EC Agricultural Subsidies for Mediterranean Products and the WTO

BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE TOKYO WASHINGTON, D.C.

SIDLEYSIDLEY AUSTIN LLP

EC Agricultural Subsidies for Mediterranean Products and the WTO

June 2006

Montpellier, France


The WTO Agreement on Agriculture

• Green Box

– Single Farm Payment not green box because of fruit and vegetable restriction

• Blue Box

– Less important after 2003 reform (if SFP is notified as green box)

• Amber Box

– EC AMS limit is € 67.2 billion

– Applied AMS is far lower, reforms in 1999 and 2003

• Notified Export Subsidies

– Still important for sugar, dairy, pigmeat, rice and alcohol

– Declining use for other products


The WTO Agreement on Subsidies and Countervailing Measures (SCM

Agreement)

• Disciplines the provision of subsidies by WTO Members

– Prohibited Subsidies• Local content subsidies

• Unscheduled export subsidies

– Actionable Subsidies • Any subsidy that involves a financial contribution that

confers a benefit and is specific


Prohibited Subsidies

• Article 3.1 of the SCM Agreement

Except as provided in the Agreement on Agriculture, the following subsidies … shall be prohibited:

(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance…;

(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.



• Prohibited Fruit and Vegetable Processing Subsidies

2005 Outlays in millions:

Tomato Products € 298 Canned Peaches € 20 Citrus Products € 261 Canned Pears € 15 Raisins € 114 Dried Figs € 1.6 Dried Plums € 45

Total - € 755 million

• Subsidies are contingent on the use of products “harvested in the Community” “harvested in the Community” for the production of the processed products.


EC

Grower

Processor

paym

ents

subsidized products

supervision

superv

isio

n


Processing subsidies for tomatoes,

peaches, pears, citrus fruits and raisins



EC

Processor

Grower

paym

ents

products

supervision

superv

isio

n

Processing subsidies for prunes and figs

minimum price



• Title III of the Wine CMO includes distillation subsidies, private storage aid, and aid for the use of must.

2005 Title III expenditures in millions

Distillation Subsidies € 512

Private Storage Aid € 67

Aid for the Use of Must € 156

Total – € 735 million

• Article 78(3) of the Wine CMO:

The subsidies “may only be granted in respect of products “may only be granted in respect of products produced in the Community from grapes harvested in the produced in the Community from grapes harvested in the Community.”Community.”


Actionable Subsidies

• Article 5 of the SCM Agreement

No Member should cause, through the use of any subsidy … adverse effects to the interests of other Members, i.e.:

(a) injury to the domestic industry of another Member …

(c) serious prejudice to the interests of another Member


Injury to the Domestic Industry

• Article 5(a) of the SCM Agreement is similar to a CVD proceeding under Part V of the SCM Agreement

• For a determination of injury there must be:

– Imports of a subsidized product

– Material injury to the domestic industry producing the like product

– A causal link between the subsidized imports and material injury to the domestic industry.

• Examples of Potential Claims

– EC canned peach exports to the United States

– EC olive oil exports to Morocco


Serious Prejudice

• Article 6.3 of the SCM Agreement:

Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply:

(a) the effect of the subsidy is to displace or impede … imports … into the market of the subsidizing Member;

(b) the effect of the subsidy is to displace or impede … exports … from a third country market;

(c) the effect of the subsidy is significant price undercutting … or significant price suppression, price depression or lost sales in the same market;

(d) the effect of the subsidy is an increase in the world market share of the subsidizing Member…


Serious Prejudice

• Components of Serious Prejudice:

– Level of EC subsidization

– EC market share

– Nature of EC subsidies (and reform)

– EC costs and returns

– EC tariff levels and other import barriers (e.g. SPS)

– Product differentiation issues


Serious Prejudice: Fresh Fruits and Vegetables

• Operational Funds for Producer Organizations – Expenditures are between € 500 million to € 700 million

per year

– Their purpose is to improve product quality and boost products’ commercial value

– Where is this money going? Which products are benefiting?

• Compensation for Withdrawals– Which products are receiving these funds?

• Processing subsidies– Do processing subsidies benefit the market for fresh

fruits and vegetables?


Serious Prejudice: Tomato Products

Canned

TomatoesTomatoPaste

Tomato Sauce/ Ketchup

Value of World Exports $224 million $869 million $320 million

EC

Exports as % world total 84 percent 38 percent 17 percent

Imports as % world total 13 percent 14 percent 3 percent

Production as % world total 70 percent 36 percent NA

Estimated value of EC market $900 million $980 million NA

EC Support

Import Tariffs 14.4 percent 14.4 percent 10.2 percent

Subsidization of primary input 65 percent 65 percent 65 percent

Trade data based on average of 2000-2004. Excludes EC internal trade. Value of EC market based on the product of consumption (production minus net trade) and unit export values.


