GATT AND DIRECT INCOME PAYMENTS: PROGRESS IN DECOUPLING?
by D Chadee and R Sohnson
The Uruguay Round of GATT negotiations has concluded and agreement has been reached between major signatories to reform their agricultural sectors. One key issue is the choice of economic instruments that are decoupled from agricultural production at the margin. The MacSharry proposals adopted at Blair House are a move in this direction. Further progress could follow from a greater shift to social assistance measures. This paper examines the agreement reached at GATT and explores possible welfare measures that could aid further decoupling from the New Zealand point of
INTRODUCTION
Government intervention in agriculture in most industrialised countries has led to substantial increases in the output of agricultural products over the last twenty years. As a result, most agricultural producers and exporters have made aggressive use of border measures and subsidies in order to cope with surplus agricultural products. By the early 1980s government expenditures on agricultural support programmes had reached unprecedented levels in most western countries. Increasing pressure on the treasuries of these countries, as well as pressure from exporters such as the Cairns Group, has led to a commitment for reforming agricultural production and trade. This commitment was formalised when agriculture was explicitly included in the GATT Uruguay Round of Multilateral Trade Negotiations (MTN) launched in
Reform involves individual countries examining their assistance programmes as they are essentially domestic policies. Multilateral negotiation is a way of countries agreeing on an international and co-ordinated way of removing the excesses of such assistance. In such discussions it has been proposed that countries consider direct income payments to farmers (decoupling) as a substitute for price support and border measures that provide incentives to increase production. What is needed is a reduction in the level of assistance, and direct income support measures not linked to production or factors of production, aimed at facilitating the process of reform by reducing distortions in production, consumption and in trade (OECD 1990, p43).
A lowering of domestic levels of price support would result in a reduction in farm incomes and an increase in their variability (ibid p 44). Temporary direct income support is seen as facilitating structural and positive adjustment. Other justifiable direct income support could provide the means to aid:
- specific groups of farmers who have suffered cyclical income losses due to unforeseen and uninsurable circumstances, such as natural disasters;
- groups of farmers who are in disadvantaged areas or circumstances; and to groups who wish to pursue environmental goals. Disadvantaged groups involve considerations of social welfare, but environmental aims should be considered to be more in the realm of public goods that would not otherwise be supported. Other justifiable forms of assistance include R&D, infrastructure improvements, crop insurance, and farm extension.
These principles have already been partially put into effect by the US and the EC (Hillman 1994, p15). In the US, the 'triple base' idea, target-price base acreage yields frozen or historically fixed, and deficiency payments only on 85 percent of base acreage are the first stage of decoupling. In the EC, the MacSharry proposal subsidises farmers on a hectarage or headage basis and thus frees up farmer decision making at the margin. These reforms must be seen as half-way houses introduced to cause minimum inconvenience to the beneficiaries but nevertheless, as Hillman establishes, they represent significant changes to the way agricultural support has been treated in the past.
In the GATT the draft final act (Dunkel text) specified the proposed content of the policy measures which would be exempted from agreed domestic support commitments (GATT 1991). In November 1992, the US and the EC struck a deal on reducing agricultural subsidies over a six-year period (Agra Europe 27 Nov 1992, Eli). Part of the deal was the inclusion of EC Farm Commissioner MacSharry's proposals for introducing direct aids to farmers on a fixed hectarage or headage basis, consistent with commitments made earlier in 1992 by EC ministers (ibid).
On 15 December 1993, agreement was finally reached on the Uruguay Round. Article 6 of the GATT Text on Agriculture (GATT 1993, p7) sets out the domestic support commitments that participating countries will supply to the GATT for annexing to the Uruguay Round Protocol. Domestic support measures that are exempted from the commitments and which are not subject to reduction are set out in Annex 2 to Part A of the Agreement (the 'green box'). Protocol Article 6 now includes the MacSharry amendments agreed to at Blair House in November 1992.
What are the implications of these agreements? What direction should further discussions and negotiations take? Can further progress be made? In the following pages, we discuss a little more of the detail of the agreement with respect to the exemptions from domestic support commitments, examine the case for more emphasis on a welfare criterion for giving assistance exemption, and make suggestions for further steps in the reform process.
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Intellectual support from Laurence Tyler and Ronnie Horesh is gratefully acknowledged.
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