Order Code RL30612
CRS Report for Congress
Received through the CRS Web
Farm Support Programs and
World Trade Commitments
Updated July 20, 2001
Geoffrey S. Becker
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
Farm Support Programs and
World Trade Commitments
Summary
The 1994 Uruguay Round Agreement on Agriculture (URAA) obligates
members of the World Trade Organization (WTO) to make changes in their domestic
farm policies to facilitate more open trade. Domestic programs deemed, at the time,
to have the greatest potential for stimulating too much production, and thereby
distorting world trade in various agricultural commodities, were subject to annual
spending limits. (Other important provisions commit countries to reduce farm export
subsidies and to lower agricultural import barriers.)
The UR commitments made by WTO members constrain their flexibility and
spending choices whenever they consider ways to assist agricultural producers. As
a WTO member and signer of the Agreement, these constraints affect the United
States, which was a leading voice in calling for agricultural trade reforms and
reductions in domestic supports. Since then, Congress, from 1998 through 2000,
passed a succession of bills appropriating a total of more than $17 billion in ad hoc
assistance, over and above benefits already authorized under the omnibus 1996 farm
law, to help producers cope with poor market conditions. U.S. officials recently
classified the first installment of these payments as potentially trade distorting.
Despite the high levels of support (relative to previous periods during the
1990s), the United States so far appears to be within its prescribed annual spending
limits. And, defenders of current U.S. farm policies point out that the 1994
Agreement, for example, has permitted the European Union (EU), a chief U.S. export
competitor, to spend far more than the United States on domestic farm aid. They
argue that so long as the EU and other foreign countries heavily subsidize their
farmers, a “free world market” in agriculture is illusory, and U.S. farm aid should not
be singled out for criticism.
In fact, domestic farm support spending by major agricultural traders generally
had been increasing in recent years, according to analysts, raising the question of how
effective the UR agreement has been in reducing trade distorting domestic subsidies
worldwide. With a new round of negotiations now under way to continue the process
of agricultural trade reform, WTO members are offering a divergence of viewpoints
on how to handle domestic farm supports. These range from countries that will seek
continuing, and deeper, reductions in spending, to those that are likely to defend their
internal subsidies as necessary for various national policy reasons.
Congress is now debating reauthorization of omnibus farm legislation, as most
commodity price support provisions expire in 2002. Because of the interrelationships
between trade and domestic support policies, lawmakers are interested in what the
Agreement on Agriculture stipulates with regard to domestic supports, and how not
only the United States but also other countries are meeting their Agreement
commitments.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Domestic Support Provisions of the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 2
Amber Box Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
De Minimis Exclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Country Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Green Box Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Blue Box Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Countries’ Performance to Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notification and Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selected Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The “Peace Clause” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Farm Spending Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Effectiveness of Current Agreement on Agriculture . . . . . . . . . . . . . . . . . 12
Future Reforms in Domestic Supports . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
U.S. Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
EU Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Cairns Group Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Developing Countries’ Views . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
“Multifunctionality” and Non-trade Objectives . . . . . . . . . . . . . . . . . 17
Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Implications for U.S. Agricultural Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Ad Hoc Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Long Term Farm Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Ad Hoc Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Long Term Farm Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Figures
Figure 1. Total AMS as Percent of Commitment . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 2. Reported AMS, Selected Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 3. Domestic Support, Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 4. Producer Support by Country (Percent of Gross Farm Receipts) . . . 11
Figure 5. Producer Support by Country (Estimate Per Farmer) . . . . . . . . . . . . 12
List of Tables
Table 1. AMS Commitments, Selected Countries . . . . . . . . . . . . . . . . . . . . . . . 4
Farm Support Programs and
World Trade Commitments
Introduction
The 1994 Uruguay Round Agreement on Agriculture (URAA) commits member
countries of the World Trade Organization (WTO) to discipline their domestic
agricultural support programs. Programs subject to annual spending limits are those
that WTO members deemed, at the time, to have the greatest potential for stimulating
too much production and thereby distorting world agricultural trade.
The goal of the Agreement is to “establish a fair and market-oriented agricultural
trading system” through a series of reforms that, among other provisions, require
WTO members to lower barriers to agricultural imports and to reduce their farm
export subsidies. The URAA was unprecedented in that it was the first time (after
seven previous trade rounds) that countries promised to make substantial changes in
their domestic agricultural policies to facilitate more open trade.
At the same time, the UR commitments made by WTO members constrain their
flexibility and spending choices when they consider ways to assist agricultural
producers during economic downturns. For example, a WTO member cannot
undertake or expand certain types of domestic farm programs that cause it to exceed
an assigned annual spending limit for such programs.
As a WTO member and signer of the Agreement, these constraints affect the
United States, which was a leading voice for agricultural trade reforms, including
reductions in trade-distorting domestic subsidies. Since then, Congress, from 1998
through 2000, has passed a succession of bills appropriating a total of more than $17
billion in ad hoc assistance to help agricultural producers cope with poor market
conditions. The funds, along with billions of additional dollars in natural disaster aid,
are over and above the aid already authorized for the sector under the 1996 omnibus
farm law (P.L. 104-127). On June 26, 2001, the House passed a bill (H.R. 2213)
providing another $5.5 billion in ad hoc aid; Senate action was pending in mid-July.
Foreign competitors are closely monitoring U.S. actions. Some have raised
concerns about this increased U.S. farm spending in light of the current WTO
negotiations to further reform agricultural trade, which were initiated in March 2000.
