Brian Fallow: Don't hold your breath - there's a lot of talking to do

ANALYSIS

The Hallelujah Chorus which has greeted the weekend's breakthrough on agriculture in the world trade talks in Geneva is understandable.

After so many years, decades really, of the frustration of being unable to profit fully from New Zealand's comparative advantage in pastoral farming because of protectionism in the richest markets, we hardly dare hope that meaningful change may be finally on the way.

The trophy is not yet in the cabinet. Years of gruelling and fraught negotiation lie ahead. Trade officials are adept at weasel words and wriggle room. But as the half-time whistle blows, the scoreboard is more encouraging than it has looked for a long time.

There is a commitment to eliminate export subsidies, which enable the dumping of otherwise uncompetitive products on third-country markets.

This applies not only to up-front subsidies but to any subsidy element in export credits and guarantees or the activities of state trading enterprises similar to our former producer boards.

The Europeans deserve some credit for this, though the softening of their stance reflects the fact that the European Union's export subsidies have fallen to a third of their 1991 level. They represent only 8 per cent of the Common Agriculture Policy (CAP) budget and 6 per cent of the value of EU agricultural exports.

An OECD study of the impact of last year's reforms to the CAP concluded that EU butter exports would decline by up to 19 per cent by 2007 as a result of the reforms, skimmed milk powder by 16 per cent and whole milk powder by 22 per cent. Even so, billions of dollars in export subsidies can do serious damage in world markets.

The Government has estimated that scrapping export subsidies could be worth $1 billion a year to New Zealand dairy farmers alone.

"Nailing down that commitment has been a major objective of New Zealand farmers for decades," Fonterra chairman Henry van der Heyden said.

But the biggest gains may come from cuts to rich countries' domestic farm support programmes.

The Geneva agreement aims to "harmonise" trade-distorting farm subsidy programmes so that countries with higher subsidies are subject to deeper cuts. The agreement includes a "down payment" cut of 20 per cent to the most trade-distorting domestic support in the first year (whenever that turns out to be).

This is a gratifying departure from the practice of back-loading concessions to the tail end of a long implementation period.

And it is a bigger cut than the Uruguay Round managed over six years. But it is understood that the cuts are from the levels a country is allowed under existing Uruguay Round commitments, which may be higher than the effective levels of support they actually use.

The Geneva deal also says that "blue box" support will not exceed 5 per cent of the value of a country's agricultural production.

The blue box includes direct payments to farmers, as distinct from price support measures which mean that the more a farmer produces the more subsidy he gets [the "amber box"].

The direct payments might be based on the area planted in a crop or the number of animals, or calculated on the basis on past payments. But they are not linked to the volumes of grain, meat or whatever produced.

The EU is the main user of blue box measures. Previous reforms have reduced the proportion of the European farm support which is production-distorting as well as trade-distorting from 91 per cent in 1987 to 60 per cent now. The CAP reforms agreed last year will continue that "decoupling" process.

OECD-wide, the fall has been from 82 per cent to 66 per cent over the same period.

On the face of it, the 5 per cent limit should bite hard.

Clearly, the less food that is produced in order to garner a subsidy rather than meet a market, the less needs to be protected from import competition or, worse, needs to be subsidised some more and dumped on world markets.

The OECD estimates that farm support among its members cost about $430 billion last year in the form of payments from taxpayers and income transfers from consumers paying higher than world prices. The dairy industry accounted for about 18 per cent of that, the beef industry 13 per cent.

The subsidies provided just under a third of farming incomes. Eighteen years ago, it was 40 per cent.

Subsidies are higher than average for beef (33 per cent), sheepmeat (just under 40 per cent) and milk (50 per cent). The OECD says these levels of subsidy distort trade and depress world prices of agricultural commodities.

They are also regressive, disproportionately hurting those on lower incomes for whom food costs take up a higher percentage of their income. "Moreover, as most of the support provided to producers is still either output- or input-linked a higher share of support goes to larger farms," the OECD says.

On opening agricultural markets to imports, the Geneva text is all words and no numbers. It embodies the harmonising principle - the higher tariffs should face the steepest cost. But it caters to concerns the Europeans and Japanese have about "sensitive" products.

The EU's gloss on that provision is: "Countries can self-select an appropriate number of sensitive products which will be treated in a more lenient way. As compensation, tariff rate quotas have to be opened in order to ensure better market access."

The scope for argy-bargy in that area as the talks get down to details next year is large.

While the focus has mainly been on agriculture, the Geneva agreement also envisages liberalisation in the non-agricultural products which comprise 90 per cent of world trade.

It reaffirms the aim of reducing or eliminating tariffs, especially high ones, and the problem of tariff escalation where barriers are much higher for value-added products than their raw materials - a particular concern of the forestry sector.

But a formula for doing so has still to be negotiated.

Stephen Jacobi, chief executive of the Forest Industries Council, said: "While positive, the Geneva text is still a minimalist outcome with a lot of detail to be worked out on the tariff elimination formula, no process for negotiating non-tariff barriers and potentially lots of exceptions."