COFI/2001/9

SUMMARY The FAO Expert Consultation on Economic Incentives and Responsible Fisheries agreed that one single definition of subsidies would not be adequate for the purposes of analysing the impact of subsidies on fishery resources and trade. It therefore identified four sets of subsidies. It agreed that the empirical knowledge of the impacts of subsidies on trade and on fisheries resources is weak. The Consultation identified, amongst sub-categories of subsidies that it defined, those it believed should be investigated first in terms of impacts on trade and on fisheries resources. Given the large amount of work involved it would be unrealistic to attempt to investigate all types of impacts for all types of subsidies. Selection and international cooperation would be essential in order to achieve results rapidly. COFI is invited to advise on how work should proceed in this area.

THE EXPERT CONSULTATION

1. The FAO Expert Consultation on Economic Incentives and Responsible Fisheries was held at FAO Headquarters from 28 November to 1 December 2000. Twelve experts, invited in their individual capacity, attended the Consultation. They elected Dr Jon Sutinen as the Chair of the Consultation and adopted an agenda that included three main issues: (i) the definition of subsidies and how best to divide them into categories; (ii) the impact of subsidies on fisheries resources sustainability; and, (iii) the impact of subsidies on trade in fish and fish products.

2. The experts discussed in plenary session the issue of what would be a suitable and operational definition of `subsidy' for the purpose of analysing the effects of subsidies on resource sustainability and on trade. This discussion occupied much time and ended with an agreement that no one, single definition could be agreed upon. Instead the experts identified four sets of subsidies. Set 1 corresponds roughly to what the man in the street commonly understands by the term `subsidy'. The experts defined this Set as "Government financial transfers that reduce costs and/or increase revenues of producers in the short term". Sets 2, 3 and 4 gradually expand this concept. Set 2 subsidies are: "Any Government intervention, regardless of whether they involve financial transfers, that reduce cost and/or increase revenues of producers in the short term". Set 3 subsidies expand those of Set 2 by adding: "the short-term benefits to producers that result from the absence or lack of intervention by governments to correct distortions (imperfections) in production and markets that can potentially affect fisheries resources and trade". Set 4 includes all government actions - including absence of correcting interventions - that potentially can affect positively or negatively the benefits of firms active in the fishery sector, also in the long run. The experts recommended that these `sets of subsidies' be referred to in future discussions and analyses of subsidies.

3. Most of the discussion concerning the impact of subsidies took place in working groups - one addressing the impacts on trade and the other the impacts on sustainability of fishery resources. The experts started by classifying subsidies into categories that would facilitate the analysis of their impact. Both groups found categories that identify subsidies according to their effects on the firm to be pragmatic. These were labelled as `revenue-enhancing' and `cost-reducing' subsidies. However, the effects of some interventions are unclear and a third category "Miscellaneous/unspecified" was added. These categories were further refined to facilitate analysis.

4. The experts then reviewed the state of empirical knowledge of the impacts that subsidies have on trade and fishery resource sustainability. They concluded that empirical knowledge of impact is very weak in both cases. However, there was general agreement that the impact of subsidies on fishery resources sustainability is critically dependent on the effectiveness of fisheries management, being least where fishing effort is fully controlled.

5. Building on their knowledge about availability of data and analytical methods, as well as their familiarity with the current estimates of the magnitude of subsidies, the experts then proceeded to identify priorities for further research about the impacts of subsidies. To facilitate analysis of impacts it was agreed that it was not essential to use the same categories when studying impact on resources as when studying impact on trade. And two different groups of sub-categories were defined. Concerning the impact on fishery resources, priority for future study was assigned to the following sub-categories: `capital expansion', `tax waivers and deferrals', and `price support'. Regarding the impact on trade, the experts assigned priorities to future study of actions that `reduce the relative price of inputs', `reduce fishing effort' and to `management and regulatory actions'. The experts also discussed the methods that would be best suited to carry out these studies.

DISCUSSION

6. Fishery subsidies were discussed at the October 2000 meeting of the WTO Committee on Trade and Environment (CTE). Delegates from several major fishing nations emphasized the importance of studying the effects of fishery subsidies and encouraged FAO to assess the impact of different subsidies on sustainable fisheries management (WTO Press Release - PRESS/TE/034, page 8).

7. The international debate about the role and appropriateness of subsidies in fisheries and aquaculture will continue. Those engaged in the discussion would benefit from access to a solid information base about subsidies and their impacts. As a minimum they ought to know about: the magnitude of subsidies; the mechanism by which subsidies affect trade, resource sustainability and (economic) development/growth; and the actual impact of subsidies on these same features.

