TOPIC : WTO RULING ON SUGAR SUBSIDY

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THE CONTEXT: A WTO panel, in its ruling on December 14, 2021, recommended India to withdraw its subsidies on sugar under the Production Assistance, the Buffer Stock, and the Marketing and Transportation Schemes as they are violative of the WTO norms and rules. Ruling in favour of Brazil, Australia and Guatemala in their trade dispute against India over its sugar subsidies, the WTO panel has stated that the support measures are inconsistent with WTO trade rules. This article analyse this issue in detail.

ANALYSIS OF THE ISSUE

COMPLAINT AGAINST INDIA

• Australia, Brazil, and Guatemala said India’s domestic support and export subsidy measures appeared to be inconsistent with various articles of the WTO’s Agreement on Agriculture and the Agreement on Subsidies and Countervailing Measures (SCM).

SUBSIDIES BEYOND DE MINIMIS LEVEL

• All three countries complained that India provides domestic support to sugarcane producers that exceed the de minimis level of 10% of the total value of sugarcane production. They said it was inconsistent with the Agreement on Agriculture. (READ AHEAD).

OTHER POINTS OF CHALLENGES.

• They also raised the issue of India’s alleged export subsidies, subsidies under the production assistance and buffer stock schemes, and the marketing and transportation scheme.
• Australia accused India of “failing” to notify its annual domestic support for sugarcane and sugar subsequent to 1995-96, and its export subsidies since 2009-10, which it said were inconsistent with the provisions of the SCM Agreement.

PROCESS AT WTO

• The consultation followed between these countries and India did not resolve the issue.
• These countries then approached the Dispute Settlement Body (DSB) with the complaint that set up three panels to inquire into the allegations. These panels ruled against India.

THE PANELS’ FINDINGS.

• From 2014-15 to 2018-19, India’s domestic support to sugarcane producers exceeded the permitted level of 10% of the total value of sugarcane production.
• Therefore, India is acting inconsistently with its obligations under the Agreement on Agriculture.
• On the export subsidy, the panel also found that the support provided by India violated its obligations and India’s failure to notify its support measures to relevant WTO Committees also violated WTO norms.

THE PANELS’ RECOMMENDATIONS

• The panel asked India to bring its support measures in conformity with WTO rules and withdraw the prohibited subsidies.

WHAT HAS BEEN INDIA’S RESPONSE?

RESPONSE OF THE COMMERCE MINISTRY

• The findings of the panel were “completely unacceptable” to India.
• Australia, Brazil, and Guatemala had wrongly claimed that domestic support provided by India to sugarcane producers is in excess of the limit allowed by the WTO and that India provides prohibited export subsidies to sugar mills.
• The panel’s findings were “erroneous”, “unreasoned”, and “not supported by the WTO rules.
• The Panel has also evaded key issues which it was obliged to determine. Similarly, the Panel’s findings on alleged export subsidies undermine logic and rationale.
• As of now, there is no export subsidy on sugar, and hence the ruling will have no impact on the sugar export.

ON DOMESTIC SUPPORT/SUBSIDY.

• India held that its subsidy does not come under the meaning of market price support under the AoA. It pointed out that the FRP is paid to the sugar mills and not to the sugarcane producers.
• It argued that as per the meaning of market price support, it would be violated only when the govt pays for or procures the agricultural product.
• The panel rejected this argument — saying “market price support does not require governments to purchase or procure the relevant agricultural product”.

APPEAL TO APPELLATE BODY(AB)

• India has appealed against the ruling of the World Trade Organization’s (WTO) trade dispute settlement panel.
• India filed the appeal in the WTO’s Appellate Body, the final authority on such trade disputes.
• Pending the disposal, India is not bound to implement the orders of the DSB Panel. The AB has not been operational due to vacancies that the USA has consistently refused to fill.

CLARIFYING CONCEPTS: THE WTO TERMINOLOGIES

WHAT IS AoA?

