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The Uruguay round agreement

After seven years of negotiations the Uruguay Round of Multilateral Trade Negotiations were concluded on 15 December 1993. The Final Act of the Uruguay Round is wider in Scope than any of its predecessors, covering agreements and decisions on a wide variety of subjects of great economic significance to the world economy, This note focuses on the Agreement on Agriculture, the Agreement on Sanitary and Phytosanitary Measures (SPS) and the Decision concerning the least developed and net food importing developing countries. An essential part of the Final Act is the Schedules of Commitments country by country, and commodity by commodity and these were not to be available before its signature at the Marrakech Ministerial Meeting in April 1994.

Description of the Agreement on Agriculture

The implementation of the Agreement on Agriculture will start in 1995, and the commitments of the developed countries to expand market access and to reduce domestic support and export subsidies should be completed within six years, by the year 2000, whereas the commitments of the developing countries should be completed within ten years, that is by the year 2004. The least developed countries are not required to make any reductions.

There are three elements to the commitments on market access: tariffication; tariff reduction and access opportunities. First, members must tariffy their non-tariff barriers (NTB) such as quotas, variable levies, minimum import prices, discretionary licensing, state trading measures and voluntary restraint agreements. These have to be abolished and converted into an equivalent ad valorem or specific tariff. The basic approach is to set a tariff equal to the difference in 1986-88 between the internal price, typically the domestic wholesale price, and the external price, typically the import unit value c.i.f. converted into national currency.

The commitment of developed countries to cut ordinary tariffs, including those resulting from tariffication, is that they be cut by an average 36 percent across all commodities in the six years starting in 1995, with a minimum rate of reduction of 15 percent for each tariff item. For developing countries the cuts are 24 percent on average and a minimum cut of 10 percent. The tariff reduction will be undertaken in equal annual installments and all customs duties will be bound in the GATT.

Where there are no significant imports, a minimum access amount will be established for 1995 equal to 3 percent of domestic consumption in 1986-88 rising to 5 percent of the base figure by the end of the implementation period. Minimum access opportunities will be implemented by a tariff quota with a low rate of tariff set on a Most Favoured Nation (MFN) basis. In the case where current access opportunities are more than the minimum, these will be maintained and increased during the implementation process.

The Agreement on Agriculture contains important special safeguard provisions which allow the imposition of additional duties when there are either import surges or particularly low prices, both compared with levels in 1986-88. In the case of import surges, imposition of additional duties should not exceed one-third of the ordinary customs duties in effect. In the case of low import prices, measured in the national currency, an additional duty can be charged which progressively increases as the price level drops further below the 1986-88 level.

The general approach adopted to domestic support has been to divide policies into two groups: (i) policies which have minimal or no production or trade distorting effects, those in the "Green Box" and (ii) policies subject to reduction commitments. The total support given to agriculture in 1986-88 by the latter policies, as measured by the Total Aggregate Measure of Support (Total AMS), is to be reduced by 20 percent in the developed countries over the period 1995-2000 and 13.3 percent in the developing countries over the period 1995-2004. Reduction commitments refer to total levels of support and not to individual commodities.

In addition to the "Green Box" category, some other policies are excluded from the AMS. These include, for the developing countries, investment subsidies that are generally available to agriculture and agricultural input subsidies generally available to poor farmers in these countries. Policies which amount to a small percentage transfer to producers, less than 5 percent of the value of production for developed countries, less than 10 percent for developing countries, are also excluded under the de minimis rule. Finally, direct payments through production-limiting programmes have been excluded from the AMS, providing certain conditions are met, namely, that they are decoupled or payments are made on 85 percent or less of production in the base period or that such payments are based on fixed area and yield or on a fixed number of head of livestock.

