Pakistan: The Consequences of a Change in the EC Rice Regime22/11/2010
Amir Muhammed and Wajid H. Pirzada*
I. The problem in context
Pakistan’s is primarily an agro-based economy, with the agriculture sector contributing around 25% towards GDP. Rice is the third-largest crop in terms of area in Pakistan after wheat and cotton, and in 2003-4 was grown on 2.46 million hectares.( 1) It is one of the key non-traditional export commodities of Pakistan. Basmati and irri are the two main types of rice cultivated, consumed in and exported from Pakistan. Basmati is a traditional, long-grain (indica), aromatic variety especially suited to the Kalar tract of Punjab province. Although its grain yield is lower than the coarse-grained, short-statured irri rice, the net income per unit area to the growers is about equal from both types, for the market price of basmati is two to three times higher than the irri varieties. Pakistan enjoys a natural comparative advantage in basmati rice production, which has an assured market in several foreign countries where aromatic, long-grain rice is preferred.
Pakistan’s annual rice exports average 1.5-2 million tonnes. During 2003-4, they were valued at US$627 million, registering a growth of 12.8% over the preceding year. Pakistani basmati has a market niche because of its characteristic aroma and cooking qualities. Super basmati, which is an extra-long-grain aromatic rice evolved from a cross between basmati 370 and basmati 320, with almost double the yield potential of basmati 370, remains the key export commodity. The European Union (EU) is one of the leading export destinations, partly because a sizable population from the subcontinent lives in the EU and relishes basmati rice. Pakistan exports basmati rice worth US$531 million to the EU, 80% of which is super basmati. The performance of this crop, on both production and export counts, therefore has long-term implications for both a sizable number of small farmers and the national economy.
In the recent past Pakistan has faced trade restrictions on its super basmati because of recent changes in the EU rice trade regime, resulting in the withdrawal of a duty abatement of € 250 a tonne, an import duty derogation earlier allowed against normal duty of € 264. This study, in the context of the WTO regime on agriculture, examines the need for and aims of such a restriction, and also its possible implications for various stakeholders, including farmers, processors, traders and of course the overall national economy .
The EU agricultural imports policy
The legislative text of the agreement on reforms of the much disputed EU Common Agricultural Policy (CAP) was finally adopted by EU Agriculture Ministers on 29 September 2003. This agreement stipulates inter alia a 50% reduction in the intervention support price for paddy rice (to €150 a tonne), and an annual purchasing limit of 75, 000 tonnes on the volume of rice that could be imported into the EU (100, 000 tonnes in 2003-4) under this intervention. EU rice farmers are to be compensated by the provision of area-based support payments, to be paid at a rate based on national/regional reference yields multiplied by € 177 a tonne. Accordingly, the subsidy payable to EU rice producers is to be increased from €52.65 a tonne to €177 a tonne, of which €102 a tonne will be included in the single payment scheme. Council Regulation No. 1785/2003 of 29 September 2003 identifies in paragraphs 3, 5, 10 and 11 the reasons for and the form of such a change:
Having regard to the Treaty establishing the European Community …
- (3) The European rice market is in serious unbalance. The volume of rice stored in public intervention is very large, equivalent to about a quarter of Community output, and is likely to increase in the long run. The imbalance has been caused by the combined effect of an increase in domestic output, which has stabilized in recent marketing years, the continuing growth of imports and by the restrictions on exports with refunds in accordance with the Agriculture Agreement. The present imbalance is to be exacerbated even further and probably to reach an unsustainable level, in the course of the years to come as a result of increasing imports from third countries due to the implementation of EBA [Everything but Arms] Agreement.
- (5) It appears that the most suitable solution is to decrease strongly the intervention price and to create, as compensation, an income payment per farm and a crop-specific aid reflecting the role of rice production in traditional production areas. The latter two instruments are incorporated in Council Regulation (EC) No. 1782/2003 of 29 September 2003 on establishing common rules for direct support schemes under the common agricultural policy and establishing support schemes for the farmers.
- (10) In order to prevent or counteract adverse effects on the Community market, which could result from the imports of certain agricultural products, imports of one or more of such products should be subject to payment of an additional import duty, if certain conditions are fulfilled.