Despite these high levels of support (relative to previous periods during the
1990s), the United States so far appears to be within its URAA prescribed annual
spending limits. And, defenders of current U.S. farm policies point out that the 1994
Agreement, for example, has permitted the European Union (EU), a chief U.S. export
competitor, to spend far more than the United States on domestic farm aid. They
argue that so long as the EU and other foreign countries heavily subsidize their
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farmers, a “free world market” in agriculture is illusory, and U.S. farm aid should not
be singled out for criticism.1
World trade obligations are a consideration as Congress debates the next major
reauthorization of farm legislation. Most commodity price support provisions are due
to expire by 2002, and a variety of potential farm policy changes already have been
proposed.2 Because of the interrelationships between trade and domestic support
policies, lawmakers are interested in what the Agreement on Agriculture stipulates
with regard to domestic supports, and how the various proposals might affect U.S.
commitments under it.
Domestic Support Provisions of the Agreement3
Although the Agreement commits member countries to control their spending
on domestic farm supports, it also permits them to exempt or exclude many types of
programs. Broadly, the Agreement on Agriculture distinguishes between domestic
policies that have the greatest potential to distort trade and therefore should be
limited, and those that are less likely to distort trade. Negotiators (not the Agreement
itself) used a color-code analogy for these categories, as described below.4
Amber Box Policies
Amber box policies are the most likely to cause producers to divert resources
into or out of the production of various commodities, thus affecting supplies and
world prices. Because of their potentially trade-distorting effects, these policies
generally were subjected to gradually more stringent annual spending limitations
under the Agreement.
1 In late June 2000, U.S. officials offered a proposal at a WTO Agriculture Committee
meeting that among other things would seek to reduce the differences in relative support
between countries like the United States and the EU. For further discussion see page 14.
2 See: Farm Income and Commodity Price Support Proposals in the CRS electronic briefing
book on Agriculture Policy and Farm Bill; CRS Issue Brief IB10085, The 2002 Farm Bill:
Overview and Status; CRS Report RL30847, Agriculture: Previewing the 2002 Farm Bill.
3 The Agreement on Agriculture was one of a series of agreements that came out of
multilateral trade negotiations, which also created the World Trade Organization (WTO) as
the institution to oversee world trade rules and referee disputes. As of April 2000, 136
countries were members. Sources for describing the Agreement are: U.S. Department of
Agriculture, Economic Research Service (ERS), Agriculture in the WTO (WRS-98-4),
December 1998; and Message from the President Transmitting the Uruguay Round Trade
Agreements, Texts of Agreements Implementing Bill, Statement of Administrative Action and
Required Supporting Statements (H. Doc. 103-316), September 27, 1994.
4 Part IV (Articles 6 and 7) of the Agreement on Agriculture contains the key provisions
affecting countries’ domestic support policies. (Export subsidies, considered to be distinct
from domestic support subsidies, are covered in Article V of the Agreement.) For a step-by-
step guide to these provisions, see CRS Report RS20840, Farm Program Spending: What’s
Permitted Under the Uruguay Round Agreements.
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Examples of such policies or programs include price supports, where the
government ensures that the farm price of a particular commodity will not fall beneath
a prescribed level; direct payments tied to each unit of a commodity produced;
subsidies on such inputs as fertilizer, seed, irrigation, or feed; and subsidized crop
loans.
In the United States, programs that have been placed within the amber box
include the dairy, peanut, and sugar price support programs; “marketing loan”
programs for grains and cotton; crop storage payments; irrigation and grazing
programs; and crop insurance programs.5
Each WTO member agreed that total annual spending for its amber box policies
– termed a “Total Aggregate Measurement of Support” (AMS) – would not exceed
a base period level (generally 1986-88). In addition, about 30 of these countries,
including the United States and most other major agricultural traders, agreed to
gradually reduce the maximum permitted levels of amber box spending each year,
using the AMS calculation to determine this spending.
The developed countries agreed to reduce their total AMS by 20% from their
base period, over a 6-year implementation period (1995-2000). Developing countries
agreed to a 13% reduction over a 10-year period (1995-2004). Each member’s AMS
for the final year of the implementation period is the “bound” level applying to each
succeeding year after that – until a new trade agreement is negotiated. Any
reductions do not have to be made equally across commodities or on a commodity-
by-commodity basis. Each country can decide which programs to reduce, and how,
in order to meet its obligation.
Annex 3 of the Agreement specifies the methods countries must use to calculate
their AMS. For example, an AMS must be calculated on a product-specific basis for
each agricultural product supported. Supports that are not product-specific (for
example, irrigation subsidies) must be aggregated into one non-product specific AMS.
National and sub-national (e.g., state) support must counted; levies or fees on
producers must be subtracted from the AMS calculation.
De Minimis Exclusion. Developed countries do not have to count amber box
subsidies toward their total AMS if total support is equal to or less than 5% of the
value of production (the exclusion is 10% for developing countries). Negotiators
created this exclusion based on the theory that a subsidy is not likely to distort trade
as long as it remains reasonably low. If subsidies apply to a specific product, e.g,
wheat, sugar, etc., then the 5% rule applies to the value of production of that product.
(All forms of non-exempt support for that product are totaled before the de minimis
calculation is performed.) If subsidies are non-commodity specific, e.g., irrigation,
then the 5% rule applies to the value of the country’s total agricultural production.
Country Commitments. Table 1 shows base period AMS commitments and
final year (bound) commitments for the major agricultural traders. For developed
5 In late June 2001, the Administration reported that it was classifying $2.8 billion in 1998 ad
hoc assistance as amber; see page 18 for details.
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countries the final year is 2000, and for developing countries (in italics) it is 2004.
For example, the United States began from a base (1986-88) AMS of $23.9 billion,
and committed to not exceeding AMS levels of $23.1 billion in 1995, $22.3 billion in
1996, $21.5 billion in 1997, $20.7 billion in 1998, $19.9 billion in 1999, and $19.1
billion in 2000. In any year after that, its AMS cannot exceed $19.1 billion.
