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Trade Developments

I. Canada Corn Action
II. Doha
III. Farm Bill Points

I. Canada Corn Action

Yesterday afternoon, The Mulch Blog pointed to a news release from Canada, which stated that, “The Honourable David Emerson, Minister of International Trade, and the Honourable Chuck Strahl, Minister of Agriculture and Agri-Food and Minister for the Canadian Wheat Board, today announced that the Government of Canada has requested consultations with the United States at the World Trade Organization (WTO) on subsidies provided to U.S. corn growers, as well as on the total level of U.S. trade-distorting agricultural support.”

The release added that, “‘The United States has been providing subsidies to its agricultural producers that create unfair market advantages,’ said Minister Emerson. ‘We hope to see the U.S. live up to its WTO obligations, particularly given that it has the opportunity to do so when it rewrites its Farm Bill this year.’

“‘Canada is concerned that these U.S. subsidies continue to cause economic harm to our corn farmers,’ said Minister Strahl. ‘That’s why we took the action we did, in order to provide the best possible support for our producers by pushing for a level playing field so that they can compete.’”

It is interesting that Minister Strahl stated that the subsidies “continue to case economic harm to our corn farmers.” As this U.S. Department of Agriculture chart indicates, the market price of corn has jumped to such considerably high levels over the past three to four months, that many American corn growers are not expecting any federal payouts under the marketing loan program or counter-cyclical payment program.

In fact, due in part to anticipated higher market prices for corn and lower federal subsidy outlays; the National Corn Growers Association has tabled a reform proposal that would provide a safety net in the form of revenue insurance.

The Canadian news release from yesterday did provide this historic context, “The United States is the world’s largest producer and exporter of corn. In 2005/2006, the U.S. accounted for 41 percent of global corn production and 68 percent of all corn exports. Over the last two years, U.S. corn subsidies have averaged almost US$9 billion per year. Since 1993, Canada has consistently been a net importer of corn, with the United States as the main supplier.”

And more specifically, the “backgrounder” section of the news release stated that, “While world corn prices declined significantly from 2003 through to 2006, U.S. corn production actually increased from 256 million tons in 2003/04 to a record 300 million tons in 2004/05, and then decreased slightly to 282 million tons in 2005/06. [click here to view a U.S.D.A chart on U.S. corn production.]

“The Government of Canada is of the view that existing U.S. corn subsidy programs cause serious prejudice to Canadian corn growers through their effects on prices in the Canadian market. The United States also maintains export credit guarantees that serve to subsidize the exportation of certain U.S. agricultural products. Canada’s position is that these programs are inconsistent with the United States’ WTO obligations.

“Moreover, the Government of Canada believes that total U.S. trade-distorting domestic support, specifically, the Total Aggregate Measurement of Support (Total AMS), exceeds the United States’ corresponding WTO commitment levels for certain years. Consequently, for these years, Canada’s position is that the United States is not in compliance with certain provisions of the WTO Agreement on Agriculture. The United States’ Total AMS consists of subsidies to a number of agricultural products, including, but not limited to, corn, wheat, soybeans and sugar.”

Sallie James, a trade policy analyst at the Cato Institute also highlighted the Canadian corn development yesterday afternoon. Writing at the Cato@Liberty Blog, Dr. James stated that, “Specifically, the Canadians want to discuss the subsidies given to U.S. corn farmers, and the damage they did to other world corn producers because of price suppression effects. Enquiring minds in Canada also want to know more about the amount of trade-distorting support that the United States paid to its farmers overall in ‘certain years’ (the press release doesn’t specify which).

“It’s hard to say at this point what effect, if any, this development will have on the U.S. farm bill debate, or the WTO negotiations in the Doha round. But it would be a brave Congress indeed that paid no heed to the WTO effects (in litigation or negotiation) of American farm subsidies when drafting a new farm policy. History has shown that the costs of farm welfare to consumers and taxpayers tend to get short-ish shrift when juxtaposed with the farm lobby, but firms facing possible retaliatory sanctions or failed market access ambitions as a result of an adverse ruling against the United States might carry more weight.”

As noted above, the “price suppression effects” have not been visible in recent months in the American corn market.

Peter Shinn of Brownfield reported yesterday that, “The timing of the move, coming at the outset of the annual meeting of America’s largest farm group, the American Farm Bureau Federation, and the language of the Canadian press release itself, both suggest Canada’s request for WTO consultations is aimed at influencing the 2007 farm bill.”

