Domestic Support

All domestic policies which are subject to reduction commitments in the WTO are summarized in the country-specific Aggregate Measure of Support (AMS).

Turkey has not bound an AMS, but declared that all of its domestic policies in the base period 1986-88 were falling into the green box category, which is exempted from reduction commitments, or were below the de minimis limit.

The de minimis category includes product-specific policies which do not exceed 10 percent of the value of production of the product concerned,²⁷ or nonproduct-specific policies which do not exceed 10 percent of the value of total agricultural production. The fact that during Turkey's base period, domestic support is falling below the de minimis threshold is partly due to the fact that support provided in the base period has been relatively low. In addition, Turkey has calculated domestic support in a way to arrive at low figures whenever it felt that it had the choice. The methodology applied by Turkey in order to quantify product-specific domestic support is quite unusual and could possibly be challenged on several points. On the other hand, rules specified in the Agreement on Agriculture (AoA) are rather vague in this area and may benefit from further clarification. Choices made by Turkey in the calculation of

27 Turkey is classified in the WTO as a developing country. For developed countries the de minimis threshold is 5 percent.

productspecific domestic support are described below against the background of the AoA.

Turkey calculated an Equivalent Measure of Support (EMS) instead of an AMS for all products. The AoA says, however, that an EMS should only be calculated for "...all basic agricultural products where market price support ... exists but for which calculation of this component of the AMS is not practicable" (AoA Annex 4:1). It is not clear on what reasons Turkey based its judgement that the calculation of an AMS was not practicable. For the products concerned, it would be possible to calculate an AMS according to the normal approach by "... using the gap between a fixed external reference price [cif or fob price in the base period, dependent on the net trade position] and the applied administered price multiplied by the quantity of production eligible to receive the applied administered price" (AoA Annex 3:8).

The AoA is vague on the method of calculating an EMS for market price support. The text says that "... equivalent measurements of market price support shall be made using the applied administered price and the quantity of production eligible to receive that price or, where this is not practicable, on budgetary outlays used to maintain the producer price" (AoA Annex 4:2). The requirement to use "... the applied administered price..." is easy to meet, as it is not specified how to "use" it. However, the only economic meaningful way to use the applied administered price for the calculation of support seems to be a comparison to the international price. But in contrast to the AMS, no reference is made to an external reference price or a price gap. The way Turkey has calculated the product-specific EMS is described below.

• Turkey fulfilled the requirement to use the applied administered price by calculating the price gap between the administered price and the market price. This, of course, is not meaningful from an economic point of view.

The market price is usually close to the administered price and any price gap between these prices is not an appropriate indicator for the level of support provided by the administered price. As a result the EMS calculated by Turkey tends to be very small. The EMS calculated in this way is also a poor measure for the budgetary outlays made by (governmental) intervention agencies. This is because i) the average yearly market price may be quite different from the selling price of the intervention agency, and ii) losses due to sales at world markets are not included.

• Furthermore Turkey has multiplied the price gap by the quantity actually purchased, interpreting this quantity as the "... quantity of production being eligible to receive that price...". This interpretation could be questioned.

Alternative interpretations are i) the total quantity produced is in principle

eligible to receive the administered price, or ii) the total marketed quantity is in principle eligible to receive the administered price. From an economic point of view these interpretations result in an EMS/AMS which is a better indicator of the support provided by the applied administered price.

However, this question needs clarification in the WTO and the fact that the same vague wording is used in a technical paper dealing with modalities for accession to the WTO (WTO, 1996) without any explanation shows that no agreement on this question currently exists.²⁸

• Turkey did not specify an EMS for sugar, as all sugarbeets were purchased by a state enterprise. This is not a valid reason, however, to not calculate any market price support and probably results from the fact that it was impossible to observe a difference between the administered price and the market price as all sugarbeets were purchased at the administered price, again reflecting the economic meaninglessness of this methodology.

Table 4.7 presents alternative calculations of an EMS and an AMS for the base period as well as for the implementation period of the Uruguay Round for selected products. Turkish notifications are above base period levels at the beginning of the implementation period as well as in the years 2000/01, except for maize in 2001. This increase is mainly due to the fact that the price gap was calculated for notifications based on international reference prices (in 1986/88) and applied administered prices. As for the base period intervention purchases were used as eligible quantities. For sugar, Turkey notified it would exceed the de minimis commitment significantly since 1997. This is also due to the adjusted calculation method using an international reference price.

Alternative calculations are based on domestic and international reference prices and production quantities used by the OECD for PSE calculation. They are performed for 1986 and the average of the years 1986-88 as base period as these were the two options for binding domestic support at the end of the Uruguay Round. Alternative estimates show that if the standard AMS approach is used for the calculation of price support in the base period, Turkey exceeds the de minimis threshold for wheat, barley, and maize, if the period 1986/88 is chosen;

and for barley and sugar if the year 1986 is chosen as base period.

