The question arises what motivated Indonesia to ban imports. We consider different explanations but shall eventually show that the motivation behind the Indonesian measures was most likely the aim of establishing food self-sufficiency with respect to the production of chicken. Against this background, we shall analyse the economic effects of the import restrictions and then explain the concept of food self-sufficiency and describe its current status under WTO law.
4.1 What was the motive behind the Indonesian measures?
According to mainstream economic theory, a first possible motive for Indonesia to ban chicken imports is a terms-of-trade motive, which at first glance does not seem unlikely given the size of the Indonesian market and the potential market power that might be exerted thereby. However, such a motive can be discarded in the Indonesia–Chicken case. Staiger and Sykes (2011) have shown that an import ban can never be motivated by a terms of trade motive, as if there is no exchange, there are also no revenues to be extracted from foreigners.
Another possible motivation for Indonesia's use of import restrictions on chicken (and other food products) is to keep domestic prices relatively stable in order to reduce poverty, in the framework of the food security and self-sufficiency goals. Some also argue that the self-sufficiency goal is an exercise of economic nationalism (e.g. Nunzio, 2013).
Indonesia's use of trade restrictions on food can also be linked to political-economic motives. Some studies argue that the import restrictions have been imposed to protect farmers. For example, the OECD (2012) mentions that the move toward greater democracy led to an increase in the political power of farmers, which have become well organized and are engaged in active lobbying. Public and political party support for the agricultural sector is strong, and the poultry industry is politically powerful. It also mentions that halal certification has been used to protect domestic poultry producers as well. For example, in 2000, Indonesia banned imports of chicken leg quarters from the US, allegedly because the slaughter could not be assured to be halal. But the Ministry of Agriculture was also under pressure to protect domestic producers from cheaper imports from the US. As we showed, tariffs are already low but there has been an increasing use of NTBs. This is due to the fact that tariffs are under the control of the Ministry of Finance, which favours more open economic policies, while line ministries have more influence in the setting of NTBs. They are more protectionists and are influenced by special interest groups (OECD, 2012). Moreover, a government advisory Panel found that import quotas encourage bribes and price spikes, and recommended that they be replaced by import tariffs (Nunzio, 2013).
The motivation to support domestic production can also be related to the Ministry of Agriculture's arguments that not all countries are applying their WTO commitments to eliminate trade barriers, and thus domestic farmers face the unfair competition of foreign farmers who are protected via tariffs, NTBs and subsidies (OECD, 2012).
The self-sufficiency target may also be seen as a desire to protect domestic farmers from the regional competition that would arise as a result of the ASEAN FTA's implementation in 2015 (Nunzio, 2013).
Finally, we note that, according to the OECD (2012), with the introduction of a relatively effective VAT in the early 1980s, trade policy no longer has to take revenue considerations into account.
4.2 The economic effects of Indonesia's policies
As shown in section 2.3, Indonesia's applied tariffs on chicken are set well below its tariff bindings. Therefore, as noted by Limenta and Chandra (2017), NTBs are the main concern and are used in order to achieve the goal of self-sufficiency.
The fact that Indonesia's trade policy considers imports as a last resort has led to substantial price volatility for main food products, and could also lead to insufficient supply and high prices (Limenta and Chandra, 2017). Food prices are very volatile, as they can be affected by changes in weather, outbreaks of plant or animal diseases, demand changes and speculative behaviour.5 Moreover, the fact that demand and supply of food are price inelastic implies that the price increase due to a quantitative import restriction will be large (Warr, 2011). Besides the standard economic efficiency losses that arise from trade restrictions, this also has important distributional effects.
The beneficiaries of high prices are the domestic producers. However, they affect consumers, especially the poor who spend a larger share of their income on food. In Indonesia, very poor households can spend up to 80% of their income on food. And if the price increases, they may be unable to satisfy their basic food consumption needs (Warr, 2011). This also affects a majority of small farmers who are net buyers of food. The OECD (2012) mentions that the fact that meat consumption is very low in Indonesia is related to import restrictions resulting in high domestic prices.
