Firstly, the two commitments budgetary outlays and quantities are obligated to be scheduled but these obligations were not carried over in the agreement on agriculture. The European Communities does not contend that ACP/India equivalent sugar is an incorporated product, but it was further agreed that to answer the legal question whether there is an obligation to mention the words budgetary outlays and quantities together in the agreement on agriculture, the treatment of incorporated products need to be considered.[2] The EC, however, fails to identify any provision of the modalities paper providing any provision to schedule non-incorporated products like sugar in terms of only budgetary outlays or quantities.
Therefore, it was held that 3.3 requires a member to schedule both budgetary outlays and quantities and since footnote 1 does not contain a budgetary outlay commitment in respect to export subsidies provided to ACP/India, it is inconsistent with article 3.3 of the agreement on agriculture.
Issue 2: whether article 9.1 is inconsistent with footnote 1 or not.
The 2nd issue before the Court for consideration was whether article 9.1 is inconsistent with footnote 1 or not.
It was argued by the European communities was that the purpose of 9.1 was to define the scope of the subsidies which are listed under the commitment level. Further, it was argued that Article 9.2(iv) does not specifically say that budgetary outlay and quantity should be reduced by the coefficients mentioned in the provision. The Court observed that as per the chapeau clause, article 9.1 the subsidies that are listed under the article are subject to reduction commitments. Therefore, sugar subsidies are subject to reduction commitments. The EC argued that they have fulfilled the obligation of reducing commitment level. But the Court found no evidence to support that the European communities have reached the commitment level both in terms of ‘budgetary outlays’ and ‘quantitates. Hence, Article 9.1 was held to be inconsistence with footnote 1. The Court was of the view that as per the requirement of Article 3.1, the member is required to limit its subsidization to budgetary outlay and quantity reduction commitment as specified in the member’s schedule.
Issue 3: whether claimed commitment in Footnote 1 "limiting" subsidization of exports of sugar can prevail over the provisions of the Agreement on Agriculture, despite such a commitment being inconsistent with Articles 3.3 and 9.1 of the Agreement on Agriculture.
With regard to this issue, it was submitted by the EC that footnote 1 is inconsistent with agreement on agriculture as there is no hierarchy between export subsidy commitment in a member schedule and agreement on agriculture.[3] The Court, however, rejected this plea relying on the language used in article 8 of the agreement that members can only provide subsidies when they are in conformity with the agreement on agriculture. Footnote 1, being part of the European Communities' Schedule is an integral part of the GATT 1994 by virtue of Article 3.1 of the  Agreement on Agriculture.  Therefore, pursuant to Article 21 of the Agreement on Agriculture, the provisions of the Agreement on Agriculture prevail over Footnote 1.[4]
Therefore, it was found, Footnote 1 is inconsistent with Article 9.1 of the Agreement on Agriculture because of exports of ACP/India equivalent sugar is not subject to reduction commitments. As Footnote 1 is inconsistent with the provisions of Articles 3.3 and 9.1, it follows that Footnote 1 is also inconsistent with Article 8 of the Agreement. But Court said that footnote 1 had no effect of modifying the commitment level of the European countries as set out in the schedule.
The next issue which arose before the Court was issue of payment. The panel examines 2 types of payment- the first one payment on export received by the C sugar producers[5] by governmental action through the sale of C beet below the cost of production and second type of payment by government action in transfer of financial resources through cross-subsidization. According to the panel both the incomes come within the purview of Article 9 (1)(c), therefore a part of 9(1).
Issue 4:  whether the sales of C beet involve export subsidies or not
Regarding the issue of whether the sales of C beet involve export subsidies, the panel made 3 observations- first, that sales of C beet involved "payments", because C beet was being sold at prices below its average total cost of production[6];  secondly, that these payments were "on the export"[7];  and, thirdly, that these "payments" were "financed by virtue of governmental action".[8]  The European Communities does not appeal the first and second of these Panel findings.  Rather, the European Communities appeals the third Panel finding, that is, that "payments" in the form of sales of C beet are "financed by virtue of governmental action".  The panel found that every aspect of domestic beet and sugar supply and management is controlled by the European Countries.  In particular, the price and supply of A and B beet are fixed with a view to ensuring a stable and adequate income to beet growers. The governmental action of imposing penalties on the producers that divert C sugar into domestic the market is found to be indispensable to the transfer of resources from consumer and taxpayers to sugar producers and through them to A and B beet grower.[9]
The main issue related to Agreement on Agriculture is that European Communities provided export subsidies for sugar in excess of its reduction commitment levels specified in Section II, Part IV of the European Communities’ Schedule, in violation of certain provisions of the Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures governing export subsidies.
According to article 9.1(b), the term ‘Government action’ connotes an effective power to regulate, control or supervise individuals or restrain their action by exercising lawful authority.[10] However, the government mandate or other directions are not necessary.[11] Also, ‘financed’ was interpreted as mechanical or process through payment was made to provide financial resources. That payment must not be provided by the government but by the private parties. The appellate body further clarified that if there is very tighter link between government actions and finance then only be considered as ‘financed by virtue of governmental action’. This clause gives some leeway for government involvement but that has to be decided by case to case basis[12].

