Agriculture in the WTO: Rules and Limits on Domestic Support

April 20, 2015 (RS20840)

Contents

Figures

Appendixes

Summary

Omnibus U.S. farm legislation—referred to as the farm bill—is renewed every five or six years. Farm income and commodity price support programs have been a part of U.S. farm bills since the 1930s. Each successive farm bill usually involves some modification or replacement of existing farm programs. A key question likely to be asked of every new farm proposal or program is how it will affect U.S. commitments under the World Trade Organization's (WTO's) Agreement on Agriculture (AoA) and its Agreement on Subsidies and Countervailing Measures (SCM).

The United States currently is committed, under the AoA, to spend no more than $19.1 billion annually on those domestic farm support programs most likely to distort trade—referred to as amber box programs and measured by the aggregate measure of support (AMS). The AoA spells out the rules for countries to determine whether their policies—for any given year—are potentially trade-distorting, and how to calculate the costs.

An additional consideration for WTO compliance—the SCM rules governing adverse market effects resulting from a farm program—comes into play when a domestic farm policy effect spills over into international markets. The SCM details rules for determining when a subsidy is "prohibited" (e.g., certain export- and import-substitution subsidies) and when it is "actionable" (e.g., certain domestic support policies that incentivize overproduction and result in significant market distortion—whether as lower market prices or altered trade patterns). Because the United States is a major producer, consumer, exporter, and/or importer of most major agricultural commodities, the SCM is relevant for most major U.S. agricultural products. As a result, if a particular U.S. farm program is deemed to result in market distortion that adversely affects other WTO members—even if it is within agreed-upon AoA spending limits—then that program may be subject to challenge under the WTO dispute settlement procedures.

Designing farm programs that comply with WTO rules can avoid potential trade disputes. Based on AoA and SCM rules, U.S. domestic agricultural support can be evaluated against five specific successive questions to determine how it is classified under the WTO rules, whether total support is within WTO limits, and whether a specific program fully complies with WTO rules.

Agriculture in the WTO: Rules and Limits on Domestic Support

Introduction

Trade plays a critical role in the U.S. agricultural sector. USDA estimates that exports account for about 20% of total U.S. agricultural production.1 Because the United States plays such an important role in so many agricultural markets, its farm policy is often subject to intense scrutiny both for compliance with current WTO rules and for its potential to diminish the breadth or impede the success of future multilateral negotiations—in part because a farm bill locks in U.S. policy behavior for an extended period of time during which the United States would be unable to accept any new restrictions on its domestic support programs.

Omnibus U.S. farm legislation—referred to as the farm bill—is renewed every five or six years. Farm income and commodity price support programs have been a part of U.S. farm legislation since the 1930s.2 Each successive farm bill usually involves some modification or replacement of existing farm programs. The current omnibus farm bill, the Agricultural Act of 2014 (P.L. 113-79; the 2014 farm bill), which was signed into law on February 7, 2014, made several substantial changes to the previous farm safety net of the 2008 farm bill.3 Many of the new farm programs became operational for the current 2014 crop year. Most of the 2014 farm bill agricultural provisions will not expire until September 30, 2018, or with the 2018 crop year. Ultimately the current farm bill will either be replaced with new legislation, temporarily extended, or allowed to lapse and be replaced with "permanent law"—a set of essentially mothballed provisions for the farm commodity programs that date from the 1930s and 1940s.

The most recent U.S. notification to the WTO of domestic support outlays (made on December 8, 2014) is for the 2012 crop year, which was governed by farm programs of the 2008 farm bill.

