Agriculture and GATT: How the Compromise was Reached

Joanna O'Riordan

Agreement on free trade in agriculture was always going to be difficult, with the existence of two mutually exclusive systems on either side of the Atlantic. The GATT accord thus stands as a remarkable, if tardy, triumph for international negotiators. In this essay, Joanna O'Riordan examines the initial strategies of both parties and details how agreement was reached.

'The deal [GATT] will create a better, more prosperous and politically safer world, as it will mitigate the tensions that would otherwise exist between peoples.'

Peter Sutherland, Director General of GATT, quoted in The Irish Times (3/12/94) after the US Senate approved the World Trade Treaty.


The GATT treaty currently being ratified by the governments of the contracting parties is the product of a lengthy series of trade negotiations which began in Punta del Este, Uruguay in 1986, Gardner (1993). The aim of those who initiated the current round of talks was to liberalise trade and decrease protective barriers throughout the world. It has been estimated by GATT that the gains from trade due to the Uruguay round deal will be $500 billion. This net welfare gain will accrue from increased competition and efficiency, economies of scale and higher world market prices. It is an understatement to point out that the deal was hard fought and no where is this more true than in the case of agriculture. In this paper I intend discussing the process by which agreement on the reducing of protective policies in agriculture was reached. The narrative is confined to the United States and European Union. This is for two reasons. Firstly because these two trading blocs represented the polar extremes in the debate on agriculture during the round and secondly because the other two major trading blocs with respect to agriculture, Japan and the Cairns Group (CG) largely hold the same views as the EU and the US respectively.

The first section of this paper will deal with the background to the Uruguay round, the treatment of agriculture in the previous GATT rounds and the reasons why it was essential that agriculture should be more fully incorporated into the GATT framework. In the section and third sections I will discuss the background to both the US and EU's involvement in the Uruguay round, the positions they adopted in Punta Del Este and their ambitions as to what the round would achieve. In section four I will link up the two viewpoints and outline the process towards ultimate agreement in Washington in December 1993. Finally I will conclude by assessing the impact of the round on world agricultural trade.

Background to the Uruguay Round

In previous GATT rounds agricultural trade was virtually ignored, despite the fact that trade in agricultural products represented 13% of total trade in goods and that extremely high protection levels were present throughout the world. While export subsidies and quantitative restrictions on imports were outlawed in other sectors, manufacturing for example, these regulations were waived with regard to agriculture. The absence of effective international rules and disciplines in evident in Producer Subsidy Equivalent (PSE)a percentages for agricultural produce for the US and EU throughout the early 1980's. The trend was clearly a rising one.

PSE percentages measure the total financial transfer to the farm sector. This figure is calculated by dividing the total PPS by the net value of production. In monetary terms the 1994 Agra Europe report estimated that the cost of supporting agriculture in the developed world amounted to $300 billion per annum during the 1980's.

The principal problem with such a high level of agricultural support was the fact that 82% was in the form of market price support. This had a number of critical consequences. Its adoption had the effect of both depressing and detribalising world market prices. The former conclusion is based on the simple logic that increased production, which leads in turn to excess supply. In the face of static demand prices will inevitably fall, thereby necessitating even greater levels of protection. Both the US and the EU are large net exporters of agricultural products. As a result of their protectionist policies, the rest of the world must bear substantial negative terms of trade. Protectionist policies to stabilise a country's agricultural prices also means the burden of adjusting to world market conditions is thrown onto the result of the rest of the world. This is shown diagrammatically below.

Due to the inelastic import demand curve of the protected domestic market the world import demand curve also becomes more inelastic. This has the effect of increasing the volatility of world market prices with particularly adverse effects for developing countries.

By the mid-eighties the budgetary and political costs of agricultural subsidisation and the extent to which consumers and taxpayers were bearing this burden were becoming increasingly well documented. It was estimated by Roningen and Dixit (quoted in Ingersentet al (1994) that for every $1 transferred to producers that consumers and tax payers had to give up $1.5. Put differently, half of the total value of agricultural transfers represented a deadweight loss to the world economy. In addition to anxieties from an efficiency perspective, the general malaise in world trade and the increasing tensions between the four main trading blocs (the US, EU, CG and Japan) resulted in agriculture not only being on the agenda in Uruguay but given top priority.

The US Perspective; Background and Aims

Modern agricultural protection in the US dates back to the thirties and the legalising of import quotas by the 1933 Agriculture Adjustment Act. For over forty years American agricultural policy was predominantly inward looking and protectionist. The farm lobby was very strong, but by the seventies there were indications that things were changing. Increased competition, lower farm prices and rural depression resulted in the US losing its position as leader in world agricultural exports worth $44 billion. Five years later that figure had slumped to $26 billion.