Import restrictions on food can also hurt firms in the food industry that import raw materials such as soybeans, sugar, and feed products.6 Furthermore, they could hurt foreign firms (including Brazilian chicken exporters) and spur WTO disputes. This is not unlikely given Indonesia's large market size, as the dispute initiated by Brazil on chicken exemplifies.
Finally, in addition to deadweight losses streaming from consumption, production, and rent seeking inefficiencies, the import restrictions may also affect competition and the industry's productivity. Moreover, the OECD (2012) mentions that the uncertainty created by the import restriction policies has discouraged trade with Indonesia. Studies have shown that trade policy uncertainty can substantially affect firms’ investment and entry into export markets (see, for example, Handley and Limão, 2015). In the case of poultry, delays and uncertainty due to trade policies can have substantial effects due to perishability and spoilage.
4.3 Food self-sufficiency, food security, and international trade
The probably most widely accepted definition of ‘food self-sufficiency’ is provided by FAO as the ‘ability to meet consumption needs, particularly for staple foods, from a country's own domestic production rather than having to rely on importing or buying from non-domestic sources (minimizing dependence on international trade)’. ‘Food security’, by contrast, is mostly understood in terms of a definition provided at the 1996 World Food Summit. Food security is deemed to exist ‘when all people at all times have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life’ (FAO, 2006).
The concepts of food self-sufficiency and food security diverge on two fundamental issues: ‘(i) food self-sufficiency looks only at national production as the sole source of supply, while food security takes into account commercial imports and food aid as possible sources of commodity supply; (ii) food self-sufficiency refers only to domestically-produced food availability at the national level, food security brings in elements of stability of supply and access to food by the population’ (FAO, 1996). Thus, self-sufficiency may not necessarily be equated with food security, although the former, of course, may contribute to the latter, as the case may be. We consider the arguments for and against food self-sufficiency next.
4.3.1 The case against self-sufficiency
Indonesia has a food security goal and it has focused on promoting self-sufficiency in order to achieve food security. Thus, a first argument against self-sufficiency is that it could actually reduce food security, since it may make food more expensive and less accessible, decreasing food security for the poor. Some studies find a negative correlation between food self-sufficiency and food security and living standards in different countries (e.g. Ministry of Agriculture and Forests in Bhutan, 2010; Galero, So, and Tiongco, 2014). They conclude that encouraging food self-sufficiency is not a good policy to achieve food security or to reduce poverty.7 Clapp (2017) mentions that self-sufficiency can reduce food security since it may lead to less efficiency, which can cause decreases in food production and higher prices. It may also hurt farmers who produce to export, which reduces their income and can affect their food security.
A second argument against self-sufficiency derives from the economic inefficiencies of the trade barriers that are used to attain it, which we discussed above. Gains based on comparative advantage are lost. The OECD (2012) argues that the focus on self-sufficiency in order to attain food security is misplaced. Import protection increases costs for consumers, and lowers competition and productivity growth. That hinders food access for poor consumers, including a majority of farmers who are net buyers of food. Moreover, the OECD (2016) finds that, as a consequence of import restrictions and agricultural interventions, Indonesians were ‘taxed’ the equivalent of US$98 billion between 2013 and 2015. The cost is equivalent to a per capita tax of US$1300, much higher than the EU's per capita tax of US$437 due to its agricultural policy. The World Bank (2016) reports that the prices of goods ranging from eggs and honey to chicken, carrots, mangoes, and oranges are between 25 and 50% higher in Jakarta than in Singapore, which imports nearly all its food. The level of total support to agriculture as a percentage of GDP was 1.9 in 2006–2010, twice the OECD average. Producer Single Commodity Transfers – the value of gross transfers to producers due to policies linked to the production of a specific commodity – as a share of commodity gross farm revenues in 2006–2010 were highest for poultry (OECD, 2012).
