US Farm Policy and the WTO

1. US Farm Policy and the WTO Joe Glauber Chief Economist, USDA 27 April 2012

2. On the collapse of the WTO G6 ministerial July 2006 “This is neither desirable norinevitable. It could so easily have been avoided. What stands between us and themodalities of an agreement are not vast numbers or enormous sums…the United Stateswas unwilling to accept, or indeed to acknowledge, the flexibility being shown by others inthe room and, as a result, felt unable to show any flexibility on the issue of farmsubsidies…Actions have consequences and this action has led to the Round beingsuspended” -EU Commissioner Peter Mandelson

3. Outline • Reforms in US agricultural policy, 1985-96 • Uruguay Round • “Counter Reformation” and consequences for US trade policy • Doha • Current farm policy debate • Conclusions

4. 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

5. 1996 farm bill • Freeze 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

6. 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

7. Trade Policy views-mid 1990s • 1995/96 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

8. 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

9. 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

10. US amber box support URAA limits

11. 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

12. Total AMS as percent of binding Source: WTO submissions; Orden et al. 2011

13. 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

14. 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

15. Percentage of Global Imports Potentially Affected by Special Product Designation Average trade over 2002-08, tariff lines ranked by import level

16. 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

17. US offers on OTDS Billion $ Overall Trade Distorting Support = Amber + Blue + de minimis

18. 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 minimisreduced to 2.5% of VOP • Product specific caps for amber and blue box payments • Overall trade distorting support = AMS + Blue box + de minimiscapped at $14.5 bil

19. 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

20. Probability of exceeding DDA commitments in 2018 Source: FAPRI Jan 2011

21. Current farm bill debate • Budget • Dissatisfaction with direct payments • Base versus planted acres • Role of crop insurance and “shallow losses”

22. Projected OutlaysSelected programs Mil $ $8.6 b avg $6.3 b $0.6 b $4.9 b Source: CBO Baseline—March 2012

23. 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

24. 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

25. Growth of the crop insurance program Mil $

26. Shallow losses Source: American Farm Bureau Federation, Oct 17, 2011

27. Classification of Domestic Support Programs for WTO Notification

28. 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)

29. 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