Bridges Weekly Trade News Digest • Volume 12 • Number 19 • 28th May 2008
US Farm Bill Passes With Broad Support, Casting a Pall on World Trade Talks
Both houses of the US Congress passed a US$307 billion farm bill last week with majorities large enough to override President George W. Bush’s promised veto of the bill. The legislation largely continues the current system of agricultural subsidies for the next five years, despite a recent jump in food prices and farmers’ incomes. Critics are calling the new farm bill a missed opportunity for reform.
The passage of the bill, with its many provisions for trade-distorting subsidies, has raised fears that the US will be more constrained than ever in its negotiating stance in the ongoing push for a framework agriculture deal at the WTO.
In votes last week, the House of Representatives passed the bill 306-110, and the Senate 82-13, thus rendering the measure immune to an executive override. Under the US system, the President can veto measures passed by the House or Senate; however, if a bill achieves a two-thirds ’super majority’, it cannot be rejected by the executive. This bill is just the second time that President Bush’s veto has been overturned.
The measure received broad bipartisan support, garnering the votes of 216 Democrats and 90 Republicans in the House, and 47 Democrats, 34 Republicans, and one Independent in the Senate. The two Democratic contenders for the presidency, Senators Barack Obama and Hillary Clinton, expressed their approval of the bill, although neither was present for the vote. Senator John McCain, the presumptive Republican nominee for the presidency, also missed the vote, but criticised the bill’s “flawed policies that distort the markets,” and said that he would veto the measure if he were president.
While the farm bill is perhaps best known for its controversial subsidy payments, over two-thirds of the measure’s total funding has been allocated for food stamps, emergency food assistance, and other domestic nutrition programmes. Conservation programmes that aim to protect environmentally sensitive farmlands will receive US$27 billion, or roughly 9 percent of the total funding.
The more controversial sections of the bill, and the ones that could cause trouble in WTO negotiations, are those that govern farm subsidies, which will receive US$43 billion in the current bill (14 percent of the total cost). Another form of support, crop insurance to help shield farmers from losses, will be given US$23 billion (8 percent of the total).
Critics of the bill claim that it misses a key opportunity to lower subsidy levels at a time when farmers are enjoying substantial income increases due to high food prices. Indeed, with wheat prices 87 percent above their five-year average, soybean prices up 70 percent, and corn prices up 90 percent, producers have made windfall profits. Net farm income in the US will reach US$92.3 billion this year, more than 50 percent above where it was two years ago, according to US government statistics.
Complex world trade implications
The passage of the farm bill casts a shadow on trade talks at the WTO, as US negotiators aiming to conclude a trade deal this year must now work within the strictures of the new measure. If and when the Doha round concludes, the negotiated agreement will be put to a vote in Congress, and, if it approves the deal, the US will have to bring its farm payments into compliance with its WTO commitments. Congressional leaders on agriculture largely ignored ongoing WTO negotiations as they drafted the farm bill, saying that they will amend it if a Doha accord is finalised.
As Congress is unlikely to support a Doha agreement that conflicts with the programmes in the farm bill that it has just passed, US trade negotiators will likely be more restricted in the positions that they take in ongoing modalities talks. According to Public Citizen’s Lori Wallach, representatives who recently voted in favour of the farm bill will be unlikely to support any subsidy-lowering deal sent to Capitol Hill for approval.
In past trade talks at the WTO, the US agreed to reduce so-called ‘amber box’ subsidies, or payments that have the most distorting effects on products and trade. Under the latest proposals at the WTO, which Washington has hinted it could accept, the US ceiling for overall trade-distorting support would fall from the current level of roughly US$48 billion to US$13-16.4 billion. However, such a reduction could prove challenging given the subsidy levels written into the farm bill.
These sorts of concerns helped fuel President Bush’s opposition to the bill. Indeed, in his veto message to the House of Representatives, sent on 22 May, the President decried the bill’s lack of progress toward cutting farm payments: “At a time of high food prices and record farm income, this bill lacks programme reform and fiscal discipline. It continues subsidies for the wealthy and increases farm bill spending by more than US$20 billion…It is inconsistent with our objectives in international trade negotiations.”