A third argument might be one related to Indonesia's geography and its implications for food distribution. Indonesia is an archipelago composed of 17,000 different islands, where Java is the main centre for agricultural production while more isolated parts of the country often face higher food prices due to distribution costs. Hence, Nunzio (2013) argues that food supply levels are actually more than sufficient to feed Indonesia's population, but inefficiencies in distribution systems across the archipelago make it difficult to fulfil demand at accessible prices. Therefore, one could argue that it is hard to see how trade restrictions would solve a national distribution system's inefficiency problem.
A fourth argument is that the self-sufficiency policies, insofar as they restrict trade, might lead to violations of Indonesia's WTO commitments and could bring about retaliation by Indonesia's trade partners.
Actually, international trade could be used to promote food security, along with poverty reduction, as some studies have argued. Trade can be used to stabilize supply disruptions that can generate severe shortages, such as those due to droughts or natural disasters (Clapp, 2017).
A final argument is potential environmental damage. Coxhead (2010) mentions that using trade restrictions and price supports to achieve self-sufficiency may lead to land degradation by promoting the expansion of relatively erosive crops and could reduce welfare. Clapp (2017) also mentions that there can be environmental constraints to food self-sufficiency, since countries may lack the natural resources needed to produce all the food they consume.
4.3.2 The case for self-sufficiency
Some studies argue that, in a number of cases, increasing domestic production for domestic consumption may be beneficial from economic and political perspectives. Does being self-sufficient in food mean that the country has no international trade in food? It depends on how exactly food self-sufficiency is defined and how the government policy is implemented. An extreme definition involves producing all food requirements domestically and having autarky in the food sector. But, in reality, all countries import some food. Another definition means that a country produces a fraction of its food consumption close to or greater than 100%. This does not imply no trade, as the food products consumed domestically may differ from those produced domestically.
Historically, governments have focused on food self-sufficiency as a matter of national security. This is also related to the stability in food supply, and to avoiding supply limitations during a war, and supply disruptions and lack of availability in the international markets (FAO, 2016).
A second and related argument for food self-sufficiency is to avoid political vulnerability if the country depends on other countries for food supply and they threaten to limit it for political motives (e.g. a trade embargo).
A third argument has been to avoid price volatility in international markets. High and volatile food prices with the 2007–2008 food crisis led to a re-emergence of a focus on food self-sufficiency policies in several countries, including Indonesia (Clapp, 2017). However, as we mentioned in section 4.2, Indonesia's trade-restrictive policies have actually led to substantial price volatility for main food products.
A fourth argument in favour of self-sufficiency in food would be to protect the agricultural sectors and support economic activity and incomes in rural areas.
A final argument may be health and environmental concerns. Advocates of producing food locally seek to improve access to healthy, organic food, to strengthen the local economy and environmental sustainability, and foster community relationships (Roberts, 2017). Producing locally could ensure that agriculture is sustainable and does not harm the environment and respects workers and animals. Importing food generates a pollution cost from its transportation, mainly due to carbon dioxide emissions. It also generates more emissions because imported food requires layers of packaging, and perishable food also requires refrigeration (Rosenthal, 2008). Moreover, buying locally has the advantage that some food products lose nutrients during transportation, and over-processing for longevity lowers nutritional value (Pratt, 2016).
Although those may be well-intentioned concerns and arguments for self-sufficiency, it is important to stress that the use of trade policies to achieve those objectives is questionable, given that trade policies are only ‘second-best’ policies, as there are usually other policy instruments that are more efficient than a trade barrier.8 Nonetheless, it might be the case that a government may be unable to use other (non-trade restrictive) policies to increase domestic production due to financial constraints, for example.
Food self-sufficiency should not be seen as the opposite of international trade in food. A not extreme definition of food self-sufficiency may make sense not only politically but also economically, in certain cases. However, we have shown that, in Indonesia's case, the food self-sufficiency objective is in fact attached to a legal requirement to use imports only as a last resource, which in turn has led to the imposition of a number of non-trade barriers.
