FarmPolicy

October 19, 2019

More Technical Background on the U.S. Classification of Direct Payments

Categories: Doha / Trade /EU /Farm Bill

Recall that Friday’s FarmPolicy update discussed some issues associated with the U.S. notification of farm subsidy payments to the WTO and highlighted the reasoning behind the U.S. decision to classify direct payments as “green box” spending.

Despite an earlier finding in a WTO case regarding U.S. cotton subsidies, where a dispute panel indicated that: “U.S. payments made under the PFC [production flexibility contract] and DP [direct payment] 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,” (from, “Background on the U.S.-Brazil WTO Cotton Subsidy Dispute,” Congressional Research Service, July 2005), the U.S. pointed out that the parameters of this legal determination in the Cotton Case were of a limited nature and did not specifically require the U.S. to reclassify PFC and DP payments to the “amber box.”

As USTR Ambassador Joe Glauber, the chief U.S. agricultural negotiator explained on Thursday, “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 [Aggregate Measurement of Support index] notifications are concerned. This was in a subsidy that did termination, and particularly under the so-called Peace Clause.”

(Under the auspices of the Agreement on Agriculture, the U.S. has committed to limit its AMS support to no more than $19.1 billion per year).

Even though the technical distinction associated with Peace Clause review and AMS review seems to permit the U.S. to currently classify direct payments as “green box,” some observers have implied that the legal basis under girding this decision is more tenuous in the longer-run.

Daniel A. Sumner (Professor at the Department of Agricultural and Resource Economics, University of California, Davis) stated in December of 2005, “In the cotton case, however, the panel and the Appellate Body rejected the United States’ classification of PFC and direct payments as green-box subsidies for peace clause purposes. Although neither the panel nor the Appellate Body expressly determined that a program that failed to qualify for green-box status in a peace clause context would also fail to qualify for AMS purposes, such a conclusion is both reasonable and likely. And if PFC and direct payments are reclassified as amber-box support, a very different picture of U.S. compliance with the Agriculture Agreement emerges” (from “Boxed In Conflicts between U.S. Farm Policies and WTO Obligations,” at page 10).

This issue is probably best summarized from an extended excerpt from a book published by the Peterson Institute (“Case Studies in US Trade Negotiation: Two Volume Set,” by Charan Devereaux, Robert Lawrence and Michael D. Watkins- Vol. 2– “Resolving Disputes,” Chapter Five: “Brazil’s WTO Cotton Case: Negotiation Through Litigation”) which stated that, “One of the rulings with the most far-reaching impact on US agriculture was the finding that direct payments did not qualify as green box, because of the prohibition on planting fruits and vegetables. ‘That is an extremely political issue, because if the appellate body confirms that, it means the whole farm bill is wrong,’ says Pedro de Camargo [former Brazilian deputy minister of agriculture]. Joe Glauber [then USDA’s deputy chief economist, who was being quoted from a 2004 interview] concurs: ‘The significance of this is substantial.’ If the United States had been required to classify the $6 billion in annual direct payments as amber box instead of green box, it would have been over its aggregate measurement of support (AMS) commitments for 1999, 2000, 2001, and 2002.

“‘This may be the first WTO-driven decision that Congress has to make about a farm program, and it won’t be an easy one,’ says Glauber. ‘Congress is indignant over the idea that something we’ve been reporting as green…has now been determined by the WTO to not be green.’ Though many believed the prohibition on fruits and vegetables would be easy to fix, it ‘isn’t just there by chance,’ he notes: ‘There was heavy lobbying in the 1996 farm bill by the fruit and vegetable lobby to have that in there- they didn’t want producers who receive payments to quit growing those crops and follow market signals and say, ‘I’m planting plum trees row to row.’…As far as [fruit and vegetable producers] are concerned, this [provision] is the one little thing they got out of the 2002 farm bill. So I don’t think it would be easy to overturn’” (from pages 254-255).

At footnote 45 on page 267 of the book, the authors explained that, “Under the program, farmers who grew fruits and vegetables on cotton base acreage were penalized (their payments were lowered). Therefore, the panel argued, the direct payments were not fully decoupled from production levels, so they did not meet the criteria of green box support. This same prohibition on fruits and vegetables existed for all program commodities that qualified for direct payments.”

