The Bush Administration has consistently advocated three categories of reforms for agricultural trade in the Doha round of negotiations: export subsidies, trade-distorting domestic supports and market access. U.S. farmers and ranchers have targeted export subsidies and restrictions on market access by other countries, while many other countries have focused on U.S. domestic support to U.S. farmers and ranchers. The recent ruling by a WTO dispute panel on a complaint filed by Brazil against programs for U.S. cotton producers sheds some light on the how farm program payments may be treated in the new agreement.

As U.S. Trade Representative Robert Zoellick commented on September 8th when the full ruling was made available, “some aspects of the panel report belong in negotiation and not litigation, namely in the Doha Development Agenda negotiations.” While the foreign press and much of the popular press in this country have played the panel ruling as a stinging defeat for the United States, the reality is that Brazil had only a partial victory, and some of that may be reduced based on a U.S. appeal of the ruling. Some U.S. farm program payments are clearly non-trade distorting and others can likely be modified to avoid problems in the future.

Payments that are fully decoupled from production and price were ruled to not have suppressed world market prices. These are the direct, fixed payments under the 1996 and 2002 farm bills that are made each year regardless of what is planted, if anything at all. These direct payment programs are also important for the European Union (EU). In 2003, the EU made reforms in its Common Agricultural Policy to shift funding to direct payments based on historical payments to make it easier for them to comply with whatever comes out of the Doha negotiations.

Crop insurance was also placed in the category of not hurting Brazil because they did not show how it depressed market prices. With the expansion of crop insurance for all crops over the last 10 years, this is a key domestic program.

Payments that the ruling referred to as “mandatory price-contingent United States subsidy measures” (marketing loan payments, Step 2 payment to domestic cotton users and exporters, marketing loss assistance payments and counter-cyclical payments) cause significant price suppression. The key words are “price-contingent,” i.e. payments tied to market prices during the current marketing year. The Administration has already proposed as part of the framework negotiating agreement reached this summer to make the counter-cyclical program part of the acceptable payments in the Blue Box. The marketing loan payments would likely remain in the Amber box and subject to agreed limits. The Step 2 payments were ruled to be export subsidies and import substitution subsidies. Unless that decision is reversed on appeal, they would likely be treated in the broad category of export subsidies with significant restraint required.

Despite the negative decision on price-contingent payments, the panel noted that Brazil had not established that the programs had depressed world market prices or that the United States had gained market share as a result of the programs. World cotton market prices would have been depressed with or without payments to U.S. cotton farmers. Even more important from a negotiation standpoint, the panel looked at changes in market share, a combination of domestic use and exports, as a measure of trade distorting impact. U.S. raw cotton exports have been increasing in recent years, but that has been offset by a decline in domestic milling use as access to U.S. cotton product markets by other countries has increased under the Uruguay round agreement.

If payments to U.S. farmers go up, but the U.S. does not gain market share because of it, then has there been any harm to trade? The argument could have been made that market share would have declined without the payments, but the panel chose not to go that far in its ruling, perhaps because they believed that they could not have made the economics of the argument hold up under scrutiny.

The U.S. export credit programs were ruled as export subsidies because they are provided, “…at premium rates which are inadequate to cover long-term operating costs and losses of the programs…” These programs are part of the wider debate over food aid and indirect export subsidies, which have been under active negotiations for several years. All parties seem to be committed to working out a deal that would be WTO acceptable. The WTO framework negotiating agreement calls for repayment periods of 180 days or less.

As noted earlier, some of the negatives of the ruling may be reversed on appeal. The price-contingent programs were likely to have been at the heart of the debate in the Doha round, with or without the ruling. Based on what is known now, the ruling on the Brazilian case, by itself, should not prevent substantial progress on market access and export subsidy issues.