September 16, 2019

U.S. Notifies WTO on Domestic Support

Categories: Doha / Trade /Farm Bill

A U.S. Department of Agriculture press release from yesterday stated that, “Acting Agriculture Secretary Chuck Conner today announced that the United States has submitted its domestic support notifications to the World Trade Organization (WTO) for the years of 2002-2005.

“‘The United States has an obligation to notify the WTO about its agricultural domestic subsidies,’ said Conner. ‘In our notification, we have informed the WTO that U.S. domestic trade-distorting support level remains below our $19.1 billion ceiling, demonstrating that the United States is in full compliance with our WTO commitments. We look forward to continuing to work with our WTO trading partners in broadening market access for all member nations.’”

Important Technical Background

A Congressional Research Service (CRS) report from May of 2005 explained that U.S. farm policy is affected by commitments made under the WTO’s Agreement on Agriculture (AA).

The CRS report stated that, “[T]he AA contains detailed rules and procedures to guide countries in determining which programs are the most likely to distort production and trade (known as amber box subsidies); in calculating their annual cost, measured by the aggregate measurement of support (AMS) index; and in reporting total cost to the
WTO. The United States currently is committed, under the AA, to spending no more than $19.1 billion per year on amber box support.”

The report went on to discuss “green box” subsidies, – supports “presumed to have the least potential for distorting production and trade and therefore not counted” against the AMS; as well as “blue box” subsidies- which were described as a “production limiting program that receives a special exemption” and is also excluded from the AMS tally.

The report included examples of the types of U.S. farm programs that might fall into each category and stated that, “green box” policies could include, “Agricultural Market Transition Act (AMTA) (production flexibility) payments; which are considered ‘decoupled.’”

However, a CRS report from July of 2005 (“Background on the U.S.-Brazil WTO Cotton Subsidy Dispute”) stated that, “In late 2002, Brazil initiated a World Trade Organization (WTO) dispute settlement case (DS267) against specific provisions of the U.S. cotton program. On September 8, 2004, a WTO dispute settlement (DS) panel ruled against the United States on several key issues in case DS267. On October 18, 2004, the United States appealed the case to the WTO’s Appellate Body (AB) which, on March 3, 2005, confirmed the earlier DS panel findings against U.S. cotton programs.”

One of the key findings of the WTO ruling identified in the CRS report included this statement; “[T]he two major types of direct payments made under U.S. farm programs — Production Flexibility Contract payments of the 1996 Farm Act and the Direct Payments of the 2002 Farm Act — do not qualify for WTO exemptions from reduction commitments as fully decoupled income support and should therefore count against the ‘Peace Clause’ limits.”

More specifically, the report noted that, “The panel found (and was upheld by the AB) that U.S. payments made under the PFC and DP programs, because of the prohibition on planting fruits, vegetables, and wild rice on covered program acreage, do not qualify for the WTO’s green box category of domestic spending. (The green box contains only non- distorting program payments and is not subject to any limit). Instead, they should be counted as domestic subsidies directly affecting cotton production (i.e., distorting) and be included with other commodity program outlays to evaluate whether the United States has met or exceeded its ‘peace clause’ limits.”

In addition, the CRS report included this key explanation, “Concerns have also been expressed regarding the reclassification of PFC and Direct Payments away from non-trade-distorting green box support. However, the panel finding that U.S. direct payments do not qualify for WTO exemptions from reduction commitments as fully decoupled income support (i.e., they are not green box compliant) appears to have no further consequences within the context of this case and does not involve any compliance measures. This is because direct payments were deemed ‘non-price contingent’ and were evaluated strictly in terms of the Peace Clause violation.

“The panel did not specifically reclassify U.S. PFC and DP payments as ‘amber box,’ nor did the panel recommend that the United States should notify such future payments as ‘amber box.’ This is a subtle but critical distinction because of the enormity of PFC and DP payments. During FY2000 to FY2003, PFC and DP payments averaged nearly $5 billion per year and accounted for 32% of total U.S. agricultural program outlays. Shifting this amount to amber box could have important implications for future dispute settlement cases, as well as for the United States’ ability to meet its WTO amber box commitments.”

