On June 8th the Government of Canada requested that a World Trade Organization (WTO) dispute settlement panel be established on the issue of U.S. agricultural subsidies. Just over a month earlier on May 2nd they had announced that no further action would be taken on a previous dispute settlement proceeding concerning U.S. corn subsidies until at least the end of the year while the Doha Round of trade talks continued. Pursuing a broad case against U.S. farm policy will likely do little to address the specific concerns of Canadian corn producers.
In January of this year, the Canadian government requested consultations with the U.S. claiming that U.S. corn subsidies were causing serious injuries to Canadian corn producers, U.S. export credit guarantees were illegal export subsidies and U.S. total domestic agricultural subsidies exceeded the U.S. amber box limit of $19.1 billion per year. Other WTO members such as the EU, Argentina, Brazil, Nicaragua and Thailand joined as interested third parties. Canada has now asked that a dispute settlement panel consider the issues of export credits and exceeding the amber box subsidy limits, but not the question of harm to Canadian corn producers. The case has morphed from one focused on U.S.-Canada corn trade to a more general case on U.S. farm policies.
Both of the subsidy arguments are outgrowths of a WTO Brazilian cotton case against the U.S. filed in September 2002. The September 2004 WTO ruling determined that U.S. export credit programs were export subsidies for all commodities not listed in the WTO agreement and production flexibility contract payments under the 1996 farm bill and direct payments under the 2002 farm bill were not fully decoupled from production and did not qualify for WTO green box status. The WTO is now reviewing at the request of Brazil whether the U.S. has met the requirements of the ruling. The dispute settlement process in agriculture is new enough that it is uncertain what is acceptable compliance with a broad decision like the Brazilian cotton case.
Changes in U.S. export credit programs have been discussed in the WTO talks. The U.S. is likely to conform to whatever changes are required. Some participants in the farm bill debate have acknowledged that changes in planting restrictions on fruits and vegetables may need to be addressed.
Given that many of the specific issues raised in the Canadian case are already in play at the WTO talks and in the U.S. farm bill policy debate, why have another WTO case now. One obvious answer is that the case is good politics among corn growers in Canada. The January request for consultations at the WTO was an outgrowth of efforts in 2005 by Canadian corn producers to gain relief under Canadian law that ended in a Canadian trade panel rejecting their arguments.
With Congress in the midst of writing a new farm bill and major trading nations gathering later this month to work on a WTO agreement, now is a good time to keep the fire kindled against U.S. farm policies. The WTO may rule as early as July on U.S. compliance with the rulings in the Brazilian cotton case. Regardless of the outcome, the debate will go on.
Another reason for pushing forward now is that the circumstances of the case are becoming old news. The data on the U.S. exceeding the amber box limit are for 1999 through 2005, except for 2003 when payments were lower due to higher market prices. With worldwide increases in production of ethanol and biodiesel, market prices are likely to be higher in the years ahead than in the large carryover stocks years of 1999 through 2002 caused by a string of good crop years. Even if Canada would win a case that might be finally decided in 2009, what relevance would that have to farm programs for the 2010 crops? The backward looking nature of WTO cases does not work well in a world of rapidly changing economic conditions.
Canada could win the case, but not have a change in market conditions for its corn producers. The U.S. produces about 40 percent of the world’s yearly corn output, basically the same percentage as 25 years ago. U.S. production has averaged about 11 billion bushels per year in recent years compared to Canadian production of 370 million bushels per year. Canadian corn imports from the U.S. averaged 81 million bushels per year over the past four years. With an open border between the U.S. and Canada under NAFTA, it is easy to see that corn production in the U.S. will drive the price of corn in both the U.S. and Canada. The current high U.S. corn prices caused by increasing demand have also increased corn prices in Canada. As a result, Canadian corn acres harvested for grain are expected to increase by 28 percent this year to 3.5 million acres and imports from the U.S. are expected to decline by 22 percent from the four-year average to 63 million bushels.
With or without U.S. farm programs, Canadian corn producers will be buffeted by changing supply and demand conditions in the U.S. corn market. The only way to avoid that is to erect trade barriers against U.S. corn imports with a variable import levy to provide for government management of corn prices. Those schemes have proven to be harmful to producers of other agricultural products that use corn and sell products into world markets.
Canada, Mexico and the U.S. must increase efforts to work within the NAFTA framework to have farm policies in each country that are more compatible to reduce the potential for trade distortions. A major benefit for any trade agreement is in allowing producers with the greatest comparative advantage to supply consumers throughout the agreement area. Producers in the other countries should have their particular concerns addressed by domestic policies that do not distort trade flows.