Tied Food Aid: export subsidy in the guise of charity

Abstract

‘Tied’ or ‘in-kind’ international food aid has been criticised as an implicit form of export subsidy that governments use to circumvent export subsidy restrictions. In addition to displacing agricultural exports, food aid is less efficient than untied aid and depresses local agricultural production in recipient countries. I argue that tied food aid is not protected by the Uruguay Round Agreement on Agriculture and could consequently be challenged under the World Trade Organization's dispute settlement mechanism as a prohibited or actionable subsidy contrary to the Subsidies and Countervailing Measures (scm) Agreement. As the USA is both the largest donor of international food aid and most consistently ties its food aid to domestic agricultural producers, this paper focuses on US policy to describe the challenge that might be advanced under the scm Agreement.

Notes

1 B Hoekman & P Messerlin, ‘Removing the exception of agricultural export subsidies’, in K Anderson & W Martin (eds), Agricultural Trade Reform and the Doha Development Agenda, Washington, DC: World Bank, 2005.

2 CE Hanrahan, ‘Agricultural export and food aid programs’, crs Report for Congress, 27 April 2007.

3 There was strong disagreement whether, ‘except in exceptional, genuine emergency situations, Members should … move toward untied, in-cash food aid only, as some members propose but other Members strongly oppose’, Para 14 of the Report of Chairman, Agricultural Negotiating Committee, Annex to DOHA WORK PROGRAMME, Preparations for the Sixth Session of the Ministerial Conference, Draft Ministerial Text, 1 December 2005, as cited in EJ Clay, ‘Food aid tying is the real problem: a response to the Barrett and Maxwell proposal’, Food Policy, 31 (2), 2006, p 120, fn 3.

4 wto Appellate Body, United States—Subsidies on Upland Cotton (US—Upland Cotton), WT/DS267/AB/R, adopted 21 March 2005.

5 wto Appellate Body, European Communities—Export Subsidies on Sugar (ec—Export Subsidies on Sugar), WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, adopted 19 May 2005.

6 oecd, dac[Development Assistance Committee] Guiding Principles for Associated Financing and Tied and Partially Untied Official Development Assistance, adopted 24 April 1987.

7 Food Trade and Nutrition Coalition, Dumping Food Aid: Trade or Aid?, April 2005.

8 Oxfam International, ‘Food aid or hidden dumping?’, Oxfam Briefing Paper, March 2005.

9 Section 203 of US food aid legislation PL 480 allows private voluntary organisations (pvos or ngos) and co-operatives to sell a minimum of 15% food aid in recipient countries or other countries in the region.

10 Hanrahan, ‘Agricultural export and food aid programs’.

11 Clay, ‘Food aid tying is the real problem’, p 119.

12 DA Sumner, Agricultural Trade Policy: Letting Markets Work, Washington, DC: aei Press, 1995, pp 109–15.

13 Ibid.

14 Ibid.

15 Hanrahan, ‘Agricultural export and food aid programs’. Other programmes include s. 416(b) of the Agricultural Act (1949) and the Food for Progress Program of the 1985 Farm Security Act.

16 Ibid.

17 ‘Under the auspices of PL 480 (1954), the United States was able to expand its export of agricultural commodities from $449 million in 1952 to $1.9 billion by 1957’. MB Wallerstein, Food for War—Food for Peace: United States Food Aid in a Global Context, Cambridge, MA: mit Press, 1980, p 5.

18 CB Barrett & DG Maxwell, Food Aid after Fifty Years: Recasting its Role, London: Routledge, 2005, as cited in S Murphy & K McAfee, ‘US food aid: time to get it right’, Minneapolis, MN: Institute for Agriculture and Trade Policy, July 2005.

19 CB Barrett, ‘US food aid: it's not your parents' program any more!’, Journal of Agribusiness, 21 (1), 2006, p 1.

20 Barrett & Maxwell, Food Aid after Fifty Years.

21 Even countries who have traditionally tied all food aid to domestic producers—such as Canada, Australia, Denmark and France—announced in 2004 and 2005 regulatory changes that would allow their donations to buy more food in developing countries. Clay, ‘food aid tying is the real problem’.

22 Hanrahan, ‘Agricultural export and food aid programs’.

23 Barret & Maxwell, Food Aid after Fifty Year, p 87.

24 Specifically, Congress warned that ‘allowing non-US commodities to be purchased would result in undermining the coalition of commodity groups, private voluntary organizations [ngos] and shippers that support the program and in reductions in US food aid’. Ibid.

25 E Clay, ‘Food aid and the Doha Development Round: building on the positive’, Overseas Development Institute, February 2006.

26 E Herfkens & M Bains, ‘Reaching our development goals: why does aid effectiveness matter?’, Organization for Economic Co-operation and Development, 2007.

27 See Food Trade and Nutrition Coalition, Dumping Food Aid.

28 Unlike in US—Upland Cotton, the ‘peace clause’ contained in Article 13 of the aoa is no longer applicable. The ‘peace clause’ was a concession added to the aoa that largely shielded agricultural subsidies from challenge under the scm, but it expired on 1 January 2004. Even before the expiration of the ‘peace clause’, in US Cotton Subsidies the Panel and the Appellate Body nonetheless ruled several agricultural subsidies provided by the US government to be prohibited and actionable. KH Cross, ‘King cotton, developing countries and the “peace clause”: the wto's US Cotton Subsidies decision’, Journal of International Economic Law, 9 (1), 2006, p 149.

