WTO negotiations operate by one country or group of countries making an offer for trade policy changes and other countries providing a response. For the past several months many WTO watchers said no progress would occur in the WTO talks until the U.S. and the EU made serious agricultural proposals. That condition was met when U.S. Trade Representative Rob Portman released a proposal on October 10 and the EU followed with one of its own.
The most significant number in the U.S. proposal is the reduction in the limit on the amber box for domestic support programs. These programs are considered to be trade distorting because they are tied to current output and market prices. Other countries have argued that the U.S. programs protect producers from the discipline of market conditions and have not been subject to real limits under the current WTO rules. The U.S. is currently limited to a total Aggregate Measurement of Support (AMS) in the amber box of $19.1 billion per year. The WTO framework agreement reached in July of 2004 called for the limit for each country to be cut by at least 20 percent in the first year of a new agreement. The U.S. has proposed to reduce its amber box limit by 60 percent to $7.6 billion by the end of a five-year transition, with product-specific caps based on the 1999-2001 period.
A few details are needed to understand what this new limit could mean for U.S. farm programs. The AMS calculation for the amber box includes direct payments like loan deficiency payments (LDP) and estimates of the benefits of price support programs for dairy and sugar. While recent numbers are not available, estimates for 2001 put the total U.S. amber box AMS at $12.3 billion. The total may be higher for the 2005 crops based on current low market prices, but it is a good working number for policy analysis purposes.
Comparing the $12.3 billion per year estimate to $7.6 billion per year after the five year transition looks like a real cut of about 40 percent, but that is not the whole story. The July 2004 framework agreement allowed the U.S. to shift payments under the counter-cyclical program to the blue box for programs based on fixed payments and yields. Those payments are highly variable, but $3-4 billion per year with low market prices is a reasonable number to use. The framework agreement proposed allowing blue box spending up to 5 percent of the value of total agricultural production for the country. The U.S. proposal would reduce the cap to 2.5 percent or about $5 billion for the U.S. If the counter-cyclical program were shifted to the blue box, the U.S. amber box AMS would be close to $8.5-9.0 billion per year.
Estimates of the amber box AMS are further complicated because the current U.S. milk price support program carries an AMS of roughly $4.5 billion per year and the sugar program about $1.5 billion per year. These estimates are based on the relationship of price supports to market prices from 1986-88. An argument can be made that these estimates should be updated under a new agreement. If these estimates are not updated and Congress does not change the programs in the next farm bill, by the end of the five year transition time there would be less than $2.0 billion for other programs.
Shifting the counter-cyclical programs to the blue box will be a tough sell in the negotiations. While it was included in the framework agreement of July 2004, most other countries only agreed to it in the interest of keeping the negotiations moving forward. The shift could survive if the U.S. makes trade-offs in other areas. Even if the shift to the blue box is allowed, the U.S. proposal accepts the framework’s caps on trade-distorting supports.
The U.S. proposal reduces the EU amber box limit by 83 percent. This would move the EU from a limit of over $80 billion a year (four times the U.S.) to about $15 billion per year (twice the U.S.). The EU has proposed a 70 percent reduction in their AMS. Japan would also face an 83 percent reduction in its amber box limit under the U.S. proposal.
The U.S. proposal does not make material changes in the green box for fixed payments not tied to production and price and for conservation programs. The EU under current farm program policies is shifting more payments to the green box. As with the blue box, any effort by the U.S. to shift programs to the green box will be met with skepticism by countries that are convinced that the U.S. is not serious about reducing trade distorting subsidies.
The U.S. proposal calls for reduced import tariffs to improve market access. For developed countries the U.S. has proposed that tariffs on agricultural products be divided into four bands of 0-20 percent, 20-40 percent, 40-60 percent and over 60 percent. Tariff reductions would begin at 55 percent for the lowest tariffs and escalate to reductions of 85-90 percent for tariffs beyond 60 percent. No tariff could be higher than 75 percent, except for “sensitive products.” These products could account for no more than 1 percent of the tariff lines of a country and expanded tariff rate quotas (TRQ) would to be required. The EU, Japan, South Korea, Switzerland and other high tariff countries will resist this level of tariff changes. The EU has proposed tariff cuts of 50-60 percent. Developing countries would have the same tariff bands, but actual tariffs cuts are not included in the proposal.
Also included in the proposal are the elimination of exports subsidies over five years, restrictions on state trading enterprises like the Canadian Wheat Board and ending of differential export tariffs like those used by Argentina to encourage the exports of soybean meal rather than whole soybeans.
This is the beginning of a year long debate in the WTO negotiations and within each WTO member country. Whether an agreement can be reached and what it may look like will not be known until next year about this time.