- (11) It is appropriate, under certain conditions, to confer on the Commission the power to open and administer tariff quotas resulting from international agreements concluded in accordance with the Treaty or from other acts of the Council.
Under Article XXVIII of GATT1994 it was obligatory on the part of the EU to undertake negotiations with the WTO member countries expected to be affected, before making such a change in the rice import regime. The CAP reforms therefore mandated the Commission to open negotiations about modifying import arrangements, so as to modify existing variable levy arrangements for rice and replace them with a new system of tariff rate quotas (TRQs).
The aim of these negotiations with EU trading partners, to be carried out under Article XVIII of GATT, was to modify the mechanism for setting EU rice import duties, and thereby restrict the import of rice into the EU markets. The Commission in fact wanted to end the current mechanism, based on the link between the intervention support price for rice and a maximum duty paid on import price (head Note 7 of the WTO Schedule), for setting EU rice import duties. This mechanism would, under the agreed rice regime changes (WTO Schedule for implementation from 2004-5), result in a significant reduction in the level of import duty applicable to both husked and milled rice imports. Council Regulation (EC) #3072/95 of 22 December 1995 on the Common Organization of the Market in Rice (Article 3 stating, ‘the reduction in the custom duties must be accompanied by a fall in the Community prices to enable the competitiveness of the Community products’) substantiates this argument.
In so notifying the WTO of its intention to modify the import duty mechanism, the Commission indicated its intention to negotiate with the main supplier countries of rice some form of ‘proportionate compensation’ for abandoning the ‘import duty setting mechanism’ inherent in Head Note 7 of the WTO Schedule. Drawing on the precedent of how the similar ‘import duty mechanism’ for cereals was amended in 2002, it was understood that the EC would try to limit the flow of rice imports into EU member countries by providing additional tariff-free or reduced tariff access to the EU market subject to TRQs.
In respect of EU rice imports, there are currently TRQs applicable to imports principally from Thailand and the United States (and also Australia), that compensate for the impact of Austria, Finland and Sweden the joining EU in 1995, plus a number of bilateral/multilateral quota-restricted preferential access agreements with African, Caribbean and Pacific (ACP) countries and overseas territories of EU countries, Bangladesh and Egypt. Lastly, within the existing import duty mechanism, unlimited imports of husked basmati from India and Pakistan could enter the EU, at an import duty concession of €250 a tonne, reducing the net import duty from € 264 a tonne to € 14 a tonne.
To offset the likely surge of imports from India and Pakistan, because of substantial reduction in tariff from € 264 a tonne to € 14 a tonne because of duty abatement, the EU regime on rice was modified on the approval of the Cereal Experts Committee (CEC) of the EU in a meeting held in Brussels on 20 November 2003. The proposal of the withdrawal of abatement of duty concession was presented by EU Farm Commissioner Franz Fischer and the import arrangements for basmati rice were amended; the abatement concession of € 250 a tonne on the import of Pakistan’s super basmati was withdrawn from 1 January 2004. In so doing the EU maintained that Pakistan’s super basmati was not a pure basmati and that the action was taken to counter alleged abuse and fraud in relation to the duty abatement.
Consequently Pakistan’s export of super basmati was subjected to the total import duty of € 264 a tonne. The abatement concession, however, was allowed, through a subsequent derogation, on the import of kernel basmati and basmati 370 from Pakistan (and India), the two varieties that did not command a significant export share, for three months starting 1 January 2004 (to 31 March 2004), provided that
- sales contracts were concluded (signed) between the suppliers from those countries and the European Community traders by 31 December 2003;
- certificates of authenticity, to be issued in the case of Pakistan by the Trading Corporation of Pakistan, valid for 90 days, were already issued for the relevant contracts before 31 December 2003 or were so issued no later than 31 March 2004;
- the consignments should land before 30 June 2004.
In the sections that follow we discuss the factors that prompted the EU to review the duty abatement for rice and to put pressure on Pakistan to institute such measures as DNA testing and the protection of super basmati under geographical indications (GIs).
