Bridges Trade BioRes • Volume 7 • Number 2 • 2nd February 2007
US RELEASES DRAFT FARM BILL; TRADING PARTNERS CHALLENGE CORN SUBSIDIES
US RELEASES DRAFT FARM BILL; TRADING PARTNERS CHALLENGE CORN SUBSIDIES
On 31 January, the US administration unveiled a first draft of its new farm bill, set to replace the current bill from 2002 that expires in September. US trading partners are scrutinising the new farm bill with a keen eye, looking for signals that the US would be willing to cut subsidies — something they are calling for in order to revitalise and conclude the newly-resurrected Doha round (see related story, this issue).
Among the new measures, the draft farm bill seeks to address features challenged by the US’ trading partners at the WTO, including countercyclical payments that give farmers extra compensation during times of low international commodity prices. It would also earmark money for bio-energy development.
In related news, Canada — along with a large number of other US trading partners — recently challenged US corn subsidies at the WTO, in part to influence the rewrite of the farm bill.
Farm bill to address countercyclical payments
Unveiled by US Agriculture Secretary Mike Johanns, the new farm bill builds on the current one, cutting payments by US$18 billion over a five-year period (the price tag attached to the 2002 farm bill amounted to US$105 billion).
Of interest from a trade perspective, the farm bill seeks to replace current price-based countercyclical payments with revenue-based payments. Such direct payments could be classified as allowable "green box" payments at the WTO. While corn farmers have welcomed the move, other commodity producers are against it. Elements of the countercyclical payments were ruled illegal in a case brought to the WTO by Brazil targeting US cotton subsidies (see BRIDGES Weekly, 9 March 2005, http://www.ictsd.org/weekly/05-03-09/story1.htm).
The new farm bill would also remove planting flexibility limitations. In the cotton case, certain direct payments not targeted at any specific crop were nonetheless deemed by the WTO to fall within the amber box of trade-distorting capped payments — precisely because flowers and wild rice were excluded from eligibility. Because of this flexibility limitation, the payments were not eligible for classification as ‘green box’ support that distorts neither production nor trade. When these payments are counted as amber box support, the US appears to have exceeded its overall farm subsidy allowances.
In addition, the new farm bill would increase environmental funding by 20 percent to US$8.7 million over five years. The bill contains US$1.6 billion in new funding for renewable energy research, development and production, and US$2.1 billion in guaranteed loans for cellulosic ethanol projects. US$500 million would be invested in bio-energy and bio-based product research.
The bill also earmarks increased funding for social programmes, targeting beginning or socially disadvantaged farmers, and renewing the food and nutrition programmes for the poor. In addition, there would be payment ceilings targeting the wealthiest recipients, which now capture the lion’s share of US farm subsidies. These cuts would be realised through a cap on payments to farmers earning more than US$200,000 in on and off-farm income, down from the current cap at US$2.5 million.
The new bill would also dedicate US$400 million "to expand exports, fight trade barriers, and increase involvement in world trade standard-setting bodies."
Before it enters into force, Congress must approve the farm bill.
Reactions
Key US trading partners reacted cautiously to the draft farm bill. "If we are to have a successful outcome to the Doha Round, the US will need to propose more ambitious cuts and disciplines in trade-distorting domestic farm subsidies," said a spokesperson for the EU. Australian Government Minister for Trade, Warren Truss said "the overall program reductions proposed by Mr Johanns are an important improvement," adding however that "Australia has always held the firm view that these programs are trade distorting and should be phased out altogether."
Internally, the American Farm Bureau Federation (AFBF) generally prefers keeping the farm bill as is, and objected against the concept of payment caps. The AFBF has also opposed making any changes before a Doha deal is reached, as this would reduce US negotiating leverage.
According to Sherman Katz, a trade analyst at the Carnegie Endowment for International Peace, the Doha talks will not necessarily influence the farm bill. He commented that the debate will "move rapidly on its own steam and in its own direction unless and until something’s coming from Geneva and the Doha Round which pushes it in a different direction."
US corn subsidies challenged at the WTO
On 8 January, Canada initiated WTO dispute proceedings against a wide range of US corn and other agricultural subsidy programmes. Argentina, Australia, Brazil, the EU, Guatemala, Thailand and Uruguay recently joined in the complaint.
The Canadian government alleges that the US has exceeded its legal limit for trade-distorting subsidies in five of the past eight years. It is also specifically targeting the billions of dollars that Washington pays to corn farmers, charging that they have distorted world prices and hurt producers in Canada.