The Bush administration’s top agriculture officials were even harsher in their criticism of the measure.
“This farm bill heads in the wrong direction in terms of our international obligations,” Deputy Agriculture Secretary Chuck Conner said in a press briefing. US trade partners “are going to be incensed, and we would expect them to protest in every way they can,” he said.
In a written statement, Conner reiterated that the measure “fails to reform farm programmes at a time when farm income and crop prices are setting records…the US Farm economy has never been stronger.”
In Geneva, Ambassador Crawford Falconer (New Zealand), the chair of the WTO’s committee on agriculture, said that the passage of the US farm bill did not have an immediate impact on negotiations at the global trade body, but remarked: “It’s another factor which complicates everybody’s life, there’s no doubt about that politically.”
Several specific provisions of the new bill could prove troublesome for world trade talks. Major problem areas include revenue guarantees for farmers, disaster recovery aid, and subsidies for sugar and cotton.
One potential problem area is the Average Crop Revenue Election (ACRE) programme, a critical component of the new farm bill, which represents a significant shift from previous payment structures in that it requires farmers to show a loss in order to qualify for subsidies. The programme provides revenue guarantees for farmers who choose to forgo a proportion of the direct payments to which they would otherwise be entitled. In exchange, those farmers would be given subsidies equal to the difference between their home state’s actual revenue from a crop and a calculated average that will be based on both five-year state average yields as well as the national average price for that crop over the previous two years.
Because the calculated average for 2009 will be based on recent record-high food prices, a sudden drop to regular price levels could cause a substantial rise in payments. Experts disagree over how popular the programme would be, but given that the potential payout could be quite large, it is possible that a very high proportion of farmers could opt into the programme. If enough producers enrol, ACRE could end up doling out billions of dollars in subsidies. If that were the case, the US could run into problems at the WTO, as experts say that ACRE payments would be considered amber box subsidies, which the US has pledged to reduce.
A new and permanent agriculture disaster programme, funded at US$3.85 billion over five years, will also conflict with US reduction commitments at the WTO. The programme, which will also be classified as an amber box activity, will allow farmers who suffer crop losses due to weather-related production problems to collect payments for both crop insurance and disaster aid.
Changes to sugar subsidies could further affect the US’ ability to meet its amber box commitments. Under the new farm bill, loan rates for sugar cane marketing assistance will go up by 4.2 percent between 2008 and 2012, while loan rates for sugar beets will rise by 5.2 percent by next year. These loan rate increases, which effectively ensure that the price for sugar in the US will remain above world market prices, will certainly increase the US’ total amber box payments, albeit by a relatively small amount.
US cotton subsidies, the source of much controversy at the WTO, are also addressed in the farm bill, but with little change in terms of compliance with international trade rules. While the new measure slightly lowers the target price for cotton, it also establishes a payment programme for domestic cotton mills that is very similar to a cotton incentive programme that the WTO recently ruled illegal.
Despite the many subsidies it maintains, the farm bill does make at least some progress toward WTO compliance. Changes to the dairy price supports in the new farm bill will decrease the US’ amber box commitments. Specifically, the new measure changes the distribution of dairy price supports in a way that reduces US trade-distorting activities while maintaining support levels for dairy farmers at essentially the same level.
ICTSD reporting. “WTO delegates say U.S. farm bill hikes subsidies while they’re trying to cut them,” REUTERS, 27 May 2008. “Glance: A look at programs and spending in newly enacted farm bill,” ASSOCIATED PRESS, 22 May 2008. “Trade: US Farm Bill passed, will cast shadow on Doha talks,” THIRD WORLD NETWORK, 22 May 2008. “New US Farm Bill will anger the world,” THE STAR ONLINE, 19 May 2008; “New farm bill seen adding fodder for trade feud,” REUTERS, 12 May 2008; “Farm bill a major win for old politics,” THE BOSTON GLOBE, 18 May 2008.