Trade Policy and the Farm Bill by chenboying

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									Trade Policy and the Farm Bill
By William Krist Senior Policy Scholar Woodrow Wilson Center

Foreword The current Farm Bill expires in September 2007, and new legislation now under consideration in Congress will define U.S. farm policies for the next five years. While the primary consideration for Congress needs to be the U.S. national economic interest, that interest includes the U.S. stake in the current World Trade Organization (WTO) rules in developing U.S. policies, or we will continue to face the risk of adverse dispute settlement findings that could result in trade retaliation. Additionally, Congress needs to consider the impact of our farm policies on U.S. trade policies, which have consistently fostered a rule based, open market system in the WTO, in crafting the 2007 Bill. While there is substantial overlap between U.S. farm and trade policies, the two communities rarely interact, and in fact have very different objectives and even terms of art. The purpose of this paper is to briefly set out the implications of trade policy for the 2007 Farm Bill and the potential impact of this legislation on U.S. trade policies.

Note: This paper was updated August 8, 2007 to reflect the July 27th WTO decision on the Brazil cotton case and the passage of the House version of the 2007 Farm Bill.

Trade Policy and the Farm Bill

EXECUTIVE SUMMARY
Barriers and distortions to trade in agricultural products remain high even after eight rounds of trade negotiations since World War II under the World Trade Organization/GATT. In contrast, such distortions and barriers to trade in industrial products have largely been eliminated among the developed countries. We are now at a critical juncture in U.S. farm policy as Congress is considering a new farm bill that will set our future direction. At the same time, the current round of multilateral trade negotiations – known as the Doha Development Round – is struggling, to a large extent over the willingness of countries to reduce agricultural barriers and distortions. Clearly, the 2007 farm bill should be based on a reasoned approach to what is in the U.S. national economic interest, and should be crafted in the context of an extremely tight budget framework. However, the farm bill will have an enormous impact on the future of international trade policy, and trade issues should not be ignored. This paper examines the interrelationship of international trade policy with our domestic farm policy. What limits and constraints do current international trade rules impose on our farm policies? What impact might the 2007 Farm Bill have on the ability of our negotiators to successfully conclude the Doha trade negotiations? How would trade liberalization impact the U.S. agricultural sector and our economy overall? What policies can be crafted that promote both our agricultural and trade interests, and yet are fiscally sound? The Uruguay Round trade negotiations, which ended in 1994 and which established the World Trade Organization, set out basic rules for trade distorting agricultural subsidies as a first step in reducing adverse trade impacts of member country policies on other nations. These new rules were largely driven by U.S. trade negotiators in the belief that these rules would promote U.S. economic interests, as well as the economic interests of the global economy. In approving the Uruguay Round trade agreement in 1994, the Congress ratified this approach. Under the World Trade Organization (WTO), all member countries bound their tariff rates, i.e., each country notified its schedule of tariffs on agricultural products and committed not to raise its duties above this “bound” level. However, negotiators did not substantially open markets to agricultural trade. Instead, tariff barriers were bound at high levels by almost all countries1, as negotiators looked to future trade rounds as the opportunity to reduce trade protection and open the agricultural sector more to market forces. With regard to agricultural subsidies, which were provided by many developed and some developing countries, negotiators defined subsidies by the extent to which they distorted
1

The average U.S. agricultural duties were bound at about 12 percent, compared to the average for all WTO members of about 62 percent.

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production and trade. Export subsidies, which are provided directly to promote exports, were considered most distortive. Domestic subsidies that distorted trade by encouraging production were placed in an “amber box”, and each country agreed to limit the aggregate level of these subsidies. Additionally, each country was allowed “de minimis” subsidies that distorted production and trade, but at what was felt to be an acceptable level. Subsidies that distorted trade but were accompanied by limits on production were placed in a “Blue Box”, while subsidies that were considered non-distortive were placed in a “Green Box” with no limits imposed. The 1996 Farm Bill incorporated U.S. policy commitments of the Uruguay Round and moved toward greater reliance on markets. Unfortunately, the 2002 Farm Bill2 did not continue moving toward greater reliance on markets by establishing a new production and trade distorting subsidy program, the counter-cyclical payments program, which replaced ad hoc emergency subsidies that had been given since the 1996 Farm Bill. Our trade partners viewed the 2002 Bill as a huge step back from the U.S. commitment in the Uruguay Round to reduce production and trade distorting subsidies. For example, the EU Commissioner for Agriculture, Franz Fischler said “This [the 2002 Farm Bill] risks calling into question the reform promises of Doha. At a time when all developed countries have accepted the direction of farm support away from trade and production distorting measures, the US is doing an about turn and heading in the opposite direction.3” Following passage of the 2002 Farm Bill, our subsidies to cotton have been found in violation of WTO rules, the Canadians are currently challenging the level of our aggregate subsidies, and several other sectors are considered at risk of future WTO challenges. In the event of an adverse WTO ruling, the U.S. must either change our domestic practice or face retaliation to our exports, or we must provide other compensation acceptable to the parties determined to be injured by our practices. While U.S. agricultural subsidies are high, the European Union‟s (EU) barriers and subsidies are larger. However, the EU and some other countries have substantially reduced their subsidies since the WTO went into effect. New Zealand substantially reduced its subsidies prior to the establishment of the WTO. In the Doha Development Round, negotiators are seeking a balanced agreement that would move all parties to a more open trading system with reduced trade-distortive subsidies in agricultural goods. Industry has benefited greatly from open trade mutually implemented by all major countries over the past fifty years, and the expectation is that our economy – and the world economy – would benefit similarly from fairer and more open trade in agriculture.

2

The 2002 Farm Bill was signed into law on May 13, 2002, and was called the Farm Security and Rural Investment Act of 2002. 3 Statement of May 1, 2002.

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The EU and other developed countries, and India and Brazil and other advanced developing countries clearly need to do their parts in ensuring a successful conclusion to the Doha Development Round. However, unless Congress considers the trade implications of the 2007 Farm Bill, prospects for a successful Doha Round could be snuffed out and the U.S. could be subject to a series of adverse WTO rulings. While economic analysis indicates that overall our economy would benefit from more liberal trade in agriculture, different sectors would be impacted differently, with some gaining new markets while others would face the need to adjust to increased competition. However, there are steps that can be taken to minimize such economic dislocations and Congress should consider these in its deliberations. The Doha Round will not be completed by September, when the current farm bill expires. To promote the prospects for a successful trade round and minimize exposure to potential adverse WTO dispute settlement cases, U.S. subsidies should be shifted from those that distort production and trade to those that are acceptable under WTO rules to the greatest extent politically feasible. Additionally, the new farm bill should include a provision that authorizes the Administration to make program changes in the future if this is needed to comply with a Doha Agreement approved by Congress.4

THE US AGRICULTURAL SECTOR
Some 2.8 million people are employed in the agricultural sector in the U.S. California is the largest employer of agricultural workers, with Texas second, and Pennsylvania third. Other states with significant agricultural employment include Washington, New York, North Carolina, Florida, Oregon, Michigan, Oklahoma, Mississippi, Wisconsin and Arkansas. Farm income in the U.S. equaled $241 billion in 2004. Income generated by some specific commodities can be seen in Table 1: Table 1: Farm Income for Major Commodities5 (2004, millions of dollars): Commodity
Cattle and calves Dairy Products Corn Soybeans Vegetables Fruits and Nuts Wheat Cotton Rice
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Value
47,296 27,368 22,199 18,375 17,256 15,463 7,381 5,405 1,728

Percent of Total
0.196 0.113 0.092 0.076 0.072 0.064 0.031 0.022 0.007

Under current rules (the so-called “Fast Track”) Congress would have an up or down vote on the entire package agreed to in the trade negotiations, and accordingly could reject such a package if the agricultural provisions were unacceptable. 5 Statistical Abstract of the United States: 2007, p. 536.