29 Sumner, Agricultural Trade Policy.

30 Art 14(d) of the scm Agreement states that ‘the provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration, or the purchase is made for more than adequate remuneration. The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase (including price, quality, availability, marketability, transportation and other conditions of purchase or sale)’.

31 In the alternative, if the US government bought food aid commodities from these suppliers at the market rate, it would be extremely difficult to prove that this constituted a subsidy. This is because the Appellate Body has narrowly interpreted ‘benefit’ to mean a ‘financial contribution … provided on terms that are more advantageous than those that would have been available to the recipient on the market’. wto Appellate Body, Canada—Measures Affecting the Export of Civilian Aircraft (Canada—Aircraft), WT/DS70/AB/R, adopted 20 August 1999. However, given that the fsa's regulations severely limit the number of eligible firms, price competition among suppliers of food aid commodities is restricted. It is unlikely that commodity prices in this oligopolistic market would reflect world market prices, and the firms that currently benefit would be extremely resistant to dismantling the fsa's supplier restrictions.

32 scm Agreement, Article 2.3.

33 Ibid, Article 1.2.

34 Ibid, Article 2.1(c).

35 Barrett, ‘US food aid’.

36 scm Agreement, Article 3 states: ‘Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited: (a) subsidies contingent, in law or fact, whether solely or as one of several conditions, upon export performance, including those illustrated in Annex I; (b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods’.

37 scm Agreement, Article 4.7.

38 wto Appellate Body, Canada—Measures Affecting the Export of Civilian Aircraft—Recourse by Brazil to Article 21.5 of the dsu , WT/DS70/AB/RW, adopted 4 August 2000, p 169.

39 scm Agreement, footnote 4. Emphasis added.

40 oecd, Export Subsidy Equivalents for Major Users, 2001, cited in Hoekman & Messerlin, ‘Removing the exception of agricultural export subsidies’.

41 scm Agreement, Article 5(c).

42 Ibid, Article 6.3(c).

43 Ibid, Article 6.3(a).

44 TW Schultz, ‘Value of US farm surpluses to underdeveloped countries’, Journal of Farm Economics, 42 (5), 1960.

45 MJ Trebilcock & R Howse, Regulation of International Trade, London: Routledge, 2005, p 283. See also A Green & MJ Trebilcock, ‘The enduring problem of wto export subsidies rules’, 13 December 2007, unpublished.

46 See Food Trade and Nutrition Coalition, Dumping Food Aid.

47 Ibid.

48 scm Agreement, Article 6.3(a).

49 See a survey of the conflicting evidence in TO Awokuse, ‘Assessing the impact of food aid on recipient countries: a survey’, Agricultural and Development Economics Division of the Food and Agriculture Organization of the United Nations, September 2006.

50 scm Agreement, Article 3.

51 wto Appellate Body, US—Upland Cotton, p 532.

52 wto Appellate Body, EC—Export Subsidies on Sugar.

53 The full text of Article 10.4 states that ‘members donors of international food aid shall ensure:

1. that the provision of international food aid is not tied directly or indirectly to commercial exports of agricultural products to recipient countries;

2. that international food aid transactions, including bilateral food aid which is monetized, shall be carried out in accordance with the fao“Principles of Surplus Disposal and Consultative Obligations”, including, where appropriate, the system of Usual Marketing Requirements (umrs); and

3. that such aid shall be provided to the extent possible in fully grant form or on terms no less concessional than those provided for in Article IV of the Food Aid Convention 1986’.

54 Article IV, ‘Terms of food aid contributions’. Food aid under this Convention may be supplied on any of the following terms:

1. gifts of grain or gifts of cash to be used to purchase grain for the recipient country;

2. sales for the currency of the recipient country which is not transferable and is not convertible into currency or goods and services for use by the donor members∗;

3. sales on credit, with payment to be made in reasonable annual amounts over periods of 20 years or more and with interest at rates which are below commercial rates prevailing in world markets∗∗;

   on the understanding that such aid shall be supplied to the maximum extent possible by way of gifts, especially in the case of least developed countries, low per capita income countries and other developing countries in serious economic difficulties.

   [∗Under exceptional circumstances an exemption of not more than 10 per cent may be granted. This limitation may be waived for transactions which are to be used for the expansion of economic development activity in the recipient country, provided that the currency of the recipient country is not transferable or convertible in less than 10 years.

   ∗∗The credit sales agreement may provide for payment of up to 15 per cent of principal upon delivery of the grain.]

55 aoa, Article 10.4(c).

56 Under Article 10.1, it is not necessary to demonstrate actual‘circumvention’ of ‘export subsidy commitments’. It suffices that ‘export subsidies’ are ‘applied in a manner which … threatens to lead to circumvention of export subsidy commitments’. Emphasis added.

57 aoa Articles 3.3, 8, 9.1, 9.2.

58 KH Cross, ‘King Cotton, Developing Countries and the ‘‘Peace Clause'': The WTO's US Cotton Subsidies Decision', Journal of International Economic Law, 9 (1), 2006, pp 149–195.

59 Ibid, p 180.

60 Ibid.

61 Ibid, p 158.