Customs Unions and Trade Conflicts

GATT and the EC: The case of Agriculture

Deborah Heaney

Senior Sophister


The concluding declaration of a GATT ministerial meeting in 1982 stated the need "to bring agriculture more fully into the multilateral trading system".[9] The seven years taken to bring about a successful conclusion of the Uruguay Round of negotiations indicate the complexity of such a task, and the painstaking edging of the EC and the US towards compromise from the diametrically opposed positions set out in the Punta del Este declaration is a result of this complexity.

This paper attempts to demonstrate how the principal areas of dispute have their roots to some extent in the particular legal status of agriculture within the GATT but how their deepest roots are in a contrasting attitude towards the best means by which agricultural support can be disciplined. The paper is divided into four sections. Section I deals with the background to the negotiations - the economic context and the legal preferences. Section II examines the main issues of dispute using the main groupings of proposals as a basis. Section III analyses the roots of these differences, showing how the GATT negotiations became a table for domestic policy and outlines the differing philosophies regarding the discipline of agricultural support. Section IV draws some conclusions.



"Agricultural trade has not been effectively governed by the institutional framework for international trade relations that has been provided by the GATT since its inception in 1957" [10]

Before moving to an assessment of the issues under dispute in the Uruguay Round, it is, I believe, vital to understand the situation in which countries found themselves in the 1980s. As a result of price, production and consumption developments the USA and the EC began to accumulate stocks at increasingly rapid rates.[11] Two main effects were notable. Firstly, to get rid of surpluses, the Europeans subsidized exports, which led to trade disputes with the US and the Third World. Secondly, budgetary pressures became intolerable and set the US and the EC on the path of reform, albeit in different directions.

As suggested by Rayner et al (1993) the primary problem lay with the operation of agricultural trade policies within a preferential GATT framework, which had not only the effect of increasing agricultural distortions, but also undermined the credibility of the GATT as an organisation. Both GATT rules designed to conform to policies of the previous three decades, and domestic policies of the 1970s became totally inadequate in the 1980s environment.

The special treatment given to agriculture under the GATT is, I would argue, a major source of dispute in the Uruguay Round. Had agriculture been subject to the same rules as other sectors then there would be little leeway for separate negotiations. Of crucial importance to the disputes are the special provisions regarding export subsidies; prohibited by Article XVI, except for primary products. Article XVI.3 says "such a subsidy shall not be applied in a manner which results in that contracting party having more than an equitable share of world trade in that product, account being taken of the share of the contracting parties in such trade in the product during a representative period." (my italics). It is clear from this quote that a minefield of definitional issues were latent, ready for such a time when agriculture was fully placed on the negotiating table.

Normally protection from imports is allowed in the form of tariffs only, however, the use of import restrictions in agriculture was permitted as long as domestic supply was restrained concurrently (Article XI). It was the US who in 1955 instigated a special waiver allowing it the right to impose import restrictions without corresponding supply restrictions - a particular case of US insistence that GATT rules fit US farm policy.[12] The position of agriculture in the GATT was also influenced by the EC who insisted that the CAP (and in particular the variable levy system) was integral to the success of the Common Market (which the US supported), and as such was non-negotiable, and never effectively challenged in the GATT.


The Issues of Dispute

The initial US proposal, the double zero option, indicated the absolute extremities of the gap between the US and the EC. It proposed the complete elimination of all forms of agricultural support over a ten year period, allowing only decoupled payments and verified food aid programmes. Import barriers to be eliminated included phytosanitary barriers. Policy changes were to be commodity specific, using producer subsidy equivalents to measure initial levels of protection and monitor changes. This option would not only have removed agriculture from its privileged status within the GATT, but would have made it the most liberalised sector under the GATT.

The EC favoured no such dramatic changes in agriculture's status within the GATT nor an ultimate goal of support elimination. The CAP was seen as integral to the success of the EC and its flagship achievement. Proposals for short term market sharing and long run reductions in support measured at the aggregate level were put forward. Such diametrically opposed proposals allowed no agreement and the impasse of Montreal was the inevitable result. By April 1989 an agreed agenda was produced with a compromise position agreeing on a `progressive reduction in support' - signalling a US abandonment of the zero option and an EC concession that reduction should take place. This statement allowed negotiations on the key areas of dispute under three primary headings:

· export subsidies

· import access

· internal supports

This structure in itself represented an EC concession in allowing negotiations on types of support and not only aggregate levels.