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Sugar beets Cane for Sugar

1,270 998

0.005 0.004

Trade is critical to the sector, with U.S. agricultural exports valued at $63.0 billion in 2005, up from $39.5 billion in 1990. Exports account for about 25% of farm receipts, and USDA estimates every $1 of exports generates $1.48 in income. Exports of some key commodities are shown in Table 2: Table 2: Value of Exports of Selected Commodities6 (millions of dollars)
2003 3145 2287 1048 4099 1024 4724 2968 1762 4813 9143 3361 2004 550 2577 1505 5273 1161 5875 3156 2220 5307 7732 4226 2005 919 3117 1681 4486 1288 4755 3452 2903 5775 7437 3920

Beef and Veal Poultry and Products Dairy Products Wheat and Products Rice Corn Fruits and Preparations Nuts and Preparations Vegetables and Preparations Soybeans and Meal Cotton

Imports were valued at $59.3 billion in 2005; major imports included vegetables and preparations (12.8 percent of the total), fruits and preparations (9.8%), grains and feeds (7.6%), wine (6.3%), beef and veal (6.2%), malt beverages and oilseeds (both 5.2%) and coffee (5.0%). A significant share of U.S. imports (over ten percent) is in products that do not compete with American agriculture, such as bananas, coffee, cocoa and rubber. Agriculture is one of the few areas where the U.S. has a favorable balance of trade in the sector. Our favorable balance of trade, however, is shrinking, as can be seen in Table 37, and this trend has continued – and perhaps accelerated - after the 2002 Farm Bill: Table 3: U.S. Trade Balance in Agriculture Percent of Percent of Exports All Exports Imports All Imports 2005 $63.0 bil. 7 % $59.3 bil. 4% 2004 $61.4 bil. 8 % $54.0 bil 4% 2003 $59.4 bil. 8 % $47.4 bil 4% 2002 $53.1 bil. 8 % $41.9 bil 4% 2001 $53.7 bil. 8 % $39.4 bil 3% 2000 $51.2 bil. 7 % $39.0 bil 3% 1995 $56.3 bil. 10 % $30.3 bil. 4%

Balance $3.7 bil. $7.4 bil. $12.0 bil. $11.2 bil. $14.4 bil. $12.3 bil. $26.0 bil.

WTO RULES ON AGRICULTURAL TRADE
6 7

Statistical Abstract of the United States: 2007, p. 541. Statistical Abstract of the United States: 2007, p. 539.

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In the eight trade negotiating rounds since World War II, barriers to trade in industrial products were largely removed; however, only minimal trade liberalization occurred in the agricultural sector. Accordingly, developed countries generally designed their agricultural policies based on domestic considerations, with the international market considered a dumping ground for agricultural surpluses, which were often caused by large domestic subsidies. The Uruguay Round, which concluded in 1994 and established the World Trade Organization, was the first round to make significant progress in setting out rules governing agricultural trade and establishing a framework for future trade liberalization. "The Uruguay Round Agreements opened a new chapter in agricultural trade policy, committing countries around the world to new rules and specific commitments to reduce levels of protection and support that were barriers to trade. Agriculture finally became a full partner in the multilateral trading system.8" The Agreement on Agriculture9 was one of twenty-nine agreements reached in that round. Under this agreement, there are general rules pertaining to subsidies and market access, and each individual participant also agreed to its own specific policy commitments10. While the Uruguay Round made significant progress, negotiators viewed this agreement as only a start to bringing agriculture under world trade rules. By and large, at the end of the Uruguay Round trade barriers in the agricultural sector remained substantially higher than for the industrial sector. Accordingly, the WTO contained a commitment to restart agricultural negotiations in 200011, and these negotiations became a precursor to the Doha Development Round, which was formally launched in 2001. Thus, agriculture has always been regarded as a core element of the Doha trade round. The US had been a major driver of the Agreement on Agriculture, and viewed the agreement as key to making WTO member country policies more market-oriented, and improving predictability and access for U.S. exported products. As Joe O‟Mara, the lead U.S. agriculture negotiator in the Uruguay Round says: “The United States was the primary driver, and we were the ones who advanced the rules for domestic support and export subsidies12.”
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Statement by James Grueff, Assistant Deputy Administrator for International Trade Policy, U.S. Department of Agriculture before the Senate Commerce Subcommittee on Consumer Affairs, June 19, 1999. 9 The Agreement on Agriculture can be found on the WTO web site at http://www.wto.org/english/docs_e/legal_e/14-ag.pdf. 10 Each WTO member country has submitted a list of specific commitments, including tariffs, quotas and subsidies to the WTO, which can be found at http://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htm 11 Article 20 of the Uruguay Round Agreement on Agriculture stated “recognizing that the long-term objective of substantial progressive reductions in support and protection resulting in fundamental reform is an ongoing process, Members agree that negotiations for continuing the process will be initiated one year before the end of the implementation period.” 12 June 27, 2007 interview.

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Given the widely divergent nature of agricultural policies among countries, the WTO agreement is complex and uses terminology very different from that used in U.S. agricultural programs. Following, however, is a brief overview of the major provisions of the agreement, which sets out three categories of basic commitments: domestic subsidies, export subsidies, and market access. “Subsidies of all kinds reported to the WTO total more than $200 billion per year, or roughly one-sixth of the $1.2 trillion total value added in the agricultural sector worldwide. A few countries dominate the total dollar value of subsidies granted. The EU and the US grant about one-third of the world total each – the EU somewhat more than the US because its agricultural sector is slightly larger – and Japan grants almost 12 percent.”13 Domestic Subsidies: The Agreement on Agriculture allows countries to use domestic support policies to assist farm and rural incomes and protect the environment. However, it seeks to limit policies that directly impact production and thereby distort international trade and potentially injure other WTO members. Subsidy programs that have a direct impact on production are said to be “coupled” and subsidy programs that are minimally production and trade distorting are defined as “decoupled”. To this end, the agreement established various “boxes”: the “Amber Box” consists of subsidies that have a direct impact on production, , the “Blue Box” pertains to subsidies that impact production but include requirements that agricultural producers limit production, and the “Green Box” consists of subsidy practices considered to be minimally distortive and therefore fully permissible. Additionally, two types of permissible de minimis exemptions were set out. To reduce Amber Box subsidies that distort production, the WTO agreed to an index – the “Aggregate Measurement of Support (AMS)” – which includes both budgetary outlays and revenue transfers from consumers to producers as a result of policies that distort market prices. Thirty five WTO members, including the U.S., committed to reductions in the aggregate measurement of support they give their producers. The developed countries committed to a 20 percent reduction in AMS support by 2000, developing countries committed to a 13 percent reduction by 2004, while the leastdeveloped countries committed to no increases in AMS beyond levels applied in 1995 or 1986. The U.S. committed to maintaining AMS subsidies at a level no higher than $19.1 billion after 2000. The actual level of our AMS programs generally amounts to around $13 billion. However, in years when commodity prices are low (and consequently loan deficiency payments are high) U.S. AMS payments have reached as high as $17 billion. The EU‟s annual AMS limit is 67.2 billion euros, although actual Amber Box subsidies by the EU amounted to 30.8 billion euros in the 2003/04 marketing year. (In current
13

“Agricultural Trade Liberalization, Congressional Budget Office, Economic and Budget Issue Brief, November 20, 2006, p. 3. This total would include Green Box subsidies as well as trade and production distorting subsidies.

