Breaking Bread: Navigating Public Stockholding in the Realm of International Trade
In April 2021, WTO Members came together to secure a package of agreements at the 12th Ministerial Conference held in Geneva; member states reached a consensus on a specific commitment to enhance trade facilitation and bolster global food market stability. This commitment aligns with the principles of Public Stockholding (PSH) and AMS.
The commitment entails a concerted effort by WTO member states to improve the functionality and resilience of international food markets. This goal relates to the concept of PSH, which involves the maintenance of government-held food reserves to ensure food security and stabilize prices in domestic markets. By enhancing the functioning of global food markets, countries can better manage their public stockholding programs, ensuring a steady supply of essential food items to vulnerable populations without negatively impacting international trade.
Furthermore, the commitment includes reaffirming the principle against imposing export bans or restrictions on the agri-food sector that does not comply with WTO regulations. This principle aligns with the discussions surrounding the AMS. The AMS is a crucial metric used to quantify the level of support provided to agricultural producers, encompassing various forms of support, including export subsidies. Member states maintain fair and transparent trade practices by reaffirming the non-imposition of export bans or restrictions not in line with WTO rules. This is crucial when calculating the AMS and evaluating the trade-distorting effects of various support measures.
These discussions were held under market access, domestic support, and export subsidies, which are the three significant aspects of agricultural and trade policy.
The overall objective of agriculture negotiations during Uruguay rounds was to move toward a fair and market-oriented trading system in agriculture. AOA was an outcome of the same. However, AOA's long-term objective is substantial progressive reductions in support and protection domestic governments provide to their agricultural sector. A pillar of agricultural negotiations is market access, which includes mandatory binding of tariffs on all agricultural products. Domestic food subsidy programs seeking to promote food security and protect livelihoods often breach such commitments and entitlements, which consequently violate WTO provisions, especially the AOA. The developing countries and the LDCs often bear a disproportionate brunt of such violations due to their AMS limit pegged at zero. This means that they do not have the flexibility of modulating the support on individual products within the total AMS levels, including price support measures and all non-exempt direct payments. This ultimately affects the state of food security in their respective countries.
The Indian agriculture sector is the largest livelihood provider in India. Its share in the Gross Value Addition in 2019-2020 was 18.29 percent, while it employs 45.6 percent of the workforce. Food insecurity in India is a significant cause of concern for the government despite large-scale agrarian production. Food insecurity refers to the lack of consistent and reliable access to sufficient and nutritious food to meet the dietary needs and preferences for an active and healthy life. It is a multifaceted issue that encompasses both the availability of food and the ability of individuals and households to acquire and consume it. India’s food grain output has risen from 265 million tons to 315 million tons in the last eight years.
Food security and sustainable agriculture are key priority areas for India as projected prior to the G20-India First Agriculture Deputies Meeting of the Agriculture Working Group.
The FAO report on "The State of Food Security and Nutrition in the World" assesses rising food insecurity in India using key metrics: 'Prevalence of Undernourishment' (PoU) and 'Prevalence of Moderate and Severe Food Insecurity' (PMSFI). The PoU measures chronic calorie deficits, while PMSFI gauges nourishing food availability. The FAO's Food Insecurity Experience Scale (FIES) is a benchmark despite India's reservations about FAO Gallup World Poll (GWP) Surveys.
The report indicates increasing food insecurity in India, notably in PMSFI, revealing 16.3% undernourishment, 17% wasting, and 31% stunting. This aligns with UN 'Zero Hunger' SDG, aiming to end global hunger and malnutrition by 2030.
At a broader level, food security ensures access to nutritious food for a healthy life, aligning with UN SDG goals, particularly 'Zero Hunger.'
Focusing on India, the report underscores escalating food insecurity. PMSFI highlights challenges in accessing nourishing meals. Despite disagreements, indicators urge action to address India's food insecurity and UN SDGs.
