BACK TO MAIN  |  ONLINE BOOKSTORE  |  HOW TO ORDER

TWN Info Service on WTO and Trade Issues (Sept09/01)
1 September 2009
Third World Network

Fake US agri-subsidy cuts for NAMA, Services market access
Published in SUNS #6758 dated 7 August 2009

Toulouse, France, 6 Aug (Jacques Berthelot*) -- Developing countries are coming under increasing pressure to open up their industrial goods and services markets on the basis of promises by the United States and the European Union to substantially cut their farm support following the conclusion of the WTO's Doha Round of multilateral trade negotiations.

Such pressures could intensify after the upcoming (3-4 September) New Delhi "mini-ministerial" meeting and the subsequent Pittsburgh Summit meeting of the G-20 leaders in September.

The developing countries, however, should not be misled by these claims of the US and the EU that they would cut, at the end of the Doha Round implementation period, their allowed FBTA (Final Bound Total AMS, aggregate measurement of support) by respectively 60% and 70%, and their allowed OTDS (overall trade-distorting domestic support) by 70% and 80% in relation to their allowed levels at the end of the 1995-2000 base period.

Rather, developing country policy- and decision-makers, negotiators and civil society should unmask the present US position in the ongoing Doha Round negotiations, and refuse any opening of their industrial products and services markets in exchange for nothing in agriculture.

[This article focuses on the US case; a full version of the paper, on how and why the US cannot cut its agricultural supports in the Doha Round, with detailed analysis, additional data, tables, references, and bibliography can be found at http://solidarite.asso.fr/home/textes2008eng.htm

If most WTO Members are misled by the oft-publicised claims of the US (and of the EU), it is because of the collusion between the WTO secretariat, the successive Chairs of the Special Session of the Committee on Agriculture (where negotiations are taking place) and most experts on agriculture trade to take at face value the US and EU notifications and their sleight of hands to change the Agreement on Agriculture (AoA) rules in the successive drafts of the Agriculture modalities texts.

Yet, as noted by the WTO secretariat, "The revised draft modalities... are NOT proposals' from the New Zealand ambassador (or from "the WTO")... They are the negotiations' chairperson's judgement of what members might be able to agree". The same can be said of the WTO General Council Decision of 31 July 2004 (the so-called July Framework) and of the WTO Ministerial Declaration of 18 December 2005 in Hong Kong, neither of which are binding texts. The only agricultural rules that WTO Members have to comply with are those of the AoA of 15 April 1994. [If the past be a guide to the future, it is possible that at the very last moment, in the final draft package to be accepted and signed, the rules may be changed. - SUNS]

The present analysis is based mostly on official US data and on the WTO Appellate Body rulings, knowing that the Hong Kong Ministerial Declaration has stated: "Without prejudice to Members' current WTO rights and obligations, including those flowing from actions taken by the Dispute Settlement Body".

I - THE 2008 FARM BILL HAS CHANGED IN VAIN THE MARKET PRICE SUPPORT FOR DAIRY PRODUCTS

To lower its applied AMS for dairy products - essentially a fake market price support (MPS) not implying any actual subsidy - the 2008 Farm Bill has changed the way to notify it from 2009 on. Instead of computing the MPS of milk, it will be notified as the sum of the MPSs of butter, nonfat dry milk and cheddar cheese.

(For a fuller explanation of the fake MPS issue, see J. Berthelot, "Doha Talks, market price support and Enron accounting", SUNS #6535 of 11 August 2008.)

The US experts rejoice at the Farm Bill changes because this would reduce the US applied AMS by about $3.5 billion. The snag is that this method does not comply with the AoA: if the rule is changed to compute the dairy MPS, the same calculus has to be applied for the base period 1986-88 as stated by Article 1 of the AoA and paragraph 5 of its Annex 3. Therefore, the total applied AMS for 1986-88 was not $23.879 billion but $20.784 billion and the final bound total AMS (FBTA) in 2000 was not $19.103 billion but only $16.627 billion.

