World Trade Organisation and Nepalese Agriculture

 

Introduction

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. The WTO began life on 1 January 1995, but its trading system is half a century older.

 Objectives of WTO

The main objectives of WTO can be specified as;

      1. To make transparent international trade related rules

      2. To help producers and traders of goods and services

      3. To strengthen world’s economic situation and increase investment, employment and income

 Functions of WTO:

The Article III of agreement establishing the multilateral Trade Organization/WTO has specified five specific functions of WTO (Bhandari, 2001). They are:

  • Administrative Functions: Under this function of WTO facilitates the implementation, administration, operation, and advances the cause of objectives of WTO agreement, multilateral trade agreements and provides framework for the implementation, administration and operation of pluri-lateral trade agreements.
  • Platform for negotiation: WTO works as a platform where its members joining their helping hands can advance negotiations among themselves concerning their multilateral trade relations in matters dealt under the WTO agreements and enlisted in its annexes.
  • Execution: WTO administers the understanding on rules and procedures governing the settlement of disputes.
  • Administering TPRM: WTO administers the trade policy review mechanism.
  • Economic Coherence: WTO works with a view to achieve greater economic coherence in global economic policy-making, cooperating as appropriate, with IMF and World Bank.

Trade Principles of WTO

The major principles of the WTO agreements are

  • Non- discrimination
  • Free Movement of Foreign Products, Services or Nationals
  • Transparency
  • Special and Differential Treatment

 

 Nepal’s Accession to the WTO

Nepal’s accession to the WTO was the result of a long and complicated process of negotiations at multilateral, bilateral and domestic level that lasted over fourteen years. On April 23, 2004 the protocol entered into force and Nepal became the 147th member of the WTO. Nepal undertook 25 systematic commitments under the terms of its accession to WTO.

Nepal is the first officially classified least developed countries (LDCs) to join since the WTO was established in 1995. According to the Nepalese government, the accession will present challenges and opportunities, particularly considering its large trade deficit

 

WTO Agreements

The WTO agreements cover a wide range of activities such as agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food and sanitation regulations and intellectual property. GATT is now the WTO’s principal rule-book for trade in goods. The Uruguay Round also created new rules for dealing with trade in services, relevant aspects of intellectual property, dispute settlement, and trade policy reviews. The complete set runs to some 30,000 pages consisting of about 30 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening (WTO, 2008).

Agreement related to Agriculture Sector in WTO

Agreement on Agriculture (AOA) 

The AOA was the outcome of the Uruguay Round (UR) negotiations that started in 1986 and concluded in 1994. The long-term objectives set by the AOA are to establish a fair and market oriented agricultural trading system through substantial reductions in agricultural support and protection.

AOA deals all the matters of tariff, domestic support and export subsidies. It is rightly identified that the root cause of distortion of international trade in agriculture is the massive domestic subsidies given by industrialized countries over the decades (WTO, 1995). In order to minimize such dumped exports and to keep their markets open for efficient agricultural producers of the world, the starting point has to be the reduction of the domestic production subsidies given by the industrialized countries, followed by reduction of export subsidies and the volume of subsidized exports, and minimum market access opportunity for foreign agricultural producers”.

    Domestic Support

Domestic support provides commitments to reduce agricultural subsidies and other programmes including those raise or guarantee farm gate prices and farmers’ incomes. These supports are divided by the AOA into different boxes in tricky way.

Implications of AOA Domestic measures to Nepal

The agricultural businesses are linked to trade and hence to WTO in several ways. The agribusiness needs imported inputs, machineries and technology from abroad. The major inputs imported by Nepal are chemical fertilizers, pesticides, hormones, veterinary medicines, seeds and packaging materials. As the market is liberalized and imports are not restricted, the agribusiness also needs to compete in domestic markets with imported goods. Some agribusinesses generate exportable goods. The export can be done either under bilateral agreements (such as with India), regional agreements (like with Bangladesh and Pakistan) and multilateral agreements (like with the countries not involved in bilateral and regional agreements such as USA, European Union, Japan). All such activities of agribusiness like import of inputs, export of outputs and competition in domestic markets are affected Agreement on Agriculture (AOA), Application of Sanitary and Phytosanitary (SPS) measures, Agreement on Technical Barriers to Trade (TBT) and Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) primarily.