Mr. Shinn added that, “American Farm Bureau Federation President Bob Stallman reacted quickly to the Canadian announcement. In a statement, Stallman said he was ‘dismayed’ by the Canadian request for consultations but that it wouldn’t impact AFBF’s approach to influencing the next farm bill.

“‘This request for consultations has no bearing on our goals in domestic and international policy,’ Stallman said, ‘which will be based on what is good for U.S. agriculture.’”

Mr. Shinn reported that, “U.S. lawmakers and Bush administration officials weren’t immediately available for comment. The Canadian request for WTO consultations does not necessarily mean Canada will file a WTO complaint against the U.S. farm program, but it is a precursor to doing so.”

Steven Chase, writing at the Globe & Mail webpage, reported that, “Canada has launched a challenge of multi-billion dollar U.S. farm subsidies at the World Trade Organization, in an aggressive move that signals a much more hawkish stand for the Harper government on trade.

“The WTO complaint targets Canadian trade beefs: $9-billion (U.S.) in U.S. corn subsidies that Ottawa says hurt Canadian producers, and the overall level of trade-distorting American government support for agriculture, which was measured at about $12.5-billion in 2005.”

Mr. Chase reminded his readers that back in April, the Canadian International Trade Tribunal found no injury in an anti-dumping and countervailing investigation of Canadian imports of U.S. unprocessed grain corn. “The move should placate Canadian corn producers, who last failed to convince federal trade regulators to slap long-term tariffs on U.S. corn,” the Globe & Mail article said.

The article added that, “Canadian corn farmers launched a 2005 complaint against U.S corn on the grounds that it was injuring them because it was unfairly subsidized by Washington and being dumped in Canada.

“In December 2005, Ottawa imposed preliminary duties of $1.65 (U.S.) per bushel on U.S. corn while it probed allegations. But it cut the duties in April 2006 after a federal trade tribunal ruled that imports of U.S. grain corn are not injuring corn farmers in Canada.”

And with respect to the April decision in that corn dispute, the Congressional Research Service provided a backgrounder on the details of what transpired in that case in a paper published on April 28 (“U.S.-Canada Corn Trade Dispute,” by Randy Schnepf).

There, Mr. Schnepf presciently noted (page 6) that, “The Canadian Corn Producers have announced that they are reviewing their options for pursuing further legal action against imports of U.S. corn. Such options include requesting a NAFTA bi-national panel review or possibly encouraging the Canadian government to pursue a WTO dispute settlement case. However, such actions would likely have to be based on a new line of reasoning that was not a part of the AD/CV duty case, which focused on the presence of injury to Canadian corn growers. A NAFTA panel review would involve a review of whether Canadian trade authorities (in this case, the CITT) had correctly interpreted and applied existing Canadian law in reaching their negative injury determination. In contrast, a WTO case — which can only be brought by the Canadian government, not the Canadian Corn Producers — would likely be pursued under the Agreement on Subsidies and Countervailing Measures and would involve an investigation of whether ‘serious prejudice’ occurred in the marketplace as a result of U.S. domestic corn program payments. Brazil’s recent success in such a WTO dispute settlement case against U.S. cotton subsidies could provide both an encouragement and a template for future action against U.S. corn subsidies.”

Mr. Schnepf added that, “Many market analysts and news media suggest that the U.S.-Canada corn trade dispute is a harbinger of future challenges against U.S. commodity programs. Given the importance of corn in the U.S. agricultural economy, Congress likely will closely monitor the legal followup and any further appeal or charges against U.S. corn exports or U.S. corn program payments, whether within a NAFTA or WTO forum.”

This development also adds additional heft to key points that U.S. Secretary of Agriculture Mike Johanns often makes in public forums: “We must also consider the vulnerability of our programs to WTO challenges. Just yesterday you might have read in the news — they certainly caught my attention — about the declaration by Brazilian leaders that they are coming after our marketing loan program and our countercyclical payments programs that are common to all of these five crops. Make no mistake about it, ladies and gentlemen, Brazil is not alone in threatening to challenge our programs. We lost the Step 2 Cotton Case in the WTO, despite aggressively defending it. Uruguay has expressed concern about our rice program, and the C4 countries in Africa continue to raise concerns about the cotton program.

“Without question, the U.S. will assign our best legal teams to defend our programs, but we have to recognize the vulnerabilities. As I’ve said many times, a true safety net for our producers is more than subsidies, but farm policy needs to be equitable, it needs to be predictable, and it needs to be beyond challenge.” (Sec. Johanns, August 31 at the Cato Institute, for more details, click here.)