WTO Commitments May Influence Policy Choices

A potential major constraint affecting U.S. agricultural policy choices is the set of commitments made as part of membership in the World Trade Organization (WTO) 4, with its various agreements governing agriculture and trade,5 including dispute settlement.6 With respect to disciplines governing domestic agricultural support, two WTO agreements are paramount—the Agreement on Agriculture (AoA)7 and the Agreement on Subsidies and Countervailing Measures (SCM).8

The AoA sets country-specific aggregate spending limits on the most market-distorting policies. It also defines very general rules covering trade among member countries. In general, domestic policies or programs found to be in violation of WTO rules may be subject to challenge by another WTO member under the WTO dispute settlement process. If a WTO challenge occurs and is successful, the WTO remedy likely would imply the elimination, alteration, or amendment by Congress of the program in question to bring it into compliance. Since most governing provisions over U.S. farm programs are statutory, new legislation could be required to implement even minor changes to achieve compliance.9 As a result, designing farm programs that comply with WTO rules can avoid potential trade disputes.

This report provides a brief overview of the WTO commitments most relevant for U.S. domestic farm policy. A key question that policymakers ask of virtually every new farm proposal is, how will it affect U.S. commitments under the WTO? The answer depends not only on cost, but also on the proposal's design and objectives, as described below.

Agreement on Agriculture (AoA)

Under the AoA, WTO member countries agreed to general rules regarding disciplines on domestic subsidies (as well as on export subsidies and market access). The AoA's goal was to provide a framework for the leading members of the WTO to make changes in their domestic farm policies to facilitate more open trade.

The WTO's AoA categorizes and restricts agricultural domestic support programs according to their potential to distort commercial markets. Whenever a program payment influences a producer's behavior it has the potential to distort markets (i.e., to alter the supply of a commodity) from the equilibrium that would otherwise exist in the absence of the program's influence. Those outlays that have the greatest potential to distort agricultural markets—referred to as amber box subsidies—are subject to spending limits.10 In contrast, more benign outlays (i.e., which cause less or minimal market distortion) are exempted from spending limits under green box, blue box, de minimis, or special and differential treatment exemptions.11

The AoA contains detailed rules and procedures to guide countries in determining how to classify its programs in terms of which are most likely to distort production and trade; in calculating their annual cost, measured by the Aggregate Measure of Support (AMS) index; and in reporting the total cost to the WTO. Specifically, the WTO uses a traffic light analogy to group programs.

These AoA classifications are described in more detail below in the section entitled, "Questions for Evaluating WTO Compliance of Domestic Farm Spending." The most recent U.S. notification to the WTO of its domestic farm program spending is provided in the Appendix.

Agreement on Subsidies and Countervailing Measures (SCM)

To the extent that domestic farm policy effects spill over into international markets, U.S. farm programs are also subject to certain rules under the Agreement on Subsidies and Countervailing Measures (SCM).14 The SCM details rules for determining when a subsidy is "prohibited" (as in the case of certain export and import-substitution subsidies) and when it is "actionable" (as in the case of certain domestic support policies that incentivize overproduction and result in significant market distortion—whether as lower market prices or altered trade patterns).15

The key aspect of SCM commitments is the degree to which a domestic support program engenders market distortion. Based on precedent from past WTO decisions, several criteria are important in establishing whether a subsidy could result in significant market distortions:

The SCM evaluates the "market distortion" of a program or policy in terms of its measurable market effects on the international trade and/or market price for the affected commodity:

For any farm program that is challenged under the SCM, a WTO dispute settlement panel will review the relevant trade and market data and make a determination of whether the particular program being challenged resulted in a significant market distortion.

Under WTO rules, challenged subsidies that are found to be prohibited by a WTO dispute settlement panel must be stopped or withdrawn "without delay" in accordance with a timetable laid out by the panel; otherwise the member nation bringing the challenge may take appropriate countermeasures. Similarly, actionable subsidies, if successfully challenged, must be withdrawn or altered so as to minimize or eliminate the distorting aspect of the subsidy, again as laid out by a WTO panel or as negotiated between the two disputing parties.

WTO Dispute Settlement Understanding (DSU)

The WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) provides a means for WTO members to resolve disputes arising under WTO agreements. WTO members must first attempt to settle their dispute through consultations, but if these fail, the member initiating the dispute may request that a panel examine and report on its complaint. The DSU provides for Appellate Body review of panel reports, panels to determine if a defending member has complied with an adverse WTO decision by the established deadline in a case, and possible retaliation if the defending member has failed to do so.