Export subsidies

Hathaway (1990) presents the disputes as an interpolation of reform and restraint and with this analysis he comments "It is in the area of export competition that the difference between reform and restraint is most pronounced and the political confrontation most stark." It is in this area, as noted in section I, that agriculture is particularly favourably treated. Specific issues relating to export subsidies centred on how they should be defined and how then they could be disciplined. Disagreement surrounded the definition of export subsidies. Should any policy that stimulated exports be regarded as an export subsidy? More specifically, should US deficiency payments be regarded as export subsidies? The US argued that domestic production subsidies were a separate dispute and should be disciplined as such.

How export subsidies should be disciplined was the second major issue - what level of reduction would be allowed and at what level of aggregation and volume. Confrontation was between reform and restraint, the former being favoured by the US, as total phase-out and prohibition, while the EC favoured the latter, involving the definition of an equitable market share and an export subsidy, i.e. clarification of what already existed. Definition of an equitable market share was seen as feasible for many products, but for others such as sugar it was more complex because major producers such as Cuba did not subscribe to GATT.

Market Access

"This is almost certainly a case in which either everybody reforms or no one does".[13]

The areas of dispute under market access included the EC variable levy which had resulted in total insulation of the market, the US section 22 waiver on quotas and voluntary export restraints (VERS) such as those between the EC and New Zealand for butter.

The increasing importance of non tariff barriers in world trade, especially in agriculture relative to manufacturing[14] meant that agreement on tariffication of non-tariff barriers was an important issue. The EC favoured tariffication with a two part tariff - a fixed element plus supplementary additions and a variable element. The US favoured a formula approach for tariffication (to increase transparency) based on the difference between the domestic price and an external reference price. These tariff equivalents were to be used for a transition period, over which reduction was to take place.

Internal Supports

The US attitude changed over the negotiation period from an overall emphasis on discipline in all areas, to an emphasis on border measures as the most distortionary and the instigation of a system of classification. "This shift was predictable once it became clear that only very limited progress would be made in the Uruguay Round in reducing domestic subsidies."[15] Overall the US defined trade distorting strategies according to red, green and amber, where decoupled payments were given the green light.

Internal subsidies may in reality be more self limiting than other protective measures due to their prohibitive cost. The choice of a measure and its level of aggregation was a continuous source of disagreement. Originally the US wished the elimination of all supports over ten years, this was later reduced to the red supports only over ten years with amber supports to be monitored. The EC desired aggregation for support reduction to allow rebalancing and the retention of domestic control.

This brief outline of some of the main issues in dispute is naturally only the tip of the iceberg but provides a launching pad for the analysis of the roots of these main disputes.


The roots of the issues

Philosophies about how best to discipline agricultural support are to some extent the roots of many of the disputed issues on agriculture outlined above. However it seems that an awareness of political realities is also important as is the potential for protectionism in agriculture. If a group of countries has taken advantage of the more liberal legal regime for agriculture, then others will do so, if not for national gain, just to level the playing field once more.

US concerns as expressed within the Uruguay round, focus on the type of support in existence (the rules base approach) and wish to take account of differing distortions imposed by different types of protectionism encompassing supports in a scheme of tariffication with income supports unrelated to current production levels. Such a philosophy on the discipline of agricultural support is based on the view held that US farmers are so efficient that they would thrive in an unregulated agricultural market.[16] Furthermore the US sees itself to a large extent as having been forced into export subsides as a retaliatory measure and thus sees the best way to reduce costs as being through enforcing protection reductions elsewhere.

For the EC the CAP is a symbol of European unity, and it will seek maximum discretion and control over agricultural policy. This being the area in which the EC has most control over its member states control will not be easily ceded. Hence CAP reforms were being worked out even while GATT negotiations were taking place. The reform package was then presented as fait accompli as a negotiation package thus retaining the image of the control of the EC on agriculture.[17] In a sense then the GATT was used as a negotiation tool to enable tough domestic policy decisions to be taken in a multilateral context and domestic policies were confused with those on trade. The EC's philosophy is that support can best be disciplined by controlling its amount not its nature (allowing maximum flexibility).