8. Following the Expert Consultation it is clear that while the exact nature and magnitude of impacts are not known for most categories of subsidies, there is a relatively good understanding of the magnitude of various sets of subsidies. There is also a good understanding of the mechanisms by which subsidies affect the costs and revenues of firms. But, there is only very limited empirical knowledge of the magnitude and exact nature of the impact which subsidy-induced, modified, behaviour of the firms will have on trade, resources and development.

9. The Consultation concluded that methods were available for empirical studies of the effects. The question is where to start, who should be involved, and what form studies should take?

10. It would appear to be unrealistic to aim to investigate all types of impacts of all the various kinds of subsidies. A selection needs to be made. The Experts who participated in the Consultation gave their views on this matter and identified categories of subsidies that in their view should receive priority.

11. It would be useful to coordinate studies among countries. Coordination would have two beneficial effects. It would facilitate studies that trace effects and impacts across national boundaries, and, it would most likely lead to a better acceptance of the results on the part of all involved.

12. Studies can be historical in nature, that is, they are basically case studies of the impact of subsidies using available time series and cross-sectoral data. Studies can also be conducted in "real time". Such studies would essentially monitor and assess the effects and impacts of subsidies being provided to the fishing industry as they occur. A programme mixing these two approaches is also possible. The effects of subsidies work themselves out over time. The duration of effects and impact vary from subsidy to subsidy. The time dimension must be carefully considered. Furthermore, if a programme is developed it needs to be based on the availability of historical data and on the willingness by those receiving subsidies to participate.

SUGGESTED ACTION BY THE COMMITTEE

13. The Committee is invited to review the conclusions and recommendations of report FIPP/R638 (see Annex 1) of the FAO Expert Consultation on Economic Incentives and Responsible Fisheries and to advise on how the work of assessing the impacts of subsidies should be continued. The Committee may also want to express an opinion about what might be appropriate partnerships in this exercise.

Annex 1

CONCLUSIONS AND RECOMMENDATIONS

A. Definition of Subsidies

Conclusions

· None of the commonly used definitions of subsidies is adequate for a comprehensive analysis of subsidies' effects on trade and sustainability in fisheries and aquaculture.

· There is no definition of subsidies that the Consultation recommends as the only definition for the measurement, analysis and political debate of subsidies in fisheries.

· Definitions for four sets of subsidies are needed in order to advance the measurement, analysis and discussion of subsidies in fisheries and aquaculture.

Recommendations

· Any analysis and discussion of subsidies in fisheries and aquaculture make explicit which of the four sets of subsidies is being considered.

· further economic research should be pursued on the issue of whether and how to include management costs in any definition of subsidies.

B. Impact of Subsidies on Sustainability of Resources

Conclusions

· Few studies have attempted to link the value of subsidies quantitatively to the effect on fish stocks

· If there were perfect control of effort, then the effect of a subsidy on sustainability through increases in capital and labour or efficiency would be matched by a compensatory reduction in effort.

· Crucial to the analysis of subsidies is the ability to trace their effects first, to changes in costs and revenues and therefore in profits. Second, to trace the effects of changes in profits to changes in effort, and third, to trace the effects of changes in effort on the state of the stock, as measured by changes in biomass

Recommendations

· Subject to available data, there are three approaches for estimating impact of a subsidy on the sustainability of a fishstock:

• Dynamic mathematical modelling using real fishery data;
• Econometric estimation of relationships based on time series, cross section or pooled data;
• Simple qualitative models
• In respect of impact on fishery resources priority for future study was given for the following categories: capital expansion', 'tax waivers and deferrals', and 'price support'.
• Future studies should also explore the potential effect of subsides for:
• Technological development and adoption of size and species selective gear
• Designing and adopting habitat protecting gear
• Fostering recruitment enhancement technologies, and
• Fostering friendly use of critical coastal ecosystems (e.g. wetlands, mangroves, estuaries, coastal lagoons, wetlands and sea grass beds) which are relevant to fisheries.

C. Impact of Subsidies on Trade in Fish and Fish Products

Conclusions

· The existing state of knowledge about the magnitude of subsidies and their impact on trade is limited.

Recommendations

· Research should proceed in a cost-effective and coherent manner.

· The theoretical platform should be provided by conventional fisheries economics models adapted specifically for examining the issues of trade.

· The research strategy - involving applied dynamic fisheries and trade models and econometric model building - should be targeted at actions that have potentially a relatively large "trade effect-to-expenditure effect ratio".