 

Market Access:

Market access is one of the three main pillars of the AOA – the other two being domestic support measures and export competition. It deals with rules and commitments related to import of goods. Its purpose is to expand trade by preventing various non-tariff barriers and by binding and reducing tariffs. Besides tariffs, other trade policy instruments covered by the market access pillar include Tariff Rate Quotas (TRQs) and Special Safeguard (SSG) as a trade remedy measure (Sharma and Karki, 2004).

In the WTO context, market access is about both obligations and rights. Nepal’s obligation is to provide market access to other Members in return for her right of access to others’ markets for Nepalese goods on multilaterally agreed terms. Thus, a balanced analysis of market access provisions would cover both obligations and rights.

THE AOA PROVISIONS ON MARKET ACCESS

  • Prohibition of quantitative restrictions on imports
  • Tariff binding and reduction
  • Bound versus applied tariffs
  • Tariff Rate Quota
  • Special Safeguard Measures

Export subsidies and export restrictions

In common with all least developed countries (LDCs) and a majority of the developing countries, Nepal does not subsidize exports. At the time of the WTO accession, it committed not to subsidize exports in future also. One of the conclusions of the study is that this commitment is unlikely to have any negative implications for the Nepalese agriculture for two reasons. First, export subsidization is not a sound economic policy. Second, Nepal could not afford export subsidies at its low level of economic development. On the other hand, there were several instances in the past when export subsidization by other countries had some negative effects on the Nepalese agriculture. Therefore, it is in Nepal’s interest to tighten WTO rules on export subsidy (Tiwari et al, 2004).

Implication on Nepalese Agriculture:

  • Nepal can promote exports through various incentive measures of the WTO Subsidies Agreement.
  • Limited implications of the WTO rules on export restriction and taxation policies.
  • Nepal is occasionally affected negatively by export subsidization by others
  • Domestic policy issues and analytical needs

 

Sanitory and Phyto Sanitory (SPS)

Food quality and safety issues have entered into a new era of evolution as it involves integrated effort linking production to consumption in the entire food chain. The traditional domain of inspecting and analysing the end product does not necessarily meet the requirement of emerging trade regime of WTO and related agreements such as the SPS.

 

The main objectives of the SPS Agreement are the following (Karki et al, 2004).

  • Protect and improve the current human health, animal health, and phytosanitary situation of    all Member countries; and
  • The entry, establishment or spread of pests, disease, disease-carrying organisms or disease-causing organisms;
  • Additives, contaminants, toxins or disease-causing organisms in foods, beverages or feedstuffs;
  • Carried by animals, plants or products thereof, or from the entry, establishment or spread of pests; or
  • Prevent or limit other damage within the territory of the Member from the entry, establishment or spread of pests.
  • The following are the main elements of the SPS Agreement (Karki et al, 2004).
  1. Harmonization
  2. Equivalence
  3. Risk assessment
  4. Transparency
  5. Consultation and dispute settlement:
  6. Technical cooperation and Special and Differential Treatment

The SPS Agreement and Trade In Live Animals and Animal Products

The SPS Agreement37 recognizes the International Office of Epizootics (OIE) as the relevant international organisation responsible for the development and promotion of international animal health standards, guidelines, and recommendations affecting trade in live animals and animal products. Similarly, the official (Public) Veterinary Services of a country are recognized as the relevant authority with ultimate responsibility for animal health matters involving international trade in live animals and animal products.

The OIE provides detailed Guidelines for the Evaluation of Veterinary Services (Chapter 1.3.4. of the Terrestrial Animal Health Code). According to these guidelines, the national Veterinary Services should be able to demonstrate capacity, supported by appropriate legislation, in the following areas (Mahato et al, 2004).

• Exercise control over all animal health matters

   • Prescribe methods for control and to exercise systematic control over the import and export processes of animals and animal products in so far as this control relates to sanitary and zoo-sanitary matters.

 • Control imports and transit of animals, animal products and other materials that may introduce animal diseases.

• Present a functional animal disease reporting system which covers all regions of the country

• Provide accurate and valid certification for exports of animals and animal products.

The SPS Agreement: Trade in Plants and Plant Products

With increasing trade in plant and plant products, the risk of the spread of harmful pests and diseases has also increased. The negative impact on plant health and plant products could be substantial, e.g. an imported harmful pest could destroy entire orange production in a country or a region, or could result into reduced yield, quality deterioration and environmental pollution.