As of April 8, 2015, 492 complaints have been filed under the DSU, with nearly one-half (232) involving the United States as a complainant or defendant.16 The Office of the United States Trade Representative (USTR) represents the United States in WTO disputes.17

Questions for Evaluating WTO Compliance of Domestic Farm Spending

The United States currently is committed, under the AoA, to spend no more than $19.1 billion per year on amber box trade-distorting support. The WTO's AoA procedures for classifying and counting trade-distorting support are somewhat complex; however, four questions might be asked to determine whether a particular farm measure will cause total U.S. domestic support to be above or below the $19.1 billion annual AMS limit. A subsequent fifth question may be asked to ascertain whether AoA-compliant outlays are also SCM-compliant.

Question 1: Can This Measure Be Placed in the Green Box?

No limits are placed on green box spending, since it is considered to be minimally or non-trade distorting. To qualify for exemption in the green box, a program must meet two general criteria, as well as a set of policy-specific criteria relative to the different types of agriculture-related programs.18 The two general criteria are:

In addition, every green-box-qualifying program must comply with at least one of the following criteria and conditions specific to the program itself.

In summary, the above measures are eligible for placement in the green box (i.e., exempted from AMS) as long as they (1) meet general criteria one and two, above; and (2) additionally comply with any criteria specific to the type of measure itself. If these conditions are satisfied, no further steps are necessary; the measure is exempt.19 However, if not, then the next step is to determine whether it qualifies for the blue box exemption.

Question 2: Can This Measure Be Placed in the Blue Box?

No limits are placed on blue box spending, in part because it contains safeguards to prevent program incentives from expanding production. To qualify for exemption in the blue box,20 a program must be a direct payment under a production-limiting program,21 and must also either:

If these conditions are satisfied, the measure is exempt. However, if not, then it is considered to be an amber box policy, and the next step is to determine whether spending is above or below the 5% de minimis rate (see below).

Question 3: If Amber, Will Support Exceed 5% of Production Value?

The AoA states that developed country members (including the United States) do not have to count, when calculating their total AMS, the value of amber box programs whose total cost is small (or benign) relative to the value of either a specific commodity, if the program is commodity-specific, or the value of total production, if the program is not commodity-specific.22 In other words, "amber box" (i.e., potentially trade-distorting) policies may be excluded under the following two de minimis exclusions.

These provisions are known as the so-called de minimis clause. To reiterate, it is not enough to determine whether a single amber box measure (i.e., one not classified as either green or blue) by itself may be beneath the 5%-of-production-value trigger. Its level of support must be added to the support provided by other non-exempt (amber box) measures. If the cost of any particular measure effectively boosts the total support above 5%, then all such support must be counted toward the U.S. total annual AMS.

Question 4: Does Total Annual AMS Now Exceed $19.1 Billion?

Finally, all support that fails to qualify for an exemption is added for the year. If total U.S. AMS does not exceed $19.1 billion, the WTO commitment is met.

The 2014 farm bill includes a provision, Section 1601(d), that serves as a safety trigger for USDA to adjust program outlays (subject to notification being given to both the House and Senate agriculture committees) in such a way as to avoid breaching the AMS limit (Figure 1 and Figure 2). Through 2012, the most recent year for which the United States has made notifications to the WTO, the United States has never exceeded its AMS limit. The closest approach was in 2000, when the United States notified a total AMS of $16.8 billion.

Question 5: Does Domestic Support Result in Significant Market Distortion in International Markets?