Reason for the withdrawal of the abatement and its likely impact
The duty abatement was allowed earlier inter alia to help EU millers to polish imported brown rice in their modern mills and thus compete with white basmati in the market. The intended effect of any mechanism to reduce the level of EU import duty applying to imports from a specific source of supply is to reduce the entry price and thus improve the competitive position of supplies from the beneficiary suppliers.( 2) Also, with mounting pressure for steep cuts on tariffs and the removal of other (trade) distorting and restrictive measures by countries in the North, it is tempting for them to use (higher) health and hygiene and ecological and environmental standards, coupled with regulations such as those on intellectual property and investment rights, to protect their industry and especially their agriculture, which had enjoyed preferential protection and support for several decades.( 3)
Super basmati constitutes 80% of Pakistani rice exports to the EU. Pakistan used to export 50-60 thousand tonnes of husked basmati rice annually under the EU abatement scheme. Consequent upon withdrawal of abatement, a bound tariff rate of € 264 a tonne as against € 14 a tonne under the abatement concession would be applicable to Pakistani husked super basmati, making it uncompetitive. Such a restriction could potentially lead to the ousting of Pakistan from the European rice market, inflicting heavy losses on Pakistan’s economy and depriving poor farmers of their livelihood. It is worth pointing out that Pakistan had earlier accepted conditions imposed by the EU on the export of brown rice from Pakistan that included (i) fixing a quota ceiling, (ii) fixing a minimum export price, and (iii) strict quality checks. Despite these preconditions Pakistan competed effectively and (for example) utilized its full quota of 9, 000 tonnes of brown rice in 1996-7, with an increase in foreign exchange earnings of US$2 million compared with the previous year.
Linking geographical indications with trade in basmati rice
It is not clear why the EU was pressing so hard for the protection of basmati under GIs except that the EU was interested in the expansion of GIs, currently limited to wines and spirits, to agricultural products to win over more supporters for the EU within the WTO system. Section 3 of the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) is dedicated to geographical indications (GIs). It is the first multilateral agreement dealing with GIs as such.
The TRIPS Agreement contains a clear triple distinction in the level of protection for (i) GIs related to all products; (ii) wines and spirits; and (iii) wines only. Article 22 of TRIPS defines GIs as
indications which identify a good as originating in the territory of a Member, or a region or a locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin.
India and Pakistan experienced the need for and the importance of the protection of GIs in the basmati rice case. The problem arose when the US Patent Office issued patents in 1997 for three new strains of rice. These strains could be sold under the name ‘basmati’, referring to a particular form of long-grained and aromatic rice associated with the plains of Punjab. In 1998 the US Rice Federation submitted that the term basmati was generic and referred to a specific type of aromatic rice. In response, Pakistan and India jointly filed a petition seeking to prevent US-grown rice from being labelled or advertised as ‘basmati’. The US Department of Agriculture and Federal Trade Commission rejected the petition in May 2001, maintaining that labelling rice as ‘American-grown basmati’ was not misleading, and deemed ‘basmati’ to be a generic term. After India and Pakistan’s protest against the use of the name ‘basmati’, the US Patent Office barred the patent holder from using the generic name ‘basmati’. This rice can now be only sold as ‘Texmati’ or any other name that clearly informs the consumer that the rice is not from the Punjab region.
In this regard it is worth mentioning that some multinationals have succeeded in securing patents on basmati rice, which is tantamount to a violation of GIs, as thousands of years ago Aryans developed this unique variety of rice with its special aroma, and named it ‘basmati’ — ‘fragrance of a virgin’. The origin of basmati has been traced back to the Kalar tract of Punjab, Pakistan, where it has been grown for centuries. As such, it is a classic example of a GI, qualifying on the basis of both traditional knowledge and place, being highly localized in character. The very name ‘basmati’, because of its origin, identifies the product, for which provision has been made under TRIPS.( 4)
In 1998 the UK government started a project, ‘DNA Testing of Basmati Rice for Purity’. For the first time, Indian rice multinational trade companies proposed the strains basmati 370, Type 3 Dehraduni, Haryana 19 (HBC19), Tarori and Karnaal as pure line basmati rice: basmati 370 and Dehradun basmati are a common heritage of both India and Pakistan, and there has been no issue over them.( 5) However, because of inadequacies in analytical and human resource capacity, coupled with financial limitations, developing countries such as Pakistan face difficulty in carrying out high-tech certification based on DNA testing.