In the case of Nepal, export and import of agricultural and forest-based products through the long and porous borders had been taking place almost without any phytosanitary considerations until recently. To a large extent the practice continues even now. As the potential negative effects are being increasingly recognized and as WTO Members started to implement the SPS Agreement since 1995 the situation is changing. Nepal also had its share of the deleterious effects of the harmful pests that came with imported plants and the difficulties in exporting plants and products, particularly to India in recent years. In view of this, and her commitment to implement provisions of the SPS agreement by 1 January 2007 timely action in this direction has become necessary ( KC et al, 2004).

 Agreement on Technical Barriers to Trade

Agreement on Technical Barriers to Trade (TBT) establishes disciplines on technical regulations, standards and conformity assessment procedures for agricultural and well as non-agricultural products. Technical regulations and standards deal with product characteristics, processes and production methods related to a product, and may also bear upon terminology, symbols, packaging, marking or labelling. Conformity assessment procedures, such as testing, inspection, evaluation and approval, are employed to determine compliance with technical regulations and standards.

The TBT agreement encourages members to give positive consideration to accepting as equivalent technical regulations of other members, even if those regulations differ from their own, provided they are satisfied that these regulations adequately fulfil the objectives of their own regulations. Under this provision, members retain the discretion to determine whether equivalence will adequately satisfy their legitimate regulatory objectives. This will lead to smoother trade of goods produced by the agribusiness as well (Pant, 2004).

Trade-related Aspects of Intellectual Property Rights

Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) protects and enforces the rights of inventors. Its main objectives are promoting, transferring and disseminating the technological innovations for the advantages of both producers and users. In agriculture sector, it includes definition of specific genes and modifications of genes. Such genes modified organisms are commonly called genetically modified organisms (GMO). The major concern in TRIPS concerning to agriculture is the exploitation of plant genetic resources and claiming rights for gene spliced plants and animals. Therefore, seed related the TRIPS would affect businesses and seed using businesses in one or the other way (Pant, 2007).

Lastly, the TRIPS agreement provides that geographical indications, hitherto used for alcoholic products, can be used in agribusiness as well.  This will be helpful to create and protect agricultural products having geographical reputations like Ilam tea, Sindhuli junar, Marpha apple, Nepal honey, etc. Such reputations of the names of the place will be protected by the law and produce of other geographic areas and foreign countries cannot use such indications.

General Agreement on Trade in services (GAT)

This Agreement opens the door for foreign investment in different sectors while accessing the membership of WTO by Nepal, had agreed on 74 different sectors and sub-sectors for trade out of which only 2 sectors are related to agriculture. They include

  1. Animal medical services
  2. Technical Experiment and investigation services

 WTO and Emerging Issues in Nepalese Agriculture

Keeping eyes on the benefits that can arise from the agreements of WTO; we need to address major issues in agricultural sector. The issues at hand include scale sensitivity, trade restriction at disguise, resource mobility and technology transfer (Pant, 2004 & 2007).

a) Scale Sensitivity of WTO Provisions

It is usually believed that the WTO Agreement on Agriculture (AOA) does not focus on addressing the development needs and concerns of the small-scale subsistence farmers in developing countries. It rather tends to emphasize on commercial agriculture and trade. For example, rules under WTO say that the fees and charges on the services from the public sector should match the amount of the service provided and not be based on the volume of transactions.

b) Disguised Protection in the Name of Quality Standard

The AOA commits reductions in protection measures and trade distorting subsidies. The experience shows that the agricultural trade has become more protected in the developed countries after the establishment of WTO. In Nepal the agriculture is exposed to market forces in the name of economic liberalization.

c) Competitiveness

The major problem in international competition is our small scale and high cost of production. Low technology production makes our product less competitive in terms of quality. In addition, our trading partners may prevent entry of our products in the name of protecting animal, plant and human health and life in their country. We have competitiveness in the products with low capital and high labour inputs. Some of such products are, for example, hybrid vegetable seeds, flower seeds, medicinal herbs, silk, honey, dry fruits and cottage cheese.

d) Labour Mobility

Nepal’s agriculture sector is labour surplus. As the surplus labour comes out of it, farms will experience labour shortage. This will have two effects. First, wage rate in the farm will increase. That will not only make agriculture workers better of but also make technological interventions like mechanization financially viable to adopt. Second, some farms will not be able to afford for higher wage or mechanization. Such financially non-viable farms need to go for enterprise transformation for increasing productivity. This will increase the efficiency of the farm sector.

e) Land Mobility

There are two issues in land mobility. First, moving land from low productive enterprises to high productive enterprises is experienced for centuries. The speed is gaining in recent years. Some examples of such movements of land (generally referred as change in cropping pattern) are as follows.

