November 25, 2014 1:44PM

India Tosses out the WTO’s Agricultural Subsidy Disciplines

The World Trade Organization (WTO) seems on the verge of approving an agreement with India to allow the Trade Facilitation Agreement (TFA) to move forward.  The TFA is to be applauded.  It will make a useful contribution toward helping goods move across borders more efficiently, which will tend to increase trade and promote economic growth.

The problem is not with the TFA, but rather with the high price that the global community seems ready to pay for it.  India has asked that it be allowed to exceed the level of domestic agricultural subsidies to which it agreed twenty years ago in the Uruguay Round negotiations.  For the first time in history, those talks led to limits on the ability of countries to use trade distorting agricultural supports.  Those subsidies had been rampant, often leading to surplus production that depressed crop prices in global markets.  Farmers who were being subsidized generally were happy enough with that arrangement, but it was a very different story for unprotected farmers in other countries.  Many of the world’s farmers are quite poor to start with.  Government-driven decreases in commodity prices make them even poorer.

A teachable moment is slipping away because no WTO member has been willing to stand up and explain what’s going on.  India sanctimoniously declares that it needs to promote food security through use of a robust public stockholding program, and would like the world to believe that existing WTO rules prohibit them from doing so.  This is simply not correct.  The Uruguay Round includes specific provisions detailing how public stockholding may be used for food security purposes.  A great deal of time, effort and tough negotiating went into developing those provisions.  There is no limit on government expenditures to provide food – including free or reduced-price food – to low-income people.  However, there is a clear requirement that purchases of commodities for public stocks must be made at open-market prices.  It is not allowable to purchase commodities at above-market prices in order to provide a subsidy to farmers. 

India’s public stockholding program does exactly that – purchase commodities from farmers at prices set well above the market.  Those high purchase prices provide incentives for farmers to increase production of subsidized crops.  Not surprisingly, this has led to surpluses of rice, sugar and wheat that are diverted to export markets.  In 2013 India was the world’s largest exporter of rice, the fifth largest exporter of sugar, and the ninth largest exporter of wheat.  Not bad for a country that thinks it needs even higher levels of distorting subsidies to promote its food security.  The fact that India ranks second in the world in terms of arable acreage underscores the potential for its subsidies to do damage to global markets.

It would not be difficult for India to bring its agricultural support regime into harmony with WTO requirements.  It would start by purchasing its food stocks at market prices.  This would save billions of dollars that now are being spent on above-market purchases.  Those savings could be devoted to some of the many policy measures that were explicitly agreed in the Uruguay Round to be considered non-distorting.  Those include providing “decoupled” income support payments (not linked to current production or price of a crop) directly to farmers.  They also include policy options designed to spur development in underprivileged rural communities, such as:  agricultural research, pest and disease control, extension advisory services, marketing services, infrastructure services (roads, electricity, irrigation, etc.), and insurance programs.

The argument is sometimes raised that developed countries, including the United States, also utilize distorting agricultural subsidies, so why criticize India?  Other countries have made efforts to bring their farm support programs into conformity with WTO commitments; those support regimes create fewer distortions now than in the past, but further liberalization is badly needed.  A key goal of the still-unfinished Doha negotiations was to continue to reduce or eliminate distorting agricultural subsidies. The world of agriculture still is beset by an abundance of within-the-rules subsidies.  However, expanding the rules to permit even more subsidies does nothing to help the situation.  Granting India’s request would shift the reform process into reverse.

It is to be hoped that WTO members will remember the origins of the organization, which was created to pursue open markets and freer trade.  Policy backsliding would be tantamount to abandoning the vision of the WTO’s founders.  There seems little doubt that millions of poor farmers would bear the costs of a decision that leads to more-highly-distorted global agricultural markets.