Table 1. AMS Commitments, Selected Countries
Country
Base
2000
2004
Argentina (million U.S. $)
87
80
75
Australia (million Aus. $)
590
472
Brazil (million U.S. $)
1.1
1
0.9
Canada (million Can. $)
5,376
4,301
EU (million ECU)
80,975
67,159
Japan (billion yen)
4,966
3,973
Korea (billion won)
1,719
1,581
1,490
Mexico (million Mex. $)
29,007
26,699
25,161
New Zealand (million N.Z. $)
360
288
Poland (million U.S. $)
4,160
3,329
South Africa (million rand)
2,519
2,015
Switzerland-Lich.(million Sw.F)
5,321
4,257
Thailand (million baht)
22,126
20,268
19,028
United States (million U.S. $)
23,875
19,103
SOURCE: World Trade Organization. AMS commitments do not count blue and green box
subsidies, amber box spending beneath the 5% de minimis, and certain special and differential
treatment of subsidies in developing countries.
Green Box Policies
Green box policies are those presumed to have the least potential for distorting
production and trade and therefore are exempt from commitments to reduce or limit
AMS spending. Annex 2 of the Agreement spells out in detail how to determine
whether a domestic measure qualifies for the green box. Generally, support must be
(1) provided through a publicly-funded program that does not involve transfers from
consumers; and (2) not have the effect of providing price support to producers. In
addition, specified programs can qualify for green box but only if they also conform
to certain detailed “policy-specific” criteria, summarized as follows:
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General services, including research; pest and disease control; training, extension
and advisory services; inspection, marketing, and promotion services; construction of
public infrastructure, all of which may qualify where they do not involve direct
payments to producers or processors;
Public stockholding of commodities for food security, if it is an integral part
of a food security program and stocks are acquired at current market prices;
Domestic food aid to needy persons subject to clearly defined criteria related to
nutritional objectives;
Direct payments to agricultural producers of the following types:
! “Decoupled income support” not linked to the type or volume of commodity,
and any condition of production after the base period, and not related to
domestic or international prices after the base period;
! Income insurance and income safety net programs that relate solely to income
(and not production or prices), within specified limits;
! Natural disaster assistance;
! Structural adjustment assistance that either involves removing land, livestock
or other resources from agricultural production or through investment aids
such as farm ownership and operating loans not tied to any type or volume of
production;
! Payments for environmental or conservation purposes;
! Payments under regional assistance programs if limited to producers in a
clearly delineated geographical area determined to be disadvantaged by
“neutral and objective criteria.”
The most prominent example of a U.S. green box policy is the Production
Flexibility Contract (PFC) payments being made under the Agricultural Market
Transition Act (AMTA; Title I of the 1996 farm law). Under this law, those who
formerly were enrolled in the annual USDA crop price and income support programs
for grains and cotton, and who signed contracts, are receiving fixed but declining
annual payments, totaling $36 billion over the 7-year term of the law. The level of
each recipient’s annual subsidy – known variously as a “Freedom to Farm,”
“transition,” “PFC,” or “contract” payment – initially was determined by a farm’s past
level of production of these particular crops, but this payment bears no relation to
current production patterns. In other words, it is eligible to be placed in the green
box because it is “decoupled,” U.S. officials have determined.
Other examples of U.S. green box policies include agricultural research and
extension programs; the Conservation Reserve Program and the Environmental
Quality Incentives Program; the food stamp and child nutrition programs (these
domestic food programs account for a large share of U.S. green box spending); and
meat, grain, and produce inspection, grading, and marketing activities.
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Blue Box Policies
Blue box policies, also exempt from AMS calculations, include the following
direct payments made under production-limiting programs: those based on fixed area
and yield; those made on no more than 85% of base production; or payments tied to
a fixed number of livestock (Article VI, paragraph 5). These criteria encompass the
now-defunct U.S. target price deficiency payments made for grain and cotton prior
to the 1996 farm law, and the EU’s direct compensatory payments. The EU
payments, linked to land use and to number livestock, were adopted with the 1992
Common Agricultural Policy (CAP) reforms to compensate farmers for significantly
reduced market intervention prices. The blue box was created primarily to facilitate
a compromise with the EU (until recently, the only major blue box user) so that the
UR negotiations on agriculture could be brought to a successful conclusion.6
Countries’ Performance to Date
Notification and Review
The Agreement on Agriculture requires countries to submit reports
(notifications) on their implementation of the domestic support (as well as their export
subsidy and market access) commitments, which in turn are reviewed periodically by
the WTO Committee on Agriculture (Part XI, Article 18).
These notifications serve as the primary information source on what each country
is spending on domestic agricultural policies, and on how they have chosen to classify
these policies – i.e., what “color” they should be. The Agreement has provided
member countries not only with some latitude in these determinations, but also in how
quickly after each implementation year a notification is submitted. For example, as
of mid-2001, numerous countries with reduction commitments had not yet submitted
their 1999 or 2000 reports – including the United States. A few countries had not
yet submitted their earlier years’ notifications, either.
The U.S. notification for 1997 was not submitted until June 1999; the 1998 U.S.
notification was not released until June 2001. The U.S. AMS is calculated on the
basis of marketing years; that is, the 1998 implementation year began in 1998 and
ended in 1999 for many commodities. (Countries may choose between the calendar,
fiscal, or marketing year as their implementation year.) USDA analysts who prepare
the notifications must wait until after the end of the marketing year when all spending
and program details become available. Then more time typically is needed to review
and calculate expenditures, and organize them into WTO formats and categories.
However, the 1998 U.S. notification was delayed for a longer period than usual
due to officials’ concern about the potential policy implications of how to classify the
ad hoc farm payments – more specifically, the $2.8 billion in so-called “market loss”
6 ERS, Agriculture in the WTO, page 15; and Young, Nelson, and Schnepf, “Domestic Farm
Programs and the Upcoming WTO Negotiations,” Choices magazine, 3rd Quarter 1999. See
also CRS Report RS20744, Agricultural Support in the European Union and United States.