Promoting Food Security through Public Stockholding
The existing disciplines on PSH, as outlined in the Annex of the AoA, were formulated to regulate government-held food stocks to prevent them from adversely affecting international trade. These disciplines were designed to ensure that countries did not use PSH programs to provide unfair trade advantages or distort global agricultural markets.
Over time, it became evident that the rigid application of these disciplines could potentially hinder countries' efforts to address domestic food security concerns. Many developing nations rely on PSH programs to safeguard their populations against hunger and price volatility. Recognizing this, negotiations within the WTO led to the development of a specific instrument on PSH.
This specific instrument, often referred to as the "Peace Clause," was established during the Bali Ministerial Conference in 2013. The Peace Clause provides temporary protection to countries implementing PSH programs that breach their obligations under the AoA but are essential for ensuring food security. It acknowledges the importance of balancing domestic food security needs with international trade commitments.
In essence, the evolution from the existing PSH disciplines to the Peace Clause represents a recognition of the necessity to accommodate food security concerns within the framework of international trade rules. It allows countries to prioritize food security while also addressing trade concerns, contributing to the accessibility, consumption, and stability of food at both domestic and global levels.
Countries utilize public stockholding as a policy tool to enhance food security, maintaining essential food reserves like grains to manage prices and ensure supply during scarcity or crises. The Peace Clause, embedded in the Bali Ministerial Conference decision, was a milestone for India. It supported domestic food security efforts, despite occasional breaches of trade laws. However, the Peace Clause solely covered staple crop procurement, omitting aid to poor farmers. Some nations enacted domestic laws to address this, advancing food security akin to public stockholding while honouring trade agreements. These measures encompass food accessibility, consumption, and stability.
The specific legal instrument referred to is the Peace Clause, which was incorporated in the Bali Ministerial Conference decision. This clause provided temporary protection to countries implementing public stockholding programs for food security purposes, even if such programs violated certain international trade rules.
The Peace Clause decision from the Bali Ministerial Conference safeguards countries' food security programs from immediate legal challenges, even if these programs violate certain aspects of the AOA. This protection allows countries to implement policies that promote food accessibility by maintaining necessary food reserves. By ensuring the continuity of these programs, the Peace Clause indirectly supports consumption by preventing sudden disruptions in food supply, contributing to more stable and reliable access to food.
The AoA, while primarily focused on agricultural trade, indirectly affects food accessibility, consumption, and stability. By reducing trade-distorting agricultural subsidies and promoting fair trade practices, the AoA contributes to stable markets and improved food availability, which in turn impacts accessibility. Furthermore, by encouraging agricultural development and productivity enhancements, the AoA supports food consumption by fostering increased production and availability of diverse food options.
Public Stockholding in India
As for India, this can also be understood under the right to life as envisaged by Article 21 of the Constitution of India, including the right to live with dignity, which includes having access to food and other essentials, even though the Constitution does not expressly mention this right. A food security program by National Food Security Act, 2013 (NFSA) was introduced along with other domestic legislations and policies that promote food security through public stockholding.
The Targeted Public Distribution System and Public Distribution System are two programmes that the Indian Government has long used to address the problem of family food security. However, the 2013 passage of the NFSA signalled a turn in favour of a rights-based strategy. Up to 50% of the urban population may lawfully receive food grains on a subsidized basis through the targeted public distribution system. Out of total coverage of 81.34 crores, almost 80 crore individuals are currently covered under the NFSA for obtaining heavily discounted food grains. The Indian grain management system combines food grain delivery with price support.
Before the planting season, the government determines the Minimum Support Prices (MSP) for each crop based on the cost of production, the domestic supply-demand imbalance, and global prices. Although farmers are allowed to sell their goods to the government at the MSP or at current market rates, the government is legally required to buy all grain presented to the market at the MSP.
The responsibility for purchasing grain at the MSP, storing it, and dispersing it across the public distribution system (PDS) falls to the parastatal Food Corporation of India (FCI). The FCI keeps grain on hand in order to subsidize grain to the disadvantaged and maintain emergency food supplies. The grain that is kept on hand is also utilized for government welfare programmes, market price stabilization, and occasionally for exports by the public or private sectors.