  • maize/millet farming upland is getting shifted to summer vegetables, ginger and cardamom
  • fallow lands during winter is moved to winter vegetables
  • pasture lands in hills are shifter to tea, coffee and fruits

f) Technology Transfer in Agribusiness

The TRIPS measure is expected to accelerate the pace of generation of agricultural technology. However, the royalty rights of the inventors will make the technology costlier to the users. On the other hand, the agribusiness can make better choice of technology for adoption and it will increase the productive efficiency and net gain of the agribusiness.

 Increase in the price of agricultural products due to reduction in the farm subsidies in developed countries will increase the demand of agricultural products from developing countries and is expected to facilitate investment in agriculture in LDCs. It ultimately will help in the modernization of agriculture sector.

g) Service Sector Openings

Nepal has opened some services to foreign investment with some conditions like compulsory incorporation of certain portion of equity to domestic investors, and employment of local staff except a certain fraction of high level experts and managers. Among the services opened, those directly concerned with the agribusiness are (a) veterinary services, (b) research and development services and (c) technical testing and analysis services. Opening of these services is expected to attract foreign direct investment in such agribusiness. In addition, availability of the better services will help domestic agribusinesses to expand. It will also help promote the product quality for export.

h) Effects of Policy Changes Abroad

Reductions in the domestic and export subsidies on agriculture in developed and developing counties is expected to increase the international prices of food items. In fact the increase in food prices will encourage the private investment in agricultural sector to increase its productivity.

Conclusions

The major provisions of WTO relating to the agribusiness are in the Agreement on Agriculture, SPS/TBT agreements and TRIPS agreements. Other agreements of WTO affect the agribusiness indirectly. Several provisions of these agreements can be used to support agricultural production, marketing and trade. For this purpose, we need to revise our domestic policies in standards setting and certification, increasing the production scale and making our resources mobile.

Nepal is concerned with the food security and safeguarding rural employment, for which we need some flexibility under the provisions for domestic support. We are also questioning the extremely high subsidies and tariff walls even now being maintained by the developed countries, although they are committed to reduction of both under the Uruguay round. We are seeking better market access for our agricultural products for integration to multilateral trading system.

Because of the large dependency on agriculture for employment, even minor changes in agricultural employment opportunities, commonly prices or trade conditions can have major socio-economic ramifications in Nepal. To comply with the principles of WTO without compromising our development needs and livelihood of the farmers we need some additional facilities like

  • Maximum improvement of opportunities and terms of access (like duty free quota free access to the markets in developed countries) for agricultural products of our production potential
  • Meaningful and practical special and differential treatment to LDCs to enable them to take appropriate domestic policy measures to address growth and development needs in agriculture; and
  • In the meantime, it is absolutely necessary to protect the resource poor subsistence farmers from surges of cheap subsidized imports.

Nepalese farmers being small in nature they may face difficult in competing to the international market. Therefore, we need to protect major commodities like food grains, fruits, vegetables, meat and milk and their processed products for protecting the interest of our farmers.

References:

Awasthi, B. D. and S. K. Adhikari, 2004. Agreement on agriculture: Domestic Support Measures. In R. P. Sharma, M. K. Karki and L. Gautam (Eds.).Implications of the WTO Membership on the Nepalese Agriculture. FAO/UN and MOAC/HMG, Kathmandu. pp 19-36.

Bhandari, S. 2001. World Trade Organization (WTO) and Developing Countries. Deep & Deep Publications Pvt. Ltd, New Delhi. pp 49-65, 105-110.

KC, G. K., B. P. Upadhyaya, N. C. T. D. Shrestha and D. Devkota, 2004. The SPS Agreement: Trade in Plant and Plant Production. In R. P. Sharma, M. K. Karki and L. Gautam (Eds.).Implications of the WTO Membership on the Nepalese Agriculture. FAO/UN and MOAC/HMG, Kathmandu. pp 111-125.

Mahato, S. N., G. N. Gongal and B. N. Chaulagai, 2004. The SPS Agreement: Trade in Live Animals and Animal Production. In R. P. Sharma, M. K. Karki and L. Gautam (Eds.).Implications of the WTO Membership on the Nepalese Agriculture. FAO/UN and MOAC/HMG, Kathmandu. pp 97-108.

Pandey, K. R. 2007. Export markets for Agro Products: Policy Issues. Proceeding of the Fourth National Agricultural Marketing Conference. Agribusiness Promotion and Marketing Development Directorate, Lalitpur. pp 76-92.

World Trade Organization and Nepalese Agriculture

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