An additional consideration for WTO compliance—the SCM rules governing adverse market effects resulting from a domestic farm support program—comes into play when a domestic farm policy effect spills over into international markets. This is particularly relevant for the United States because it is a major producer, consumer, exporter, and/or importer of most major agricultural commodities, but especially of temperate field crops (which are the main beneficiaries of U.S. farm program support). If a particular U.S. farm program is deemed to result in market distortion that adversely affects other WTO members—even if it is compliant with all AoA commitments and agreed-upon spending limits—then that program may be subject to challenge under the WTO dispute settlement procedures (Brazil's WTO case against U.S. cotton programs is a prime example of this).23

Conclusion

The AoA's structure of varying spending limits across the amber, blue, and green boxes is intentional. By leaving no constraint on spending in the green box while imposing limits on AMS spending, the WTO implicitly encourages countries to design their domestic farm support programs to be green-box-compliant.24 Negotiations to further reform agricultural trade within the context of the WTO—referred to as the Doha Round of multilateral trade negotiations—began in 2001.25 They are not expected to be completed in the near future. As lawmakers consider policy options, other countries will be evaluating not only whether, in their view, these options will comply with the U.S. commitments under the AoA, but also how they reflect on the U.S. negotiating position in the Doha Round of talks.

The U.S. objective is for negotiations to result in substantial reductions in trade-distorting support and stronger rules that ensure that all production-related support is subject to discipline, while preserving criteria-based "green box" policies that can support agriculture in ways that minimize trade distortions. At the same time, Congress might seek domestic farm policy measures that it can justify as AoA- and SCM-compliant.

Figure 1. U.S. Amber Box Outlays Subject to AMS Spending Limit

Source: WTO, annual notifications of the United States through 2012.

Figure 2. Total U.S. Amber Box Outlays Including De Minimis Exclusions

Source: WTO, annual notifications of the United States through 2012.

Notes: WTO notifications are available at https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S003.aspx.

Figure 3. U.S. Annual Notifications to the WTO, All Categories

Source: WTO, annual notifications of the United States through 2012.

Figure 4. U.S. Annual Green Box Notifications by Green Box Category

Source: WTO, annual notifications of the United States through 2012.

Appendix. Classification of U.S. Policies in 2012

The last U.S. notification to the WTO was made on December 8, 2014, for the 2012 marketing year and the farm programs of the 2008 farm bill. Following are examples of how various U.S. domestic policies were classified in that notification, along with the associated values.26

Green Box Policies ($127.5 Billion)

The United States notified $127.5 billion in green box outlays, including outlays under the following programs (Figure 4).

General Services ($10.3 Billion)

Domestic Food Aid ($106.8 Billion)

Decoupled Income Support ($4.8 Billion)

Payments for Relief from Natural Disasters ($0.344 Billion)

Structural Adjustment Through Investment Aids ($0.135 Billion)

Environmental Payments ($5.2 Billion)

Blue Box Policies ($0)

The United States has not notified any payments under the blue box since 1995 (the first year of WTO notifications). In that year, U.S. blue box notifications consisted entirely of target-price deficiency payments, which ended with 1996 farm law (P.L. 104-127).

De Minimis Exclusions ($5.3 Billion)

Amber Box Policies ($6.9 Billion)

Prior to the de minimis exclusions, U.S. amber box notifications totaled $12.1 billion, including $11.8 billion of product-specific outlays and $0.3 billion of non-product-specific outlays. However, $5.0 billion in product-specific support and all non-product-specific support of $0.3 billion were exempted from the AMS limit under the de minimis exclusions, leaving $6.9 billion in amber box support subject to the $19.1 billion limit.

Product-Specific Support ($11.8 Billion)27

Non-Product Specific Support ($0.3 Billion)31

Footnotes

1.

CRS Report R43696, Agricultural Exports and 2014 Farm Bill Programs: Background and Issues.
2.

See CRS Report R43448, Farm Commodity Provisions in the 2014 Farm Bill (P.L. 113-79).
3.

CRS Report R43076, The 2014 Farm Bill (P.L. 113-79): Summary and Side-by-Side.
4.

The WTO a global rules-based, member-driven organization dealing with the rules of trade between nations. As of June 26, 2014, the WTO included 160 members. See also CRS Report I10002, The World Trade Organization at 20 (In Focus), by [author name scrubbed].
5.

For a complete list of WTO agreements and their text, see WTO, The Legal Texts (Cambridge University Press and World Trade Organization, 1999); hereinafter referred to as WTO Legal Texts; available online at https://www.wto.org/english/docs_e/legal_e/legal_e.htm.
6.