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dollars, the EU AMS would be about $92.9 billion and the amount actually used would be about $42.6 billion.) Japan‟s AMS limit is higher than ours, although their notified use is considerably lower than their allowable. (Japan‟s AMS ceiling is just under 4 trillion yen, equivalent to roughly $33 billion at current exchange rate.) Green Box subsidies exempted from WTO commitments include such practices as research, conservation, disaster payments, food stamps, and rural development14. Decoupled direct subsidies would also be included in the Green Box15. Blue Box subsidies, which distort production but include limits on production, are also exempted from WTO commitments. Seven countries, including the U.S., have notified practices under this exemption, although the U.S. discontinued its blue box programs with passage of the 1996 farm bill. Additionally, there are two categories of allowable de minimis subsidies under the Agreement on Agriculture. The first is defined as commodity specific support that is less than five percent of the commodity‟s value of production for developed countries, or ten percent for developing countries. The second allows exclusion of non-product specific support provided it does not exceed 5 percent of the total value of agricultural production for developed countries and ten percent for developing. It was recognized that de minimus subsidies are trade distortive, but as a negotiating matter in the Uruguay Round it was recognized that this was the best that could be agreed upon and that this issue would be revisited in the next round. Export subsidies distort both production and trade of agricultural products; the WTO divides these subsidies into “direct” and “indirect”. Direct subsidies are defined as explicit cash payments per unit of product exported, and include such practices as direct export payments contingent on export performance, sales of government stocks at prices lower than the comparable domestic price, export payments financed through government action such as a levy on producers, subsidies to reduce export marketing costs other than widely available export promotion and advisory services, and subsidies on goods incorporated into export products. Twenty five WTO members agreed to reduce direct export subsidies; the United States and other developed countries agreed to reduce direct export subsidies by 36 percent by value and 21 percent by volume, while developing countries committed to reductions of 24 percent by value and 14 percent by quantity. “The EU makes the greatest use of such subsidies, providing 85 percent to 90 percent of the export subsidies reported by the 25 countries (that made commitments to reduce export subsidies). The United States has accounted for between 1 percent and 2 percent.

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While these subsidies are generally considered non-distorting, it should be noted that some countries argue that some practices may in fact be trade distorting, and in the Doha Round they are pressing for caps on the amount of such subsidies that can be provided, although it is extremely unlikely that this will be agreed to in the Doha Round. 15 See page 14 regarding the Brazil dispute settlement case, in which the WTO found U.S. direct payment program would not qualify for Green Box because fruits and vegetables are excluded from eligibility.

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The EU‟s export subsidies have averaged 6.6 percent of the value of its exports; the United States‟, about 0.05 percent.”16 Indirect export subsidies include practices such as export credit guarantees, export promotion and information activities, and tax benefits. Additionally, some would include certain types of food aid as indirect export subsidies. Uruguay Round negotiators were not able to reach agreement on how to deal with these practices, except for a restriction on the use of exempted export marketing practices that could circumvent their export subsidy commitments (Art. 10.1 and 10.3). Additionally, they agreed to continue work to develop agreed rules to discipline the use of export credit programs. Market Access: Most agricultural producing countries have historically maintained tariff and non-tariff barriers to protect their domestic producers and preserve rural society. Prior to the Uruguay Round, these practices were generally not subject to international discipline. As a first step in the Uruguay Round, non-tariff barriers were converted to tariffs at their equivalent level of protection (a process known as “tariffication”) and were bound at their January 1, 1995 levels. A system of special safeguards, which allows additional tariffs to be imposed if imports exceed trigger levels or if import prices fall below trigger levels, was put in place for these products. Additionally, for many of these products, tariff rate quotas were established which permit some imports at a low tariff level while imports above this level are charged substantially higher duties. It was also agreed in the Uruguay Round that all WTO members would bind the maximum tariff rates that could be applied to imports of agricultural products at the 1986-88 levels, which means that they could reduce applied tariffs from these rates but could not exceed them. Developed countries bound their rates at the applied rates, while developing countries could have “ceiling bindings” which could be considerably higher. Developed countries further agreed to reduce these bound rates by 36 percent on average by 2000, and developing countries agreed to a reduction of 24 percent by 2004.

U.S. FARM POLICIES
The 2002 Farm Bill (The Farm Security and Rural Investment Act), which expires in September 2007, sets out basic U.S. farm policies. Title I of this legislation, which establishes income support programs for wheat, feed grains, upland cotton, rice and oilseeds, has the greatest implications for trade policy, both with regard to the Doha Trade Round and potential dispute settlement cases. Title III pertaining to programs to expand commercial sales and international food assistance has some relevance to the Doha Round, and Title IX regarding biofuels could be subject to future trade disputes if U.S. programs are not crafted with WTO rules in mind. The other programs established by this legislation are generally considered non-trade distorting and have not been stumbling blocks in the trade negotiations or targets of trade disputes.

16

“Agricultural Trade Liberalization”, Congressional Budget Office, Economic and Budget Issue Brief, November 20, 2006, p. 4

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In authorizing U.S. farm programs, the 2002 Bill uses different terminology for funding various programs than does the World Trade Organization. Title I – Commodity Programs This title provides for income support for wheat, feed grains, upland cotton, rice, oilseeds and peanuts through loan deficiency payments, counter-cyclical payments and direct payments, as well as special programs for sugar and dairy. Loan deficiency payments are paid when farm prices fall below levels specified in the legislation, so they increase in relation to falling prices. The payment rates are based on local prices for wheat, feed grains and oilseeds, or the world price for rice and upland cotton. Loan deficiency payments are based on current production, and are considered to be trade distorting. Since 1996, the largest recipients of loan deficiency payments have been corn ($13.5 billion), soybeans ($8.7 billion), cotton ($3.6 billion), wheat ($2.4 billion), and rice ($1.8 billion). Sorghum, barley, oats, sunflowers, and canola have all received between $100 million and $1 billion. Minor amounts (less than $50 million) have been received by honey, triticale, peanuts, wool, mohair, chickpeas, lentils, sunflowers, flaxseed, and some oilseeds. Counter-cyclical payments rise in relation to falling prices, and are paid when prices fall below levels specified in the legislation. Counter-cyclical payments are not directly linked to current production because they are made on a historical base acreage for a given crop. Accordingly they are considered less trade distorting than loan deficiency payments, but more so than direct payments. To be eligible for counter-cyclical payments, participants must maintain their land for agricultural use, which includes letting it lie fallow or for pasture. Additionally, they can plant their acreage to any crop, except fruits and vegetables which are specifically excluded. Cotton is the largest recipient of countercyclical payments followed closely by corn. Peanuts and rice receive far less, and small amounts are received by sorghum, barley, wheat, and soybeans. Direct payment rates are set out in the legislation for eligible commodities. A producer must enter into an annual agreement with the Department of Agriculture to receive payments, which are based on historical acreage and yields of eligible commodities. To be eligible, participants must maintain their land for agricultural use, which includes letting it lie fallow or for pasture. Additionally, they can plant their acreage to any crop, except fruits and vegetables which are specifically excluded. The amount of payment does not vary based on the price of the commodity or level of production, and accordingly these payments are considered to distort trade less than either loan deficiency payments or counter-cyclical payments. Major recipients of direct payments are corn, wheat, cotton, soybeans, and rice. Minor recipients are sorghum, barley, peanuts, canola, crambe, flaxseed, mustard seeds, oats, rapeseed, safflower seed, sesame seed, and sunflowers.