Furthermore, the report noted that, “The European Union (EU) is also likely to be concerned about this finding since the EU’s agricultural program (following agricultural policy reforms of June 2003) relies heavily on ‘decoupled’ payments similar to the those of the U.S. program.”

Current Issue

Yesterday, U.S.T.R. Ambassador Joe Glauber, Chief Agricultural Negotiator, held a press briefing regarding the domestic support notifications (which are available here– U.S. amber box payments of $9.6 billion in 2002, just under $7 billion in 2003, $11.6 billion in 2004 and $12.9 billion in 2005).

More details regarding the legal detail of the WTO Brazil Cotton case and support classification issues were flushed out during the discussion: REPORTER- “Just wanted to make sure here the current direct payments to producers, you have notified the WTO, fall into our green box payments. And how does that square with the panel in the Brazil Cotton Case which basically said those are a trade-distorting subsidy?”

MR. GLAUBER: “It’s a good question, inaccurate however. And let me explain why. First of all, yes we did report them as green. I think that’s important point I want to make sure I made that one while I was talking about the green box payments, but I want everyone clear on that. We notified direct payments as green box. And our feeling is, is this is not at odds with the Cotton Decision at all. The Cotton Decision, the panel themselves did not rule on direct payments insofar as our AMS notifications are concerned. This was in a subsidy that did termination, and particularly under the so-called Peace Clause. Moreover, the Cotton Panel when looking at the trade-distorting aspects of direct payments concluded that they were not. That is, they concluded that they did not contribute to price suppression in world markets. And I think that’s something that’s often misunderstood because again when the panel was considering direct payments insofar as how they affect production and affect world prices they concluded, sided with the U.S. position on this, that they have no effect on production.”

REPORTER: “Well, what about their discussion relative to the limitation or the prevention of planting fruits and vegetables on program crop acres in exchange for receiving the direct payments?”

MR. GLAUBER: “Again what I’d point out, this was in a very specific aspect of the Peace Clause determination on those program payments. We feel that they are consistent with green box criteria.”

The classification of direct payments is important and appears to be controversial.

An update yesterday at the CATO@Liberty Blog noted that, “[I]f direct payments are properly classified as amber box measures, the United States’ spending might look very different, and may not be below the legal ceiling after all, especially in years 2004 and 2005 (see more here). Members of Congress currently writing a new farm bill might want to keep the threat of WTO litigation (including pending challenges by Canada and Brazil) in mind.”

The Associated Press reported yesterday that, “Glauber defended the U.S. rationale for excluding a number of payments from its list of most trade-distorting payments, which otherwise could have pushed the U.S. over its amber box cap as Canada and Brazil claim.

“The WTO has ruled that U.S. direct payments worth US$5.3 billion (€3.76 billion) annually were linked to production and were thus trade-distorting payments. But Glauber said those payments were ‘green’ subsidies — those that have limited or no effect on trade — and argued that a WTO cotton ruling from 2003 does not change how Washington classifies its farm programs.”

And Dow Jones News writer Bill Tomson reported yesterday that, “Also not included in the U.S. amber box submission are billions of dollars of trade-distorting subsidies that are allowed to be placed in a ‘de minimis’ category – a loophole that allows nations to exempt a certain percentage of subsidies because they are not tied to a specific commodity.

“That de minimis category contains a key U.S. agriculture subsidy program known as countercyclical payments that farmers get when commodity prices drop below a set target,” the article said.

Recall that both Canada and Brazil, in part, charge that, “that the United States has exceeded its annual commitment levels for total Aggregate Measurement of Support (AMS) in each of the years 1999, 2000, 2001, 2002, 2004, and 2005” (Canada report, Brazil report).