Challenges in Domestic Support Measures and Distorting International Trade
Members of the WTO are allowed to provide subsidies in order to support their home markets. The agreement on Subsidies and Countervailing Measures (SCM Agreement) of the WTO provides rules for the use of government subsidies in a remedial manner as such subsidies tend to have harmful effects on commerce and international trade. The agreement initially established three categories of subsidies. The “prohibited” subsidies are the subsidies that can be granted only when the potential recipient of such subsidies meet certain export targets or uses domestic products over imported goods. The “actionable” category are those subsidies whose allowance is contingent upon the fact that they must not cause “adverse effects” on the interests of other signatories. These adverse effects include injury to the domestic industry of another member, nullification or impairment of benefits accruing directly or indirectly to other signatories under the general agreement or serious prejudice to the interests of another member. There is a third category of “non actionable subsidies” as well. The AOA is another agreement which contains specific rules governing the use of agricultural subsidies. The AOA recognises and distinguishes between support programmes by states that distort the market by increasing exports or reducing imports. According to WTO nomenclature, subsidies are generally denoted by ‘boxes’ that have the traffic light colours of green (allowed), amber (slow down, need to be decreased), and blue.
a) Green Box Subsidies: These subsidies have the minimal trade distorting effect and are therefore not restricted by trade agreements. For instance, within the Research, Pest & Disease Control, Capacity Building, Extension and Consulting Services, Infrastructural Services, and other services fall under the category of green box subsidies mentioned in Annex 2 of the agreement which lays down a list of such policies that would fall under the green box.
b) Blue Box Subsidies: Subsidies in this category are comparable to a traffic signal which has become red. Subsidies in this category are in the form of direct payments to farmers under production limiting programmes. China is one such country which has notified implementation of blue box measures for corn and cotton. European Union, in its new 2023 Common Agricultural Policy keeps the new targeted direct payments and rural development interventions for smaller farmers at the forefront of its policy design thereby incorporating blue box support measures.
c) Amber Box: With a few exceptions, all domestic assistance programmes for agriculture that are thought to affect trade and production are placed in the amber box. Developing country’s public distribution programmes are a part of the trade-distorting efforts known as ‘amber boxes,’ which demand a reduction in commitments. The developing countries contend that the subsidies given for the acquisition of agricultural commodities at prices higher than market prices should be incorporated into the green box subsidy and should not be decreased in compliance with AoA Clauses.
Domestic food subsidy programmes in the form of public stockholding consequently distort international trade by influencing prices and quantities. A trade distorting policy measure shifts the market price of a product above or below what it would have been in a competitive market. Subsidies in the form of domestic support and protection for agriculture mean that other countries producing and exporting the same products would have to compete with subsidised production and exports while simultaneously incurring the burden of import taxes as well as enforced low procurement prices.
These would consequently increase exports or reduce imports. Additionally domestic food subsidy programmes also lead to problems of overproduction. All these factors in essence affect the demand and supply in the international market thereby distorting the prices international trading market. Such trade distortions impact farm income as well as livelihood security for millions of farmers living in other countries. One of the most innovative elements of the AoA is that it established a limit and reduced the baseline domestic support as measured by the aggregate measure of support thereby formally recognizing domestic support policies for agriculture at a global level. One of the outcomes of the negotiations for AoA was under Domestic support measures to be undertaken by countries. Since all the developed countries had high subsidies in the base period taken for the calculation of AMS, they became entitled to AMS limits. Hence, they acquired the right to provide domestic support beyond their de minimis limits. Conversely, most developing countries offered minimal domestic support during the base period, resulting in them losing any such entitlement to AMS beyond the minimal threshold. The outcome of this was that those who had previously disrupted agricultural markets with substantial subsidies, mostly developed countries, before the AoA were permitted to continue with it while the developing countries found themselves prohibited from employing any extensive subsidies in the future. This aspect of the negotiations was not realised by the developing countries during the negotiations.