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As can be seen in Table 4, corn has been the largest recipient of U.S. subsidies, followed by cotton. Wheat, rice, soybeans and peanuts have been other significant recipients. Table 4. U.S. Subsidy Programs17 (in billions of dollars) FY 2002-2006:
Loan Deficiency Payments Rice 0.7 Cotton 0.9 Wheat 0.2 Corn 7.0 Soybeans 0.3 Peanuts neg Countercyclical Direct Total Payments Payments Payments 0.5 1.3 2.5 4.3 1.8 7.0 neg 3.4 3.6 3.8 6.2 17.0 neg 1.8 2.1 0.7 0.2 0.9

In addition to these commodity programs, this title outlines specific programs for dairy and sugar. With regard to sugar, the 2002 Farm Bill establishes a tariff rate quota (TRQ) of 1.23 million tons allocated to historical suppliers, with high duties applied to imports above that level18. This TRQ is consistent with commitments made by the U.S. in the Uruguay Round and serves to create a price in the U.S. market two times as high or more than the world price19. To balance markets and comply with U.S. sugar import commitments, the Secretary of Agriculture has authority to manage inventory through market allotments. The program is to be run at no net cost to the government; however, given high domestic U.S. prices, the costs are born by U.S. consumers, including such industries as soft drink and chocolate manufacturers. Under the NAFTA agreement, the U.S. market to Mexico will be completely open in Jan. 1, 2008. Increased imports of sugar from Mexico could put pressure on the market allotment system, or force the government to purchase sugar, which would conflict with the "no cost" requirement. With regard to dairy, the U.S. maintains two programs to support the dairy industry: the Milk Income Loss Contract Program and the Milk Price Support Program. Under the Milk Income Loss Contract Program, dairy farmers receive a payment from the government when the price paid to them for milk marketed falls below $16.94, for up to 2.4 million pounds of milk. Recently payments under this program have been low, as the price of milk in the U.S. is currently very high. Under the Milk Price Support Program, the government maintains a standing offer to buy cheese, butter and non-fat dry milk at a constant price, which is set in the legislation. The government then donates food purchased under this program to school lunch programs, charities, and international feeding programs.
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See U.S. Department of Agriculture web site http://www.fsa.usda.gov/FSA/webapp?area=about&subject=landing&topic=bap-bu-cc. 18 Imports under the tariff rate quota face a duty rate of 1.4606 cents a kilogram; over that level, the duty jumps to 33.87 cents a kilogram. 19 Currently the U.S. price for sugar beets is 24 cents and about 21 cents for cane, compared to a world price for sugar of about 8 cents.

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To ensure a higher domestic price for milk than the world price, the U.S. also maintains a tariff rate quota to limit imports. (The duty on imports over the quota, however, is not always prohibitive, as we import some butter & cheese.) WTO Categorization of Farm Bill Programs: The U.S. has not notified its subsidy programs to the WTO since 200120, and accordingly it is difficult to know exactly how some programs would be notified. However, a U.S. notification might be along the following lines:  Amber Box programs would include Loan Deficiency Payments, the Milk Price Support Program, the Milk Income Loss Contract Program, and sugar. Additionally, if there were any amount over the non-product specific five percent de minimis category, the entire amount would be included under Amber Box. Under our current commitments, we are allowed $19.1 billion in Amber Box subsidies. The Milk Price Support Program regularly utilizes about $4.4 billion of our AMS, the Milk Income Loss Contract Program would perhaps utilize $1 billion if prices were high, and sugar is regularly about $1 billion. Loan Deficiency Payments have been slightly higher than $6 billion in some years.  Non-Product Specific De Minimis has included programs such as crop insurance, irrigation, etc. The U.S. allowable for non-product specific de minimis is roughly $10 billion (5% of approximately $200 billion total agricultural production). Counter cyclical payments, which would likely be notified under non-product specific de minimis, have been over $4 billion in some years and crop insurance has been over $2 billion. Product Specific De Minimis currently only includes miniscule programs, although our allowable is roughly $10 billion. Export Subsidies are currently negligible, but in the past the export enhancement program, which mostly benefited wheat, and small amounts of dairy subsidies would have qualified as export subsidies.

 

Green Box programs, which do not count against the AMS limit, would include our conservation programs and other non-distortive items. The U.S. would also want to include our Direct Payments program, which is frequently above $5 billion, in the Green Box. However, in the Brazil complaint regarding our cotton policies (see pages 15 and 16), the WTO ruled that because of our restrictions on planting fruit and vegetables for
20

In the Uruguay Round, countries agreed to notify the status of their domestic and export subsidy commitments, including level and types of subsidies, to the WTO on an annual basis. However, the US has not notified its agricultural subsidies programs since 2001 while the EU and Japan have not notified since 2003.

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these subsidies, our program is not eligible for the Green Box. If this is maintained, Direct Payments would have to be included in the Amber Box, and this could put us over our allowed AMS limit in some future years, thereby subjecting us to possible retaliation unless we provided adequate compensation in other areas. Compliance with the WTO: To comply with the U.S. Uruguay Round commitments, the Secretary of Agriculture was given authority to adjust the level of trade-distorting domestic support programs as measured by the aggregate measurement of support (AMS). Title III: Trade To promote U.S. agricultural exports, the 2002 Farm Bill continued the Intermediate Export Credit Guarantee Program, which covers private credit for up to seven years, and extended terms of repayment from 180 to 360 days for short term supplier credit guarantees21. It also set out programs to assist organizations in promoting exports, and to assist U.S. exporters in competing against foreign subsidized agricultural products. The 2002 Bill also provides for U.S. food aid oversees, in language parallel to P.L 48022. Title IX: Energy The 2002 legislation sought to encourage development of biobased products for fuel. To this end, authorization was provided for payments to producers to encourage increased purchases of energy feedstocks to expand production of bioenergy, along with several other programs. Under this program, for example, distillers receive a 51 cent tax credit for each gallon of ethanol they produce, and every gallon of biodiesel fuel blended with mineral diesel is eligible for a one dollar per gallon subsidy. Biofuels will be more important in the 2007 Farm Bill, given current interest to increase energy security and deal with climate change. To this end, President Bush has set a goal of “reducing America‟s projected annual gasoline use by 20 percent in 10 years by increasing alternative energy and improving energy efficiency. A key pillar of achieving the President‟s goal is diversification of supply, including the promotion of alternative fuels such as biofuels.”23 While current programs are open to all crops, corn has been far and away the largest beneficiary of U.S. programs to promote usage of ethanol. (By contrast, Brazil is emphasizing sugar as a source for ethanol, a product that can be converted to ethanol at considerably lower cost than corn.)

21

The WTO Appellate Body in the Brazil Cotton case found that some of these programs can be illegal export subsidies (see pages 15 and 16). 22 P.L. 480, better known as “Food for Peace”, was set out in the Agricultural Trade Development and Assistance Act of 1954. The program seeks to enhance food security in the developing world by using our abundant agricultural resources. 23 US Department of State Fact Sheet, March 9, 2007, “Advancing Cooperation with Brazil on Biofuels”

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This issue, of course, is part of the House Bill and will also be considered by the committee responsible for energy policy in the Senate as well as the Farm Bill. However, as will be noted in the next section, U.S. support for biofuels could raise WTO trade issues. Other Titles Funding provided in the other titles of the 2002 Farm Bill have not been challenged under WTO dispute settlement procedures to date. These include:  Title II – Conservation  Title IV – Nutrition Programs  Title V – Credit  Title VI – Rural Development  Title VII – Research  Title VIII – Forestry  Title X – Crop Insurance and Other Programs

WTO DISPUTE SETTLEMENT
The dispute settlement mechanism of the World Trade Organization represents a major advance of the WTO over the previous General Agreement on Tariffs and Trade (GATT), its predecessor organization from the end of WWII to 1995. Under GATT, nations relied largely on the integrity of their trade partners to adhere to the trade rules, as the dispute settlement process lacked real sanctions. However, under the WTO dispute settlement process, real timelines are in place for resolving disputes, and an appeals mechanism was established. Under these procedures, the losing party must either bring its policies into conformance with panel rulings, or provide compensation satisfactory to its WTO trading partners. If this is not accomplished, then retaliation is authorized, which may adversely affect other products. This new dispute settlement mechanism went into effect in 1995 when the WTO came into being. However, for agriculture, WTO members agreed to exercise “due restraint” in bringing dispute settlement cases against other WTO members - the so-called "Peace Clause" - until the end of 2003, when it was hoped a new, more far-reaching agreement on agriculture could have been reached. With the expiration of that commitment and the failure of WTO members to agree to new commitments on agriculture, a number of dispute settlement cases have been brought to the WTO in recent years, and this trend will undoubtedly continue. The U.S. has successfully brought dispute settlement cases, e.g., against Japanese rules on apples, an EU moratorium on bio-tech products, and EU restrictions on beef hormones. (In the latter case, the EU maintained its restrictions and the U.S. retaliated with tariffs of 100 percent on other products that the EU exported to the U.S. such as hams.) In order to bring a successful WTO case regarding agricultural subsidies, the complainant has to prove the magnitude of the subsidies is excessive, the commodity is relevant to

