Dhaka weighs up losses, gains from farm subsidy cut in rich nations

Bangladesh seems to have been caught between a rock and a hard place on the call for cutting agriculture subsidies in developed countries – which may lead to global price hikes of farm produce and raise import bills for everything, from wheat to sugar to cotton.

Again, when it comes to exports, though still meagre, Bangladesh has a chance to benefit if prices of fresh fruits and vegetables go up in the global market.

The call came from India, a developing country that feels itself discriminated against by the provisions of the World Trade Organisation's Agreement on Agriculture that gives developed member countries the flexibility to provide higher domestic support to farmers, thus distorting trade of farm products.

Being a leading producer and exporter of farm products, India raised the issue at the WTO forum and proposed that developed countries lower their farm subsidies to end trade distortions.

As Bangladesh is assessing the Indian proposal, agro-economists and trade analysts feel that Bangladesh is likely to see a rise in import payment as an immediate impact if subsidy cuts lead to price hike of farm items in source countries.

They suggest that Bangladesh needs to balance between defensive and offensive positions on the farm subsidy issue.

An inter-ministerial meeting was held yesterday at the commerce ministry, but officials at the ministry's WTO Cell did not comment on Bangladesh's position on the issue.

Trade analysts say a lot of discussions regarding the agreement on agriculture are going on at the WTO and many proposals are coming up. India has submitted a proposal to the WTO to increase import duty if necessary to protect the interests of small farmers and Bangladesh has supported it.

But the United States and the European Union have opposed the proposal and opined in favour of removing all barriers to free market activities. Against this backdrop, India has proposed reducing agricultural subsidies in developed countries.

"Subsidies are provided to reduce the cost burden on farmers and keep prices lower in the market. If subsidies are cut, prices will go up and Bangladesh will have to pay more for imported products," says Dr Mohammad Saidur Rahman, a professor of agricultural economics at Bangladesh Agricultural University.

Similarly, Bangladesh may gain from exports of farm products although the country ships much less compared to its huge imports. "Our gains will depend on the volume of our exports of farm items," he said.

Prof Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue, however, believes reduction of farm subsidies in developed countries could pave the way for many other countries to enter the coveted $11 trillion global agriculture market.

"Bangladesh is in both defensive and offensive positions. On the one hand, our agricultural exports will go up if rich nations reduce subsidies, on the other hand, we will have to pay high costs for many products we now import at low costs," he said.

Many developing countries now cannot export agro-products because of high subsidies in developed countries such as the US, the EU and Canada, he added.

In Bangladesh, most product-specific Aggregate Measurement of Support (AMS) related expenditure was used for price support for rice and wheat, and non-specific AMSs mainly focused on subsidising fertiliser imports.

Bangladesh applies tariff protection for domestic agriculture and restricts export of several agricultural commodities to ensure adequate domestic supply. Cash incentives are offered to promote agricultural exports, while domestic support measures include concessional credit for farm machinery, procurement of rice and wheat from farmers, lower electricity tariffs for irrigation and tax holiday for agro-processing industries.

Between 2017 and 2019, the OECD counted $708 billion of support for agricultural producers in the 54 countries, according to research farm Statista. Although high agricultural subsidies in developed countries reduce global prices, they also cause decline in incomes of farmers in low-income countries.

World Bank studies suggest that US subsidies alone reduce West Africa's annual revenue from cotton exports by $250 million a year.

One of such domestic subsidies is AMS given by the governments to farmers both for specific products and overall agriculture.

AMS is seen as a trade distorting subsidy as it directly influences production and prices of farm produce both in local and global markets.

That is why a support measure announced for wheat farmers in India or change in Canada's canola export policy for China concerns Ukraine and China's auction of rice stocks is a reason for US worries.  

Canada, USA, and Ukraine are among the 32 members offering highest levels of domestic farm subsidies, but they are the ones that raise questions in WTO secretariat against any agriculture support measures in developing countries that they feel go against their trade interest.

In its proposal sent to WTO, India noted that higher support per farmer in the developed members serves as an incentive for extensive commercial production and has a greater trade-distorting effect on markets than the lower support farmer given by developing members.

Developed members, with relatively fewer farmers, have significant flexibility to provide trade distorting support to their farmers, while developing members, because of a very large number of farmers, do not have the policy space to support their farmers, it pointed out.

A farmer in Switzerland gets $37,952 in subsidy in a year, while an Indian farmer ends up with $451.

Provisions of AMS under Article 6.3 of WTO's Agreement on Agriculture (AoA) have created significant asymmetry in the rules of agriculture trade and have tilted the playing field against the interests of most developing countries, read the Indian document.

Developed members have access to a huge amount of AMS beyond their de minimis, it pointed out, stressing that any meaningful attempt at reforms in agriculture subsidies must address the asymmetry between developed and developing countries in agriculture trade.

De minimis is the threshold set by AoA for domestic subsidies in terms of price support, direct subsidies for production and inputs. Developed countries can provide product-specific domestic support up to 10% of the total value of agriculture production while the ceiling is 20% for developing countries.

Even though developing countries cannot provide domestic subsidies beyond their threshold, most developed countries have the flexibility to cross their ceiling, leading to trade distortion, India pointed out in its proposal to WTO.

Between 1995 and 2018, Japan provided domestic subsidies in the range of 48% to 42% of the total value of agriculture production, while Norway's farm subsidy ranged between 61% and 32%, Switzerland's between 43% and 38% – far beyond the ceiling.  

In the USA, domestic subsidies cross 50% of the value of specific products and even exceed total value in some cases. The US subsidy for rice amounts to 82% of the value of the crop, 65% for sunflower, 74% for cotton and 215% for wool.

Developed countries in some cases concentrate support for a single product for years (US for dairy and Canada for milk, for example) as part of their strategic application of the flexibility, which they reduce progressively and shift to other products.

To reduce the distortion, India proposes that all members reduce their domestic farm subsidies to their ceiling in three to five years. Each member should notify the WTO's Committee on Agriculture the AMS and value of farm products annually to help monitor the compliance, it says.