II. Local and external players and their roles
The change in the rice import regime made unilaterally by the EU understandably generated strong protests from the affected stakeholders and governments in the developing countries. The most vigorous protests were made by the government and the rice exporting community of Pakistan, who estimated an annual loss of US$45 million to Pakistani exporters as a consequence.
The Pakistan government
The Commerce Minister, Humayoon Akhtar Khan, assured Pakistan’s rice exporters that Pakistan would oppose any unilateral amendment in the rice import regime that would affect Pakistan’s export of super basmati to EU member countries. Pakistan’s mission to the WTO took the position during negotiations with the EU of not accepting any unfavourable deal, particularly one including TRQs. It maintained that TRQs not only were trade distorting in nature but could never compensate for the loss of Pakistan’s current unlimited access to the EU market.( 6)
During his visit to Brussels after the withdrawal of the duty abatement, Pakistan’s Commerce Minister asked the EU Trade Commissioner, Pascal Lamy, to seek Pakistan’s opinion before making any changes in the rice import regime. Lamy was reported as assuring the Pakistani minister that the EU would further consult Pakistan in the matter before any final decision was taken. Consultations on this issue continued until September 2004, when a mutually acceptable deal on the issue was reportedly struck through an exchange of letters.
The private sector
The Rice Exporters Association of Pakistan (REAP) in its formal reaction said that the change in the EU regime on rice imports would affect Pakistan’s exports to the EU and asked for the status quo to be maintained until Pakistani traders were to be adequately compensated. REAP deemed the proposal a violation of the code approved by the UK Grain and Food Trade Association (GAFTA) at a meeting where the Pakistani basmati variety was declared to be pure rice. They were of the view that Pakistan would not be in a position to receive substantial quota under the TRQs system worked out on the basis of previous export performance, which in Pakistan’s case stood at 20-30% only.
Barrister Syed Najaf Hussain Shah, the chairman of REAP, while detailing the official stance of REAP, said that the government was fully supporting rice exporters and REAP had been assured that it would protest at the highest forum against the decision of the EU Cereal Experts Committee (CEC).( 7) He said that the withdrawal of the concession would continue till September 2004, and after that all rice exports to EU member countries would be free from any duty. Shah added that the withdrawal of the concession, while a shock to rice growers and exporters in the short term, would serve as a blessing in disguise in the longer run with the possibility of more value added and as the rice exporters gradually switched to the export of polished rice, which would not only add profit but also increase employment opportunities in the country. Mr Shah went on to say that Pakistan would not lose any of its market for super basmati because it would not be substituted by Indian Pusa basmati, a similar quality rice which has been given the same treatment for import purposes.
As against the above stance, the convenor of the Rice Export Committee of Lahore Chamber of Commerce and Industries, Agha Javed, said that the country could face a shortfall of 90,000 tonnes of rice export after the EC’s decision. He said that the Commerce Minister had already lodged a protest with the EC and promised that the government would take precautionary measures. The co-convenor of the Committee, Zahid Khawja, said that Pakistan should not take any hasty decision in this regard and should continue to maintain that the EC decision to withdraw the concession in import duty on basmati rice was unjustified.( 8)
Leading Pakistani rice exporters too, while showing their serious concern over the change in the EU rice import regime, expressed the hope that the CEC would set aside the draft proposing the new definition of basmati rice and that the old system would continue, since India too had decided to oppose the draft.
III. Challenges faced and the outcome
It had been suggested( 9) that if the outcome of the EC’s WTO negotiations to modify the current rice import duty mechanism focused on the additional use of TRQs to replace the current import duty setting mechanism inherent in Head Note 7 of the WTO Schedule, this would inevitably result in a reduced level of the market and of economic efficiency, to the detriment of established suppliers like Pakistan and consumers in the EU market. It was further suggested that any alternative form of agreement (including the current mechanism) that at least maintained the current level of market access outside TRQs (e.g. reduced import duty market access for basmati that was unrestricted by volume) was preferable, because it would avoid adding further losses and inefficiencies associated with TRQs. A non-tariff solution was therefore to be commended as an approach to take in the WTO negotiations between the EU and the third-country suppliers.