14

world markets, and that there is a causal relationship between the subsidy and injury. Given the difficulty of winning a dispute, some argue that there are several reasons why additional dispute settlement cases might not actually be brought. First off, bringing a successful dispute settlement case in the WTO requires a large investment in both finances and human capital, and many developing countries would not have the resources to undertake such an effort. Additionally, a potential complainant might have geopolitical concerns that would discourage it from bringing a confrontational WTO dispute settlement case. Because of these factors, some argue that we should not be overly concerned about WTO rules in formulating our subsidy policies. Under this argument, we would seek to prevent cases from being filed, and if they were filed at least the industry could benefit from the subsidy pending the WTO ruling. Other than its blatant cynicism, this approach has the serious drawback that in the event of an adverse ruling, the U.S. would have to unilaterally alter our policies or face trade retaliation, without gaining any foreign concessions, as we would in the Doha Trade Round. More fundamentally, the U.S. has been the leading proponent of international trade law. For us to cynically violate trade law would set an unfortunate standard for trade in all goods and services that many countries would be all too eager to follow. To date, the U.S. has lost a dispute case brought by Brazil against our payments for cotton, and Canada has recently filed a dispute challenging our subsidies and other domestic support for corn and other agricultural products. Additionally, there have been rumblings regarding U.S. subsidies for biofuels. The EU has also lost a dispute case brought against their sugar payments. Each of these issues will be briefly discussed. Cotton Case In September 2002, Brazil challenged U.S. subsidies to cotton under the WTO dispute settlement procedures, arguing that the 2002 Farm Bill violated the WTO Agreements. Brazil specifically criticized domestic support measures, export credit guarantees and other measures that it alleged were export and domestic content subsidies. It claimed that these subsidies caused the U.S. to produce excess supplies of upland cotton, thereby depressing world prices. In September 2004, the WTO panel circulated its report. It found that Step 2 subsidies24, loan deficiency payments and countercyclical payments together resulted in serious prejudice and thus violate U.S. WTO commitments. Additionally, the export credit guarantee program (as provided for under Title III of the 2002 Farm Bill) was judged to be WTO inconsistent.

24

Under this program, when the U.S. price was higher than the world price, the government gave the industry payment for exporting. Step 2 subsidies were initially put in place to help the textile industry and generally amounted to around $300 to $400 million annually.

15

The U.S. appealed the panel ruling in October 2004, and the Appellate Body report was released on March 5, 2005. Overall, the Appellate Body upheld the panel findings. Some of its rulings:  The subsidy programs at issue – i.e. marketing loan program payments, Step 2 (user marketing) payments, market loss assistance payments, and counter-cyclical payments – caused significant price suppression and serious prejudice to Brazil's interests. However, it ruled that other US domestic support programs (e.g., direct payments and crop insurance payments) did not cause serious prejudice to Brazil's interests because Brazil failed to prove a necessary causal link between these programs and significant price suppression. Step 2 payments to exporters of U.S. upland cotton constituted subsidies contingent upon export performance and were prohibited export subsidies. U.S. export credit guarantee programs at issue were export subsidies and thus, circumvented the U.S. export subsidy commitments. The Appellate Body, in a majority opinion, also upheld the Panel's finding that the Agricultural Agreement Article 10.2 does not exempt export credit guarantees from the export subsidy disciplines in Article 10.1 of that agreement.

 

When the United States failed to meet deadlines for compliance, Brazil claimed the right to retaliate against $3 billion in U.S. exports to Brazil based on the prohibited subsidies, and proposed $1 billion in retaliation based on the actionable subsidies. The United States objected to these retaliation amounts and requested WTO arbitration on the matter. In mid-2005 the United States and Brazil reached a procedural agreement to temporarily suspend retaliation proceedings. In February 2006, Congress approved a bill that repealed the Step 2 subsidy program for upland cotton, which took effect in August 2006. Additionally, the Administration has proposed to change the export credit guarantee program in the 2007 Farm Bill. However, Brazil does not believe these measures are adequate and in August 2006 requested the establishment of a WTO compliance panel to review whether the United States has fully complied with panel and Appellate Body rulings. The panel issued its report July 27, 2007, and unofficial reports indicate that the panel found the U.S. response inadequate. Corn and Other Agricultural Products On January 8, 2007, Canada requested WTO consultations with the U.S. regarding several U.S. agricultural subsidy programs for corn and other agricultural products. Mexico, the EU, Australia, Argentina, Brazil, Guatemala, Nicaragua, Thailand and Uruguay requested 3rd party status and will participate in formal consultations. Canada claims the U.S. has exceeded its $19.1 billion AMS limit for trade-distorting domestic farm subsidies in 1999, 2000, 2001, 2004 and 2005 by not counting direct payments and counter-cyclical payments to corn growers under this limit. The direct payments challenged are made to farmers based on historic acreage levels, but planting of fruits and vegetables is prohibited, which makes these payments subject to our AMS, 16

Canada argues. With regard to the counter-cyclical payments, Canada argues these should be included in the amber box because they are a form of product specific support25. Canada also challenges U.S. export credit guarantees that facilitate the export of corn and other agricultural products. Canada argues that these programs are export subsidies because the fees USDA charges do not cover the long-term costs of the program. (The U.S. adjusted the fees in the wake of the cotton case, but is limited by a statutory cap on fees set at 1 percent of the USDA-guaranteed portion of the loan.) On June 8, 2007, Canada requested that a WTO panel be established to consider its challenge of our subsidies. Biofuels U.S. subsidies for biofuels26 could be subject to WTO challenge. To date there has been an early rumbling of this from the European Biodiesel Board (EBB); in a March 19, 2007 letter to EU Trade Commissioner Peter Mandelson, the EBB alleged that U.S. Biodiesel policies represent an unfair trade measure that needs to be reviewed and eliminated. The EBB argues that the U.S. is importing Biodiesel from countries such as Malaysia and Brazil, and blending it with one percent or less of regular diesel – thus allowing the US blender to collect the dollar per gallon subsidy. The EBB argues that EU imports of this „B99‟ blend have risen sharply and that this subsidized competition is putting EU biodiesel producers out of business27. EU Sugar Case Brazil, Thailand and Australia filed a dispute settlement complaint against EU sugar export subsidies on September 27, 2002, arguing that the EU exceeded its scheduled commitments. In the final WTO report released October 14, 2005, the WTO panel rejected EU arguments that a footnote to its schedule of commitments excluded 1.6 million tons of sugar – equivalent to the quantity that it imported from the ACP countries and India – from the scope of its subsidies reduction undertaking. While the EU was dissatisfied with the ruling, it is proceeding with its plans to reform its sugar sector to minimize trade and production distortions.

DOHA TRADE ROUND
The Doha Development Round was launched at the WTO Ministerial held in Doha, Qatar in November 2001. A new round had long been envisioned, and in fact provisions of the Uruguay Round, which was concluded in 1994, specified on-going work particularly in
25

The U.S also provides these payments for wheat, corn, grain sorghum, barley, oats, upland cotton, rice, soybeans and other oilseeds. 26 Ethanol is considered an agricultural product under the WTO and subject to the subsidy restrictions under the Agreement on Agriculture. However, plant-based biodiesel is considered an industrial product and subject to the more stringent disciplines of the Agreement on Subsidies and Countervailing Measures. 27 Bridges, Year 11 No. 2 April 2007, Published by International Center for Trade and Sustainable Development, p. 2.