The US's firm line in the Uruguay round was as a direct result of its desire to reclaim its share of world trade. In order to achieve this the US proposed the phasing out of all trade distorting measures over a ten year period. It is important to note that the US government saw GATT as an excellent opportunity to pursue their domestic objective of reforming agricultural policy. Agricultural groups were still strong in Washington and it was felt that change, which the Reagan administration was determined to introduce, could be more readily implemented through an international and wide-ranging trade treaty.

In the years immediately prior to 1986, US agricultural policy was one of qualified ambivalence. While the 1985 farm bill had succeeded in decreasing subsidies, Section22 of the 1933 Adjustment Act which allowed for the use of import quotas even when domestic constraints didn't operate, was widely still in use. It is estimated that US transfers to producers in 1986 were still worth a huge $88 billion (Ingersent et al., 1994). In the light of the above the 'zero option' which the US adopted at the start of the Uruguay round and which would have necessitated the sweeping elimination of all trade distorting agricultural subsidies by the year 2000 is all the more surprising. It is debatable whether the US was fully committed to the 'zero option'. Some commentators have suggested that the US was calling the EU's bluff and foresaw that their strong opening position would inevitably have to give way to something like the final outcome. However, others point to the length of time the US took to fully back down from the 'zero option' and argue that the US was fully determined to liberalise agricultural commodity markets and the only reason they backed down was because they had miscalculated the strength of the resistance from the EU.

Two final points with regard to the US opening position must be made. Firstly support for the notion of 'decoupled payments' was mooted by the EU at this time. These payments would be in the form of a direct income transfer and would be divorced from production incentives. They would allow agricultural support to continue but would avoid the adverse effects of market price supports. Secondly the US proposed the tariffication of all non-tariff barriers (NTB), which could then be subject to a phased reduction. Tariffs were more desirable than other support mechanisms because the deadweight loss is less.

By the end of 1988 at the Montreal mid-term review.the US stance had changed little. It demanded the prior commitment of all parties to the eventual elimination of support before negotiations could begin on merely reducing it in the short-term. Furthermore the US wanted the EU in particular to quantify the extent to which it was prepared to reduce certain specific support mechanisms. This approach was to become known as 'rules-based'.

The EU perspective: Background and Aims

By the start of the Uruguay round in 1986, the EU had become the world's largest exporter and second largest importer of agricultural produce. Clearly it would play a crucial role in the GATT talks. The EU however, found itself in a difficult position. Mounting budgetary pressures and surpluses within the Community had triggered off a series of demands for support levels to be reduced. The need for reform was therefore widely accepted. At the same time the EU was not yet prepared to yield on the fundamental principles of the Common Agriculture Policy (CAP), which served to insulate and protect EU producers from world prices. The CAP had been the first truly common policy within the EU and in a sense was held sacred . The power of the farm lobby in Europe was a further contributing factor. The initial EU position was therefore an extremely vague one. In the short term the EU proposed action to decrease instability in agricultural markets and to deal with the problem of excess supply. Only in the longer term would any move towards a redistribution of support be contemplated, and indeed, it wasn't till after 1990 that the EU was prepared to quantify the size of the reductions it was prepared to concede.

The one early concession which the EU did make was in its willingness to contemplate an Aggregate Measure of Support (AMS) to measure and monitor all trade distorting mechanisms with a view to reducing them in the future. The adoption of such a system would be conditional on the EU being permitted to rebalance external protection by increasing it on some commodities and decreasing it on others. While such an approach certainly amounted to a compromise as far as the EU was concerned, it also had its advantages. If support levels were to be reduced on an aggregate level the appropriate measures to be used would be left entirely up to each country. The European Commission therefore believed that it might be possible to avoid having to cut export subsidies, which politically were especially significant.

The determination and intransigence of the EU is evidenced by the fact that it was prepared to jeopardise the whole Uruguay round if the US did not make major concessions on the 'zero option'. Despite statements by the Commission to the contrary, the importance of CAP reform to the eventual GATT agricultural agreement can not be over emphasized. Progress on agriculture was only really achieved after the MacSharry plan was adopted.

How the Compromise was Achieved

It was only after the Montreal deadlock that the US finally signalled a willingness to move away from the 'zero option'. The Geneva Accord of 1989 salvaged the negotiations from complete breakdown, with the US accepting that instead of the elimination of all trade distortions, 'substantial and progressive reduction of agricultural support and protection' would suffice. Agreement on agriculture was due to be finalised in Brussels in 1990. Two months prior to that the US issued its final proposal. This consisted of a renewed emphasis on tariffication, coupled with the reduction of all trade-distorting agricultural subsidies over a ten year period. Included in this would be a 90% reduction in export subsidies. This was in stark contrast to the stance of the EU who proposed that export subsidies should be reduced only in the context of overall levels of support. It was inevitable that the Brussels meeting would breakdown. The crises was heightened by US threats of a trade war.