On a bilateral basis, both the EU and Pakistan continued interacting both formally and informally, and it was reported formally in August 2004 that exports of Pakistan’s super basmati would resume from the beginning of the EU fiscal year in September 2004, as the EU had decided through an exchange of letters to re-include super basmati in its duty rebatement list with the condition of DNA testing, and had agreed as follows:
- the tariff rate for husked rice (CN code 1006 20) shall be € 65 a tonne;
- with respect to the import regime for husked rice (CN codes 1006 20 17 and 1006 20 98) of the varieties kernel (basmati), basmati 370, Pusa basmati and super basmati, the EC’s specific bound rate of duty shall be zero.
The following measures have been agreed to implement this agreement.
- A Community control system based on DNA analysis at the border shall be created.
- Pakistan shall actively co-operate with the EC to set up such a control system and the EC shall provide the appropriate technical assistance in this matter.
- Pakistan will protect basmati rice as a geographical indication. The EC would welcome an application for protection as a GI of basmati rice under Council Regulation (ECC) No. 2081/92 of 14 July 1992 on the protection of geographical indications and designation of origin for agricultural products and foodstuff.( 10) The EC shall process any such application as expeditiously as possible. The EC shall provide any necessary technical assistance in the matter.
As a transitional arrangement, the following has also been agreed to by both the parties.
- As from 1 September 2004 and until the date of entry into force of the above-mentioned Community control system, the EC would put in place a transitional regime with regard to husked rice (CN codes 1006 20 17 and 1006 20 98) of the varieties described above based on the following elements:
- The EC’s autonomous applied rate of duty shall be zero. However, if market disturbance occurs, the EC will consult with Pakistan’s competent authorities to agree to an appropriate solution. If no agreement is reached, the EC reserves the right to revert to the bound rate of € 65 a tonne for husked rice (CN code 1006 20).
- The EC shall establish separate tariff lines for basmati rice of the varieties indicated in the agreements with India and Pakistan.
- The competent Pakistani authorities shall continue to issue the authenticity certificates prior to the issuance of import licences, meaning that the current system of administration of the certificates of authenticity shall be maintained.
Consequently, free access for Pakistani basmati rice was allowed with effect from September 2004, partially endorsing the viewpoint of the Chairman REAP, who is on record as stating that the present restriction would cease to be effective after September 2004, when full access to Pakistani rice would be provided.( 11)
The EU, however, has not yet withdrawn the condition of DNA testing nor has the issue of GIs so far been settled. Meanwhile, the EU has clarified to the Pakistani authorities that should the imports from Pakistan increase to a level of disturbance, then imports beyond certain limits would be subject to the normal tariff applicable to rice in the EU. Commission Regulation (EC) No. 1549/2004 of 30 August 2004, derogating from Regulation No. 1785/2003, indicates in paragraphs 1-5 the arrangements for importing rice and laying down separate transitional rules for import of basmati rice:
Having regard to the Treaty establishing the European Community,
Having regard to Council Decision 2004/618/EC of 11 August 2004 on the conclusion of an Agreement in the form of an Exchange of Letters between the European Community and Pakistan pursuant to Article XXVIII of GATT 1994 relating to the modification of concessions with respect to rice provided for in Schedule CXL annexed to the GATT 1994, and in particular Article 2 thereof,
- Decision 2004/619/EC modifies the import regime for husked rice and milled rice in the Community. Decisions 2004/617/EC and 2004/618/EC lay down conditions for importing basmati rice. This change in regime makes it necessary to amend Regulation No. 1758/2003. In order to enable those Decisions to be applied on 1 September 2004, as provided for in the Agreements approved by those Decisions, it is necessary to derogate from Regulation (EC) No. 1785/2003 for a transitional period expiring on the date of entry in to force of the amendment to that Regulation, and no later than 30 June 2005.
- Decisions 2004/617/EC and 2004/618/EC also provide for a transitional import regime for basmati rice to be set in place until the entry into force of a definitive import regime for this type of rice. Specific transitional rules should be laid down.
- In order to be eligible for zero import duty, basmati rice must belong to a variety specified in the Agreements. In order to ascertain that basmati rice imported at zero rate of duty meets those characteristics, it should be covered by an authenticity certificate drawn up by the competent authorities.
- In order to prevent fraud, provision should be made for measures to check the variety of basmati rice declared.