See CRS Report RS20088, Dispute Settlement in the World Trade Organization (WTO): An Overview.
7.

See CRS Report RL32916, Agriculture in the WTO: Policy Commitments Made Under the Agreement on Agriculture (pdf).
8.

See CRS Report RS22522, Potential Challenges to U.S. Farm Subsidies in the WTO: A Brief Overview.
9.

For example, see CRS Report RL32571, Brazil's WTO Case Against the U.S. Cotton Program.
10.

These spending and subsidy commitments are detailed in each Member's country schedule. For more information, see CRS Report RL32916, Agriculture in the WTO: Policy Commitments Made Under the Agreement on Agriculture (pdf).
11.

WTO special and differential treatment exemptions are reserved for "developing" countries and are thus not relevant for evaluating U.S. domestic farm policy.
12.

In other words, general domestic support (not specific to any one commodity, such as rural infrastructure or extension) that is below 5% of the value of total agricultural production is deemed sufficiently benign that it does not have to be included in the amber box. Similarly, support for a specific commodity (such as sugar or dairy price support, marketing loan benefits, commodity storage payments, etc.) that is below 5% of that commodity's value of production is deemed sufficiently benign that it does not have to be included in the amber box.
13.

The term "Red Box" is not actually used by the WTO, but is included here to complete the traffic light analogy.
14.

For details, see CRS Report RS22522, Potential Challenges to U.S. Farm Subsidies in the WTO: A Brief Overview.
15.

Part II: Prohibited Subsidies, Articles 3-4, and Part III: Actionable Subsidies, Articles 5-7, ASCM, WTO Legal Texts; available at http://www.wto.org/english/docs_e/legal_e/legal_e.htm.
16.

WTO dispute settlement data is available at https://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm.
17.

See CRS Report RS20088, Dispute Settlement in the World Trade Organization (WTO): An Overview.
18.

The so-called green box is actually Annex 2 of the AoA, WTO Legal Texts.
19.

For examples of U.S. outlays on various green box programs, see the Appendix of this report which contains the most recent U.S. notification to the WTO of its domestic farm program spending.
20.

Article 6.5, AoA, WTO Legal Texts.
21.

An example of a production-limiting program is the now-abandoned U.S. target-price, deficiency-payment program that linked payments to land set-aside requirements. The target-price, deficiency-payment program was first established under the 1973 farm bill (the Agricultural and Consumer Protection Act of 1973; P.L. 93-86), and was terminated by the 1996 farm bill (The Federal Agriculture Improvement and Reform Act of 1996; P.L. 104-127). As a result, the United States only notified blue box payments under this program for the year 1995.
22.

Article 6.4, AoA, WTO Legal Texts.
23.

CRS Report R43336, The WTO Brazil-U.S. Cotton Case.
24.

Zulauf, Carl and David Orden, U.S. Farm Policy and Risk Assistance: The Competing Senate and House Agriculture Committee Bills of July 2012, ICTSD Program on Agricultural Trade and sustainable development, Issue Paper No. 44, International Centre for Trade and Sustainable Development, Geneva, Switzerland, http://www.ictsd.org.

25.

For more information, see CRS Report RS22927, WTO Doha Round: Implications for U.S. Agriculture.
26.

"U.S. Domestic Support Notification for Marketing Year 2012," G/AG/N/USA/100, WTO, December 8, 2014.
27.

Of which $5.0 billion was exempted under the product-specific de minimis exclusion as described above.
28.

AMS is a measure of both actual and implied support and not necessarily a measure of actual budget outlays. In the case of both dairy and sugar programs, U.S. support—provided primarily in the form of import tariff quotas—is measured by applying the difference between higher U.S. support prices and lower international prices to U.S. domestic production.
29.

These are upland cotton economic adjustment assistance (EAOA) payments ($60.2 million).

30.

LIP is the Livestock Indemnity Program; LFP is the Livestock Forage Disaster Program; ELAP is the Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish Program; and TAP is the Tree Assistance Program.
31.

Of which the entire amount was exempted under the non-product-specific de minimis exclusion as described above.