However in early 1991 three independent events helped to diminish tension and enable talks to be restarted. Firstly, the departure of US trade representative, Yeutter, so long identified with the US 'zero option' heralded in a softening of the US line. Secondly, aware of the Fact that there were significant pressures on both sides to enact reform, GATT secretary general Dunkel began a series of reductions aimed at reaching a compromise. Simultaneously with the 'Dunkel Shuttle' the EU was preparing proposals for CAP reform. The MacSharry Plan, named after the then Commissioner for Agriculture, Ray MacSharry, recognised the fundamental imbalances inherent in the CAP system and proposed the guaranteeing of farm income rather than market prices.

The Uruguay round was formally revived in February 1991 with all parties agreeing to reach 'specific binding commitments to decrease farm supports in each of the three areas'(Ingersent et al 1994 ch. 4), namely internal protection, border protection and export competition. This represented a significant EU concession, in that it implied an accession to America's demands for specific support-reducing commitments, in other words rules-based approach. In December 1991 Dunkel submitted his draft agreement which the US was prepared to accept. The two most critical features of the agreement were, firstly, the provision for improved market access and, secondly, the twin requirements of a 36% decrease in budgetary outlays on export subsidies and a 24% cut in the subsidised export volume. While the EU was beginning to accept that concessions on export subsidies were going to have to be made, it still held back for a number of reasons. Dunkel contained no concession towards allowing Europe to rebalance its overall commitment to decrease protection. More importantly there was doubt as to the compatibility if the draft agreement and MacSharry's proposals for CAP reform. In particular it was found that the compensatory payments at the centre of the MacSharry plan would not meet the criteria laid down by Dunkel for direct income support to be classified as 'decoupled', and therefore exempt from reduction.

Following on from the Dunkel Draft agreement the US and EU eventually reached an agreement during bilateral talks in Washington at the end of 1992. This compromise, which was essentially a slightly watered down version of Dunkel, became known as the Blair House Agreement (Nov. 1992). The essential provisions of the agreement were as follows:

Following on from the compromise achieved in Washington the agricultural Final Act was agreed on in Brussels in December 1993. The principles incorporated were largely the same as those agreed on between the US and EU a year previously. One difference however, was that the Final Act allowed for 'frontloading' of subsidised exports to enable existing EU stocks to be reduced.

Three years behind schedule agreement on agriculture within the Uruguay round had been reached. Writing this at the end of 1994 all that remains is for the governments of the EU and Canada to formally ratify the treaty.

The Final Position Analysed

The bilateral agreement between the US and EU that clinched the GATT deal represented a considerable compromise by both parties. As far as the US was concerned the levels of support reduction agreed on were a far cry from the 'zero option'. However, it is debatable whether the US ever seriously expected to secure the total liberalisation of agricultural trade. Meanwhile the EU finally gave up insisting that the CAP couldn't be the subject of international negotiations. In particular the issue of qualified export subsidy reductions was conceded.

The rules-based approach of the US, was adopted in so far as the final Blair House Agreement does hone in on specific forms of support. At the same time the agreement also shows the influence of the AMS approach with all measures of domestic support being aggregated. Furthermore, AMS, as defined by GATT, excludes all 'green box' policies, thereby exempting all decoupled payments. This has advantages for both the EU and US. The formers direct payments under the MacSharry reforms and American deficiency payments will both be exempt from reductions.

Ingersent, Raynor and Hide (1994) estimate that the net economic welfare of both the US and EU will increase with unilateral agricultural trade liberalisation by $3.3 and $21.4 billion respectively. Clearly it was essential that the Uruguay round incorporated agriculture, and that moves were made to reduce protection. However, while much work has been done , two issues remain at large. Firstly to what extent is the Uruguay round agreement compatible with the MacSharry plan? Some commentators have suggested that a further series of CAP reforms may be necessary. Secondly the next round of GATT talks will need to consolidate and extend progress on agricultural policy reform. Whether either of these can be easily achieved is in moot.


Agra Europe Report, No.74, 1993.

Gardner, B., (1993) Urugual Round Agreement, Effects on European Agriculture.

Ingersent, Raynor and Hide, (1994) Agriculture in the Uruguay Round.

The Irish Times, 3/12/1994.