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Trade Policy and the Farm Bill

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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.


                                                                                                        2
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 Bill 2 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.


                                                                                                       3
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 Commodities 5 (2004, millions of dollars):

         Commodity                                     Value             Percent of Total
          Cattle and calves                            47,296                    0.196
          Dairy Products                               27,368                    0.113
          Corn                                         22,199                    0.092
          Soybeans                                     18,375                    0.076
          Vegetables                                   17,256                    0.072
          Fruits and Nuts                              15,463                    0.064
          Wheat                                         7,381                    0.031
          Cotton                                        5,405                    0.022
          Rice                                          1,728                    0.007

4
  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.


                                                                                                               4
             Sugar beets                                       1,270            0.005
             Cane for Sugar                                      998            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 Commodities 6 (millions of dollars)

                                                                       2003   2004      2005
             Beef and Veal                                             3145    550       919
             Poultry and Products                                      2287   2577      3117
             Dairy Products                                            1048   1505      1681
             Wheat and Products                                        4099   5273      4486
             Rice                                                      1024   1161      1288
             Corn                                                      4724   5875      4755
             Fruits and Preparations                                   2968   3156      3452
             Nuts and Preparations                                     1762   2220      2903
             Vegetables and Preparations                               4813   5307      5775
             Soybeans and Meal                                         9143   7732      7437
             Cotton                                                    3361   4226      3920

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 3 7,
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                        Balance
           2005 $63.0 bil.       7 % $59.3 bil.       4%                         $3.7 bil.
           2004 $61.4 bil.       8 % $54.0 bil        4%                         $7.4 bil.
           2003 $59.4 bil.       8 % $47.4 bil        4%                         $12.0 bil.
           2002 $53.1 bil.       8 % $41.9 bil        4%                         $11.2 bil.
           2001 $53.7 bil.       8 % $39.4 bil        3%                         $14.4 bil.
           2000 $51.2 bil.       7 % $39.0 bil        3%                         $12.3 bil.
           1995 $56.3 bil.       10 % $30.3 bil.      4%                         $26.0 bil.

WTO RULES ON AGRICULTURAL TRADE
6
    Statistical Abstract of the United States: 2007, p. 541.
7
    Statistical Abstract of the United States: 2007, p. 539.


                                                                                               5
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 Agriculture 9 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 2000 11, 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.”
8
  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.


                                                                                                           6
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 least-
developed 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.


                                                                                                        7
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 development 14.
Decoupled direct subsidies would also be included in the Green Box 15. 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.




14
   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.


                                                                                                              8
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


                                                                                                      9
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.



                                                                                            10
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              Countercyclical Direct   Total
                  Payments                     Payments        Payments Payments
         Rice            0.7                        0.5            1.3        2.5
         Cotton          0.9                        4.3            1.8        7.0
         Wheat           0.2                        neg            3.4        3.6
         Corn            7.0                        3.8            6.2        17.0
         Soybeans        0.3                        neg            1.8        2.1
         Peanuts         neg                        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 level 18. 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.
17
   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.


                                                                                                                11
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.


                                                                                                       12
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 480 22.

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”


                                                                                                      13
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 subsidies 24,
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
support 25.

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.


                                                                                                         17
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 Declaration 28 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.


                                                                                           18
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 billion 29. 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.


                                                                                           19
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 agriculture 31.

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 are 32:

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.


                                                                                                         20
      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 production 34.”

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 eliminated 35, and that trade distorting domestic subsidies
for cotton would be reduced more ambitiously 36 and in a shorter time period than other
34
   Page 7 of the draft “modalities” paper, http://www.wto.org/english/tratop_e/agric_e/chair_texts07_e.htm.
35
   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 on-
going, 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.


                                                                                                        22
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 least-
developed countries.

Although upland cotton 37 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 trade-
negotiating 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 counter-
cyclical 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.


                                                                                                     23
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.


                                                                                                     24
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).


                                                                                                        25
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 Administration 45 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


                                                                                                           26
          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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