The Agreement on Agriculture spells out a list of export subsidies that are to be reduced including: direct subsidies; sale from stocks by governments at prices lower than the domestic market price; export payments financed by obligatory levies; subsidized export marketing costs, and special domestic transport charges. The volume of exports benefiting from such subsidies must be reduced by 21 percent and the expenditure on export subsidies by 36 percent over the 1995-2000 period. Reductions will be implemented on a product-specific basis. Calculation of the commodity-specific final level of subsidized exports is based on average 1986-90 levels. However, exporters would in certain cases be allowed to maintain a higher level of subsidized exports in the years up to 1999, by availing themselves of a special option. Under this option countries may start to make reductions from the subsidized levels of 1991-92 or 1986-90, whichever is higher, though they would still be required to achieve the same final level of reduction by the year 2000.

The Agreement on Agriculture also provides for prevention of circumvention of export subsidy commitments, including some important provisions on food aid, namely: that it should not be tied directly or indirectly to commercial exports; that food aid transactions should be carried out in accordance with FAO Principles of Surplus Disposal; and that such aid should be provided to the extent possible in fully grant form or on terms no less concessional than those provided for in Article IV of the Food Aid Convention 1986.

A late addition to the Agreement on Agriculture was Article 12 on disciplines on Export Prohibition and Restriction, which concerns limitations on exports of foodstuffs taken under Article XI 2(a) of the GATT that allows such restrictions "temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party". Exporters must in future consider the effects on importing members' food security and must consult with importing members having a substantial interest at their request.

Special and differential treatment for developing countries is an integral part of the Agreement on Agriculture, although what has been provided may not necessarily be adequate. Special and differential treatment basically has three elements. First, as discussed above, developing countries are given more time to adjust and are expected to make smaller reductions in support, including a higher de minimis level. Moreover, the least developed countries are exempt from the reduction commitments altogether.

The second area where special and differential treatment applies concerns the various types of policies that are "acceptable" to the GATT. As regards export subsidies, developing countries are allowed to provide subsidies to reduce the marketing costs of agricultural products and differential internal transport costs, which developed countries must curtail. Regarding domestic support the "Green Box" category has special provision for developing countries in regard to public stockholding for food security purposes and domestic food aid. Developing countries may also exclude from the calculation of the Total AMS the following policies: (i) investment subsidies which are generally available to agriculture, (ii) domestic support to producers to encourage diversification from the growing of illicit narcotic crops, and (iii) agricultural input subsidies Provided to low-income or resource poor producers which are available to all producers.

Thirdly, there are special provisions for developing countries contained in the Decision on "Measures Concerning the Possible Negative Effects of the Reform Programme on Least-Developed and Net Food Importing Developing Countries". The idea behind this Decision was that agricultural trade liberalization is likely to lead to higher world prices for food while a reduction in export subsidies will also raise the effective price paid by importers, There was also some concern that the volume of food aid, which historically has been closely linked to the level of surplus stocks, could contract in future with a rundown of surplus stocks. Action promised in this Decision includes: improving the level and terms of food aid; giving full consideration to requests for technical and financial assistance to improve agricultural productivity and infrastructure; that in any agreement on export credits "appropriate provision" would be made for differential treatment in favour of these countries; and the provision of short term assistance in financing normal commercial imports from international financial institutions under "existing facilities, or such facilities as may be established, in the context of adjustment programmes".

The Agreement on Sanitary and Phytosanitary Measures

The Agreement on Sanitary and Phytosanitary Measures (SPS) recognizes that governments have the right to take sanitary and phytosanitary measures but that they should be applied only to the extent necessary to protect human, animal or plant life and should not arbitrarily or unjustifiably discriminate between members where identical or similar conditions prevail.

In order to harmonize sanitary and phytosanitary measures on as wide a basis as possible, members are encouraged to base their measures on international standards, guidelines and recommendations where they exist, including the Codex Alimentarius and the International Plant Protection Convention (IPPC). However, members may maintain or introduce measures which result in higher standards if there is scientific justification or as a consequence of consistent decisions based on an appropriate risk assessment. The Agreement on SPS spells out procedures and criteria for the assessment of risk and the determination of adequate levels of protection.