Financing of C beet by the government

The second issue involves is that EC regime regulates the price of A and B beet and ensure stable and adequate income by providing a contractual framework to beet grower and sugar producers. The main problem in this regard is growing of C beet is not ‘incidental’, but rather an ‘integral’ part of the governmental regulation of the sugar market.[13] Since both C beet grower and C sugar producer have an incentive to supply and produce to maintain shares in A and B market and receiving demandable price. After analysing the issue thoroughly, the appellate body decided that there exist tight nexus between the govt action and payment. Thus the sales of C beet cannot take place profitably at a price below the total cost of production.[14]
Further, the appellate body overlooked the second contention raised by the EC by applying the principle of constructive res judicata.[15] The EC also argued that their factors also involved which do not have any link between govt actions and finance but failed to provide distinction between dairy product and sugar beet production. Also, contended that there exists two type of C beet production: Production of C beet is due to “profit reasons”[16], and another part is by ‘other factors’ which is unintended. Considering the entire scenario, it is quite clear that the status of farmers, their continued cultivation of C beet would not be possible without government actions.   

Cross Subsidization is payment under art 9.1(c) of agreement on agriculture?

According to the EC, Cross Subsidization is mere internal allocation of resource by the producers. Also, argued that it does not provide any benefit to the producers. The appellate body laid down standard for determining ‘payment’[17] that depended on a comparison between the price of a particular product that is ‘commercial export milk’ and an ‘objective standard or benchmark’ which reflects the proper value of that product to its provider.[18] The panel applied the test of average total cost of production which was denied by the EC saying that it does not provide new additional sources to the producers. Contrary to it, the EC argued that there has to have two entities for receiving and granting the resources. Appellate body analysed Art 9.1(c) and held that ‘payment’ under this article is ‘on the export of an agricultural product’ and ‘financed by virtue of governmental action’. The appellate body partly agreed on the contention of EC that it requires two entities but differed on the view that in every case, it does not require two entities. The general economic understanding is that in a business transaction the operator makes the decision to produce and sell the product to get in return some profit out of that production.[19] Therefore, it was clearly established from the C beet was sold at the cost which was very below total cost of the production which is not possible without the help of finance from the other sources. In appeal, they also rejected the contention of the EC that ‘benefit’ is an important element to determine the payment under Art 9.1(c) of Agreement of Agriculture. 

Proposal on Food Security

The objective of Agreement on Agriculture is to establish a fair and market oriented agricultural trading system with further recalling that their objective is to provide for substantive progressive reductions in agricultural support and protection sustained over an agreed period of time, resulting in correcting and preventing restrictions and distortions in world agricultural markets. Also the Preamble to Agreement on Agriculture provides that there should be reform programmes in an equitable way among all the members having regard to non- trade concerns including food security and the need to protect the environment. Article 20 of the AOA provides for continuation of the reform process by recognizing the long term objective of substantial progressive reductions by taking into account non – trade concerns, special and differential treatment to developing country members and to establish a fair and market-oriented the agricultural trading system along with the other objectives of the Preamble.
Agreement on Agriculture is essential and is very important to ensure food security and also alleviation of poverty. In developing countries agriculture is the basis of employment to the majority of the population and workforce, leading to a significant contribution to GDP of the developing countries. Most of the developing countries are engaged in subsistence land farming with a small share of landholdings, unirrigated and heavily dependent on soil, climatic factors. The productivity is also low which causes less participation in these countries in International trade of agricultural commodities.
The importance of developing countries on agriculture when compared to developed countries is based on factors like-

