The WTO Policy Litigation Threat


As the New Year continues to unfold with no apparent, substantive movement in the Doha round negotiations on agricultural issues, key countries are considering how to jumpstart the talks. For the U.S. and the EU, part of the calculation is the potential for cases against their current farm programs to be brought before the WTO Dispute Settlement Body. Even with a new agreement, a threat would remain unless a “peace clause” is part of the deal.

The U.S. and the EU were recent losers in farm program cases. The U.S. lost a cotton case brought by Brazil and the EU lost a sugar case brought by Brazil. The Uruguay Round Agreement on Agriculture provided a nine year period, 1995 to 2003, in which cases could not be brought as long as subsidies did not exceed the levels in the Uruguay agreement. Ending of the peace clause in 2003 provides an opportunity for more cases to be heard.

Such a clause in the new agreement would likely have a cost in trade-offs in other areas of the agreement. Trade officials in many developing countries believe that the previous peace clause gave the U.S. and the EU a free ride in not reducing trade distorting subsidies under the Uruguay Agreement.

Engines are already being warmed up for cases against U.S. and EU agricultural programs. In November of last year Oxfam International in a briefing paper titled “Truth or Consequences, Why the EU and the USA Must Reform Their Subsidies, or Pay the Price” outlined cases against the U.S. in corn, rice and grain sorghum and the EU in tomatoes, canned peaches and pears, citrus fruit juices, wines and spirits, tobacco, butter and skim milk. The analysis included a list of countries, both export competitors and importers whose farmers may have been disadvantaged by U.S. and EU programs, who would be likely candidates to file cases.

Using the Oxfam list as a guide, the EU is at less risk than the U.S. Wine and dairy products are the biggest concerns for the EU. If the recent EU reforms in CAP programs for grains and meats are good enough to avoid cases on those commodities, the EU may be willing to take their chances with no new agreement or a minor agreement with no peace clause. If the EU agreed to substantial reforms in subsidies and tariff reductions as part of a new agreement, they would likely demand a long-term peace clause.

The U.S. is at greater risk, but perhaps not as much as first appears. The outcome of the cotton case already requires changes in the export credit programs for all crops and elimination of the step 2 program for cotton. Also, the current provision for exclusion of fruit and vegetable plantings on farm program acres receiving direct payments will need to be resolved with or without another case against U.S. crop programs.

The U.S. wheat program has escaped much of the criticism directed at other crops even thought the program is similar to the ones for other crops. With U.S. wheat area harvested down almost 13 million acres, 20 percent, since 1996, it is hard to argue that U.S. farm programs are encouraging wheat production in the U.S. Soybean program payments had been criticized in past years, but there has been less talk lately. Even though U.S. soybean area has increased eight million acres, 13 percent, since 1996 because of planting flexibility under current farm programs, U.S. exports of soybeans and products as a percent of total world trade have declined from 41 percent to 26 percent while total world trade has increased by 60 percent.

Talk about filing a complaint against U.S. farm programs usually centers on the total amount of government payments and increases in U.S. production even though market prices have declined. These are not good indicators of the impact of U.S. programs on production and exports. Direct payments not tied to production are considered green box for the WTO rules as minimally trade distorting and are not subject to limits. Conservation programs are also green box. Payments under the marketing loan program and the counter-cyclical program are considered trade distorting because they increase when market prices go down.

Some portions of farm program payments end up benefiting landowners through higher land rents and higher prices for land in non-metro areas. Depending on the research methods used and the region of the country, from 15-50 percent of the value of land in rural areas has been attributed to farm program payments. That can be argued as either good or bad, but all farm program payments do not equally distort trade in agricultural products.

In a market system with advances in production technology, the long-term real price of a good will decline as productivity increases, unless there is some constraint on production. That can be clearly seen in the decline in prices for farm program crops in the U.S. over the past 30 years. Declining prices for commodities and production increases are opposite sides of the same economic coin and are driven by productivity increases. Increased production would happen in the U.S. with or without farm programs. Also, the record yields for U.S. crops in 2004 would have occurred without current farm program.

If the Dispute Resolution Body truly focused on the economics of farm program payments, allowing cases against U.S. programs to work through the process would be a reasonable option. Uncertainty about the outcome of cases under the present system provides incentives for negotiators to work out an agreement that is good for the U.S. and other countries. If that cannot be achieved, living with WTO cases against U.S. farm programs may be worth the risk rather than accepting a bad agreement or giving up too much to get a peace clause.

Ross Korves

Ross Korves

Ross Korves served Truth about Trade & Technology, before it became Global Farmer Network, from 2004 – 2015 as the Economic and Trade Policy Analyst.

Researching and analyzing economic issues important to agricultural producers, Ross provided an intimate understanding regarding the interface of economic policy analysis and the political process.

Mr. Korves served the American Farm Bureau Federation as an Economist from 1980-2004. He served as Chief Economist from April 2001 through September 2003 and held the title of Senior Economist from September 2003 through August 2004.

Born and raised on a southern Illinois hog farm and educated at Southern Illinois University, Ross holds a Masters Degree in Agribusiness Economics. His studies and research expanded internationally through his work in Germany as a 1984 McCloy Agricultural Fellow and study travel to Japan in 1982, Zambia and Kenya in 1985 and Germany in 1987.

Leave a Reply