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agriculture and services, which were to be precursors to the broad round. Prior to the Doha meeting, however, efforts to launch a trade round failed, notably at the WTO meeting held in Seattle in 1999, under a wave of anti-globalization protests and sharp divisions among the developed and developing countries. In launching the Doha Round, trade ministers recognized that many developing countries were effectively excluded from the benefits of world trade, and were mired in severe poverty. They recognized that trade has been an engine that has lifted incomes in the world broadly and in countries that were actively engaged in trade. They also recognized that high tariffs and subsidy practices in many developed countries had an adverse impact on many poor countries. Accordingly, it was agreed that this round would give special emphasis to the needs of developing countries. The Doha Ministerial Declaration28 launched negotiations on a broad range of issues, including agriculture, non-agricultural goods, and services. However, the results are to be a "single undertaking", which means that all WTO members would either have to accept the entire package or reject it. Given the importance of agriculture to developing countries and the fact that agricultural trade is heavily distorted by high tariffs and developed country subsidies, it was recognized from the beginning that agriculture would be the lynchpin of the negotiations. It was agreed that comprehensive negotiations on agriculture would include market access, export subsidies, and domestic support measures. A successful Doha Round would have significant implications for U.S. agriculture. First off, the U.S. generally has a comparative advantage in agriculture, given our vast expanse of rich farmland, and reducing foreign barriers and distortions would open up significant export opportunities. Secondly, however, the U.S. also has some high tariffs and provides our farmers with large subsidies, second only to the European Communities in size. To achieve a successful round, it was recognized that we would have to make concessions in these areas. If done on a multilateral basis where all countries liberalized agricultural trade, potential loss in exports or production in any specific industry now benefiting from such trade barriers or subsidies would be reduced. A third impact is potential increases in sales of agricultural products to developing countries, if a successful round promotes their economic development. These countries are the largest potential markets for food products, and have the most rapidly growing populations. Economic growth worldwide would significantly expand global demand for agricultural products, as poor people could increasingly afford better diets. In all likelihood, the Doha Round, like all the trade negotiating rounds before it, will only require incremental changes in U.S. policies. For example, it took eight trade negotiating
28

The Ministerial Declaration can be found on the WTO web site at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm.

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rounds and more than 50 years to reduce the tariffs on industrial goods from the high levels following World War II to the low levels of today. Of the three areas in the agriculture negotiations, the most important in terms of trade and income effects is market access. Tariffs and market access barriers are more important than domestic or export subsidies for several reasons. First, trade barriers on agricultural goods are several times higher than for non-agricultural goods. (E.g. average rates for agriculture and processed foods for the EU is 13.9%, and 9% for Canada). Furthermore, EU, Japanese and other developed country barriers are generally significantly higher than ours and inhibit U.S. exports, so the U.S. stands to particularly benefit from this aspect of the negotiations. Secondly, tariffs distort both production and consumption, while subsidies principally distort production. And finally tariffs also cover food processing, while subsidies only impact primary agriculture. However, the issues are linked: there will be no progress on market access unless there is also progress on subsidies. Many countries and blocs have made specific proposals in the agricultural negotiations, including the EU, Brazil, the G-20 (a group comprised exclusively of developing world countries, such as India, the Philippines, Indonesia with defensive interests, and Brazil and Argentina with export interests), the Cairns Group (includes both developed and developing farm-exporting nations), and the G-33 (a group comprised of poor countries wanting to defend uncompetitive farmers). The key U.S. proposal was tabled in October 2005. It would limit U.S. trade-distorting subsidies to $22.6 billion29. It would expand the “Blue Box” to include counter-cyclical payments. It would limit Amber Box subsidies to $7.6 billion for the U.S., which would either limit current programs for dairy and sugar, or require that they be reconfigured to be eligible for the Green Box, or require other modifications to our programs. The G-20, the EU and others have categorized these U.S. proposals as “extremely modest”, and argue that they would not require a reduction in the overall level of our subsidies. The U.S., on the other hand, argues that this would represent a significant movement in our programs from the Amber Box to the Green Box. Another proposal that needs to be noted was tabled by Benin, Burkina Faso, Chad and Mali to have a sectoral initiative on cotton. These countries argued that extensive U.S. subsidies to the cotton industry have depressed world prices and injured their farmers. A major step was taken in the agricultural negotiations at the Ministerial Meeting in Hong Kong in December 2005, where negotiators agreed to broad concepts on all aspects of the agricultural negotiations. In April and May of this year the Chairman of the

29

Such U.S. trade distorting subsidies amounted to an estimated $20 billion in 2005.

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Committee on Agriculture, Crawford Falconer, issued two papers30 based on his sense of the parameters of a possible deal. These papers provided the basis of intense discussions by the Chairman with WTO members, and led to issuance on July 17 by Chairman Falconer of draft “modalities” for a possible agreement on agriculture31. While a final deal, if it is to happen, will be determined by the 150 members of the WTO and the Chairman‟s papers are simply his best assessment of the state of play, these papers, combined with the Ministerial declaration, represent a good frame of reference for considering what a possible outcome of the Doha negotiations might be. Elements of most concern to U.S. farm policy are32: Market Access: The negotiators agreed to adopt four bands for structuring tariff cuts. These bands, and the Chairman‟s assessment of the possible range of reductions for the U.S. and other developed countries, are as follows: 1. Reductions of 48 to 52 % for bound duties between zero and 20 percent; 2. Reductions of 55 to 60 % for bound duties greater than 20 percent and less than 50 percent; 3. Reductions of 62 to 65 % for bound duties greater than 50 percent and less than 75 percent; and 4. Reductions of 66 to 73 % for bound duties greater than 75 percent. Each developed country could designate between four and six percent of its dutiable tariff lines as “sensitive products”33, and tariff reductions for these items would be one-third to two-thirds the level for other reductions. As previously noted, the market access element of the negotiations is of significant potential benefit to the U.S. However, since the depth of cuts are not yet known, and because we do not know what products countries will declare as "sensitive", it is impossible to predict what the specific impact will be. Some potential gains for U.S. exporters might be the following:


Livestock is the largest segment of the agricultural sector, accounting for $47 billion in farm income in 2004. U.S. exports face high tariffs in the EU, while U.S. tariffs on imported livestock are low. If the Doha Round reduced foreign barriers, U.S. exports would likely increase, as the U.S. has a comparative advantage in this industry.

30

These can be found at http://www.wto.org/english/tratop_e/agric_e/chair_texts07_e.htm. Chairman Falconer is expected to issue a new paper on draft modalities for the agricultural negotiations on July 16, 2007. 31 The draft “modalities” for an agriculture agreement can be found at the WTO web site at http://www.wto.org/english/tratop_e/agric_e/chair_texts07_e.htm. “Modalities” are the ways or methods that member governments would use to reduce tariffs and subsidies as part of a WTO agreement. 32 Because this paper is focused on implications for the U.S. Farm Bill, the many other implications of the likely outcome of the Doha negotiations are not explored here 33 Developing countries will also be allowed to take exemptions for “Special Products” important to food security or economic development needs. While the number has not been agreed on, Chairman Falconer estimates it would be somewhere between 5 and 8 percent of tariff lines.

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





 

Vegetables including commercially produced products such as lettuce, tomatoes, egg plant, etc, is the fifth largest U.S. agricultural sector. U.S. exports amounted to $5.8 billion in 2005, more than double the 1990 level. Reduced trade barriers would likely benefit the U.S. industry by gaining improved access to the EU and other markets. Fruits and nuts, the sixth largest sector, would similarly benefit. Fruit exports by the U.S. equaled $3.5 billion in 2005, while nut exports equaled $2.9 billion. American exports of fruits and nuts have grown substantially since 1990, when exports of fruit were $2 billion and nuts $1 billion. Rice exports are limited by tariff rate quotas in Japan, Korea, and Taiwan. In particular, medium grain rice grown in California could gain market share in Japan with better market access. Soybean exports could benefit if high tariffs in countries like India were reduced. Wheat exports might gain market share if distortions from State Trading Enterprises (STEs) are removed, such as the Canadian and Australian Wheat Boards.