II - THE PRODUCT-SPECIFIC SUBSIDIES IMPROPERLY NOTIFIED IN THE GREEN BOX OR IN THE NON PRODUCT-SPECIFIC AMS

(1) THE PRODUCTION FLEXIBILITY CONTRACTS (PFCs) AND FIXED DIRECT PAYMENTS: The WTO Appellate Body ruled on 10 February 2005 in the cotton case that "Production flexibility contract payments and direct payments are not green box measures that fully conform to paragraph 6(b) of Annex 2 of the Agreement on Agriculture" and that they are product-specific subsidies. This ruling was acknowledged in a Congress Research Service (CRS)'s report of 25 October 2006 but also by USDA (US Department of Agriculture) which asked Congress to consolidate the "green" status of direct payments by getting rid of the interdiction to grow fruits, vegetables and wild rice. However, the Farm Bill of 22 May 2008 did not follow the USDA's advice and has maintained the planting restriction to get fixed direct payments, countercyclical payments (CCPs) and ACRE payments (an alternative to CCPs in the 2008 Farm Bill). Another reason to put in the amber box PFCs and fixed direct payments is that a large part has been granted to feed grains and to corn used for ethanol, input subsidies that the AoA Article 6.2 puts in the amber box for developed countries.

(2) THE COUNTERCYCLICAL PAYMENTS (CCPs) CANNOT BE NOTIFIED IN THE "NEW BLUE BOX": The new blue box (BB) has been proposed in the Framework Agreement of July 2004 to accommodate the US CCPs but these do not comply with the criteria of the new BB, as acknowledged by the CRS. This is because: (a) they are based on current prices, contradicting the AoA requirement that non trade-distorting subsidies "shall not have the effect of providing price support to producers" (Annex II, paragraph 1); (b) they have always been notified in the non product-specific (NPS) AMS; ( c) like the fixed direct payments, CCPs and ACRE program do not have a full production flexibility as ruled in the cotton case; (d) the ACRE program is even coupled twice: to current price and current production volume; (e) a large part of CCPs, granted to feed grains and to feedstocks for bio-fuels, are input subsidies to be notified in the amber box. Besides, CCPs have been ruled product-specific by the WTO Appellate Body.

(3) THE CROP INSURANCE SUBSIDIES: The US has constantly under-notified them, limiting them to "the net value of the indemnities paid to producers for losses less the amount of the producer-paid premium". This is factually incorrect, as attested by numerous specialists and official bodies, notably the CRS, the Government Accountability Office (GAO), the USDA and its Chief economist Joe Glauber. Beyond the gap between indemnities to producers less the premiums and administration fees they pay, the costs to taxpayers include payments to insurance companies (to deliver the policies and underwriting gains) and the administrative expenses of the Risk Management Agency. From 1995 to 2007, the US has under-notified 51% of its actual subsidies, the average under-notified amount having risen from $694 million in the 1995-2000 period to $1,820 million from 2001 to 2007, and total subsidies for 2008 are expected to be $6.5 billion. Furthermore, the US has under-notified many disaster payments which do not comply with the restrictive conditions of the green box.

Another important issue for the Doha Round is that the US has notified crop insurance subsidies in the non product specific (NPS) AMS when in fact they are product specific (PS), as acknowledged by a CRS report of January 2009; and this is crucial for the issue of capping PS AMSs.

(4) SUBSIDIES TO GRAZING FEES: Subsidies to grazing fees on public lands have been notified for an average of $50.6 million from 1995 to 2000. However, according to a GAO report of September 2005, the net US expenditures on grazing are at least of $123 million.

III - THE PRODUCT-SPECIFIC SUBSIDIES NOT NOTIFIED AT ALL: THOSE TO CORN ETHANOL

As ethanol is an agricultural product for the WTO, ethanol subsidies must be added to the PS AMS. Indeed, AoA Annex 4 paragraph 4 states that "Measures directed at agricultural processors shall be included to the extent that such measures benefit the producers of the basic agricultural products", which is obvious as the ethanol boom has raised corn prices considerably.

The main subsidy is the volumetric ethanol excise tax credit (VEETC) of $0.51 per gallon.

Adapting the calculus made in 2007 by the International Institute for Sustainable Development <http://www.globalsubsidies.org/en/research/biofzek-subsidies-united-states-2007> - update) by eliminating the subsidies to corn producers (to avoid double counting) and the MPS linked to the tariff (which is not a subsidy), and taking into account the actual ethanol production of 2006 to 2008, we get total subsidies of $3.609 billion in 2006, $4.550 billion in 2007 and $6.380 billion in 2008.

However, to this must be added the additional revenue of corn producers resulting from the spike in corn prices attributable to the ethanol boom resulting from Congress' mandate. As all international institutions have blamed the US corn ethanol boom as the main culprit of the spike in food prices from 2005-06 to 2007-08, we can at least take the 13% conservative increase estimated by FAPRI. Given that the farm price has jumped from $2.00/bushel in the marketing year 2005-06 to $3.04 in 2006-07, $4.20 in 2007-08 and $3.78 in 2008-09, 13% of that increase multiplied by a production of 10.535 billion bushels, 13.038 billion bushels and 12.101 billion bushels respectively, amounts to $1.422 billion, $3.729 billion and $2.800 billion in additional subsidies to corn producers.