To reform the agriculture trade and to improve the predictability and security of importing and exporting countries, the World Trade Organization came up with the agriculture agreement. It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into force with the establishment of the WTO on January 1, 1995. The three provisions/pillars that the agriculture agreement focuses on are –

• Market access — the use of trade restrictions, such as tariffs on imports
• Domestic support — the use of subsidies and other support programmes that directly stimulate production and distort trade
• Export competition — export subsidies and other government support programmes that subsidize exports.

DOMESTIC SUPPORT

• There are two categories of domestic support — support with no, or minimal, distortive effect on trade on the one hand (often referred to as “Green Box” measures) and trade-distorting support on the other hand (often referred to as “Amber Box” measures).
• For example, government-provided agricultural research or training is considered the former type, while government buying-in at a guaranteed price (“market price support”) falls into the latter category.
• Under the Agreement on Agriculture, all domestic support favouring agricultural producers is subject to rules. The Green Box also provides for the use of direct payments to producers, which are not linked to production decisions, i.e. although the farmer receives a payment from the government, this payment does not influence the type or volume of agricultural production (“decoupling”).
• The “Blue Box” exemption category covers any support measure that would normally be in the “Amber Box”, but which is placed in the “Blue Box” if the support also requires farmers to limit their production.
• All domestic support measures which do not correspond to the exceptional arrangements known as the “Green” and “Blue” boxes, are considered to distort production and trade and therefore fall into the “Amber Box” category.

DE MINIMIS LEVEL

• Minimal amounts of domestic support that are allowed even though they distort trade — up to 5% of production value for developed countries, 10% for developing.
• All domestic support measures favouring agricultural producers that do not fit into any of the above exempt categories are subject to reduction commitments. This domestic support category captures policies, such as market price support measures, direct production subsidies or input subsidies.
• However, under the de minimis provisions of the Agreement there is no requirement to reduce such trade-distorting domestic support in any year in which the aggregate value of the product-specific support does not exceed 5 percent of the total value of production of the agricultural product in question.
• In addition, non-product specific support of less than 5 percent of the value of total agricultural production is also exempt from reduction. The 5 per cent threshold applies to developed countries, whereas in the case of developing countries, the de minimis ceiling is 10 percent.

AGGREGATE MEASUREMENT OF SUPPORT

• The AMS represents trade-distorting domestic support and is referred as the “amber box”. As per the WTO norms, the AMS can be given up to 10 % of a country’s agricultural GDP in the case of developing countries.
• On the other hand, the limit is 5% for a developed economy. This limit is called de minimis level of support. It means that the AMS and the De Minimis Level are similar. Both relates to the Amber box.

SCM

• The Agreement on Subsidies and Countervailing Measures (Subsidies Agreement) of the World Trade Organization (WTO) provides rules for government subsidies and applying remedies to address subsidized trade that has harmful commercial effects.
• These remedies can be pursued through the WTO’s dispute settlement procedures, or through a countervailing duty (CVD) investigation which can be undertaken unilaterally by any WTO member government.
• Countervailing measures may be used against subsidies when imports of subsidized goods harm a competing domestic industry. They are used to offset the effect of the subsidy by, for example, imposing a countervailing duty (limited to the amount of the subsidy) on the import of subsidized goods or securing quid pro quo commitments from the subsidizing country (that it will abolish or restrict the subsidy, or that exporters will raise prices).
• Export subsidies which are in full conformity with the Agriculture Agreement are not prohibited by the SCM Agreement, although they remain countervailable. Domestic supports which are in full conformity with the Agriculture Agreement are not actionable multilaterally, although they also may be subject to countervailing duties.

DISPUTE SETTLEMENT BODY (DSB)

• Settling disputes is the responsibility of the Dispute Settlement Body (the General Council in another guise), which consists of all WTO members. The Dispute Settlement Body has the sole authority to establish “panels” of experts to consider the case and accept or reject the panels’ findings or the results of an appeal. It monitors the implementation of the rulings and recommendations and can authorize retaliation when a country does not comply with a ruling.
• Under the Subsidies Agreement, if a WTO member government believes that non permissible subsidy is being granted or maintained by another member government, it can request consultations with that government under the WTO’s dispute settlement procedures.
• If no mutually agreeable solution is reached in initial consultations, the matter can be referred to the WTO’s Dispute Settlement Body (DSB), which consists of representatives of all WTO members.
• The DSB establishes a panel, which reports its findings to the parties to the dispute with in a time frame. If the panel finds that the measure in question is a prohibited subsidy, the subsidizing government must withdraw it without delay.
• But when the appeal is filed in the AB and not yet decided, the practice is that the member country does not withdraw the subsidy immediately. The DSB can only reject the recommendations of the Panel on consensus among the members.