A couple of interesting issues stem from this information. One is that currently, both Canada and Brazil have filed WTO petitions claiming in part 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” (from “Canada’s WTO Case Against U.S. Agricultural Support: A Brief Overview,” CRS report (September 18, 2007); and “Brazil’s WTO Case Against U.S. Agricultural Support: A Brief Overview,” CRS report (September 21, 2007)).

It appears that this case would allow a WTO panel to clear up any jurisdictional technicalities with respect to direct payments and the green box as applied strictly to a Peace Clause determination. As the cite from Dr. Sumner noted previously implied, an application of the reasoning from the peace clause context to AMS purposes, which the Canadian – Brazil complaints would presumably petition for, “is both reasonable and likely.”

Although it might take a long time for a WTO panel to make this potential ruling, a panel could possibly determine that the U.S. should officially reclassify direct payments as amber box.

Secondly, despite an administration recommendation that the fruit and vegetable planting restriction on base acres be removed, (“To ensure that direct payments will be considered to be non-trade distorting green box assistance, the Administration proposes that the provision of the 2002 farm bill that limits planting flexibility on base acres to exclude fruits, vegetables, and wild rice, should be eliminated” -from USDA’s 2007 farm bill proposal, page 32); the House version of the 2007 Farm Bill has left the fruit and vegetable planting restriction in place, (“The House-passed 2007 farm bill (H.R. 2419, the Farm, Nutrition, and Bioenergy Act of 2007) extends the planting restriction and includes a Horticulture and Organic Agriculture title (Title X) that contains a total of $1.6 billion in mandatory funds through FY2012 for several major programs and annual appropriations authority for others” –(from, “Specialty Crops: 2007 Farm Bill Issues,” August 17, 2007).

And with respect to eliminating the planting restriction provision, economic analysis indicates that, “Although eliminating restrictions would not lead to substantial market impacts for most fruit or vegetables, the effects on individual producers could be significant.”

Senate farm bill action is still forthcoming, however, Senator Debbie Stabenow (D-MI), along with 33 of her Senate colleagues, sent a letter on September 19 to Chairman Harkin (D-IA) and Ranking Member Chambliss (R-GA) concerning the role of specialty crops in the upcoming Farm Bill.

Although the letter did not specifically mention the fruit and vegetable planting restriction issue, the Senators did indicate that, “The House bill includes approximately $1.6 billion in mandatory funding over five years for specialty crops. This is half of the total funds needed to meet critical needs. We, therefore, request that the Senate Farm Bill build on the work of the House of Representatives by adding an additional $1.6 billion to fully meet the needs of the broad array of specialty crops throughout America.”

And on Friday, Sen. Stabenow issued a press release indicating that, “The Heartland, Habitat, Harvest and Horticulture Act,” which was passed last week by the Senate Finance Committee, “acts as a good first step in recognizing the contributions our fruit, vegetable, and other specialty crop farmers make to the health and well-being of consumers…”

It remains unclear whether the fruit and vegetable planting restriction will become an important focal point in the Senate debate for the 2007 Farm Bill. The implications of this issue will likely garner additional attention if the Canadian – Brazilian WTO complaints regarding amber box limits move forward to a successful conclusion at some point in the future.

***

In news regarding the Doha round of WTO trade talks, the Associated Press reported on Friday that, “The European Union’s trade chief joined the United States on Friday in calling on India, Brazil and South Africa to back a draft trade deal that would see them reduce tariffs on industrial goods while the U.S. and Europe slash farm subsidies.

EU Trade Commissioner Peter Mandelson said leading developing nations had to signal that they accepted what is on the table for both agriculture and industry.

“‘The EU, the U.S. and the Asia-Pacific Economic Cooperation nations have done so,’ he said. ‘India, South Africa and Brazil can send such a message at their summit on Oct. 17. It is important that they do so.’”