The argument put forth by India, advocating for developing countries' ability to maintain food stocks without penalties, aligns with the principles outlined in Paragraph 3 of Annex 2 of the AOA.
Paragraph 3 of Annex 2 recognizes the importance of food security and the need for developing countries to support their low-income or resource-poor producers. It acknowledges that developing countries may need to provide support to these vulnerable agricultural producers through various measures, including government-held food stocks. The paragraph emphasizes that such support should not be considered trade-distorting or subject to reduction commitments, provided it meets specific criteria aimed at ensuring that it does not adversely affect trade.
India's stance emphasizes the significance of allowing developing countries to maintain food stocks for the sake of food security and the welfare of their farmers. By continuing domestic food security policies, even if they appear to contravene international commitments on paper, developing countries like India can utilize the flexibility granted by Paragraph 3 of Annex 2. This flexibility enables them to prioritize the interests of their farmers and vulnerable populations while addressing food security concerns, as long as they adhere to the agreed-upon criteria.
In essence, India's argument reflects the spirit of Annex 2 of AOA by advocating for a pragmatic approach that balances international commitments with the imperative to safeguard food security and support farmers in developing countries.
India- Measures concerning Sugar and Sugarcane (DS 579) is a case in point where India has doubled its ‘fair and remunerative price for sugarcane from INR 1391.2 per tome in 2010/11 to INR 2750 per tonne in 2018/19.’ It is the price that Indian sugar mills must pay Indian sugarcane producers. In addition to this, some Indian states provide for even higher prices the sugar mills are to pay to local sugarcane producers. Apart from this, a minimum price for sugar has also been reintroduced. In the Indian domestic support regime, a lot of assistance programs have been introduced and reintroduced to incentivize sugarcane farmers to produce large amounts of sugarcane. In addition, mill-specific Minimum Indicative Export Quota has been fixed to export sugar surplus. This quota has been increased from 2 million tons in 2017/18 to 5 million tons in 2018/19 thereby increased the pricing pressure in the global market.
In the dispute, Brazil raised this as one of its objections, arguing that such high domestic support regime for sugarcane and sugar was in conflict with India's commitments under WTO AoA Articles 3.2, 6.3, and 7.2(b) even though they supplied domestic support for sugarcane above India's de minimis entitlement of 10% of the value of production. The panel held that India’s AMS was around ten times more than the de minimis value of sugar production defined under Article 6.4 of AoA. The panel concluded that India was violating the AoA provisions which prohibit grant of subsidies in the sugar sector. AMS includes market support price which comprises Fair and Remunerative price(FRP) and state administered price. However, the base period for FRP is 1986-88. This baseline period fails to account for inflation. This is one of the potential issues with the outcome of the dispute. In 2018, Even the United States submitted its claim in its first ever counter notification that India is in breach of its de minimis entitlement to rice and wheat.
Solutions in Domestic Support Measures and Distorting International Trade
A New Method to Calculate Aggregate Measure of Support
To solve India's breach of the de minimis 10% rule, one solution is to change the way the Aggregate Measurement of Support (AMS) is calculated. The current method doesn't consider that farm prices and global market rates often differ from the reference price used to calculate the AMS. To address this, a new calculation method should be used that considers these factors more accurately. This would ensure that India's support for its farmers is measured correctly and does not exceed the permissible limit. Reference can be made to a communication made by Costa Rica in 2023 wherein it proposed a method by which developing countries could retain adequate policy space as well as flexibility in the area of subsidies while not being subjected to disproportionate commitments. It proposed a “global cap” on trade and production distorting domestic support entitlements and a global reduction objective of 50% with an implementation period of 10 years for individual reductions. In order to do this, Costa Rica proposes a formula that would not only enable developing countries to retain their policy space but also exempt the LDCs from any capping and reduction commitments.