APPELLATE BODY

• The Appellate Body was established in 1995 under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO Members. The Appellate Body can uphold, modify or reverse the legal findings and conclusions of a panel. Appellate Body Reports are adopted by the Dispute Settlement Body (DSB) unless all members decide not to do so. The Appellate Body has its seat in Geneva, Switzerland.
• Currently, the Appellate Body is unable to review appeals given its ongoing vacancies. The term of the last sitting Appellate Body member expired on 30 November 2020.

NAIROBI PACKAGE

• The Nairobi Ministerial conference was held in 2015. WTO members decided to eliminate the export subsidies on agriculture and make new rules on export measures that have a covalent effect. To implement this decision, the developed countries will remove all the subsidies on export immediately. Developing countries will have a little longer period to eliminate the subsidies except for a few agricultural products.
• The decision was taken to give effect to the sustainable development goal on zero hunger and also help the farmers of the developing countries who face intense competition against the rich countries and the artificially boosted exports by the help of subsidies.
• Members also collectively agreed to find a permanent solution for developing countries to use the public stockholding programs for food security purposes. Negotiation on a special safeguard mechanism, which allows the developing countries to raise tariffs temporarily on agricultural products in cases of import surges or price falls, was also agreed upon by the ministers.

BALI PACKAGE 2013

• Members agreed to refrain from challenging the breach of domestic support commitments that resulted from developing countries’ public stockholding programs for food security if they met certain conditions. They also decided to negotiate towards the permanent solution for public stockholding for security purposes.
• A more transparent tariff rate quota administration was called for whereby the governments were not allowed to create trade barriers by distributing quotas among importers.
• The list of general services includes more spending on land use, Land Reforms water management, and other poverty reduction programs that come under the green box( Green box is domestic support which is allowed without any limit as it does not distort the trade) were to be expanded.
• A declaration on the reduction of all forms of export subsidies and enhancement of transparency and monitoring was made.
• The Bali package also provides for a peace clause that protects the food procurement programs of developing countries from the action of other WTO members if the developing country branches the subsidy ceiling as given.
• In 2018-19 India became the first WTO member country to invoke this clause in the financial year. India stated that its rice production was $43.67 billion and it provided subsidies of $ 5 billion to the farmers, which is more than the de minimis level of 10%. To safeguard its domestic support policy the Indian government invoked the peace clause.

PUBLIC STOCKHOLDING FOR FOOD SECURITY PURPOSES: ANOTHER PRESSING ISSUE

Some governments use public stockholding programmes to purchase, stockpile and distribute food to people in need. While food security is a legitimate policy objective, some stockholding programmes are considered to distort trade when they involve purchases from farmers at prices fixed by the governments, known as “supported” or “administered” prices.

In India’s case the subsidies provided to run the food security programme (NFSA) as per the developed member countries are trade distorting and they fall under the   Amber box. As per AMS, the total support in monetary terns should not exceed 10 percent of the total value of agri production as on 1986-88. The government buys the produce at MSP which subsidises the prices of food grains. In the instant case (sugar subsidy), the public stock holding programme per se was not challenged but one specific component “buffer stock” of sugar, presumably related to the subsidised sugar provision to the Antyodaya Anna Yojna category under the NFSA. But India argues that the public stockholding programme is vital for its food security, nutritional needs, supporting the marginalised farmers, and meeting the goals of SDGs.

At the 2013 Bali Ministerial Conference, ministers agreed that, on an interim basis, public stockholding programmes in developing countries would not be challenged legally even if a country’s agreed limits for trade-distorting domestic support were breached. They also agreed to negotiate a permanent solution to this issue.