In addition, the Canadian action may provide a boost to the National Corn Growers proposal regarding revenue insurance.

II. Doha

David Gow reported yesterday at the Guardian Online that, “Peter Mandelson, EU trade commissioner, will press the Bush administration in Washington today to rescue the stalled talks on world trade liberalisation by committing itself in principle to radical cuts in US farm subsidies.

“In talks with his American counterpart, Susan Schwab, he will warn that failure to agree to reforms of the US agriculture support system in the next three months would mean the collapse of the so-called Doha round and that any revival of global trade talks would be unlikely before 2010.

“‘We are not there yet but I am convinced there’s a deal to be done in agriculture,’ Mr Mandelson told the Guardian on the eve of the Washington talks, which will also involve the US president, George Bush, and the European commission president, José Manuel Barroso.

“‘We are not so far apart on the numbers and we know what each other can do but we have not yet agreed on equivalences – on what equals what to reduce farm subsidies and tariffs. The key is to show political will.’”

Reuters writer Missy Ryan reported yesterday that, “President George W. Bush and European Commission President Jose Manuel Barroso on Monday said it was urgent the world’s two largest trading partners resolve differences that have blocked a global trade deal.

“‘We talked about the importance for Europe and the United States to resolve any differences we have when it comes to the Doha Round,’ Bush told reporters after meeting with Barroso.

“Barroso and EU Trade Commissioner Peter Mandelson met with top U.S. officials Monday in the latest attempt to revive the ill-starred Doha Development Round, launched in 2001 with great hopes for helping the world’s poorest nations.

“The world faces a ‘moment of truth’ for the Doha round and the multilateral trading system, Barroso said after meeting with Bush, urging negotiators to break the impasse soon.”

The Washington Wire Blog (Greg Hitt, The Wall Street Journal) reported yesterday that, “European Union trade chief Peter Mandelson sees ‘fresh impetus’ for the Doha Round of global trade talks after visiting President Bush today at the White House.”

Mr. Hitt added that, “Mandelson said Europe is prepared to make new concessions on the critical issue of farm supports, but suggested the U.S. must move more aggressively, too. ‘Taking cash away from farmers is not an easy thing to do,’ he said, warning time is running short to reach a broader Doha Round deal. ‘We are now in the endgame.’”

III. Farm Bill Points

The “Think Tank Town” section of The Washington Post Online included a segment today by Robert W. Klein and Gregory Krohm, entitled, “A New Season for Crop Subsidies?

The article noted in part that, “The federal government instituted crop insurance in 1938 in an attempt to end the need for ad hoc aid to farmers following disastrous droughts or floods. But ad hoc aid has not ended in the past seven decades, and the insurance program that was intended to replace it has transformed into a massive, poorly disguised crop subsidy program that provides few benefits to farmers who practice good risk management. Instead, the program rewards poor risk managers with generous subsidies at the expense of taxpayers, contrary to the fundamental principles of insurance.

“To be sure, lawmakers have made several efforts to ‘reform’ crop insurance. But each wave of legislative changes has moved the program further away from economic rationality and exacerbated its distortion of incentives and inefficiency.”

In addition, the article stated that, “The last set of statutory changes enacted in 2000 is scheduled to expire in 2007 when a new farm bill will be enacted. With that deadline looming, The Washington Post has been running a provocative series, ‘Harvesting Cash,’ on the perverse politics and economics of U.S. farm subsidies. Other papers across the country have also been running articles, editorials and series pointing out the need to fix agriculture programs. Perhaps this time the public will push lawmakers to truly reform crop insurance. They may need a big push, given special interest pressures to move other crop subsidies into the crop insurance program, where they would be less transparent.”

Near the conclusion of the piece, the writers indicated that, “The current program suffers from a number of flaws that need to be addressed. First, there are significant conflicts between private insurers, who issue and service insurance policies and nominally underwrite a small portion of the risk, and the federal government, which administers the program and underwrites most of the risk. Second, producer incentives are distorted by premium rates that do not adequately and accurately reflect their risk of loss — in essence building government subsidies into the rate structure for the benefit of high-risk farmers. Third, the introduction of an excessive number of new products to accommodate special interests exacerbates pricing problems. Fourth, both the federal Department of Agriculture and participating insurers are hampered by a number of mandates and constraints created by Congress with the intent of benefiting special interests instead of rationalizing insurance.”

-Keith Good