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payments made that year to those enrolled in the AMTA-PFC program. (See page
18 for details.)
AMS Notifications Compared
Nonetheless, in the latest notifications to the WTO, most countries reported that
their AMS remained well below their commitments. Figure 1 shows selected major
trading countries’ reported total AMS for 1996 through 1999, expressed as a
percentage of their annual commitments under the Agreement.7
Countries generally have been able to remain comfortably beneath their annual
AMS commitments – at least through 1998 – for a number of reasons. First, major
countries’ spending on price-related support, an amber box subsidy, was relatively
high in 1986-88, the base period from which reductions are being made, due to low
market prices during the base period. As world markets and farm prices strengthened
in the 1990s, domestic support spending declined. Second, the United States, EU,
and Japan have instituted policy changes that, they contend, have enabled them to
7 Source: WTO. As of mid-2001, Brazil had not made its notification for 1998. New Zealand
reported zero AMS spending for all 3 years.
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shift a significant part of their reported domestic support from the amber box to
exempted methods, such as direct payments not tied to current prices.
Most if not all of the major trading countries are likely to claim compliance with
AMS commitments in subsequent years’ reports. However, analysts have observed
that annual spending has been high in recent years. This is due in large part to the
downturn in world agricultural markets in the late 1990s and the ensuing increase in
the these countries’ spending on amber box policies (also see “Farm Spending
Trends” on page 10).
In 1997, the EU accounted for about $66 billion, or 63%, of the total AMS
reported by 11 leading agricultural trading countries. (as reported to the WTO and
converted to U.S. dollars; see figure 2). Japan accounted for more than $26 billion
or 25% of the total; the United States was a distant third with over $6 billion or 6%
in 1997. In 1998, the EU represented about $51 billion or 71% of the 11-country
total. The United States and Japan accounted for $10 billion (14%), and $6 billion
(8%), respectively.8
8 CRS converted foreign currencies used in WTO notifications to U.S. dollars, using the
average exchange rates for the year as reported by the International Monetary Fund (IMF)
and, in some cases, by the WTO. Argentina and Brazil are major exporters, but had not
submitted their notifications for 1998. (Argentina had not done so for 1997, either.)
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Japan’s share decreased for 1998 primarily because it altered its support program
for rice. Japanese officials assert that their rice policy is now exempt as a blue box
policy because they have more closely linked rice payments to farm production
limitations. Prior to that time, the Japanese reported their rice support as a costly and
trade-distorting amber policy. (Critics point out that the Japanese rice regime remains
highly trade-distorting because it relies on restrictive tariff rate quotas to protect the
domestic industry.)9 Still, three countries represented over 90% of total reported
AMS in 1997 and 1998.
SOURCE: WTO notifications. Local currencies converted to U.S. dollars based on average exchange
rate for periods covered (using International Monetary Fund data).
Figure 3 indicates that, although amber box spending in these three countries has
been below base period levels, spending which they have classified as green box
increased substantially through 1998.
Selected Issues
The Uruguay Round provided new and strengthened rules for the conduct of
agricultural trade. Continuing the process of agricultural trade liberalization has been
a priority. Trade ministers of World Trade Organization (WTO) countries met
9 See: “Japan’s Changing Agricultural Policies,” in the April 2001 issue of USDA’s
Agricultural Outlook magazine.
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November 30-December 2, 1999, in Seattle, but were unable to agree on an agenda
for a comprehensive new round of multilateral talks, which would have included not
only agriculture, but many other, non-agricultural, issues. Another effort to launch
a comprehensive round is expected when trade ministers meet again in November
2001 in Qatar.
However, because Article 20 of the URAA required that sectoral negotiations
in agriculture begin in early 2000, these negotiations were launched March 23-24,
2000 at a special session of the WTO’s Committee on Agriculture. Since then,
countries have submitted their detailed negotiating proposals on agriculture (selected
domestic support provisions of these proposals are discussed later in this section).
The agricultural negotiations are under way, and proceeding slowly.
The “Peace Clause”
There is no deadline for concluding the agricultural negotiations. However,
expiration, in 2003, of provisions under Article 13 of the URAA known as the “peace
clause” could exert pressure on member countries to reach an agreement by then.
Under provisions of the peace clause, as long as the subsidizing country is meeting its
reduction commitments or other criteria agreed to in the UR, it is exempt from certain
WTO challenges.
More specifically, WTO members, during the first 9 years of the URAA, must
refrain from taking actions under domestic countervailing duty proceedings, or
initiating WTO dispute settlement proceedings, alleging adverse effects or serious
prejudice resulting from green box (permitted) subsidies. Members also cannot bring
dispute settlement proceedings alleging nullification or impairment of UR tariff
reductions that are the result of green box subsidies.
With regard to amber and blue box subsidies, WTO members are to exercise due
restraint in initiating countervailing duty investigations. Amber box challenges may
not be initiated so long as spending for a particular commodity does not exceed the
level of its spending in the 1992 marketing year.
Some domestic agricultural interests have urged the United States to oppose any
extension of the peace clause. They contend that the clause is preventing them from
challenging the EU’s blue box payments and seeking relief under WTO procedures.
The EU has indicated that it wants to continue the peace clause.
Farm Spending Trends
Through 1997 and 1998, countries’ annual AMS generally were below the levels
to which they committed under the UR Agreement on Agriculture (and in most cases
comfortably so). However, countries’ overall domestic support remains high, when
green box and other exempted spending (i.e., that which does not have to be counted
as part of the AMS) is considered. Such overall domestic support – both exempt and
nonexempt – is examined annually by the Organization for Economic Cooperation and
Development (OECD) in its annual reports on domestic agricultural policies.
