The reason why the United States is rejecting the agricultural modalities of December 2008
Jacques Berthelot, Solidarité,
February 15, 2015
To those who thought that WTO-compatibility was a guiding principle of the American agricultural policy, do not read what follows!
As outlined by Jacques Berthelot in one of his recent articles we are excerpting below on the 1995-2012 years1, Washington has poorly reported, or under-notified, its support to agriculture, and thus failed to comply with the WTO Draft Agricultural Modalities of December 20082. The passage of the Agricultural Act of 2014 in February 2014 is one of the recent cases in point, and shows once again that the WTO negotiations are totally disconnected from reality, and consequently have no impact on the policy of the world’s top agricultural power.
In fact, the Agriculture Act of 2014 focuses on several, complex and counter-cyclical insurance programs. On a theoretical basis, this tightening of support measures might increase the WTO total Aggregate Support Measure (ASM), which lumps in only one number all the by-product support measures and the others than by-product measures. Yet, using the “de minimis” clause other than by-product is at the core of the American support system, since public support to the various insurance programs accounts for 96 percent of all support paid under the “de minimis” clause other than by-product ($8.9 billion out of $9.2 billion).
In the end, we found ourselves in a paradoxical situation in which the world’s two major agricultural powers––the United States and the European Union––are pursuing opposite strategies. The first encourages the maintenance of regulation and support tools, without worrying about the objectives set by the WTO. The second is moving towards a compliance of the common agricultural policy with the strategy of total market liberalization advocated by the WTO, without any concern for a food security and regulation strategy. Effectively comparing the EU with the other major agricultural powers––especially the United States––shows that the EU does not support its agricultural activities, but also benefits from significant and legal leeway due to the current agreements within the WTO.
La rédaction de momagri
The paper begins by a background section presenting the main agricultural trade concepts, useful to understand the technicalities of the paper, after what the US agricultural supports and subsidies from 2007 to 2013 are compared according to the three official sources available: notifications to OECD and WTO and USDA budgets.
But the main issue of the paper is to assess the compliance of the US notifications from the
1995-2000 period up to 2012 and its likely compliance with the Agricultural modalities draft of 6 December 2008 (called here Doha Draft), taking into account the new 2014 Farm Bill.
Table 2 summarizes the US under-notified agricultural supports from 1995 to 2012, that the paper will analyse in turn. We consider first that all direct payments in a broad sense managed by the Commodity Credit Corporation (CCC) – except those to conservation and to the tobacco buyout which were rightly notified in the green box (GB) – should be put in the product-specific supports AMS (PS AMS, the aggregate measurement of support, so-called amber box of domestic trade-distorting supports) given the WTO Appellate Body ruling of 3
March 2005, but also the many analyses of authorized economists, particularly that made recently by Rashmi Banga of UNCTAD.
We present then the two US irregularities – that feed subsidies are input subsidies to notify in the PS AMS of developed countries and that the PS de minimis (PSdm) is much lower than
5% of the whole agricultural production value – which have reduced the allowed total AMS
(FBTA) and Overall trade-distorting domestic supports (OTDS) at the end of the Uruguay
Round implementation period 1995-00, this is also the base period for the Doha Round reduction commitments.
The US has hugely under-notified its dairy market price support (MPS) since 2008 because the AoA rules do not permit to change the rule to compute the dairy AMS from the
administered price of the whole milk production made for 1986-88 in the US Schedule of
commitments to the GATT to the sum of the administered prices of butter, cheddar cheese
and non-fat dry milk. The more so as the US has continued to notify up to 2012 the same
allowed total AMS of $19.103 bn calculated on the basis of the whole milk production.
The subsidies to crop insurances, which have become the major type of agricultural subsidies in recent years, have been at the same time under-notified and mis-notified up to 2011 in the sense that they are crop-specific and should not have been notified in the non-product specific (NPS) AMS. However the US has eventually recognized this fact in its 2012 notifications, and it did it because it realized that most of its crop insurance subsidies could be notified in the product-specific de minimis (PSdm) AMS. This overdue recognition of the product specificity of the crop-insurance subsidies allows us to rectify the previous notifications made in the NPS AMS from 1995 to 2011.
We continue with the undernotified subsidies to grazing fees on public lands whereas those to corn ethanol have been forgotten altogether, both subsidies being clearly crop specific to be notified in the PS AMS. If the main subsidy for corn ethanol was the volumetric ethanol excise tax credit (VEETC), deleted since 2012, it has benefitted to blenders and not so much to farmers. But the ethanol mandate has been the main driver of the spike in corn prices and producers revenues since 2007 so that we assume a highly conservative estimate of average annual subsidies to corn ethanol of $1.6 bn from 2007 to 2013, to be notified in the PS AMS.
