TCS Daily

Wheat From Chaff

By Michael Standaert - June 10, 2002 12:00 AM

BRUSSELS, Belgium -- It's been called 'Farm Folly' by the Financial Times. The Wall Street Journal Europe hailed it as 'The Great Pig-Out.' The 17-member Cairns group condemned it and the Australian trade minister Mark Vaile said it was 'immoral.' EU Commissioner for agriculture, Franz Fischler says the US has 'flunked farm policy reform.'

The U.S. Farm Bill, officially the 'Farm Security and Rural Investment Act of 2002' replaces the 'FAIR Act of 1996' and as it is a hugely complex piece of legislation most analysts are still trying to figure out what the economic effects will be on international trade and prices. Spending on commodities is projected to be at $15-20 billion a year for crops, representing an increase of 70 percent by some calculations over the amount at the end of the FAIR Act.

Three types of subsidy payments are proposed under the new bill: fixed decoupled payments (set payments per year to farmers for each eligible crop; continuation of the AMTA payment program under FAIR, yet payments remain constant, whereas AMTA decreased over time); loan deficiency payments or 'LDPs' where farmers are paid the difference between a fixed price and local market price, direct subsidies which raises payments by an average of 5% over FAIR; and counter-cyclical payments, subsidies paid when overall income of farmers falls below a target price, which was not covered under FAIR (though there were subsequent emergency packages in response to price drops.

In Paris on May 16, at the close of a two-day annual meeting of the Organization for Economic Cooperation and Development (OECD), Deputy U.S. Trade Representative Peter Allgeier said he had focused on ways to advance the trade negotiations launched November 2001 at the World Trade Organization (WTO) ministerial meeting in Doha, Qatar. "The United States reiterated our very strong unequivocal commitment to negotiate across the full range of topics in the Doha agenda, to meet the overall deadline of completing the negotiations by January of 2005 and to meet the intermediate deadlines such as we face in the coming months," he said. This will include, he says, an 'ambitious' overhaul of the global agriculture trade system, covering the so-called "three pillars": market access, export subsidies and domestic support for farmers.

Allgeier claims that criticism of the U.S. Farm Bill ignores that U.S. domestic support for agriculture would remain within the $19,000 billion annual limit set by the WTO rules and also contains a "circuit breaker" that would allow the agriculture secretary to intervene if the ceiling approaches a level where it would be breached. This is true, however it is difficult to forecast a breaching as expenditure will fluctuate according to market price movement. If there was a breach, it would be political suicide to make farmers pay back the excess, and the U.S. could find itself suddenly going counter to WTO obligations or attempting to reclassify expenditures. There is also a loophole called the de minimis clause that some claim the counter-cyclical subsidies should be exempt from. Usually counted against the ceiling, payments which are 'non-product specific' and do not exceed 5 percent of the value of production could be excluded. Five percent would be about $10 billion per year which is based on the total value of U.S. farm production. There is some debate whether these would fall under 'non-product specific' or 'crop specific.'

There is some reason for the U.S. to feel pressure to protect its own. The WTO annual domestic support limit for the European Union is more than $61,000 billion and around $31,000 billion for Japan. "The fact is, unless there is a negotiation of a new reform package, we are allowed to have this level of support," Allgeir said. It is however, counterproductive for the U.S. to implement a massive agriculture bill when it would be better off pressuring the other markets to further reform their own subsidy policies.

Belgian Prime Minister Guy Verhofstadt who held the EU presidency under the Doha round, was also at the OECD meetings and warned that pressure for more farm support in the EU would increase because of the US position. The European Commission had lately been trying to reduce subsidies on production in the Common Agricultural Policy (CAP). Though now the EU now says there can be no 'substantial changes' to the $40 billion per year CAP, at least until the next round of talks after 2005.

As far as market access and export subsidies, Allgeier pointed out that the average U.S. tariffs on agricultural products are 12 percent, compared with the EU's 30 percent average. He said U.S. export subsidies are far lower than those of the EU, and reaffirmed that the United States remains committed to their elimination.

TPA? To Be Announced...