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In its 2001 report, for example, OECD concluded that support to producers had
decreased from 1999 to 2000, after rising the previous 2 years. OECD stated that
the decline was a “positive development,” but “...like changes in previous years,
reflected international price and exchange rate movements rather than major
agricultural policy changes. There were no major policy reform initiatives and
differences in the level of support among OECD countries widened.”10
In 1998-2000, total support to agriculture in the OECD countries was an
estimated $341 billion per year, on average, compared with an annual average of $298
billion in 1986-1988 (nominal dollars). Estimated producer support as a percentage
of total farm receipts for all OECD countries averaged 35% in 1998-2000 compared
with 39% in 1986-88. (It decreased from 37% in 1999 to an estimated 34% in 2000.)
Roughly four-fifths of the total in 1998-2000 went to individual producers, and the
rest was for general services such as infrastructure, research, and marketing. Market
price support (where consumers generally pay higher prices to ensure farmers receive
higher incomes) and output payments accounted for most producer support.11
10 OECD. Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2001.
OECD was established to promote economic growth, higher living standards, and trade
expansion worldwide. OECD Members are Australia, Austria, Belgium, Canada, the Czech
Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy,
Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland,
Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
11 The OECD data differ from that collected by the WTO for AMS reporting purposes, and
(continued...)
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These forms of support “are among the most production and trade-distorting,”
OECD observed. The 2001 report also documented the wide differences in support
provided among countries in 1998-2000, from 6% and 1% of farm receipts in
Australia and New Zealand, respectively, to about 65% or more in Iceland, Japan,
Korea, Norway, and Switzerland (figure 4). Sugar, milk, and rice received
particularly high levels of support.
The following countries spent, on average, more than $20,000 per full-time
farmer in 1998-2000: Iceland, Switzerland, Norway, Japan, Korea, and the United
States (figure 5).
Effectiveness of Current Agreement on Agriculture
OECD’s 2000 report on agricultural subsidies stated:
The upward movement in support to agriculture, first evident in 1998, continued
in 1999, with support reaching the high levels of a decade earlier. Low world
commodity prices, and the resulting pressure they put on farm incomes, led many
OECD countries to introduce new measures or to provide additional support to
farmers. The ways in which these measures were implemented were, in many
11 (...continued)
therefore are not directly comparable. For example, if the OECD support were categorized
as was done for WTO, some would fall in the amber box and some would be exempt. Also,
the OECD counts more forms of government intervention than just the internal measures used
for the WTO calculations of AMS.
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cases, inconsistent with the longer-term principles of agricultural policy
reform.12
In its 2001 report, OECD noted:
Despite some shift away from market price support and output payments, these
continue to be the dominant forms of support in most countries, insulating
farmers from world market signals and distorting global production and
trade...Overall, progress towards further policy reform agreed to by OECD
Ministers has been insufficient and remains fragile.13
Some analysts contend that the relatively high levels in domestic agricultural
subsidies documented by OECD – which, they believe, likely will also be reflected in
countries’ future AMS notifications – can be attributed at least partly to language of
the UR Agreement, which, in their view, has not been effective in curbing spending.
First, the Agreement set high base levels from which countries are making their annual
reductions. The United States, the EU, and other leading agricultural traders were
able to claim credit for spending cuts they already had made before the Agreement
took effect in 1994.
Second, various exemptions in the URAA have shielded some large subsidies
from any required cutbacks at all, they add, citing the creation of the blue box that
protects the EU’s compensatory payments. On the other hand, starting from a higher
base, and creating the blue box category, was viewed by many as the only way to
conclude a deal and at least begin the long process toward meaningful reforms.
Third, the categorization and reporting of subsidies are largely self-policing,
these analysts point out. That is, each member country has considerable discretion
in determining whether a subsidy is “green” or “amber” and, if it is the latter, in
calculating its value for WTO reporting purposes. Such discretion makes countries’
choices subject to criticism and future challenges by other WTO members, according
to USDA and other analysts. Defenders of the URAA language contend that it is
sufficiently explicit to prevent WTO members from undermining the basic objectives
of the URAA.
Fourth, green box expenditures for many countries appear to be increasing.
Such expenditures – including direct payments to farmers so long as they are not tied
to prices and production – were presumed by UR negotiators to have the least likely
effect on trade. “However, any policy that transfers income to producers could
conceivably have some effect on production by increasing wealth and reducing the
risk of financial failure. Some specific policies that otherwise might meet the URAA
green box criteria could have significant positive effects on production if financed
with a large enough total amount of government expenditure.”14
12 OECD. Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2000.
13 OECD. Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2001.
14 ERS. Agriculture in the WTO, page 19.
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In another recent report, OECD confirmed that green box and other exempt
policies have assumed greater importance, observing that over 60% of domestic
agricultural support in OECD countries is excluded from WTO reduction
commitments. Many of these exempt policies, although they may be less trade
distorting than traditional market price support, still have production and trade
effects. The OECD report called for more research on whether green box payments
really are minimally trade distorting, which could “contribute to the further
development of more rigorous operational criteria for exemption from reduction
commitments.”15
For example, the U.S. Congress has provided $25 billion in ad hoc assistance
provided to U.S. producers between 1998 and 2000 ($17 billion of it to address poor
market conditions and most of the rest for disaster assistance), and another $5.5
billion or more is expected to be provided for 2001. While much of this aid is
expected to be exempted from AMS calculations, the OECD reports that its provision
for 3 consecutive years “...gives a strong signal to farmers that they can expect to
receive extra support at times of low world prices and may, as a result, contribute to
world price depression.”16 (See “Implications for U.S. Agricultural Policy,” below,
for a more detailed discussion.)