This leads us to turn to the issue of capping the product-specific (PS) subsidies established in the Doha Draft. This issue is particularly sensitive for four crops – corn, wheat, soybean and cotton – which got 79% of all insurance subsidies from 1995 to 2012 and also 76.3% of the other PS supports than to crop insurance. It follows that on average corn, cotton and soybean have exceeded their caps, particularly in 2011 and 2012 (except cotton in 2012), but cotton and wheat did not exceed their caps in 2013.
If the US did not notify any blue box (BB) payment after the $7.030 bn notified in 1995, it has succeeded to introduce in the Doha Draft a new type of BB to accommodate its countercyclical payments (CCPs) which have been notified in the NPS AMS but that we have transferred to the PS AMS since the WTO Appellate Body ruled on 3 March 2005 that they were PS subsidies. In fact the CCPs, together with the fixed direct payments, have been repealed by the 2014 Farm Bill to that the US BB would remain useless as well as the BB caps for specific products.
We turn then to the undernotified subsidies of the non-product specific (NPS) AMS. Although the US did not notify any subsidy on agricultural fuel, the OECD has reported €2.385 bn for all years since 1986 under the label of "energy subsidy". The US notification of irrigation subsidies has been ridiculously low – $215 million on average from 2005 to 2012 –, in contradiction with many official and experts' reports for which they have been of at least two bn for most of them so that we propose to retain at least one bn.
The US has notified subsidies to agricultural loans in the NPS AMS and above all in the green box for an average of $155 M from 2005 to 2011, a notification in the green box which is not in line with the fact that most loans have been granted to non-disadvantaged farmers. And the US did not notify the large tax exemptions granted to the farm loan program run by the Farm Service Agency for more than one bn in 2005 but, for conservative reasons, we keep the average $155 M notified from 2005 to 2011 but to be notified entirely in the NPS AMS.
The US has notified all its nutrition subsidies in the green box, of which $106.781 bn in 2012 but several approaches can be used to assess the level of their trade-distorting impact in the sense of having fostered the US food production. A first approach was proposed by Debart
and Blogowski in 1999 and updated by Rahmi Banga in 2011 who found an "equivalent aid to agricultural production" of $ 6.6 billion in 2010. A second approach was used by Solidarité in 2014 showing that the 5 million tonnes of US wheat incorporated in wheat products consumed by the recipients of food aid in 2012 implied $235.5 million of tradedistorting subsidies and that the 9 million tonnes of corn incorporated in animal products and soft drinks consumed by these recipients received $280 million of trade-distorting subsidies.
A third macro approach assesses the amount of total PS subsidies having benefited to the US food production of domestic origin and hence to the domestic food aid consumption. It shows that the average food aid to be notified in the NPS AMS was on average of $4.447 bn from 2005 to 2012, of which $6.6 bn in 2012 ($4.1 bn in 2010).
Finally it results that the total NPS AMS was of about $8 bn on average from 2005 to 2012, of which of $10.1 bn in 2012, unfortunately above the allowed NPS de minimis (NPSdm) of $9.7 bn so that these $10.1 bn must be added to the PS AMS of that year which jumps from $24.5 bn to $39.6 bn, exceeding by 3.2 times the allowed PS AMS of $9.1 bn at the end of the Doha Round implementation period. As a consequence of the US notification of its crop insurance subsidies in the PS AMS in 2012 its PSdm of 2012 has jumped that year to $4.963 bn which was larger than the allowed PSdm of $2.184 bn at the end of the Doha Round implementation period. And despite the leeway of $3.681 bn for the allowed BB the applied OTDS of 2012 was twice as large as its allowed level of $12.866 bn at the end of the Doha Round implementation period.
Despite that most US experts agree that, up to 2013, all the previous Farm Bills since 1995 did comply with the WTO rules, all are convinced that the 2014 Farm Bill would increase agricultural domestic subsidies so that it would be very problematic to comply with the Doha
Draft reduction commitments. Let us just quote Colin A. Carter of the University of California: "On both counts (larger and more distortive subsidies), the 2014 Farm Bill fails the test of being consistent with WTO objectives… The provisions of the 2014 Farm Bill, which chart a diametrically opposite path, may well have cost the United States any credibility in future agricultural trade negotiations in the Doha round".
And he concludes: "Various aspects of the 2014 Farm Bill send a message to trading partners that U.S. agriculture is becoming more protectionist. Furthermore, the new farm bill indicates that international trade commitments have little or no influence over U.S. farm policy choices". A word to the wise!
1 The full text of Jacques Berthelot’s paper is available from:
2 Submitted in December 2008, this draft proposes to cut by 60 percent (WTO 2008) the AMS ceilings in a developed nation whose consolidated AMS is higher than $15 billion but lower than $40 billion.