It is expected that members would accept the sanitary and phytosanitary measures of others as equivalent if the exporter demonstrates to the importing member that its measures achieve a level of protection appropriate to the importer. The Agreement on SPS includes provisions on control, inspection and approval procedures.

The Agreement on SPS also contains requirements on transparency, including the publication of regulations, the establishment of national enquiry points and notification procedures. It also establishes a Committee on Sanitary and Phytosanitary Measures which, among other things, would provide a forum for consultations, maintain contact with other relevant organizations and monitor the process of international harmonization.

Preliminary assessment

A number of studies have attempted to assess the effect of the eventual Uruguay Round Agreement on Agriculture; some of these are summarized below. However it must be noted that a full assessment can only be made after the Schedules of Commitments are finalized.

The Agreement on Agriculture represents only a partial liberalization agreement. Overall, the cuts in support to agriculture are relatively small and spread out over a number of years. Regarding domestic support, a large number of policies have been excluded from reduction commitments and only part of those included is to be reduced. The market access provisions are likely to have a greater effect on trade. Perhaps the most important provision is the commitment to reduce subsidized exports. Overall, however, a large degree of distortion in the world agricultural commodity market will still remain even after the complete implementation of the reduction commitments.

In general, and compared with trend, increases in world prices of 5 to 10 percent were forecast for temperate zone products which in the past have enjoyed high levels of assistance, particularly in the developed countries (Table 8). A reduction in support should lead to a lower output in these countries than what would otherwise have been the case, with consequential effects on world market price levels. In contrast, the prices of tropical products are unlikely to change greatly.

Export earnings of developing countries from tropical products may thus not be affected by much in view of the small changes expected in world market prices and the relatively inelastic demand of the main consuming countries for these commodities. As regards temperate zone products, it can be expected that export earnings will rise especially those of the low cost exporters; export earnings of developing countries would depend to a large extent on their net trade position in these commodities.

Overall, the implementation of the total Uruguay Round package ought to have positive effects on developing country export earnings, with most gains coming from the ending of restraints on textile and clothing exports under the Multi-Fibre Arrangement (MFA). An analysis of the detailed losses and gains must however await publication of the detailed schedules.

The effects of trade liberalization on the stability of international prices, especially those of cereals, have also been the subject of considerable debate with most commentators arguing that prices would become more stable. This conclusion is based largely on the fact that with the removal of non-tariff barriers to trade, all countries will absorb shocks in the world market to a greater degree than before, thus dampening market instability.

It was also noted that the Final Act allows for special safeguard measures in the event of import surges or sharp falls in import prices from their base period level. Countries would thereby be allowed to introduce temporary additional import duties to stabilize domestic prices to a fairly high degree. The problem with this clause is that it makes for accentuation of the problem of falling prices on international markets. If import prices fall considerably below the base year level the safeguard clause would lead to a sharp rise in import duties and thus a reduction in import demand putting further downward pressure on world prices. Not only is this clause unhelpful in this respect but it probably cannot be used by many developing countries. This is because the price level that triggers safeguard action is set in nominal national currency terms, while many developing countries face significant rates of inflation and currency depreciation which will raise the future import prices in national currency well above the base year levels. The whole question of the effect of inflation on commitments is to be reviewed by the Committee on Agriculture, which is to be established within the World Trade Organization.