The EU’s exempted blue box payments (based on fixed area and yields or a fixed
number of livestock) are no less contentious. These payments, which have been $23-
$24 billion annually, are considered by many analysts to be trade-distorting.
“Payments for exempt blue box policies compensate producers for foregone income.
Blue box payments received in excess of foregone income from program compliance
immediately increase producer wealth, lead to expectations of future windfalls, and
may encourage expanded production, especially if any production limitations are
subsequently relaxed,” USDA observed.17
Future Reforms in Domestic Supports
WTO members bring to the new negotiating round a divergence of viewpoints
on how to handle domestic farm supports. These range from countries that will seek
continuing and deeper reductions in spending, to those that are likely to defend their
internal subsidies as necessary for various national policy reasons.
In the United States, agricultural interests have long complained that the EU and
Japan were permitted, under the URAA, to begin their AMS reductions from base
spending that was much higher than the U.S. base level. Moreover, the Japanese
bound (allowable) AMS level at the end of implementation (2000) will be
approximately twice the U.S. level, at $37.1 billion versus $19.1 billion. The EU’s
15 OECD. The Uruguay Round Agreement on Agriculture: An Evaluation of its
Implementation in OECD Countries. 2001.
16 OECD. Agricultural Policies in OECD Countries: Monitoring and Evaluation, 2001.
17 ERS. Agriculture in the WTO, page 18. The OECD also has asserted that increased
output-based payments generally (along with price supports) contribute to lower world prices
and impose costs on producers in countries that do not protect their domestic markets.
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final bound level is likely to be more than $60 billion when converted from EU to U.S.
currency, or more than three times the U.S. level. Moreover, if the estimated $24-$25
billion or more in EU blue box payments were included, EU spending might be more
than 4 times the U.S. bound level.
U.S. Proposal. Concerns about this large disparity in spending undergird the
U.S. proposal for achieving further reductions in domestic and export subsidies and
in agricultural trade barriers, which was presented to the WTO Agriculture
Committee in June 2000. The proposal includes the following key elements:
•
Domestic support disciplines would be “simplified” by placing supports in one
of two (rather than the current three) categories: exempt supports, for those with
no, or minimally, distorting effects on production or trade; and nonexempt
supports subject to reduction commitments. This effectively would eliminate the
blue box exemption claimed by the EU for its compensatory payments.
•
Nonexempt supports would be reduced as follows: reductions would start at
member countries’ final bound AMS; each one’s AMS would be reduced to a
new final bound level that is equal to a fixed percentage of the members’ value
of total agricultural production; this fixed percentage would be the same for all
members – for example, 10%, 15%, or some other figure yet to be negotiated;
and reductions would be made through progressive annual reductions over a
fixed period. In summary, while final levels of support (in absolute value) might
still differ among countries, they would be the same when measured as a
proportion of the country’s production value.
•
The criteria for determining exempted support measures would be “enhanced
further...while ensuring all exempt measures are targeted, transparent, and, at
most, minimally trade distorting.”
•
Special consideration would be given for exemptions of support measures that
are essential to the development objectives of developing countries.
EU Proposal. EU officials have criticized the U.S. proposal, arguing that its
formula would require few if any cuts in U.S. farm programs, because U.S. support
as a percentage of the value of total output is much lower than the EU’s (see figure
4). If reduction formulas were based on support per farmer, the United States would
be required to make larger reductions (see figure 5).18
The EU tabled its own comprehensive proposal for reforming agricultural trade
in December 2000.19 Key elements affecting domestic subsidies include:
•
The need to recognize the “multifunctional role of agriculture” (see
“Multifunctionality” and Nontrade Objectives, on page 17, for an explanation);
18 “U.S. Agriculture Proposal Receives Mixed Response at WTO Talks,” Inside U.S. Trade,
July 7, 2000.
19 EC Comprehensive Negotiating Proposal (G/AG/NG/W/90), December 14, 2000.
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•
Acknowledgment that the current URAA framework for addressing domestic
supports generally is appropriate, providing a basis for aid that moves away from
price support towards more transparent and less trade distorting policies. Aid
which varies in relation to market price changes can be particularly trade
distorting and should specifically be disciplined;
•
Pursuit of further AMS reductions, starting from final bound commitment levels
under the 1994 agreement, “by a further strengthening of the rules concerning
non-product specific domestic support, and a by a reduction of the ‘de minimis’
clause for developed countries;”
•
Retention of the concept of the blue and green boxes and the general rules for
their use, although detailed rules would be open for discussion;
•
A re-examination of the criteria for placing measures into the green box to
ensure both minimal trade distortion and at the same time appropriate coverage
of other societal goals such as environmental protection and rural development
(see “Multifunctionality” and Nontrade Objectives, page 17);
•
Specific disciplines applied to variable amber box subsidies that effectively
increase exports by providing compensation for market price variations.
Defending its blue box payments in a paper submitted to the WTO Committee
on Agriculture in June 2000, the EU cited an OECD simulation analysis that found:
“...compared to market support, area payments in one country or region, whether tied
to a requirement to plant or not, lead to smaller production, trade and welfare impacts
on other countries and regions.”20
Cairns Group Proposal. The Cairns group of agricultural exporting
countries submitted its proposal on domestic support in September 2000. The group
declared that current disciplines and reductions are “clearly inadequate and have not
resulted in a fundamental shift away from trade and production-distorting forms of
domestic support.”21 More specifically, the proposal includes:
•
Use of a formula approach to achieve “major reductions in trade and production
distorting domestic support, including AMS and blue box, leading to the
elimination of such support and thus the removal of disparities in the levels of
20 OECD, A Matrix Approach to Evaluating Policy: Preliminary Findings from the Policy
Evaluation Matrix Pilot Studies of Crop Policy in the EU, the U.S. Canada, and Mexcio,”
February 2000, as quoted in WTO, European Communities Proposal: The Blue Box and
Other Support Measures to Agriculture (G/AG/NG/W/17), June 28, 2000.