  1. Agriculture employs over 70% of the labour force in low-income countries, 30 per cent in middle-income countries and only 4 per cent in high-income countries.[20]
  2. A significant contribution to GDP in developing countries.
  3. Agriculture is an important source of revenue generation and also a significant contributor and source of foreign exchange.
  4. Food consumption in developing countries as compared to developed countries contributes a large share of expenditure.
  5. The social and economic vulnerability of agriculture in developing countries is seen from various factors like weak market orientation, low level of commercialization of agriculture, low productivity, and high dependency on monsoons, natural calamities, poor infrastructure etc.
These factors are thus the reasons because of which a large majority of the population is dependent on agriculture as a major source of income and livelihoods. Thus it is the need of the hour to protect this viable source of livelihood and to reduce the poverty level. The imports are also many times constrained by meagre foreign exchange resources. The rise in the prices and also fluctuations in the International market in the world the food grain markets have created a problem for developing countries and food entitlements of the poor if it is transmitted to domestic economies of developing countries. It is also not desirable for developing countries to largely depend on imported food because of inadequate physical and institutional infrastructure in rural areas. The farmers also suffer the problem of income entitlements due to shift in cropping patterns or relocation because of low literacy levels, limited infrastructure.
The income entitlements of people in developing countries are largely dependent on agricultural production and it is threatened due to an increase in subsidized imports. Commodities which are of great significance for the developing countries like wheat grains, oilseeds, vegetable oils, sugar etc. are subjected to high levels of export subsidies by the developed countries. The export subsidies in developed countries artificially depress the international prices, and thus lower the farm incomes of producers in importing countries, thus practising high trade distortions due to which developing countries require a level of tariff protection. Thus developing countries should be allowed to revise the bound levels of their sensitive items. Reduction in tariffs by the developing countries would be considered only after a substantial reduction in trade-distorting domestic subsidies and the elimination of export subsidies.
The green box of WTO and its present structure shows that most of the provisions are not used by developing nations. Input subsidies given by developing countries for crops wherein production levels are far below the average should be covered under the green box.  Also, there is a demand to exempt developing countries from the ambit of AMS calculations.
There is also a need to address the issues like market access, domestic support, export subsidies to enable developing countries to take care of food security and livelihood issues.


From the above, it can be seen that the following measures would constitute a 'Food Security Box' for developing countries:
  1. All the provisions of Annex 2 to be continued except direct payment to producers, decoupled income support, and Government financial participation in income insurance and income safety-net programmes.
2. All measures taken by the developing countries for poverty alleviation, rural development, rural employment and diversification of agriculture should be exempted from any form of reduction commitments.
3. Flexibility should be given to developing countries to give support to their farmers in providing subsidies.
4. Product specific support given to farmers should be excluded from AMS calculations.
5. Negative Product-specific support to be permitted to be adjusted against positive Non-product specific support to take care of inflation and depreciation.
6. Appropriate levels of tariff bindings and rationalization should be allowed to developing countries in areas like export competition, market access.
7. Rationalization of low tariff bindings in developing countries which could not be rationalized in the earlier negotiations.
8. There should be a separate safeguard mechanism on the line of Special safeguard provisions like quantitative restrictions.
9. Developing country members should be exempt from any obligation to provide any minimum market.
10. Also “product coverage” in Annex 1 of AOA is excluded and there is a demand to include products like forest produce, rubber, etc     


It can be seen from the above Agreement on Agriculture that Food security is an extremely important issue and it needs to be addressed in WTO negotiations. India is a developing country and the farmers are heavily depended on it. If subsidiaries are not given to the farmers of developing nations they will not be able to trade internationally and also will not be able to survive as they are totally dependent on agriculture as a major source of livelihood. The proposals put by India in WTO in 2001 are still not addressed and the situation is the same even after 14 years.
When it comes to the European Community they should not completely do away with the subsidies to their farmers otherwise they will become totally dependent on other countries and these other countries may take advantage of such a situation by giving crops etc at a very high price etc. But at the same time while exporting minimum level of standards need to be maintained. The product should not be exported below the average cost price of the product which may otherwise lead to prejudice to other developing countries.

[1] European Communities' appellant's submission, para. 139
[2] European Communities' statement at the oral hearing
[3] European Communities' appellant's submission, para. 156
[4] Ibid.
[5] Panel report para 7.338
[6] Panel Reports, para. 7.270. 
[7] Ibid., para. 7.279.  
[8] Ibid., para. 7.292.
[9] European Communities' Appellant's Submission, para. 268.
[10] Appellate Body Report, Canada – Dairy, para. 97.
[11] Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II), paras. 127-128 
[12] Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US II), para. 134  (referring to Appellate Body Report, Canada – Dairy (Article 21.5 – New Zealand and US), para. 115)
[13] See FN 373.
[14] para 239
[15] Sales of A and B beet are ‘largely insufficient to cover all the fixed costs of producing C beet’ was not argued before the panel.
[16] beet grower takes additional advantage by selling C beet above marginal cost.
[17] Canada – Dairy (Article 21.5 – New Zealand and US)and Canada – Dairy  (Article 21.5 – New Zealand and US II)
[18] para 260
[19] para 266
[20] UNCTAD 1999 'Examining Trade in the Agricultural Sector, with A View to Expanding the Agricultural Exports of the Developing Countries, and to Assisting them in Better Understanding the Issues at Stake in the Upcoming Agricultural Negotiations', TD/B/Com.l/EM.8/2, 23 February 1999.

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