US Farm Policy and the WTO

Joe GlauberChief Economist, USDA

27 April 2012

On the collapse of the WTO G6 ministerial July 2006

“This is neither desirable nor inevitable. It could so easily have been avoided. What stands between us and the modalities of an agreement are not vast numbers or enormous sums…the United States was unwilling to accept, or indeed to acknowledge, the flexibility being shown by others in the room and, as a result, felt unable to show any flexibility on the issue of farm subsidies…Actions have consequences and this action has led to the Round being suspended”

- EU Commissioner Peter Mandelson

Outline

Reforms in US agricultural policy, 1985-96

Uruguay Round

“Counter Reformation” and consequences for US trade policy

Doha

Current farm policy debate

Conclusions

Reforms in farm policy, 1985-95

Lower support prices

Moves towards greater planting flexibility

Moves towards decoupling payments from plantings

Conservation programs

But– Marketing loans introduced– Export subsidies

1996 farm billFreeze loan rates

Eliminate set asides; [almost] full planting flexibility

Replace deficiency payments with fixed transition payments

Eliminate honey and wool; phase out dairy support

But: – marketing loans for wheat and feed grains– No mechanism to lower support prices

Uruguay Round provides minimal disciplines on domestic support

Uruguay Round Agreement on Agriculture– 20% reduction in total amber box support

from 1986-88 base– Minimally distorting policies exempt from

reduction commitments (green box)– Supply limiting policies exempt from reduction

commitments (blue box)– Peace Clause

Broadly consistent with US farm policy

Trade Policy views-mid 1990s1995/96 record high prices– 1995 AMS: $6.2 b (well under cap of $23.1b)

With planned dairy phaseout under farm bill, AMS projected to fall to $1.2 billion by 2000 (Nelson 1997)

With deficiency payments gone, no need for blue box

US well positioned for next trade round– Lower AMS– Eliminate blue box– End peace clause

The “counter-reformation” in US farm policy

Collapse in prices in late 1990s => ad hoc legislations

Dairy program is extended

Ag Risk Protection Act 2000 => $6 billion increase in crop insurance spending

2002 Farm Bill– Raised loan rates; extended to pulses– Reintroduced counter-cyclical payments– Updated payment bases– Peanut reform

With consequences…

Amber box spending soars:– Almost $17 bil in 1999 and 2000– Marketing loan payments $8-9 bil/yr

US notifies ad hoc market loss assistance payments as amber

WTO members critical of increase in spending– Brazil investigates soybeans and cotton

support; brings cotton case to WTO in 2003

US amber box support

0

5,000

10,000

15,000

20,000

25,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

f

Mil

lio

n d

oll

ars

URAA limits

Doha sharpens incongruities between US trade policy goals and US farm policy

US 2002 proposal– Reduced combined amber and blue to 5% of

value of agricultural production– No extension for peace clause

Unlike Uruguay Round, US is isolated on domestic support issues– EU CAP reforms– Japan rice reforms

Total AMS as percent of binding

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

USEUJapan

Source: WTO submissions; Orden et al. 2011

Reversals in US trade policy

Perceived need to accommodate policies:– Changes in blue box to accommodate

countercyclical payments– Extension of peace clause to protect itself

from WTO challenges

Aug 2003: US-EU agreement (Blue box for CCPs in exchange for EU demands on sensitive products and export subsidies)– G20 forms—no more Blair House– C4 cotton initiative

Cancun collapse

Framework AgreementJuly 2004

Tradeoff of market access concessions in developing countries for concessions for US domestic support policies

US gets new blue box for CCPs but w/ additional disciplines

Developing countries get Special Products, Special Safeguard Mechanism

Percentage of Global Imports Potentially Affected by Special Product Designation

China

Korea

Taiwan

Turke

y

Mala

ysia

Indo

nesia

India

Thaila

ndBra

zil

Philipp

ines

Venez

uela

South

Afri

ca

Colom

bia

Argen

tina

0%10%20%30%40%50%60%70%80%90%

100%

5 percent of tariff lines 12 percent of tariff lines

Average trade over 2002-08, tariff lines ranked by import level

October 2005 US Proposal

Domestic support offer– Cut AMS cap by 60% => $7.6 bil– Cap blue box at 2.5% of vop => $4.8 bil– Cut OTDS by 53% => $22.6 bil