The U.S. Senate recently passed the new Trade Bill giving President Bush momentum to get approval for the Trade Promotion Authority, though it still has to go through the House. EU Trade Commissioner Pascal Lamy has expressed concern over the difficulties the Bush administration faces in negotiating with Congress on trade agreements. U.S. Trade Representative Robert Zoellick, originally scheduled to attend the OECD meetings in Paris, remained in Washington to lobby the Senate on passage of TPA, where his efforts have paid off - to a point. The last grant of fast track expired under President Clinton's tenure in 1994 and various attempts to renew it have failed due to disputes with labor and environmental groups. Even with the happy face the Bush administration is putting on the passage of TPA in the Senate, the new bill would allow Congress to reject proposed changes to U.S. laws on antidumping and countervailing duties and other trade remedies while still approving the rest of a negotiated trade agreement, restricting Bush's ability to act swiftly on trade disputes. The White House is hoping for better results out of the House, but it may be little more than wishful thinking.

Commissioner Lamy has said multilateral trade negotiations would be difficult if the U.S. lacks the authority to conclude a deal. TPA "is terribly important for all of us," he said, adding that he hoped approval would be complete before the next congressional recess.

Doha Delayed

Allgeier attempted to assure ministers at the OECD meetings that the U.S. commitment to the Doha negotiations remains firm despite new legislation raising domestic farm
supports, congressional obstacles to TPA approval, and other recent activity in Congress.

"Yes, we are committed to an ambitious negotiating result in agriculture, encompassing all three pillars enunciated in the Doha Declaration," Allgeier said. "Proposals we present in Geneva will demonstrate that.

"We are carrying out these commitments under the difficult circumstances of protectionist pressures that are present and active in many, if not all, of your countries."

But the message that is being sent to much of the rest of the world is already out there, and will take much to reverse. Unfair or not, if you account for the protectionism in many of the other markets across the world, the US is seen lately as willing to role back efforts worked out in Doha and before to expand worldwide free trade in order to protect domestic markets and bow to pressure of 'pork-barrel' politics - namely steel and agriculture. Whether the US eventually does come back to the negotiating table on the 'three-pillars' they will already have lost much of the public relations battle due to recent protectionist measures. Repairing that perception will be difficult heading into the fifth WTO ministerial meeting to be held in Cancun, Mexico on 10-14 September 2003. Getting substantial negotiations underway before the next round of trade talks in 2005, without swift action in the next year to reverse the backsliding, could scrap any progress that had been made at Doha six months ago.

"There are storm clouds on the economic horizon and hanging over the multilateral trading system -- economic trends, proliferation of disputes, increasing pressure for a return to protectionist measures," said WTO Director Michael Moore at the OECD meetings. "We need your visible commitment and we need it now. If I can be frank, we also need reassurances from the majors that the issues you have before you currently will not be allowed to undermine our work towards a successful round."

LDPs and counter-cyclical payments guarantee a given level of income to U.S. farmers making them less interested in following market signals, particularly when prices are rock bottom. Supposedly this will also lead to overproduction, analysts say, further driving down prices while incomes are protected at set levels. As the U.S. exports around 25% of its farm production, there are worries about cheap exports flooding the world market while making the U.S. market unattractive for potential importers, especially from developing countries.

Stick It Under Your CAP

The EU had been willing, to a point, to put the CAP on the table in upcoming global trade talks, but this seems a great distance away now. The time was right to reform the CAP even more, especially when possibly 10 new countries could join the EU in the next few years. The largest, Poland, has a huge agricultural economy and other EU countries are worried what distortions the addition of Poland could have on the internal farm markets. Far from moving away from support subsidies, the EU could follow the lead of the US and fatten the pork, or at least stand still. Neither is good for the direction toward more liberalization of the agriculture trade.

According to the main OECD indicator, the Producer Support Estimate (PSE), for 2000 there was $49 billion in support for U.S. farmers and $90 billion in the EU. The EU also has over 7 million farms, compared to around 2 million in the U.S. The EU has only 134 million ha of land under farming activity, compared to the U.S. 425 million ha. In 2000, agricultural imports to the EU from developing nations were around $33 billion, compared to $20 billion for the U.S. Exports to developing nations from the EU were at $16.5 billion for 2000; $25.7 billion from the U.S.

The Losers

The obvious losers are struggling developing nations who do not have the resources to lavishly subsidize their own farmers and who would like to better access the global trading system. This is one of the main objectives of Doha, to bring predominantly agricultural developing economies into the global trading spectrum on a somewhat even level.

Also, of the $71 billion doled out to American farmers in the last five years, two-thirds went to just 10 percent of the farms. American taxpayers will carry the burden of this welfare package that goes mainly to those who need it least.



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