IV - UNDER-NOTIFIED OR NOT NOTIFIED AT ALL SUBSIDIES OF THE NON PRODUCT-SPECIFIC AMS

(1) AGRICULTURAL LOANS SUBSIDIES: The US has notified on average from 1995 to 2007 $48.8 billion in subsidies to State credit program in the NPS AMS and $105 million in the green box under "Structural adjustment through investment aids". These last notifications are referring to the subsidized direct and guaranteed loans run through the Farm Service Agency (FSA) but their amount does not match the average $1.092 billion of actual government costs in the 1995-00 base period given by USDA (Charles Dodson and Steven Konig, USDA, Evaluating the Relative Cost Effectiveness of the Farm Service Agency's Farm Loan Programs, USDA, Farm Service Agency, August 2006): $426 million of subsidies and administration expenses plus $666 million of write-offs.

On the other hand, the US has notified to the OECD an average of $645 million in the 1995-00 base period: $377 million of "payments based on use of fixed inputs", i. e. for investments, and $233 million of "payments based on use of variable inputs", i. e. for operating loans, both of them being coupled subsidies of the amber box.

However, beside the Farm loan program run by the FSA with a market share of 3% of farmers' indebtedness in 2007, the Farm Credit System (FCS) is a government-sponsored enterprise owned by its cooperative members-borrowers to provide loans to farmers, ranchers, agro-industries, rural houses and infrastructures. The FCS enjoys large tax exemptions and highly favourable cost of borrowed funds. Based on the FCS's financial results for 2005 and the first half of 2006, its tax exemptions were about $850 million annually, of which $725 million were on its real-estate lending.

To this must be added $350 million of profit from its after-tax funding cost advantage, of about 0.3%-0.4%. The FCS benefits of $1.2 billion of government subsidies have raised its market share to 16% of farmers' indebtedness, as a large part of the subsidies are transferred to borrowers in lower lending rates. And, contrary to the farm loan program benefitting mostly small farmers, the FCS lends primarily to large farmers: the average farm of FCS customers in 1999 had 935 acres against 600 for bank customers. Therefore, we keep conservatively the figures notified to the OECD, i. e. $645 million on average in the 1995-2000 period, to be put in the NPS AMS.

(2) AGRICULTURAL FUEL SUBSIDIES: Although the US did not notify any such subsidy to the WTO, the USDA has kept notifying each year to the OECD $2.385 billion of them. An investigation confirms that US farmers have benefitted from $2.987 billion in fuels tax exemption in 2005 and $3.123 billion in 2006. To this could be added about $1 billion of tax exemption on electricity used for farm operations. Hence, keeping $2.385 billion for the whole period as notified to the OECD is highly conservative.

(3) IRRIGATION SUBSIDIES: The figures notified are very ridiculous compared to the actual cost to the Federal and States budgets. The last notification for 2007 ($239.5 million) was justified as "Based on a debt financing method.' A long term interest rate is applied to the outstanding unpaid balance of capital investment by the Government in irrigation facilities to obtain the subsidy. Irrigators repay the principal but not the interest on the project debt". Water subsidies have been a recurrent nightmare for the US authorities and the General Accounting Office (GAO) has devoted about ten reports on the issue, without any change being made by Congress, due to large pressures from the irrigators lobby: not only irrigators but also the water districts and the numerous Federal and State administrations involved, including the US Army Corps of Engineers. Irrigators have only to repay a small part of the construction costs over at least 50 years but have been exempted from paying interests on the principal. Water rates do not even cover operation and maintenance costs of water facilities since they were established under the assumption that the costs would remain stable over time.

Many experts - Bruce Sundquist (1989), Michael Lind (2003) and even Interior Department economists (2002) - have estimated that irrigation subsidies were at least $2 billion, far from the $239 million notified for 2007 or the average $376 million notified in the 1995-2000 period, so that we can retain conservatively $1 billion in annual irrigation subsidies.