Serious Prejudice: Tomato Products

• Processing Subsidies:– Expenditures are € 300 million in total

– Grower receives € 34.5 per tonne unless quantity overrun

– Contract price for processing tomatoes ≈ € 50 - € 55 per tonne

– Subsidization rate ≈ 65 percent

• Compensation for Withdrawal– Benefit to processed tomato products unknown

• Operational Funds:– Benefit to processed tomato products unknown

• Countries that export tomato products, such as the United States, China, Chile, Tunisia and Morocco, can claim that EC subsidies impede or displace their exports to third countries and cause price suppression.


Serious Prejudice: Canned Peaches

Canned Peaches

Value of World Exports $231 million

EC

Exports as % world total 41 percent

Imports as % world total 17 percent

Production as % world total 48 percent

Estimated value of EC market $300 million

EC Support

Import Tariffs 15 to 19 percent

Type of Subsidy Prohibited

Subsidization of primary input 20 percent

Trade data based on average of 2000-2002, Greek crop failure in 2003 changed EC production and export/import share substantially. Excludes EC internal trade. Value of EC market based on the product of consumption (production minus net exports) and unit export values.


Serious Prejudice: Canned Peaches

• Processing Subsidies:– € 20 million total

– Grower receives € 47.7 per tonne unless overrun

– Contract price for processing tomatoes ≈ € 200 - € 300 per tonne

– Subsidization rate ≈ 20 percent

• Compensation for Withdrawal– Unknown

• Operational Funds:– Unknown

• Countries that export canned peaches, such as South Africa, Australia, China, and Argentina, can claim that EC subsidies impede or displace their exports to third countries and suppress prices in world or specific country markets.


Serious Prejudice: Other Fruit and Vegetable Products

• Other products include:

– Dried plums - Almonds

– Raisins - Walnuts

– Canned pears - Filberts

– Grape juice - Pistachios

– Citrus products

• The EC is a net importer of these products

– Major exporters can potentially claim that EC subsidies impede or displace exports into the EC market within the meaning of Article 6.3(a) of the SCM Agreement


Serious Prejudice: Olive Oil

Olive Oil

Value of World Exports $1.5 billion

EC




Estimated value of EC market $4.8 billion

EC Support

Import Tariffs 40 to 50 percent

Type of Subsidy Actionable

Subsidization rate 30 percent

Trade data based on average of 2000-2004. Excludes EC internal trade. Value of EC market based on the product of consumption (production minus net exports) and unit export values.


Serious Prejudice: Olive Oil

• Production aid of € 2.2 billion per year

• The 2004 Mediterranean reform will shift 60 percent of production aid into the SFP scheme. The remaining 40 percent will become an area aid for the upkeep of olive groves of economic or social value.– Will reform result in lower production?

– Is the SFP needed to cover production costs?

• Are any countries in a position to challenge EC olive oil subsidies?– Turkey is the second largest exporter

– Tunisia, the third largest exporter in the world, exports 56,000 tons of olive oil to the EC duty free


Serious Prejudice: Wine

Wine

Value of World Exports $8.404 billion

EC



Estimated value of EC market $57.8 billion


EC Support

Import Tariffs $12 to $38 per hl

Type of Subsidy Prohibited / Actionable

Subsidization Rate ???

Trade data based on average of 2000-2004. Excludes EC internal trade. Value of EC market based on the product of consumption (production minus net exports) and unit export values.


Serious Prejudice: Wine

• Restructuring Subsidies

– Expenditures are € 450 million per year

– Their purpose is to adapt production to market demand

– Which wine varieties are benefiting from these subsides? Is production benefiting from restructuring subsides displacing imports from Australia, Chile, Argentina and U.S.?

• Distillation Subsidies

– Expenditures are € 500 million per year

– Distillation subsidies remove wine from the EC market and protect EC wine producers from low prices. What is the net impact on producers in third countries?


Reform of Wine CMO

• The EC is unlikely to introduce decoupled payments

• The EC would like to reduce emphasis on distillation measures. – How will surplus wine be dealt with?

– How will the existing distillation infrastructure be dealt with?

• Restructuring subsidies will likely remain– Are their effects alone enough to support a serious

prejudice?


Reform of the Fruit and Vegetables CMO

• Operational funds for producer organizations are likely to remain

• Processing subsidies will likely be reformed

– Decoupled processing aid?

• Probably result in a large decline in production

– Area payments?

• May continue to constitute a prohibited local content subsidy


Preparing for WTO Cases

• Prohibited subsidy claims are easier to prosecute

• Actionable subsidy claims are factually intensive. The following information is needed:

– Trade data

– Subsidy amounts and recipients

– Costs and returns data

• The EC is far less transparent than the US

– No centralized source of information (e.g. USDA)

EC Agricultural Subsidies for Mediterranean Products and the WTO

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