Also of significance, as documented yesterday by Brownfield’s Peter Shinn; “During a teleconference with reporters, U.S. Chief Ag Trade Negotiator Joe Glauber said the figures proved the U.S. kept its most trade-distorting farm program spending well below the $19.1 billion ceiling allowed as part of the Uruguay Round of agreements. He said it also proved the U.S. offer to cut domestic farm program spending on Amber Box programs to a maximum of $7.6 billion dollars a year, first tabled in October 2005, really would result in meaningful reductions to U.S. agricultural subsidies.

“‘I would note that in seven of the past eight years, our U.S. AMS levels would have exceeded the proposed $7.6 billion cap,’ Glauber said.”

DTN writer Chris Clayton also noted yesterday (link requires subscription) that, “While keeping under the payment cap, the report does show the U.S. proposal in 2005 to lower its trade-distorting subsidies to roughly $7.6 billion annually would be a significant subsidy reduction, Conner [Acting Agriculture Secretary Chuck Conner] said, given the four-year average of the amber-box subsidies was $10.27 billion.”

Farm Bill Finance Activity

Meanwhile, a press release issued yesterday the Senate Finance Committee stated that, “Senate Finance Committee Chairman Max Baucus (D-Mont.) today led the approving the ‘Heartland, Habitat, Harvest, and Horticulture Act of 2007.’ The fully-offset ‘4-H Bill’ – totaling $15.05 billion prior to the addition of amendments today – will create a trust fund to help ranchers and farmers hurt by crop and livestock losses, convert a number of conservation payment programs into fully-offset tax credit programs, and offer additional incentives for rural economic development and energy-related tax relief to aid agricultural producers. Creating the disaster assistance trust fund and converting payment programs to tax credits will free up previously obligated spending funds for the Agriculture Committee to use elsewhere in farm bill spending.” (The press release also included a summary of the package).

Dan Morgan reported in today’s Washington Post that, “Tapping savings resulting from tighter tax rules on business, the Senate Finance Committee yesterday approved the creation of a $5 billion fund that would compensate farmers hit by weather-related losses over the next five years.

“The proposed Agricultural Disaster Trust Fund is part of a nearly $14 billion package of tax incentives for rural conservation programs, bioenergy development and young farmers, outside the existing farm subsidy program.

“Sen. Kent Conrad (D-N.D.), who has led the fight for the disaster program, said that ‘an awful lot of people around this country are going to benefit.’ Echoing that, the committee chairman, Max Baucus (D-Mont.), said the fund would be a more efficient way to provide disaster aid than the current system of sporadic payouts in annual spending bills.”

Mr. Morgan added that, “Senate Agriculture Committee Chairman Tom Harkin (D-Iowa), whose panel will draft a new five-year farm bill this month, has repeatedly questioned the wisdom of a disaster relief program. He favors the creation of a broad safety net that would provide help when a farmer’s revenue falls below a state’s norm.

“The disaster program, Harkin said, is ‘a priority for three or four states, but not for the country.’

“In a study released this week, the Washington-based Environmental Working Group noted that most disaster aid goes to a few low-rainfall states, including the home states of Conrad and Baucus.”

The Post article concluded by stating that, “To offset the costs of new tax credits encouraging more rapid development of new biofuels, the committee approved a 5-cents-a-gallon reduction of the current 51-cents-a-gallon credit on ethanol blended by gasoline makers.”

Congressional Quarterly writer Catharine Richert reported yesterday that, “The committee also adopted an amendment by Ken Salazar, D-Colo., that would increase the tax credit for cellulosic ethanol to 17 cents per gallon and one by Blanche Lincoln, D-Ark., that would provide new tax credits for energy-efficient motors in farm equipment.”

The CQ article stated that, “If Baucus succeeds in adding his tax package to the farm bill on the floor and Republicans decide to fight the tax increase, it could sink the farm reauthorization’s passage.

“And even if the Senate passes the measure, it would create challenges for an eventual conference with the House.

“‘It’s not going to help,’ said Robert W. Goodlatte of Virginia, the ranking Republican on the House Agriculture Committee. Goodlatte was among the Republicans who opposed a $4 billion tax package in the House bill that would help pay for nutrition programs.