V - THE FRAUDULENT TREATMENT OF THE ALLOWED PRODUCT-SPECIFIC DE MINIMIS LINKED TO THE NON NOTIFICATION OF FEED SUBSIDIES REDUCES A LOT THE ALLOWED OTDS IN THE BASE-PERIOD

(1) THE PS DE MINIMIS IS NOT 5% OF THE WHOLE AGRICULTURAL PRODUCTION VALUE: Paragraph 30 on de minimis of the Chair's Revised draft of 6 December 2008 claims to be in line with the AoA definition on product-specific (PS) de minimis: "5 per cent of a Member's total value of production of a basic agricultural product in the case of product-specific de minimis". This is factually incorrect as the AoA states: "A Member shall not be required to include in the calculation of its Current Total AMS... (a) product-specific domestic support which would otherwise be required to be included in a Member's calculation of its Current AMS where such support does not exceed 5 per cent of that Member's total value of production of a basic agricultural product during the relevant year". In other words, as soon as a product-specific (PS) support reaches 5% of the production value of the product, it loses its allowed PS de minimis exemption and gets a PS AMS which is added to the applied total AMS and the production value of that product is added to the production value of all products with PS AMSs. Several experts confirm this AoA rule - H. de Gorter and J. D. Cook (2006); Ivan Roberts (2005), and even the CRS (2007).

(2) ANOTHER REASON TO CHANGE THE PS DE MINIMIS RULE WAS TO AVOID CONSIDERING FEED SUBSIDIES: The huge subsidies to feedstuffs (cereals, oilseeds, pulses) are denied to be input subsidies to notify in the PS AMS of animal products (meats, eggs, milk) having consumed them. Yet, the CRS has acknowledged that "program commodities such as corn are feed inputs for livestock". For the OECD also, "Input subsidies are typically explicit or implicit payments reducing the price paid by farmers for variable inputs (for example... feed)".

Although the US notifies subsidies to grazing on federal lands, it has refused (as the EU) to notify those to feed grains, of $4.372 billion on average in the 1995-2000 period. As feed is the largest input of animal products, feed subsidies are conferring PS AMSs to them. Incorporating the PS AMSs of meats - the milk had already a PS AMS as market price support - lowers the allowed OTDS through reducing the allowed PS de minimis. But there is no impact on the applied OTDS and the applied total AMS because there is a transfer of part of the cereals and oilseeds AMSs to the animal products AMSs.

(3) CONSEQUENTLY, THE ALLOWED OTDS IS ONLY $42.875 BILLION: Once added the production value of $57.075 billion of meats, the production value of products with PS AMSs rises from $49.734 billion to $106.987 billion so that, given an average agricultural production value of $194.139 billion in the 1995-2000 base period, the production value of products without PS AMSs falls to $87.152 billion and the allowed PS de minimis, being 5% of that value, falls to $4.358 billion. Therefore, the allowed OTDS in the base period falls from $48.224 billion (in Canada's simulations of 19 May 2006 made on behalf of the EU, the US and Japan): 19.103 (FBTA) + 9.707 (PSdm) + 9.707 (NPSdm) + 9.707 (BB) - to $42.875 billion: 19.103 (FBTA) + 4.358 (PSdm) + 9.707 (NPSdm) + 9.707 (BB). Thus, the allowed OTDS at the end of the implementation period, once cut by 70%, falls to $12.863 billion.

CONCLUSION

All the rectifications made above lead to an average total applied AMS of $19.895 billion during the base period 1995-2000, exceeding by $792 million the Final Bound Total AMS (FBTA) ceiling of $19.103 billion at the beginning of the implementation period. As this ceiling has to be cut by 25% on the first day of the implementation period, to $14.327 billion, there is no chance it could be cut at all as the total applied AMS has always exceeded that level since 1998 and was on average $25.418 billion from 2004 to 2007. There is even less credibility that the applied total AMS might fall to the allowed level of $7.641 billion at the end of the fifth year of the implementation period.

As for the OTDS, cutting the allowed $42.875 billion by one-third on the first day of the implementation period puts it at $28.583 billion, whereas the applied OTDS has been $28.969 billion on average from 2004 to 2007. There is even less credibility that it could fall to 30% of the allowed OTDS, i. e. to $12.863 billion, at the end of the fifth year of the implementation period.

Given these hard facts on the actual US agricultural subsidies, we do not find it necessary at this stage to deal with the additional requirements on the caps per product in the PS AMSs and the blue box, given that the cap of the main crops, particularly corn, is already largely exceeded. Not to speak of cotton where the US is totally unable to cut its PS AMS to $142 million.

Therefore, developing country negotiators and civil society should unmask the present US position in the on-going Doha Round negotiations and refuse any opening of their industrial products and services markets in exchange for nothing in agriculture.

(* Jacques Berthelot is a civil society activist based in Toulouse, France. He is an agricultural economist and a former lecturer in economics at the National Superior Agronomic College of Toulouse (ENSAT) and a former Jean Monnet Chair in European economic integration at the National Polytechnical Institute of Toulouse.) +

 


BACK TO MAIN  |  ONLINE BOOKSTORE  |  HOW TO ORDER