TABLE 8. Simulated effects of Uruguay Round trade liberalization on world prices

^a Simple average of maize and sorghum.
^b Refers to beans; for roasted, 0 percent and for coffee extracts, 1.4 percent.
^c Refers to beans; for buffer, 0.5 percent; for powder, 0.8 percent and for chocolate, 1.8 percent
^d Refers to leaves; for cigarettes, 0.1 percent and for cigars, 0.8 percent.
^e Refers to butter.
^f Refers to beef, veal and sheepmeat; for other meats. 3.1 percent.
^g Refers to all oilseeds.
^h Refers to beef, veal and sheepmeat.
ⁱ Refers to all vegetable oils.
Sources: UNCTAD/WIDER Agricultural Trade Liberalization in the Uruguay Round: Implications for Developing Countries, United Nations, New York, 1990.
S. Page, with M. Davenport and A. Hawk, The GATT Uruguay Round: Effects on Developing Countries, Overseas Development Institute, London, 1991.
Food and Agricultural Policy Research Institute, FAPRI 1993 World Agricultural Outlook, Staff Report No. 2-93, Iowa State University and University of Missouri-Columbia 1993. A.S.P. Brandao and W.J. Martin, "Implications of Agricultural Trade Liberalization for the Developing Countries", Agricultural Economics 8, 313-343, 1993. E. Goldin, O. Knudson and D. van der Mensbrugghe, Trade Liberalisation: Global Economic implications, OECD and the World Bank, Paris, 1993.

Possible increases in net foreign exchange earnings referred to above are only part of the overall effects on incomes arising from the Uruguay Round agreements. Other potential and substantial gains would be derived from a more efficient use of domestic resources when distortions of domestic prices and markets are reduced or removed. Such income gains for the world as a whole from multisector partial liberalization have been estimated to be in the order of $200 billion. Income gains were estimated to be broadly spread across regions with the share of developing countries as a group calculated at over 40 percent. However, these income gains would also rely considerably on widespread liberalization of domestic markets.

Of greater significance than the quantitative effects of the Uruguay Round agreement is probably its implications for agricultural policies, particularly in the long run. The way in which agricultural policies are undertaken is likely to change radically in the future. First and foremost this concerns the list of policies that are discouraged and those that are acceptable, according to the Final Act. The former includes the classical forms of guaranteed, target, indicative or procurement prices which are maintained at levels above those on the world market. The future is for targeted, non-price, decoupled forms of support. However, many of these "Green Box" policies are costly to governments and hence may be not affordable in many developing countries.

Next in terms of significance is the demise of most non-tariff barriers to trade and their conversion into tariffs by tariffication. This allows import prices to vary with variations in world prices and hence improves the quality of price signals sent to producers and consumers. Trade regimes in future should be much more transparent. However this is not to say that new obstacles to trade will not arise.

The disciplines on export subsidies and export restraints are important in principle because they bring agriculture closer to the other sectors. Fundamentally, export subsidies are not acceptable but will be tolerated for the time being and disciplined. Moreover it will be difficult for countries that have not used them in the past to have recourse to export subsidies.

The broad thrust of these changes in the policymaking environment is equally applicable to developed and developing countries. For most developing countries, however, any policy initiatives will take place within the framework of structural adjustment programmes. In agricultural and food policy, there is currently a general trend towards more precise targeting of policies to particular groups of beneficiaries. This trend is partly a consequence of increasing concern with the administrative difficulties and excessive costs of many current policies and broadly reflects the requirements of structural adjustment programmes.

The dual influences of changes in the international trading environment and structural adjustment programmes, generally require governments in developing countries to shift the focus of their interventions away from attempts to influence the price mechanism. The required shift is likely to be towards investment in the infrastructure of the agricultural economy, including programmes to develop the marketing services and appropriate storage facilities accessible to the rural population. In addition, a shift in resources away from direct input subsidies to enhanced credit provision may be considered on account of the superior allocative efficiency of the latter, as well as its potentially more progressive nature and greater targeting facility.

In conclusion, therefore, the implications for the developing countries are significant mainly in the way in which agricultural policies are to be formulated in the future. Whether the change is motivated by the new GATT disciplines or by structural adjustment policies, both point in a rather similar direction, one where actions to influence prices are no longer the main instruments of agricultural policy. Whether, however, it will always be feasible for developing countries to adopt non pricedistorting policies is a matter that requires further analysis.

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