21 Cairns Group Negotiating Proposal, Domestic Support (G/AG/NG/W/35), September 22,
2000. The Cairns group (formed in 1986 in Cairns, Australia) includes Argentina, Australia,
Brazil, Canada, Chile, Colombia, Fiji, Indonesia, Malaysia, New Zealand, Paraguay, the
Philippines, South Africa, Thailand, and Uruguay. The group has been the most vocal in
calling for the removal of trade barriers and for substantial reductions in subsidies affecting
trade.
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this support...” with the time period and other parameters agreed to in the
negotiations;
•
A “substantial downpayment” in the first year of implementation – e.g., not less
than a 50% initial reduction in trade and production-distorting supports;
•
Commitments that are “disaggregated” to ensure that the reductions will occur
on all agricultural products (for an explanation, see Other Issues, on page 17);
•
Review of green box criteria to ensure that all such supports fundamentally are
not, or are no more than minimally, trade- or production-distorting;
•
Recognition of the need for special and differential treatment to assist developing
countries.
Developing Countries’ Views. A June 2000 submission to the WTO by a
group of 11 developing countries focuses on the concept of special and differential
treatment for such countries, which generally infers greater flexibility and longer
phase-in periods for WTO rules. The submission criticizes the developed countries
for increasing domestic subsidies (including those in the green box). The developing
countries’ proposal recommends the creation of a “Development Box” with policy
measures that aim to enhance developing countries’ food security and their capacity
to produce their own food; to sustain employment for the rural poor; to support small
farmers; and for other purposes (see also “Multifunctionality” and Non-trade
Objectives,” on the following page). They also argue for eliminating the green box
category in favor of a single general box for all subsidies, with a fixed common level
of support, above which subsidies would be prohibited.
“Multifunctionality” and Non-trade Objectives. The EU, along with
Japan and several other countries, have voiced concern that reforms in agricultural
trade should not come at the expense of other policy objectives important to an
individual country. They have introduced a widely discussed concept commonly
known as “multifunctionality of agriculture.” Proponents of this concept argue that
production-linked support for agriculture may be necessary to achieve socially
desirable benefits that are not necessarily agricultural. They believe that exemptions
should be permitted if such support creates such benefits as open space, biodiversity,
food safety, protection of soil and water resources; contributes to cultural goals;
alleviates poverty; and/or sustains the economic viability of rural communities. The
United States generally has argued that trade-distorting measures and protection
should not be used to pursue non-trade objectives. The United States and Cairns
Group view multifunctionality and food security as disguised rationales for shielding
agriculture through the use of trade-distorting support and protection.22
Other nontrade objectives also could be introduced into the negotiations. For
example, the EU has cited its growing body of legislation on animal protection,
covering farming, transport, slaughter and experimentation. It noted, in a June 2000
22 See also USDA/ERS, Multifunctionality in the WTO trade negotiations (overview), at:
[http://www.ers.usda.gov/briefing/WTO/multifunctionalityoverview.htm].
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submission to the WTO, that “high animal welfare standards can increase costs to
producers over and above any possible increased returns from the market,” and that
“trade liberalization can exacerbate this effect.”23 In its December 2000
comprehensive submission, the EU proposes, as possible actions to address animal
welfare, the development of multilateral agreements, appropriate labeling, and
exempting “compensation of additional costs to meet animal welfare standards from
reduction commitments where it can be clearly shown that these costs stem directly
from the adoption of higher standards...”
Another nontrade objective is food security, which some countries define as the
ability for their own producers to provide all, or at least much, of the food needs of
the population. On food security, Japan has stated that domestic agricultural
production should have the primary role of ensuring food supply by increasing
production, and it consequently calls for an examination of policy interventions in
support of that role. Others including the United States embrace a broader definition
of food security whereby people have the means to obtain adequate food either by
growing it themselves or by earning enough income to buy it at home or overseas.
Other Issues. Currently, commitments to reduce domestic subsidies are on
an aggregated basis – that is, support for individual commodities are combined into
a total annual level of spending for the purposes of reporting AMS. Under this
approach, countries can seek competitive advantage in one commodity area and
reduce subsidies in another. Some suggest that commitments be “disaggregated” so
that future limitations on support would be commodity-specific, particularly for those
commodities that are more heavily subsidized such as dairy, sugar, and various grains.
Other considerations include the relationship between reforms in domestic support
and other trade policies (i.e., export subsidies and import barriers); whether reduction
commitments, which are now expressed in nominal terms, should be adjusted to
account for inflation and currency exchange rates; and the production and trade
effects of the current 5% de minimis rule.24
Implications for U.S. Agricultural Policy
The URAA potentially imposes constraints on U.S. policymakers in considering
both short-term economic relief for farmers and longer term policy. Most provisions
of the 1996 farm law (P.L. 104-127) expire in 2002. Congress already is considering
legislation to succeed the 1996 law. The House Agriculture Committee, for example,
was expected to begin markup in late July 2001; the Senate Agriculture Committee
has been holding hearings on a new bill.
23 WTO, European Communities Proposal: Animal Welfare and Trade in Agriculture
(G/AG/NG/W/19), June 28, 2000.
24 For more information see the ERS briefing room on the World Trade Organization at:
[http://www.ers.usda.gov/briefing/WTO/], and Agriculture: Work in the WTO, The Current
Negotiations, at the WTO site: [ http://www.wto.org/english/tratop_e/agric_e/negoti_e.htm].