While U.S. tariffs are generally lower than other developed countries, there will be some areas where U.S. producers could face increased competition or where opening our market could lead to the need to restructure our programs. The sectors most affected are probably the dairy and sugar industries, which are currently protected by tariff rate quotas that restrict imports so that the U.S. can maintain high domestic prices, thereby providing indirect subsidies to the industry. However, the U.S. might be able to preserve high tariff protection for these industries by designating the relevant tariff lines as "sensitive". Export Subsidies: Ministers agreed in Hong Kong that all forms of export subsidies would be eliminated by 2013, if the negotiations were successful. It was also agreed that export credit, export credit guarantees or insurance programs with repayment periods of 180 days and below would be self-financing, and of a sufficiently short duration so as not to effectively circumvent commercially-oriented disciplines. As noted, the EU accounts for some 85 to 90 percent of export subsidies. EU subsidies for sugar and dairy account for the largest portion of their subsidies, and additionally there are some for poultry, beef and pork. Eliminating these subsidies could be expected to raise world market prices for those commodities, and improve export prospects for American farmers or at least reduce increased import competition in the U.S. market. The only U.S. export subsidies are the Dairy Export Incentives Program, which hasn't been used for several years since the price of milk is so high, although this program would have to be eliminated. Additionally, our export credit, export credit guarantee and insurance programs would have to be modified to put them on a solid commercial footing. Domestic Support: Negotiators are considering a measure of subsidies, in addition to Aggregate Measurement of Support, called “Overall Trade Distorting Domestic Support

21

(OTDS)”, which would include Amber Box, Blue Box, and de minimis subsidies. Each country would commit to reducing its OTDS by an agreed percentage. The draft modalities paper projects that the European Union, which has the highest level of trade distorting subsidies, would reduce its level of Overall Trade Distorting Domestic Support by 75 to 85 percent. The U.S. and Japan, which have the second highest levels, would reduce their levels of subsidization by 66 to 73 percent each. And all other WTO members would reduce their subsidy levels by 50 to 60 percent. With regard to the Aggregate Measurement of Support for Amber Box subsidies, the U.S. and Japan might reduce their bound total aggregate measurement of support by 60 percent and the EU by 70 percent, according to the Chairman's draft modalities paper. Additionally, there would be some specific commodity “caps” on how much support is allowed. For each of the two categories of de minimis subsidies (currently up to five percent of a specific commodity‟s value and up to five percent of total agricultural production for developed countries) the allowable level would be reduced by fifty to sixty percent. The Chairman also noted that that a newly defined “Blue Box would likely have a permissible overall ceiling of 2.5% of the total value of agricultural production34.” Green Box subsidies, which could include our direct payment system if we remove planting restrictions on fruit and vegetables, would continue to be unrestricted. The thrust of these changes would be to continue the global movement away from production and trade distorting subsidies that are targeted to specific commodities, while permitting support for such programs as conservation, rural development, research and other green box programs. In general, we would need to reduce our programs overall that make up our Aggregate Measurement of Support (the loan deficiency program, the Milk Price Support Program and our sugar program). Food Aid: Ministers agreed to a "safe box" for bona fide food aid to ensure no unintended impediment to dealing with emergency situations, while ensuring elimination of commercial displacement of such aid. Changes may be needed to U.S. food aid programs to make sure that they do not displace commercial agricultural sales. Cotton: Ministers reaffirmed the commitment to address cotton issues ambitiously and expeditiously. Additionally, they agreed that all forms of export subsidies for cotton by developed countries would be eliminated35, and that trade distorting domestic subsidies for cotton would be reduced more ambitiously36 and in a shorter time period than other
34 35

Page 7 of the draft “modalities” paper, http://www.wto.org/english/tratop_e/agric_e/chair_texts07_e.htm. In Hong Kong, Ministers anticipated completion of the Uruguay Round in 2006, and accordingly specified 2006 as the date to eliminate all export subsidies. However, since the negotiations are still ongoing, this provision has not yet gone into effect. 36 The Chairman‟s modalities paper projects a possible agreement might have a complex formula for determining the level of cut, but if the cut would normally be 50 percent, the “ambitious” cut for domestic cotton subsidies might be 66 percent.

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agricultural products under whatever formula is finally agreed. Finally, they agreed that developed countries would give duty and quota free access for cotton exports from leastdeveloped countries. Although upland cotton37 is not one of the major U.S. agricultural sectors (annual farm income from cotton is about $5.4 billion compared to $47 billion for livestock or $22 billion for corn), it is the second largest recipient of government subsidies ($4.2 billion in 2005 compared to $6.8 billion for corn). Because cotton is so heavily subsidized (in some crop years the value of U.S. subsidies has exceeded the value of the U.S. crop), changes to U.S. policies for this sector would likely be necessary as the result of a Doha agreement. Other cotton producers also subsidize their domestic cotton industries (e.g., the EU and Turkey) and provide import protection (e.g., China and India). Under a Doha agreement, these countries would also have change their programs, and this would reduce the impact on the U.S. industry.

CONCLUSION
As it debates the 2007 Farm Bill, Congress will rightly be concerned with what is best for American farmers and rural communities. However, the Congress should also be mindful of the implications of the Farm Bill for U.S. trade policies. Fortunately, these two objectives can be compatible. Since the end of World War II, U.S. trade policy has been focused on reducing government distortions in the marketplace and liberalizing barriers to world trade. For non-agricultural goods, these policies have been extremely successful. In eight tradenegotiating rounds, tariffs have been reduced from the extremely high levels prevailing in the late 1940's to minor rates of today, and trade in manufactured goods has increased dramatically. By and large agriculture has not fully participated in the trade liberalization process, and agricultural trade barriers and distortions around the world remain extremely high. The Uruguay Round, which ended in 1994, took the first real step toward setting a framework for future trade liberalization. This framework, incorporated into the World Trade Organization, encouraged greater reliance on market forces and discouraged trade and production distorting subsidies and other government programs. The 1996 Farm Bill incorporated U.S. policy commitments of the Uruguay Round and moved toward greater reliance on markets. Unfortunately, by establishing a new countercyclical program and continuing high production distorting subsidies, the 2002 Farm Bill did not continue this trend toward greater reliance on markets. “The intention behind the 1996 Farm Bill was to start the decoupling process as part of a transition to the least trade distortive policies. The 2002 bill was a move in a different direction. Prior to the 2002
37

California and Arizona produce Pima Cotton, which is a long staple cotton with its own programs. Pima cotton requires irrigation and can be grown on the same land as almonds, tomatoes, etc.