The complaint follows along the lines of Brazil’s successful WTO case against US support for cotton growers in 2005.
Corn singled out…
Ottawa is alleging that US subsidies hurt Canadian farmers and violate its own WTO obligations. It is targeting several types of payments under the US’ 2002 farm bill, its 1996 equivalent, and a raft of disaster assistance bills and other legislation on agriculture dating as far back as 1978.
Specifically with regard to corn, Canada claims that direct and indirect governmental support to the US corn industry allows US producers to undercut their Canadian counterparts and cause ’serious prejudice’ to their interests, in violation of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement).
…but domestic support broadly targeted
Canada also contends that the US, through the "improper exclusion" of some payments from its domestic support calculations, was actually in excess of its annual limit for providing trade-distorting support to farmers in 1999, 2000, 2001, 2004 and 2005. This would violate both the SCM Agreement and the Agreement on Agriculture.
Since 2000, the US has been allowed to provide its farmers up to US$19.1 billion in ‘amber box’ subsidies. Allegations about US subsidy spending are complicated by the fact that Washington has not formally notified its agricultural subsidies to the WTO since spending under the 2002 farm bill came into effect.
Ottawa argues that a series of US domestic support programmes - direct payments, production flexibility contract payments, counter-cyclical payments, market loss assistance payments (under ‘emergency’ legislation compensating farmers for low prices) - are linked to production decisions and thus should properly be classified as amber box support. Counting these programmes against the limit for amber box spending, however, puts the US over the allowable total.
In a further claim, Canada’s request said that the US provides some better-than-market-rate loans specifically to exporters. This, it contended, is incompatible with Washington’s own export subsidy commitments, as well as the SCM Agreement’s prohibition of subsidies contingent on export performance.Influencing the farm bill
Ottawa has strongly hinted that it is trying to influence US lawmakers as they write new legislation this year mapping out future agricultural spending. "The United States has been providing subsidies to its agricultural producers that create unfair market advantages," said David Emerson, Canada’s minister for international trade. "We hope to see the US live up to its obligations, particularly given that it has the opportunity to do so when it rewrites its farm bill this year."
By joining Canada’s request for consultations, some of the WTO’s largest Members appear to be warning US policymakers that even if they do not end up having to cut subsidies as part of the Doha round trade talks, they might have to do so under order from WTO dispute settlement - or else risk retaliatory sanctions.
After his country joined the complaint, Australian Trade Minister Warren Truss told Reuters that if the negotiations could not be resurrected, "the lawyers will have a field day… The negotiators will give way to the lawyers, who will take advantage of the expiry of the so-called peace clauses to exploit elements of the US and current European programmes in particular."
Complex corn-ethanol linkages
In joining up with Canada in the dispute, Brazilian WTO Ambassador Clodoaldo Hugueney Filho said "this is not just about corn," noting that his country was the world’s largest producer of ethanol — which is produced in increasing quantities in the US from subsidised corn. Brazil is already exporting substantial amounts of sugar-cane based ethanol, which is much less costly than that produced in temperate climate countries. However, the US maintains an import tariff on Brazilian ethanol while supporting its own domestic production.
While opinions differ with regard to the sustainability of producing ethanol from corn — a process that requires a high input of fossil fuels — US-based Institute for Agriculture and Trade Policy (IATP) has noted that as more corn in the US Midwest is distilled into ethanol, less corn will be entering the international marketplace with the potential to depress global corn prices.
Additional resources
Proposed US farm bill http://www.usda.gov/wps/portal/!ut/p/_s.7_0_A/7_0_1UH?contentidonly=true&contentid=view_proposals.xml.
ICTSD reporting; "EU executive criticizes US farm bill proposal," WASHINGTON POST, 1 February 2007; "Administration’s farm bill plan quickly attracts critics," THE HILL, 2 February 2007; "Johanns Unveils 2007 Farm Bill Proposals," USDA RELEASE, 31January 2007; "EU joins WTO complaint against U.S. corn subsidies" INTERNATIONAL HERALD TRIBUNE, 22 January 2007; "Doha round failure will set loose lawyers-Australia," REUTERS, 24 January 2007; "Global coalition joins U.S. subsidy challenge," GLOBE AND MAIL, 23 January 2007; "Canada set to challenge US farm subsidies at WTO," GLOBE AND MAIL, 9 January 2006.