The article added that, “The long-stalled talks seem to have picked up in recent weeks after the U.S. said it was willing to limit trade-distorting farm subsidies to a level between US $13 billion and US $16.4 billion (€9.3 billion and €11.74 billion) if other parts of the world joined in.

“Many trade officials have expressed doubts in recent weeks over Washington’s ability to sell subsidy cuts to farm groups, which could play a key role in next year’s presidential and congressional elections.”

Meanwhile, Reuters writer Jonathan Lynn reported on Friday that, “More compromises are needed to clinch agreement on agriculture in global trade talks, though the outlines of a deal are visible and progress has been made in recent weeks, trade diplomats said on Friday.

“‘There is clearly a lot of work that has to be done over the next few weeks to get an agreement,’ Joe Glauber, chief Doha agriculture negotiator for the U.S. trade representative, told a World Trade Organisation (WTO) forum.”

The article indicated that, “Negotiators are now seeking to reach enough agreement in agriculture and manufactured goods talks for ministers to come to the WTO to bless the outlines of a global comprehensive deal.

“Very roughly, the key elements would involve a cut in U.S. farm subsidies and European Union farm tariffs coupled with a cut in developing country industry tariffs.

“Washington argues it has been flexible, by agreeing to cap its farm subsidies in ranges proposed by the WTO mediator.

“But it says other countries must set tariffs and subsidies in the ranges proposed in both the farm and industry texts, a challenge echoed by EU Trade Commissioner Peter Mandelson who said several developing nations still need to support the texts.”

An item posted yesterday at The Hindu Online indicated that, “Commerce Minister Kamal Nath and US Trade Representative Susan Schwab will meet in London next week at the behest of WTO chief Pascal Lamy to renew efforts for reaching a breakthrough in the stalled trade negotiations.

“Nath would meet Schwab between October 15-17 as ‘Lamy believes the two countries that can take the WTO talks forward are India and the US,’ a highly-placed official said.”

And the editorial board at The Wall Street Journal noted in today’s paper that, “How appropriate that the fate of global trade talks may be decided in Africa today when the leaders of Brazil, India and South Africa huddle in Pretoria. Developing countries stand to gain the most from the embattled Doha Round, which makes it all the more strange that these three regional economic powers are threatening to kill it.

“What a switch from previous years, when the U.S. and Europe almost let Doha founder rather than reduce their agriculture subsidies. Now that dynamic has changed. The U.S. offered last month to cap annual farm subsidies to between $13 billion and $16.4 billion; current U.S. subsidies are even lower, at around $11 billion. Given that the U.S. walked away from the table earlier this year when a $17 billion offer was floated, that’s a big concession.

“This U.S. flexibility has created a spurt of goodwill, especially among European Union countries, many of which now look ready to do a deal. But the so-called advanced developing countries, led by Brazil and India, have turned up their noses. Bowing to their domestic constituencies, neither has even accepted the agricultural or industrial texts on offer with the World Trade Organization as a basis for discussion.”

The Journal editorial also stated that, “At least in principle, both Brazil and New Delhi recognize the benefits of cutting tariffs. President Lula da Silva has kept Brazil growing by shedding some of the country’s more backward economic policies. In India, the Congress-led coalition government has unilaterally cut industrial tariffs. Yet Indian industry remains highly protected, especially for a country with aspirations to become a global power. Under the current Doha text, India’s average industrial tariffs would fall to just 16.8% from 19.5%. Contrast this with the U.S., where average industrial tariffs are 3.9%, and would fall to 2% under the Doha draft.

“The U.S offer is a last-ditch effort to break the Doha impasse. The more concessions India and Brazil make in return, the more the U.S. delegation can do — and the more pressure will be exerted on Europe to match the U.S. offer. There’s room to negotiate, too, over mechanisms that would safeguard Indian farmers while tariff cuts phase in.

“This decade has seen the greatest world economic boom in 40 years, fueled in large part by an enormous expansion in trade. But such prosperity is not guaranteed to continue, and it won’t if the world retreats from further trade liberalization. The latest U.S. concessions mean that Brazil and India can no longer use farm subsidies as an excuse for their own failure to move. If Doha dies, they will bear a large part of the blame.”

Keith Good

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