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farm bill, the U.S. was considered a reformer of agricultural policies. With the 2002 bill, that attitude changed38.” As was the case for trade in non-agricultural goods, the agricultural sector would undoubtedly benefit over the long run with less government interference and more open trade. For example, the price support programs for milk and sugar, which generally result in substantially higher prices in the U.S. market than in our trade competitors, injures down stream industries, such as the chocolate, soft drink and food processing industries. Additionally, high domestic prices reduce the ability of the milk and sugar industries to export. (As an indicator of this, in periods when world prices of these commodities are at levels near our domestic prices, such as the current period for milk, the U.S. is able to export some products, such as cheese.) Similarly, our trade and production distorting subsidies, such as loan deficiency and counter cyclical payments, create economic distortions that limit our competitiveness in unforeseen ways. One of the major economic effects of these subsidies is to increase the price of land where commodities that receive these subsidies are grown. This increases the industry's cost structure and inhibits new entrants in the market. As it considers the 2007 Farm Bill, it is imperative that Congress makes the needed legislative changes to bring the U.S. into compliance with our WTO obligations as set out in the Brazil cotton case, and better protect our interests in the pending Canadian case. This requires amending the export credit program to limit the length of term to 180 days. It also requires the U.S. to remove the planting restrictions that prevent beneficiaries of direct payments from planting fruits and vegetables. Unless this restriction is removed, the U.S. would have to notify our direct payments program in the Amber Box, instead of the Green Box. This would mean that in some years we could exceed our Aggregate Measurement of Support limits, which could subject us to foreign retaliation or force us to modify our farm programs. The fruit and vegetable industries oppose removing this restriction, which they feel could open them up to increased - and subsidized - competition. However, the Administration proposals include a number of ideas to support the fruit and vegetable industries to offset this concern39. The Congress also needs to consider the impact of the new Farm Bill on the Doha trade negotiations. As noted in this report, agriculture is now the linchpin of the Doha Development Round. Without progress in agriculture, there will be no continued multilateral progress for industrial and other goods. More importantly, efforts to open trade in services - America's main competitive strength and an area that faces many trade barriers and distortions - will flounder.
38

Interview with Joe O‟Mara, U.S. agricultural negotiator in the Uruguay Round and presently with O‟Mara and Associates, June 27, 2007. 39 The Administration‟s proposals include nearly $5 billion for fruit and vegetable producers through expanded research and greater government purchases of fruits and vegetables for school lunch programs.

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Agricultural trade barriers and distortions can best be addressed in a multilateral trade negotiation. Market disruption is far less when all countries move together to reduce barriers and distortions than when one country moves unilaterally. And the Doha Round presents the only forum where agricultural trade barriers and distortions can be addressed multilaterally. Under WTO rules, if the U.S. agreed to reduce domestic subsidies in a bilateral free trade agreement, the benefits of these reductions would flow to all WTO members. Because of this sensitivity, agriculture has generally been excluded from the coverage of U.S. bilateral free trade agreements. The Doha Round will not be completed by September - and may not be completed for several years40. As Congress debates the 2007 Farm Bill, a major issue will be whether trade and production distorting subsidy programs, such as the loan deficiency payment program and the counter-cyclical program, should be decreased or increased. Some argue that the U.S. should not move to less trade and production distorting subsidies in the 2007 Farm Bill, arguing that this would be "unilateral disarmament" and that we should save these concessions for concessions from our trade partners. There are several flaws in this argument. First off, U.S. negotiators would probably be able to claim credit in the Doha negotiations for any changes made in the 2007 Farm Bill and use these as leverage in gaining foreign concessions. Secondly, by and large our trade partners have been steadily reducing their trade and production distorting subsidies, without waiting for trade negotiations, because they believe this is in their own economic interest. For example, Canada has been moving to decouple its programs from production, e.g. Canada has had a revenue insurance program for 10 years. And New Zealand made enormous progress in reducing subsidies and liberalizing its market prior to the Uruguay Round. Most importantly, the EU started reforming its Common Agricultural Policy (CAP) in 1992 and has made serious progress in limiting trade distortions over the past 15 years. The EU has reduced sugar production by one-third and now imports sugar rather than exports it; by 2009 the EU will provide duty free, quota free access to sugar. With regard to beef, the EU has moved to direct payments and away from distorting programs. The EU has even decreased support for the wine industry. In doing this, the EU has increased benefits for rural areas and away from programs that benefit specific commodities. On the other hand, if the 2007 Farm Bill shifted some trade and production distorting subsidies to "Green Box" programs and increased reliance on market forces, this would decrease our risk of losing WTO dispute settlement cases and increase the prospects for

40

The first four rounds of trade negotiations after WWII were completed in one year. The fifth, the Dillon Round, required two years, the Kennedy Round required three, the Tokyo round six, and the Uruguay Round eight. The Doha Round is still more complicated, involving substantially more countries and many more issues than these previous rounds. Accordingly, it is not unreasonable to expect the round to take eight years or more to complete (i.e., 2009 or even later).

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trade negotiations41. The Bill could also decrease loan rates and target prices in our payment programs, thereby reducing the likely scope of these programs and our risk of exceeding our AMS limits42. As Craig Thorn (former head of the Agriculture Section in the Geneva Mission of the U.S. Trade Representative during the Uruguay Round) says: “The best thing we could do is reform our own farm programs to minimize production and trade distortions, as other countries have. Maintaining these programs forces U.S. negotiators into a defensive posture of defending our programs, instead of pressing for removal of other countries‟ barriers43.” James Grueff, former Assistant Deputy Administrator for International Trade Policy in the Department of Agriculture notes: "It will be very difficult to successfully conclude the Doha negotiations if the 2007 Farm Bill increases Amber Box subsidies. Instead, we have a great opportunity with the 2007 Bill to indicate to the rest of the world that we are serious about promoting trade and development by redesigning some of our programs so that they move toward the Green Box and away from the Amber Box.44" The Administration's proposals for the 2007 Farm Bill would move U.S. agricultural policies in the right direction from a trade policy perspective. While the Administration's proposals were formulated on the basis of what it considered to be best for U.S. agriculture, the proposals would nonetheless reduce our exposure to adverse WTO or NAFTA rulings and promote our ability to negotiate a successful Doha Round. Specific proposals by the Administration45 that would accomplish this include the following:  Reduce loan deficiency payments by $4.75 billion by reducing loan rates compared to the 2002 farm bill (e.g. the trigger price for loan deficiency payments for cotton would be reduced from $0.52 to $0.39 per pound).  Reduce counter cyclical payments by about $3.7 billion annually.  Remove planting flexibility restrictions under the direct payments program, which prevented farmers from receiving direct payments for growing fruits and vegetables (this would meet WTO rules to enable this program to be in the Green Box).  Phase down the payment rate under the Milk Income Loss Contract program from 34% of the difference between the market price and $16.94 per cwt to 20 percent by 2013.
41

Annex II of the Agricultural Agreement pertaining to the “Green Box” sets out the types of programs that qualify as decoupled and therefore likely to prevail against any WTO dispute settlement challenges. 42 Some agricultural sectors are pressing for increases in target prices, such as wheat and soybeans. This, of course, would increase our risk of losing WTO dispute settlement cases and put additional pressure on the Doha trade negotiations. 43 Phone Interview, July 2, 2007. 44 Interview July 13, 2007. 45 The Administration proposals can be found on the USDA web site at http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1UH?contentidonly=true&contentid=farm_bill_by_tit le.xml

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Reduce the annual income limit for payment eligibility from $2.5 million to $200,000, and eliminate loopholes that allow farmers to skirt existing payment limitations by creating multiple partnerships and corporations. (Because this would likely result in a significant reduction in U.S. subsidy levels, it would reduce our risk of adverse panel rulings.) Provide authority to reduce domestic U.S. production of sugar to maintain higher domestic prices even if U.S. imports increase.

Many of the Administration's other proposals to support the agricultural sector would be consistent with WTO rules and would not hinder trade negotiations. These include:  Expand direct payments by $5.5 billion, which will not be tied to production of specific crops (Green Box).  Add $3 billion for school lunch programs (Green Box).  Consolidate conservation programs and increase funding by $7.8 billion, and offer a 10% premium to farmers who implement a strategic conservation plan on their farms (Green Box);  Change the counter cyclical payments program to be based on revenues, rather than crop prices, to improve the program's effectiveness. In addition to these proposals, of course, there are many others that would advance our agricultural and trade interests, such as proposals to establish Risk Management Accounts. In many ways, the 2007 Farm Bill is the most important trade legislation that Congress will address this year. Resolving the best way to support our agricultural sector without conflicting with our trade policies will be a difficult test for Congress. However, given the high prices for many agricultural products that currently prevail, this year is possibly a propitious time for accomplishing this.

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