Identifying, estimating and correcting the biases in WTO rules on public stocks. A proposal for the post-Bali food security agenda

Abstract

In this paper, we analyze the WTO rules that specify how to estimate the subsidy provided to farmers by public stocks. We identify three biases in these rules: - Bias B1, resulting from using a fixed past unit value of import or export as external reference price, instead of the current price cost of imports or exports. - Bias B2, resulting from using the procurement price of the public stock instead of the price prevailing on the domestic market to estimate the price support received by the farmers who sell their production on the domestic market. - Bias B3, resulting from using the national production instead of the marketed share of national production, by this way ignoring farmer self-consumption. The effect of these three biases on the estimated subsidy varies with the country but, on average, WTO rules lead to overestimate the subsidy by a factor 2 to more than 300, depending on the modalities of public stock interventions and other parameters. This means that in the most favorable scenarios, the estimated subsidy is (on average) twice the real subsidy. The effect of these biases on country compliance proves to be huge: many countries have an estimated subsidy above their maximum allowed level (even with very light public stock interventions), just because the subsidy provided by public stocks is overestimated by WTO rules. This result challenges the widespread idea that almost all countries comply with WTO rules on public stocks. We also test the effect of correcting only some of the biases. It appears that doing this would not allow eliminating the biases in country compliance. An implication of this is that expressing the fixed external reference price (FERP) in US dollar, correcting it with the country inflation rate or replacing it by the average unit value of imports or exports over the last five years (as proposed by several experts and WTO Members) would not be enough to remove the bias on country compliance. There is therefore a need to correct all the three biases, what can be done in a rather simple way, as is shown at the end of the paper.