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The key section of the 1996 law, Title I (AMTA), was intended to accelerate an
ongoing policy trend toward exposing U.S. farmers to the greater opportunities, but
also the higher risks, of the global marketplace. This was done primarily by ending
the payments made to grain and cotton producers that were tied to production and
prices, and replacing them with gradually declining “transition” payments, totaling
about $36 billion over the 7 years ending in 2002.
However, the fact that billions of dollars in supplemental payments have been
provided by Congress for 3 years in a row (and are likely to be provided again in
2001), in response to the downturn in prices for major farm commodities, has caused
a closer and critical examination of the 1996 policy direction. When these
supplemental payments are added to already programmed spending, outlays for U.S.
commodity programs are reaching record levels, despite a policy that initially was
intended to wean farmers from federal support.25
Ad Hoc Relief
There was intense interest, here and abroad, in how the United States would
classify, for its WTO notifications, the ad hoc farm assistance. The 1998 AMS
notification, made in June 2001, was the first to reflect this assistance. In this
notification, the $2.8 billion in market loss payments to PFC participants ultimately
were classified as amber (i.e., potentially trade-distorting), but not counted toward the
AMS because they were determined to be non-commodity specific support, and their
cost was not high enough to make all non-commodity specific spending for the year
exceed the 5% de minimis threshold. In other words, when the payments were added
to all other non-product-specific support, the total ($4.6 billion) was still beneath the
de minimis threshold of 5% of the value of all U.S. agricultural production. (This
value was $191 billion in 1998; 5% of this figure is about $9.5 billion).
The decision to classify the payments as amber was controversial – even though
they did not have to be counted toward the AMS for 1998. “Under WTO rules, these
market loss payments must be classified in the amber box,” the Secretary of
Agriculture announced in June. “By classifying them properly, we set the right
precedent for other nations in the way they classify their own trade-distorting
subsidies, and we set an open and above-board tone as we move toward a challenging
new round of trade negotiations in the WTO.” Some agricultural interests supported
the decision; the American Farm Bureau Federation (AFBF), for example, noted that
the market loss payments were made in response to low farm prices, and that
classifying them as amber maintained the credibility of the system.26
Others, including the House Agriculture Committee Chairman, criticized the
Administration for classifying the payments as amber. The chairman argued that the
25 Net outlays for crop loan-related subsidies alone have increased from zero in FY1996 and
FY1997 to $8.1 billion in FY2000 and an estimated $6.4 billion in FY2001. Such subsidies
are authorized by the 1996 farm law, but the high level of outlays, a result of low market
prices, was not anticipated at the time. These types of loan-related outlays are counted toward
the AMS in U.S. notifications to the WTO.
26 Statement by Bob Stallman, AFBF President, June 22, 2001.
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payments should have been placed in the green box because they were provided after
the production year and thus could not influence planting decisions. "The USDA
decision creates a precedent for classifying assistance that will apply to payments also
made in 1999 and 2000, as well as restrict our ability to make these payments in the
future," the chairman stated, adding: “Since market loss payments are based on
Agricultural Market Transition Act payments, this action could call into question the
placement of non-trade distorting AMTA payments in the WTO green box."27
Long Term Farm Policy
The next omnibus farm bill is expected to be signed into law before the WTO
negotiations on agriculture are concluded. The long-term farm policy developed in
this measure is likely to be shaped not only by current U.S. and world market
conditions and by federal budgetary constraints (as they almost always do), but also
by WTO developments. More specifically, congressional perceptions of progress in
agricultural trade reform, and of other countries’(e.g., the EU’s) commitments to
further discipline their own domestic farm spending also could influence the type and
level of assistance that U.S. farmers may be provided after 2002.
At the same time, the official U.S. negotiating position in the WTO is to continue
to further reduce trade-distorting domestic farm subsidies and to achieve a more
equitable balance among member nations. Thus, lawmakers are paying close attention
to how various policy options might affect both current U.S. URAA obligations, and
U.S. negotiations in the new round.
Lawmakers have been asking which “box” – amber or green – the farm support
proposals, now being offered by agricultural interest groups, might belong. Those
perceived to have the least potential to distort trade, and to be exempt from WTO
reduction commitments, might ultimately be viewed as the most attractive, particularly
if they also achieve other key policy goals, most notably raising farm income.
Examples of such proposals include direct payments not linked to production or
prices, assistance to achieve environmental and conservation goals on the farm, and
funding for research and market development.
One policy option receiving widespread attention and support is some form of
new “counter-cyclical assistance” – generally as a supplement to other, existing policy
tools such as marketing loans and fixed payments. Although the various
counter-cyclical proposals differ in detail, they all share a common objective: to build
into standing law an automatic trigger that would provide more government support
when farm prices and/or incomes decline, and less support when they improve.28
However, the URAA requires that programs tied to current prices or production
be counted as amber. Some groups have argued that their counter-cyclical proposals
27 House Agriculture Committee press release, June 22, 2001.
28 For an explanation of this policy approach, see What Is “Counter-Cyclical Assistance”?
In the CRS electronic briefing book on Agricultural Policy and the Farm Bill, and CRS
Report RS20901, Farm “Counter-Cyclical Assistance.”
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could be designed in a way that they would not be amber (i.e., trade-distorting). For
example, if payments to farmers were triggered by low income (as measured by gross
receipts for one or more commodities) rather than low prices, they would be exempt,
they argue. Others disagree, noting that it is usually low prices that cause low
income. The current Under Secretary of Agriculture for Farm and Foreign
Agriculture stated in June 2001 that he has not yet found a counter-cyclical proposal
that would satisfy the WTO green box definition.
The counter-cyclical approach is just one of several major options now being
debated for inclusion in a new farm bill. It is not yet clear what types of program
tools Congress ultimately will choose for supporting domestic agriculture in 2002 and
beyond. But most observers believe that trade considerations will be a significant
consideration in their development.