A decision on public stockholding taken at the 2015 Nairobi Ministerial Conference reaffirmed this commitment and encouraged WTO members to make all concerted efforts to agree on a permanent solution.

In the MC III, the G 33 is seeking a permanent solution to the stockholding issue.

VARIOUS SUBSIDIES PROVIDED BY INDIA FOR SUGAR SECTOR

SCHEME FOR EXTENDING FINANCIAL ASSISTANCE TO SUGAR UNDERTAKINGS (SEFASU-2014)

• The Government on 3.1.2014 notified a Scheme for Extending Financial Assistance to Sugar Undertakings (SEFASU-2014) envisaging interest free loans by bank as additional working capital to sugar mills, for clearance of cane price arrears of previous sugar seasons and timely settlement of cane price of current sugar season to sugarcane farmers. Rs. 6484.77 crore has been disbursed under the scheme. For five years, the interest burden on this loan is borne by the Government through Sugar Development Fund.

SOFT LOAN TO SUGAR MILLS TO FACILITATE CLEARANCE OF CANE PRICE ARREARS

• A scheme was notified on in 2015 to provide soft loan to sugar mills to facilitate clearance of cane price arrears of current sugar season 2014-15. Rs. 4213 cores have been disbursed under the scheme. The Government bore interest subvention during moratorium period of one year. About 32 lakh farmers have been benefited.

OTHERS

• The procurement at the Fair and Remunerative Prices and the PDS operations for sugar for AAY card holders etc.

EXPORT SUBSIDY

• There is no export subsidy for sugar as of now.

WHAT IS THE WAY FORWARD?

OVERHAULING THE AoA

• The genesis of the problem lies in the skewed nature of many agreements that are set in stone at WTO.
• The agreements that were negotiated during the Uruguay Round of the General Agreement on Trade and Tariffs, which governed global trade before the establishment of WTO on January 1, 1995.
• The most egregious of these is AOA which astute negotiators pushed through from the rich world to suit their interests.

RE WORKING OF SUBSIDIES AND RE DEFINITION OF “ BOXES”.

• Those considered non-distorting are listed in the green box, the minimally distorting ones come under the blue box while subsidies seen as causing serious market distortions are categorised as amber box subsidies.
• Nearly all the rich countries’ subsidies fall into the green box while those of developing nations are mostly in the amber box.
• There is no expenditure limit on the subsidies that fall into the first two boxes while the amber box subsidies have to be limited to 10 per cent of the value of agricultural production for developing countries and 5 per cent for developed countries.

PRO ACTIVE LOBBYING BY G-33

• The G 33 needs to work in a coordinated manner and position itself as a pressure group to safeguard and promote the developing countries’ interests transparently. The forthcoming MC 12, scheduled to be held in Geneva at the end of 2021 has been postponed which will provide more time for the G 33 to develop consensus and common strategy on issue like Public Stock holding, food security, fisheries subsidy, domestic support etc.
• The momentum generated  from the G-33 Virtual Informal Ministerial Meeting organized by Indonesia in December 2021 needs to be harnessed and follow up actions needs to be continued at official level.

APPEALING THE DECISION

• India has appealed the ruling on sugar subsidy and as the AB is not functional as of now it provides enough space to India for recalibrating the content and compositions of its subsidies if need be.

LEARNING FROM SETBACKS.

• Of late India has been at the receiving end of the WTO dispute resolutions and many decisions  have gone against it like the Domestic Content  Requirement  on solar panels, the export subsidy schemes in 2019, and the recent challenges. It means that there is a requirement  for India to bring its subsidy/support regime in consistent  with the WTO norms and at the same time devise such innovative measures that comply with WTO regimes.

THE CONCLUSION: The WTO system is the sheet anchor for a rule based multilateral trading system. Thus, the dispute setline and adherence to the rulings is necessary for realizing the objective. But that does not mean the sovereign rights of a country to devise policies for the welfare and development of a country should be forfeited. What is necessary is to create a healthy balance between the two and that’s why there has to be synergy between foreign trade policy and domestic agricultural policies which are dynamically linked with the WTO norm and rules.