While offer on AMS and blue box recognized as significant, OTDS is seen as insufficient and far above applied levels

US offers on OTDS

Base Oct 2005 proposal

Jul 2006 Ministerial

Feb 2007 Jul 2007 Potsdam

Jul 2008 Lamy text

0

10

20

30

40

50

60

48

22.619 17 15 14.5

Offer Actual

Billion $

Overall Trade Distorting Support = Amber + Blue + de minimis

DDA texts as of Dec 2008

AMS cap reduced by 60% => $7.6 billion

Blue box capped at 2.5% VOP => $4.8 bil

De minimis reduced to 2.5% of VOP

Product specific caps for amber and blue box payments

Overall trade distorting support = AMS + Blue box + de minimis capped at $14.5 bil

2008 farm bill

Introduced area revenue plan (ACRE)– producers allowed to switch from CCP

program– Blue box => amber box

Supplemental disaster assistance (SURE) – Amber box

DDA implications:– Increased amber support– Decreased blue box

Probability of exceeding DDA commitments in 2018

Baseline No ACRE 100% ACRE

Product specific AMS > commitments

corn 10% 0% 22%

soybeans 2% 0% 18%

wheat 7% 0% 27%

cotton 8% 8% 0%

Total AMS > $7.6 bil 21% 18% 35%

OTDS > $14.5 bil 23% 17% 34%

Source: FAPRI Jan 2011

Current farm bill debate

Budget

Dissatisfaction with direct payments

Base versus planted acres

Role of crop insurance and “shallow losses”

Projected OutlaysSelected programs

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

0

5,000

10,000

15,000

20,000

25,000

Crop InsuranceConservationMLG+CCP+ACREDirect

Source: CBO Baseline—March 2012

Mil $

$8.6 b avg

$4.9 b

$0.6 b

$6.3 b

Budget proposals

Administration: $33 billion cut over 10 years

Ag Committees: $23 billion cut over 10 years with $15 bil coming from commodity programs

House: $33 billion

Dissatisfaction with Direct Payments

Need for payments questioned in times of high prices

Benefits accrue largely to landowners

Wide differences between planted and base acres

Payment limitation issues

But…

For many producers, DPs are the only payments received over past several years

Minimally trade distorting; notified as green box

Tie to conservation compliance

Growth of the crop insurance program

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

PremiumsOutlays

Mil $

Shallow losses

Source: American Farm Bureau Federation, Oct 17, 2011

Classification of Domestic Support Programs for WTO Notification

Program Under URAA Under Doha agreement

Direct payments Green Green

Marketing loan benefits Product-specific amber Product-specific amber

Counter-cyclical payments Non-product specific amber Blue

Crop insurance premium subsidies

Non-product specific amber Policies > 70%: non-product specific amberPolicies ≤ 70%: green

Crop insurance delivery costs (A&O + underwriting gains)

Green Green

ACRE payments Product-specific amber Product-specific amber

Supplemental disaster (SURE) Non-product specific amber Non-product specific amber

Livestock disaster payments Product-specific amber Product-specific amber

Dairy price support Product-specific amber Product-specific amber

Milk Income Loss Contract Product-specific amber Product-specific amber

Sugar Product-specific amber Product-specific amber

Conservation Reserve Program Green Green

Environmental Quality Incentive Program

Green Green

Conservation Stewardship Program

Green Green

Nutrition Programs Green Green

Program proposals

Transfer $ from DPs to ACRE/shallow loss programs (green => product-specific amber)

Extend Supplemental Disaster (non-product-specific amber)

Tie DP to cost of production (green => amber/blue)

Margin-based dairy program (potentially blue/green at least for base level protection)

Conclusions

Since mid-1990s, US farm policy has developed with little attention given to WTO disciplines (contrasts with other major subsidizers)

US trade policy has sought to accommodate farm policy changes (blue box for CCPs); but at a price (SP/SSM)

High prices have kept AMS levels low, but potential for breaching limits remains non-trivial if prices fall

Budget pressures present opportunity to make significant changes in farm policy, but likely outcome will favor policies that are tied to prices and actual plantings

Shift of green box programs to amber box