- The transitional import regime for basmati rice provides for a procedure for consulting the exporting country in the event of disturbance on the market and possibly applying the full rate of duty if a satisfactory solution has not been found at the end of the consultations. It would be appropriate to define from what point the market may be considered to be disturbed.
IV. Lessons for others
Despite the inflated claims by key players since the inception of trade liberalization under the WTO in 1995, trade distortions and restrictions continue to be rampant in the global market. A country like Pakistan, with limited exports, can hardly afford to adjust to sudden shocks because of changes like the one imposed by the EU through reforms in its rice trade policy. Trade and economic superpowers such as the EU also use their economic and trade weight to influence in their favour negotiations with developing countries such as Pakistan. In this case too, a year-long restriction on Pakistan’s super basmati inflicted heavy losses on both the national economy and the farmers. Nevertheless, the proactive engagement on the part of the public and private sectors helped resolve the issue temporarily. The temporary solution, however, will result in a quota-restricted preferential treatment in terms of duty-free market access. Such solutions are not sustainable, for trade preferences are bound to erode in the long run under the WTO regime. The strategic advantage that Pakistan currently enjoys after the events of 9/11 will also not last for too long. Moreover, the TRQs system does not augur well for trade liberalization under the WTO; in fact developing countries have already been protesting aboutnon-transparency in the administration of TRQs. As a measure for contributing to the liberalization of trade and improving market efficiency TRQs have several weaknesses. It would be in the best interest of developing countries such as Pakistan to
- strive for reduced import duty market access, rather than quota-restricted, duty free (preferential access) import for basmati rice;
- develop legal, trade and economic analyses and research capacity to face squarely issues like trade restrictions;
- develop quality infrastructure that will help realign with the standard economy;
- undertake proactive legislation on GIs that can potentially benefit Pakistan, with the ability to sell basmati rice with confidence and certainty since GIs promote consumer confidence;
- diversify, in terms of both agricultural production and processing, which will give the country economic resilience and farmers a more dependable source of income; and
- vertically integrate agricultural production in general and of high-value crops in particular, rather than depend on mono-crop culture.
Such initiatives in turn will help to counter technical barriers to trade such as DNA testing and linking trade with issues such as GIs, as such issues will continue to surface in future. Pakistan should also avail itself of the offer of the EU in developing a DNA testing service and also towards legislation on GIs in this regard.
Moreover, the present agreement between Pakistan and the EU is not definitive, and there is every likelihood that after June 2005 Pakistan may have to face a similar situation. Efforts therefore need to be directed at resolving such issues proactively on a bilateral basis. The Dispute Settlement Mechanism (DSM) under the WTO is a time-consuming and costly proposition, besides the fact that resorting to the DSM needs legal and technical capacity which most developing countries including Pakistan lack at present. It would be in the long-term interest of these countries to build such capacity, pooling their human and material resources.
1.-Pakistan Economic Survey 2003-4, Government of Pakistan, Finance Division.
2.- Graham Brookes (2003), briefing note: ‘Impact of Tariff Rate Quotas (TRQs) on the EU Indica Rice Market’, Brookes West, Jasmine House, Canterbury Road, Elham, Canterbury, Kent, UK.
3.- Wajid H. Pirzada (in press), ‘Market Access and Standards’, Journal of Science Technology and Development.
4.- Wajid H. Pirzada (2003), ‘A Log-Frame of Sui Generis System to Protect Farmers’ Rights: Pakistan’s Perspective’, in Ratnakar Adhikari and Kamalesh Adhikari, eds., Farmers’ Rights to Livelihood in the Hindu Kush Himalayas, Nepal: South Asia Watch on Trade, Economics & Environment (SAWTEE).
5.- Syed Faisal Hassan (2004), ‘India Commercially Exploits Pakistani Basmati’, The Nation, 23 Feb.
6.- Ministry of Commerce (2003), ‘Impact of TRQs on Basmati Rice’, official document, 21 Aug.
7.- Noshad Ali (2003), Daily Times, 30 Dec.
8.- Rizwan Ali (2003), The News, 8 Dec. (http//www.jang.com.pk).
9.- Brookes (2003).
10.- Ibid. It
11.- Noshad Ali (2003).