First, ‘legitimate’ food security concerns should not be used to justify trade protection. Improperly used non-tariff measures become non-tariff barriers and can decrease food security. The APEC Business Advisory Council (2016) finds that APEC countries were more protectionist and imposed more non-tariff measures when food security was interpreted as food self-sufficiency, and it argues that self-sufficiency has been used to justify protecting inefficient agricultural sectors.
Moreover, becoming self-sufficient in products in which the country does not have – and will not have – a comparative advantage would be inefficient, and a strong emphasis on some sectors may discourage diversification toward higher value products. Nunzio (2013) mentions that an issue with the goal of self-sufficiency in Indonesia is lack of comparative advantage in some areas of agriculture. This is also the case for chicken meat and chicken products, as we discussed in section 2.1.
4.4 Food self-sufficiency and WTO law
As the Panel rightly observed, self-sufficiency as a policy objective is compatible with WTO law. Questions of food policy and self-sufficiency are as such not regulated by WTO law. WTO Members are free to choose any policy they deem fit for their respective societies. However, while WTO law does not constrain the policy objectives pursued, it undeniably constrains the means available to attain those objectives. WTO Members must not resort, for example, to tariffs above the bound level, discriminatory taxation/regulation, or trade distorting subsidies to implement their desired policy objectives. Therefore, if a policy objective can only be attained through those instruments, then, for all practical purposes, it cannot be attained at all in a WTO consistent fashion.
In this section, we discuss whether Indonesia could have attained the policy goal of food self-sufficiency in a WTO-compliant manner. For this purpose, we assume that Indonesia needed a means either to block imports or to support its domestic industry such that it could compete with imports.
It is not entirely clear why Indonesia did not resort to tariffs to restrict Brazilian chicken imports. In principle, Indonesia had substantial leeway in raising tariff barriers on chicken imports. While its applied tariffs on poultry are quite low at 5%, its bound tariffs are much higher and range from 40 to 50% (see supra at 2.3). Thus, the question arises why Indonesia did not simply increase duties up to the bound rate.
One possible explanation is that even at a 50% price mark up, Brazilian chicken would still have been cheaper than locally produced chicken. Thus, higher tariffs up to the bound rate would have missed Indonesia's policy goal. Even if this were the case, at least in theory Indonesia could have re-negotiated its bound tariff rates in accordance with Article XXVIII GATT, which provides a framework for tariff renegotiations. Yet, this venue was probably ‘less attractive’ than internal regulations with the same effect because such negotiations ‘may include provision for compensatory adjustments’ and the parties ‘shall endeavour to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade’ (cf. Article XXVIII:(2) GATT).
Another possibility is that Indonesia intended to avoid reputational damage by openly increasing its applied tariff rates. To establish additional import barriers could have provoked counter-reactions by Indonesia's trading partners or elicited criticism from relevant international organizations. In addition, the risk of detection is probably the highest in the area of tariffs due to the many transparency obligations.
Finally, it is not unlikely that there were domestic political reasons why the Indonesian government preferred non-tariff measures over custom duties. As discussed supra (4.1) tariffs fell into the competence of the more liberal Ministry of Finance, whereas the more ‘protectionist’ Ministry of Agriculture could only adopt NTBs.
Theoretically, Indonesia could have resorted to subsidies to increase the competitiveness of its domestic chicken producers. However, Indonesia's leeway to subsidize its domestic industry is significantly curtailed by the Agreement on Agriculture (‘AgA’). Indonesia did not offer a commitment on the total value of its Aggregate Measurement of Support (AMS) (Article 3 AgA), and therefore could not provide product-specific domestic support above the de minimis threshold provided for developing countries in Article 6(4)(b) AgA. According to this provision, annual product-specific domestic support must not exceed 10% of a Member's total value of production of a basic agricultural product. Arguably, subsidies in conformity with this provision would not have sufficed to level the playing field between domestic and imported chicken produce.