These philosophies were played off in a strategic way, but I would argue that equally crucial were the political realities. If we set up a game[18] between the US and the EC using payoffs calculated by Tyers and Anderson then we can see a strategic interaction based on the net gains and the producer gains. The Nash equilibrium for net welfare gains is to liberalise, but where only producers are taken into account the Nash equilibrium is to not liberalise. Hence the striving towards discipline of agricultural support largely depends on how the governments weigh interests within the economy, and not just on an overall self interested philosophy.

Payoffs (EC, US) Net Economic Gains

                  US (do not        US            
                  liberalise)       (liberalise)  
EC (do not           (0.0, 0.0)     (-1.9, 3.3)   
EC (liberalise)     (21.4, 1.7)     (17.6, 3.1)   

Payoffs (EC, US) Producer Gains

                  US (do not        US            
                  liberalise)       (liberalise)  
EC (do not           (0.0, 0.0)     (5.0, -21.5)  
EC (liberalise)     (-88.6, 7.6)    (-73.7, 3.1)  



The legal status of agriculture within the GATT has been shown as the main culprit of the painstaking negotiation process from dramatically opposed positions by the EC and the US. For too long, agriculture was accorded special status within GATT, natural interests superseding those of international trade. Once agriculture was included under the GATT umbrella, a minefield of issues was unearthed. Productive negotiations focused on three areas: export subsidies, market access & internal supports. Within these areas disputes focused on the time periods for phase-out supports, the base period from which to calculate reductions, levels of aggregation and definitional issues. For the EC, maintaining a semblance of autonomy and allowing CAP structures to remain was crucial to negotiations -- thus a domestic reform package predated the final GATT outcome. Linked with this, I have argued that positions were based not so much on deep held philosophies, but on political realities, and the interaction of interest groups in this context -- and that these were crucial to the final outcome and the process of negotiation towards it.


Table 1

Level of Public Stocks : EC : 1000t year end

          1979  1983     1986   1987  1988   
Cereals   2677   9542   14717   8147  8312   
Beef       293    410     576    776  425    
Butter     310    686    1297    860  120    

Source: European Commission (1989) "A Common Agricultural Policy for the 1990s"

Table 2

% Imports subject to NTBs

                    Manufacture  Agricultu  
                              s         re  
EC (from LDCs)             29.9       26.9  
EC (from ind.              15.2       47.7  
US (from LDCs0             18.6       25.1  
US (from ind.              16.5       23.5  

Source: Zietz and Valdes 1988.


Australian Bureau of Agricultural and Resource Economics (1990) "Proposed strategies for reducing agricultural protection in the GATT Uruguay Round"

European Commission (1989) "A Common Agricultural Policy for the 1990s" European Documentation Periodical

Fitchett, D (1989) "Agriculture" in Finger, J & Olechovski, A eds. The Uruguay Round, A handbook for the multilateral negotiations

Greenaway, D (1991) "The Uruguay Round of Multilateral Negotiations : last chance for GATT?" in Journal of Agricultural Economics Vol.42 No.3

Hathaway, D (1987) Agriculture and the GATT, Rewriting the Rules

Hathaway, D (1990) in Schott, J ed. Completing the Uruguay Round: A results orientated approach to the GATT trade negotiations

Matthews, A (1993) Gatt Impact: Agriculture and Food

Rayner, A, Ingersent K, Hine, R C (1989) "Agriculture in the Uruguay Round: from the Punta del Este declaration to the Geneva Accord" in The Journal of Agricultural Economics Vol.40, No.3

Rayner et al., (1993) "Agricultural Trade and the GATT" in Rayner A and Colman D Current Issues in Agricultural Economics

Sumner, D (1993) "The economic underpinnings of the Uruguay Round Proposals", in Becker, T ed. Improving Agricultural Trade Performance under GATT

The Economist September 22nd 1990

Zietz, J, Valdes, A (1988) Agriculture in the GATT, An Analysis of Alternative Approaches to reform