28 An earlier draft version of that paper (version of 22.01.1996) includes the additional sentence "... this will generally be only the proportion of production marketed, i.e.

excluding production consumed on-farm". This clarification was later omitted, probably due to the fact that not all member states agreed to this interpretation.

Table 4.7: Bound and Notified EMS

Compared to Alternative Calculations (percent of production value)

Wheat Barley Maize Sugar

Base period

Base EMS according to schedule 0.7% 0.3% 1.1% 0.0%

Base AMS alternative estimate (1986/88) 24.3% 20.3% 13.9% 8.4%

Base AMS alternative estimate (1986) 5.7% 30.2% 8.1% 14.5%

1996

1996 EMS according to notification 2.5% 3.8% 6.9% 0.0%

1996 AMS alternative estimate (base 1986/88) 61.0% 59.6% 51.2% 55.9%

1996 AMS alternative estimate (base 1986) 51.1% 64.7% 53.4% 62.4%

1997

1996 EMS according to notification 8.4% 5.9% 9.3% 55.3%

1996 AMS alternative estimate (base 1986/88) 61.8% 55.4% 48.8% 65.7%

1996 AMS alternative estimate (base 1986) 52.0% 61.0% 51.1% 70.8%

2000

2000 EMS according to notification 5.4% 1.1% 0.3% 49.5%

2000 AMS alternative estimate (base 1986/88) 43.0% 42.5% 29.6% 64.4%

2000 AMS alternative estimate (base 1986) 28.4% 49.7% 32.8% 69.7%

2001

2001 EMS according to notification 1.7% 0.5% 0.0% 40.9%

2001 AMS alternative estimate (base 1986/88) 30.9% 18.7% 62.8%

2001 AMS alternative estimate (base 1986) 13.1% 22.4% 68.3%

Sources: WTO (various issues), Turkish WTO Notifications; GATT (1994); OECD (2001a, 2002a); own calculations.

The AMS calculations for years of the implementation period show, that Turkey exceeds base levels for all products in all years, indicating that price protection increased if compared to the base period. For cereals, protection declined in 2000 and 2001, but is still above de minimis.

The consequences in terms of the WTO are unclear. Turkey has calculated its base period domestic support in a quite unusual and, from an economic point of view, nonsensical way. But this was not challenged during the process of verification of schedules and therefore became part of Turkey's legal commitments in the WTO. If the rules on how to calculate an EMS were more clearly specified within the WTO, Turkey could come under pressure to lower its administered prices as AoA Article 7:2(a) states, "Where no Total AMS commitment exists...the Member shall not provide support to agricultural producers in excess of the relevant de minimis level..." Even if Turkey were able

to renegotiate its bindings in a schedule rectification process, the resulting bound levels would be lower than current policies as shown in Table 4.7.²⁹

The commitments of the EU in the area of domestic support are not presented here as they are analyzed in detail elsewhere.³⁰ Currently the EU still has quite some room to maneuver within the bound AMS. But if the blue-box is abolished in the current round of negotiations, and the EU does not fully decouple its direct payments such that they fall into the green-box category, the AMS binding would become restrictive.

Extending the Turkish CU with the EU to cover agriculture would thus leave little room for Turkish domestic support policies which do not fall in the green box or exceed the de minimis requirement.

If Turkey and the EU negotiate a joint schedule in the WTO, Turkey would not automatically add anything to the EU's total bound AMS due to its zero binding.

The question arises whether an upward adjustment in the WTO would be negotiable in order to account for the scope of Turkey's current de minimis policies. Otherwise, Turkey could apply de minimis policies up to 5 percent (developed countries’ rate)³¹ only for those products that do not contribute to total AMS calculations of the EU, and for which the de minimis option is still available. For these products, however, support could be considerable as 5 percent of total production in Turkey and the EU would be the threshold. In the case of separate schedules the 10 percent de minimis threshold would apply and therefore limit the provision of domestic support.

Summarizing the results of Section 4.3.3, no major difficulties are foreseen in the WTO with respect to the extension the CU between Turkey and the EU to cover agricultural products.

29 Current reforms of cereal and sugar policies in Turkey will probably ease this problem.

30 For a review of the implementation of the Uruguay Round results by the EU see Tangermann (1995).

31 It is assumed that in case of a joint schedule the developed countries de minimis rate of 5 per cent would apply to the EU-Turkey CU.

5 Q

S

T

A

-TURAL

S

M

P

A

5.1 Potential Modeling Tools for the Analysis of the Extension of the CU