Less targeted subsidies, on the other hand, which would escape the aforementioned constraints (‘green box’ or Annex 2 subsidies), such as additional investment in infrastructure or improving access to credit, would not necessarily attain Indonesia's objective of bolstering food self-sufficiency; in particular, because such subsidies must not provide price support to producers (Annex 2, para. 1(b) AgA). Thus, while such measures might have been WTO compliant, they would not necessarily contribute to the pursued policy goal. Finally, for developing countries, such as Indonesia, budget constraints might be a significant factor that in practice render subsidies unavailable.9
4.4.3 Trade remedies
As there were no indications of dumping or subsidization of Brazilian chicken imports into Indonesia, the only trade remedy Indonesia could resort to were safeguards according to Article XIX GATT and the Agreement on Safeguards (‘SG’).10 However, adopting safeguard measures would not only require the showing of a surge in imports and injury to the domestic industry, it would also require compensation for the adverse effects of the measure on the affected Members’ trade and the best endeavour to maintain a substantially equivalent level of concessions and other obligations (Article 8.1 SG). Hence, similarly to tariff renegotiations under Article XXVIII GATT, the withdrawal of market access would have entitled existing exporters to seek compensation and would thus come at a cost either in the form of increased competition for another sector of the domestic economy or less export opportunities.
Finally, safeguards are meant to be temporary safety valves, given that Members ‘shall apply safeguard measures only for such periods of time as may be necessary to prevent or remedy serious injury and to facilitate adjustment’ (Article 7.1 (1) SG). As a rule, safeguards must not be adopted for periods longer than four years (Article 7.1 (2) SG). In the case of the Indonesian chicken industry, it is, however, structural disadvantages relative to Brazil (see supra 2.1.2) that are the cause for the need for protection and for which no short-term remedy is available.
At least four possible exemptions come to mind that could justify import restrictions that serve to implement food self-sufficiency policies: Articles XI:2(c), XX, and XXI GATT and a ‘waiver’. However, the conditions set forth in Articles XI:2(c), XX, and XXI GATT are in practice rarely met, and to obtain a waiver from the WTO Membership might not be feasible.
(i) Article XI:2(c) GATT
Article XI:2(c) GATT is an exception to the prohibition on quantitative restrictions and could therefore be used to block imports to pursue self-sufficiency policies. The provision provides in relevant part that the prohibition on quantitative restrictions shall not apply to import restrictions on any agricultural product necessary to the enforcement of governmental measures which operate:
• to restrict the quantities permitted to be marketed or produced; or
• to remove a temporary surplus by making the surplus available to certain groups of domestic consumers free of charge or at prices below the current market level; or
• to restrict the quantities permitted to be produced of any animal product the production of which is directly dependent, wholly or mainly, on the imported commodity, if the domestic production of that commodity is relatively negligible.
However, in a recent ruling concerning Indonesia's import licensing system, the Appellate Body decided that the provisions of the AgA are lex specialis and render Article XI:2(c) GATT inapplicable (WTO, 2017b).
(ii) Articles XX:(a), (b) and XXI:(b)(iii) GATT
Similarly, it would be difficult to justify import bans to promote food self-sufficiency based on Article XX GATT, i.e. the ‘general exception’. In theory, it would be conceivable to justify self-sufficiency policies on the basis of the ‘public morals’ exception (Article XX:(a) GATT), arguing that self-sufficiency reflects domestic societal preferences. However, if WTO Members could indeed favour domestic over foreign produce solely on the ground that the former is locally produced while the latter stems from abroad, the very foundation of the WTO's enterprise would be called into question. Moreover, any delineation between ‘public morals’ and other public policy interests would become elusive. Under such a broad interpretation, basically any policy objective could be justified under the ‘public morals’ exception. In any event, product distinctions solely based on origin would not pass muster under the chapeau of Article XX GATT, which prohibits ‘discrimination between countries where the same conditions prevail’.
