WTO AGREEMENT ON AGRICULTURE

A real challenge for Pakistan's economy highly dependent on agriculture

By Ayaz Ali Umrani* 
Apr 04 - 10, 2005

Agriculture is the back-bone of our country's economy and it consumes 55% to 60% of the workforce moreover, agriculture adds up 25% to 28% to GDP. As far as foreign exchange is concerned Pakistan also earns a whopping amount of foreign exchange by exporting rice, cotton, fruits, vegetables and agriculture related products to US, Middle East, Japan, Hong Kong, UK, France, and Germany. Thus, WTO implementation will surely affect those people who are associated directly or indirectly with the agriculture sector. In this connection an agreement was signed called Agreement on Agriculture (AoA). There are three main components of Agreement on Agriculture defined below:

MARKET ACCESS

Mandatory Minimum Market Access: The AoA requires nations to accept a minimum amount of imports of certain foods. For example, under AoA rules, the Philippines is required to import 59,000 metric tonnes of rice (since the late 1990s, rice imports have leaped tenfold). The result has been the displacement of thousands of farmers and their families in a country that has been self-sufficient in rice production for centuries.

Elimination of Quantitative Restrictions and Other Non-Tariff Barriers: The AoA requires that border control mechanisms on imports and quantitative restrictions be significantly reduced or eliminated. Such restrictions or quotas are designed to protect domestic farmers from foreign competition in order to ensure both the livelihood of rural communities and the sustainability of the local food supply by reducing dependence on less reliable cash-based food supplies coming from thousands of miles away.

DOMESTIC SUPPORT

The clauses on Domestic Support demand that developed and developing countries significantly reduce subsidies to producers. There is a false assumption that this will make small farmers and the Third World more competitive and lead to prices that reflect the true cost of production. However, the articles on Domestic Support target only a small fraction of agricultural subsidies. What are ignored are the subsidies enjoyed by global agribusiness and trading interests, such as subsidies for investment, fertilizer, marketing, and infrastructure. Also exempted are direct payments to support the incomes of farmers. This allowed the US government, for instance, to announce in June 2000, a $7.1 billion increase in direct payments to US farmers. In contrast, the incomes of Third World farmers are derived from production and trade, not from direct support from governments. Third World farmers, therefore, are at a real disadvantage as they are vulnerable to changes in global trade patterns and international prices of agricultural commodities. Today the United States and the European Union subsidize their agriculture to the combined tune of almost $1 billion a day. The 2002 US Farm Bill continues this trend, with $180 billion in new subsidies for the next ten years for the largest US agricultural corporations. This support goes mainly to large-scale export-oriented agriculture at the expense of family farm-based food produced for the domestic market.

EXPORT COMPETITION

This is the 'official explanation' for the AoA, namely the removal of export subsidies that have facilitated the sale of large European Union and US surpluses on the world market. While the liberalization of exports was justified by the argument that northern agricultural markets would open up to southern nations, India's exports to Europe, for example, have declined from 13 to 6 percent. One reason is that high subsidies and protectionist barriers are still largely maintained in the North. The export subsidies that are allowed to developed countries (to cover the costs of marketing agricultural exports, including handling, processing and international transport and freight) do not apply to Third World farmers because these small farmers do not export as big companies do. Thus, WTO supporters speak of the need to level the playing field, however, the AoA rules in export competition give a distinct advantage to large exports. While developing countries subsidies are outlawed by the WTO, the 'indirect' subsidies employed by the developed nations are still allowed. Since the WTO was established, the US has expanded export credit and marketing promotion programs. The 1996 US Farm Bill mandated $5.5 billion for export promotion. An additional $1 billion was granted for promoting sales to emerging markets.

IMPACT ON PAKISTAN

The overall result of agricultural liberalization and implementation of the AoA is not positive for the developing countries. Although, liberalization of trade in agriculture under the Uruguay Round is estimated to produce a possible net welfare gains for the low income Asian region in the amount of $1.3 billion, the region remains a net importer of food after the Uruguay Round liberalization. While there was little change in the volume exported, in the post UR period in agricultural exports, food imports were rising rapidly in most cases. These countries were not able to raise their exports due, amongst other factors, to supply side constraints, thus deteriorating balance of payment situation. While the concentration of farms led to an increased productivity and competitiveness, in the absence of safety nets, this process has marginalized small farmers and has added to unemployment and poverty.

The UR negotiations did result in some liberalization for non-traditional products. Tariffs, in the developed markets, were reduced by 36% on fruits and vegetables and by 48% on flowers and other agricultural products (44% in Europe). Pakistan needs to diversify its exports of agriculture by exporting such horticultural/floricultural products to these markets. However, to take full advantage of these potential opportunities, Pakistan requires to introduce policies to further attract investment in packing and marketing facilities and in transportation of these products.

The result of the AoA on rice and wheat were considered to have mixed effects on Pakistan. The agreement to reduce subsidies on rice and cotton maintained by the US, the EU, Japan, and Korea could result in increased market access for Pakistan's exports. However, Pakistan would have to switch production to rice varieties popular in Southeast Asia, as they are currently not produced in Pakistan.

In case of Pakistan, while applied tariffs on most agricultural products have fallen since the early 1990s these tariffs remain relatively high for commodities classified as 'essential' such as edible oils and oil seed. High ceiling bindings for most products, under their Uruguay Round commitments place India, Pakistan and Bangladesh with the highest bound rates among WTO members. Although progress has been achieved on the export side by removing export controls, however, restrictions still apply for commodities such as sugar in India and cotton in Pakistan.

CONCLUSION

The establishment of the World Trade Organization has institutionalized the international economic environment. It is becoming more competitive and inter-linked in view of globalization forces. The loopholes in the WTO agreements and lack of technical expertise in Pakistan are accentuating the challenges for Pakistan. In a rule-based system, Pakistan would be facing much more acrimonious situation in its economic relations with other countries. Economies, which are adapting themselves to the new realities, will be able to survive in the competitive world. Due to complexity of the world trading system, the implementation of its UR obligations has placed new demands on the knowledge and skills of the economic managers in Pakistan. Domestically, in implementing its UR commitments, Pakistan has to modify its domestic legal and administrative rules to be consistent with the WTO rules. The agriculture sector is the back-bone of the Pakistani economy. Thus, Pakistan needs to give a special attention to prepare agriculture sector not only to mitigate the effects of risks within the competitive world, but also to realize the potential benefits being offered. Greater gains are likely to be made through formation of trading blocs through preferential access to the developed countries' markets, where Pakistan lacks initiative and stands marginalized.

*Author works for KKI Research and Development Department