“Meanwhile, House Ways and Means Chairman Charles B. Rangel, D-N.Y., the architect of the comparatively leaner House tax package, said he’s frustrated that Baucus and Grassley didn’t consider his approach to finding offsets.

“‘I only hope that no matter what agreement Sen. Grassley and Sen. Baucus have, it is not a statement that it’s their way or no bill,’ Rangel said.”

Associated Press writer Mary Clare Jalonick reported yesterday that, “The finance panel is raising much of the money by cracking down on companies under the ‘economic substance’ doctrine, which holds that for a company to claim a tax deduction for a specific transaction, that transaction must yield a profit or have some other clear economic benefit separate from the tax effect.

“That provision could prove controversial when the bill hits the floor. Though it has the support of Iowa Sen. Charles Grassley, the top Republican on the committee, most of the panel’s other Republicans voted against it.”

Reuters writer Charles Abbott reported yesterday that, “The bill lowers the excise tax credit for ethanol by 5 cents a gallon, to 46 cents, when production exceeds 7.5 billion gallons a year and it extends until 2011 a 54-cent-a-gallon tariff on ethanol imports.”

The article also indicated that, “Finance Committee members approved the tax bill, 17-4, after a 14-8 vote on the major way to pay for it — tighter rules on tax shelters that would raise $10 billion over 10 years. Baucus and Iowa Sen. Charles Grassley, the Republican leader on the committee, said a uniform definition of ‘economic substance’ was needed because of differing court decisions.

“‘I am convinced the only reason we are legislating it is as a revenue-raiser,’ objected Arizona Republican Jon Kyl. Most Republicans on the committee voted against the Baucus-Grassley amendment while all Democrats voted for it.”

Philip Brasher, writing in today’s Des Moines Register, pointed out that, “Some Republicans complained the move amounted to a tax increase, and supporters conceded it could provoke a battle with the White House, but the measure was approved 17-4 by the Senate Finance Committee.”

With respect to Farm Bill timing, DTN Political Correspondent Jerry Hagstrom reported yesterday (link requires subscription) that, “Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, is planning to mark up the farm bill the week of October 22, a spokeswoman said Thursday.”

In a broader look at the Farm Bill debate, David Rogers reported in today’s Wall Street Journal that, “A stalled farm-bill debate in Congress exposes a gap in the Democratic leadership: there is no single strongman to force deals upon three Senate committee chairmen who all want a hand in agriculture policy.

“Senate Majority Leader Tom Daschle played that role in the last big farm bill five years ago, and even Republicans, who helped bring down the South Dakota Democrat in 2004, now miss him. ‘When Daschle walked in, it was like Gen. Patton. Everything sort of came together,’ says Rep. Frank Lucas (R., Okla.). ‘There’s no Gen. Patton this time.’

“There’s no Senate farm bill either. Two months after the House passed its version, Senate Agriculture Committee Chairman Tom Harkin (D., Iowa) was forced to again postpone action yesterday for lack of a consensus among Democrats.”

The Journal added that, “Senate Majority Leader Harry Reid (D., Nev.), who served under Mr. Daschle but has little of his background in agriculture, will face pressure to intercede if the delays persist. Already his hands-off approach contrasts with that of House Speaker Nancy Pelosi (D., Calif.), who steeped herself in the details of the House bill, brokering deals and directing tax writers to provide added revenue to keep her rural-urban coalition together.”

Concluding, Mr. Rogers stated that, “With a new fiscal year under way, portions of the 2002 farm bill have already expired. But the real crunch will come in December and January when farmers begin to talk to bankers about their next crop year.

“Mr. Harkin hopes to get his committee back together again in two weeks to produce a bill that can be moved quickly to the Senate floor. But supporters fear there will be growing pressure to simply reauthorize the current commodity programs, without any change, for another crop year.

“Going into the 2008 elections, failure to produce a farm bill would be a setback for Ms. Pelosi’s hopes of expanding Democratic gains in rural areas. And the chore of writing a bill doesn’t get any easier with time.”

Keith Good

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