Another possible basis to restrict imports for food self-sufficiency purposes is Article XX(b) GATT, according to which WTO-inconsistent measures might be justified, if they are ‘necessary to protect human life or health’. Under normal circumstances, the conditions of this proviso are not met because healthy imported food usually does not pose a threat to human life or health. To the contrary, under standard assumptions one would assume that trade in food would lead to lower prices and increased quantities and thus rather promote human health. Nevertheless, there is a very limited number of scenarios under which it would, at least in theory, be conceivable to restrict food supplies to protect human life or health. If, for instance, a WTO Member could prove exceptional conditions under which a policy of food self-sufficiency is economically sound (see supra 4.3.2)), it should not be per se excluded that the measures to implement such policies should be considered to be WTO-consistent.
However, if circumstances are indeed as grave so as to necessitate the ban of food imports, probably also the requirements of the security exception under Article XXI(b)(iii) GATT (‘other emergency in international relations’) are met. Thus, in states of emergency both Article XX(b) and Article XXI(b)(iii) GATT may legalize the restriction or prohibition of imported food in order to achieve food self-sufficiency.
(iii) Waiver (Article XI:3 WTO-Agreement)
Finally, a WTO Member that requires relief from certain legal obligations in order to implement a policy of self-sufficiency, could request a so-called ‘waiver’. According to Article IX:3 of the WTO Agreement, in exceptional circumstances the Ministerial Conference may decide to waive an obligation imposed on a Member by the WTO Agreement, or any of the Multilateral Trade Agreements, provided that any such decision shall be taken by three fourths of the Members.
The wording of Article XI:3 WTO Agreement seems to indicate that waivers are meant to be adopted only in a very narrow set of circumstances. In this vein, the GATT and WTO judicial bodies have emphasized the exceptional nature of waiver decisions, referring in particular to the substantive requirement for there to be ‘exceptional circumstances’ (GATT, 1990; WTO, 1997). However, the actual waiver decision practice under the GATT and the WTO has been much broader and not confined to situations in which members were unable to comply with their GATT/WTO obligations.
Waivers can be a suitable solution to reconcile trade with other societal interests and values. Some commentators argue that waiver decisions would allow for more political and less legal debates in which not only economic interests count, but also other public interests and perspectives could be voiced (Feichtner, 2009). Thus, waivers could be a versatile tool to solve conflicts between WTO obligations and other social values, such as, for instance, a state's intention to attain self-sufficiency. On the other hand, the biggest strength of ‘waivers’ is at the same time their biggest weakness. If politics trumps law, this inevitably means that only those concerns will be put on the agenda that have sufficient political support. The latter might not be the case for an individual member's food policy preferences.
In conclusion, the only WTO-compliant way for a WTO member, whose tariffs are constrained, to permanently implement a policy of food self-sufficiency would be to renegotiate its concessions pursuant to Article XXVIII GATT, save exceptional circumstance in which restrictive measures might be justified under Article XX:(b) or XXI:(b)(iii) GATT or a waiver is granted. Thus, once bound tariff rates are below the prohibitive level, there is no turning back, and any policy of self-sufficiency can only be implemented in a WTO consistent manner though multilateral negotiation. Given that reciprocity is a key value of the WTO, this does not come as a surprise from a trade law perspective. On the other hand, when viewed from a development or food policy perspective, this outcome might cause some discomfort. Many commentators are displeased with a (perceived) supremacy of trade law over food policy and are concerned that ‘excessive reliance’ on international trade will eventually compromise developing countries’ food security (De Schutter, 2011). In their view, the trend in developing countries to specialize in exportable agricultural products, instead of securing food self-sufficiency, has left them vulnerable to the turmoil of international markets, as has been evidenced during the world food price crisis of 2007–2008. Others argue that the dominant trade narrative that market liberalization leads to increasing food stability, lower prices, and price stability rests on assumptions that do not hold in practice and are based on an outdated understanding of food security (Clapp, 2014). According to them, the problem of hunger may not be solved by international trade because the main problem is not general food availability (supply) but poor people's ability to access food (demand), which in turn depends on ‘their ability to obtain resources to produce it, buy it, or trade personal items for it’.