Bridges Weekly Trade News Digest • Volume 11 • Number 1 • 17th January 2007

Canada Initiates WTO Dispute Proceedings Against US Farm Subsidies


Canada has initiated WTO dispute proceedings against a wide range of US agricultural subsidy programmes, in a move that appears calculated to influence future farm spending by Washington.

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.

On 8 January, Canada requested consultations with the US, the first step in WTO dispute settlement procedures. If the two sides cannot resolve their differences, Canada would be free to seek the creation of a panel to adjudicate the dispute.

The complaint appears to follow along the lines of Brazil’s successful WTO case against US support for cotton growers in 2005. In that decision, the Appellate Body ordered Washington to cancel certain subsidy and export credit programmes that violated its WTO commitments, and distorted production and depressed global cotton prices to the detriment of Brazil’s trade interests (see BRIDGES Weekly, 9 March 2005).

Canada trying to affect next US 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."

The Bush administration has been trying to convince Congress and the US’ powerful agricultural lobby to accept some changes to existing farm subsidy programmes in order to head off several potential WTO challenges. Although US Agriculture Secretary Mike Johanns called Canada’s announcement "troubling" and vowed to "aggressively defend" subsidy programmes, he told farm groups that the request was another indication that a failure to reform could mean that "the safety net that you rely upon could be pulled out from underneath you."

Trade analysts have long believed that US corn subsidies would be vulnerable to challenge at the WTO. In a November 2005 report, civil society group Oxfam claimed that US marketing loan and counter-cyclical payments (the latter rise when world market prices fall) had both pushed up production and depressed world prices. Oxfam argued that other major corn exporters, as well as some countries with vulnerable corn producers, would both be able to claim that their interests were being harmed by Washington’s subsidy programmes.

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, according to the letter requesting consultations that Canadian WTO ambassador Don Stephenson sent to his US counterpart, Peter Allgeier.

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; Articles 5(c) and 6.3(c)). Such support, in the form, for example, of direct and counter-cyclical payments, marketing assistance loans, market loss assistance, and export credit guarantees, pushed down the price of corn in the Canadian market between 1996 and 2006.

…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 USD 19.1 billion in ‘amber box’ subsidies - which cover most payments thought to distort production and trade. 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 Brazil’s case against US cotton subsidies, the WTO ruled that both direct payments and production flexibility contracts were not eligible for classification as non-trade-distorting - and therefore vulnerable to legal challenge - since they were related to the type of production undertaken, even if not linked to the volume of output (see BRIDGES Weekly, 15 September 2004). For instance, fruit growers are not eligible for direct payments. It has not been determined, however, whether such support definitely belongs in the amber box.

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.

Canadian farmers look to WTO

Canadian corn farmers have for years sought to convince national trade authorities to impose long-term tariffs to give them a measure of protection against cheaper US imports. However, their attempts were ultimately unsuccessful. In April 2006, the Canadian trade remedy system concluded that Canadian farmers were not being injured by imports US corn.

US trade officials have pointed to this decision to bolster their claims that their subsidy programmes are WTO-compliant. Gretchen Hamel, a spokesperson for the US trade representative’s office, said "Canada’s own international trade tribunal found just last year that Canadian corn growers have not been injured by imports of US corn," reports the Globe and Mail.

Trade officials in Ottawa, however, pointed out that a WTO case would be based on a different set of issues and legal standards. While the Canadian tribunal based its investigation on domestic law, a WTO panel would address the US’ compliance with its obligations under WTO agreements. "As the world’s largest producer, consumer and exporter of corn, the United States exerts a very significant influence in the global market for corn. In this regard, we believe that the trade-distorting effects inherent in US corn subsidies result in serious prejudice to the interests of Canadian corn growers," said Renee David, a spokesperson for Canada’s department of foreign affairs and international trade.

In the course of the troubled Doha Round trade negotiations, the US has been attempting to win legal shelter for counter-cyclical payments of the sort that Canada is now targeting. It has also sought a ‘peace clause,’ which would protect countries’ farm subsidies from many kinds of legal challenge for some years.

ICTSD reporting; "Canada set to challenge US farm subsidies at WTO," GLOBE AND MAIL, 9 January 2006.