Negotiating A Distinct Baseline For AMS Assessment
A constructive solution to tackle the issue of conflation in calculating the AMS involves a strategic focus on negotiating a distinct baseline for assessment. This approach acknowledges the historical challenges faced by developing countries, where past negotiations may not have fully elucidated the long-term implications of support measures. In some instances, more developed nations might have exploited this lack of understanding to gain advantages.
In light of historical negotiations where the wisdom of developing nations was often overshadowed by the astuteness of their developed counterparts, a solution of profound significance emerges. This remedy entails directing unwavering attention towards the meticulous crafting of a distinct baseline for assessment, an endeavour imbued with purpose and foresight.
Guided by the principle of transparency, the solution envisions a realm where open discussions flourish, where the experiences of developed nations are shared not as tools of advantage, but as illuminating beacons to illuminate the path for their developing counterparts. Through this prism of knowledge-sharing, the tapestry of negotiations is woven with threads of equity and understanding.
At its heart, this proposition kindles a profound consideration of the future. It urges developing nations to gaze beyond the immediate horizon, contemplating the enduring consequences of support measures on their economies, industries, and, perhaps most crucially, on the tapestry of food security. The distinct baseline, a masterpiece of collaborative endeavour, becomes a canvas upon which the brushstrokes of sovereignty and welfare blend harmoniously.
As negotiations unfold, the solution champions a personalized approach, one that celebrates the distinctive contours of each nation's economic landscape. It advocates for a symphony of criteria that resonates with precision and fairness, capturing the essence of support measures in ways that defy facile conflation.
To address this, negotiations can be structured to provide a comprehensive understanding of the implications of various support measures. Developed countries would share insights and expertise transparently, ensuring that the potential consequences, both short-term and long-term, are thoroughly discussed and comprehended by all parties involved.
The "Japan-Films case (1998)" underscores a significant principle: “subsequent negotiations supplant prior agreements.” In the current context, an enlightened path lies in transparent and equitable negotiations, wherein all facets are unveiled to developing nations. This empowers informed decision-making, presenting a superior avenue for addressing food security concerns through the AMS.
This informed negotiation process would lay the foundation for establishing a distinct baseline tailored to the unique circumstances of each country. This baseline would consider not only the specific support measures in question but also the broader economic and social contexts of developing nations. By customizing the baseline, the intricate economic interplay can be better captured, and the implications of support measures can be more accurately assessed.
Regular reviews and flexibility mechanisms within this distinct baseline would accommodate evolving economic conditions and changing global trade dynamics. This adaptive approach ensures that developing countries are not locked into a rigid framework that may not suit their long-term goals and development trajectories.
Furthermore, international collaboration can play a pivotal role. Developed countries and international organizations could extend technical and financial support to empower developing nations in negotiations. This assistance would level the playing field, enabling developing countries to meaningfully engage in discussions and protect their interests.
In essence, focusing on negotiating a distinct baseline for the assessment not only addresses historical imbalances but also empowers developing nations to make informed decisions. By comprehensively understanding the long-term implications of support measures and tailoring assessments to their unique circumstances, developing countries can participate more equitably in global trade negotiations. This approach ensures that the exploitation of naivety is replaced by a fair, transparent, and balanced trade dialogue that respects the interests of all parties involved.
Public stockholding programmes are important from the perspective of food security however a permanent solution is yet to be recognised to balance the twin goals of public stockholding and smooth flow of international trade. The problem of public stockholding has room for tremendous advancement that could result in an everlasting resolution. There are still considerable disparities in the members' positions on the subject at hand, however, India’s goal to remedy food insecurity can only be dealt with by recognizing and strengthening the role of trade to enhancing global food security, taking dedicated steps to facilitate trade and improving and creating strong markets for food and agricultural products and agricultural inputs in conformity with WTO disciplines.
This article was authored by Mansi Verma and Parishti Kaushik, students of law at the Gujarat National Law University. This blog is a part of RSRR’s Blog Series on 'Emerging Trends in Indian Approach to Trade & Investment: Treaties & Agreements', in collaboration with the Centre for Trade and Investment Law.