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TWN Info Service on WTO and Trade Issues (Feb07/06) 9 February 2007
Green Box agricultural subsidies have boosted the agricultural exports and output of many developed countries (especially the US and EU). They thus have major distorting effects on trade and production, even though they are designated as "non trade distorting" in the WTO and they are not subject to a cap or to reduction disciplines. If Green Box (GB) subsidies were removed, it is estimated that the agricultural exports of the United States, European Union and Canada would decrease by 40-50%. Production would also fall in many developed countries while developing countries' output would rise by $42 billion. These conclusions and estimates in a paper by the UNCTAD India team have major implications for the current Doha negotiations of the WTO. If a new commitment is made by the US to lower the cap to below $20 billion (which is the amount actually spent on the trade-distorting subsidies), it may spark a resumption of the Doha talks. However, it can be seen from the findings of the UNCTAD paper that the expected new offers of the US will not be meaningful if it does not reduce its Green Box subsidies, or if it shifts even more subsidies to the supposedly "non trade-distorting" Green Box. In order for positive effects for developing countries, it becomes important that new and effective disciplines are also put on Green Box subsidies. Below is the 2nd of 3 article on the Green Box. It was published in the SUNS. With best wishes --------------------------------------- Green Box removal may
reduce US, EU exports by 40-50% Green Box agricultural subsidies have boosted the agricultural exports and output of many developed countries (especially the United States and European Union states). They thus have major distorting effects on trade and production, even though they are designated as "non trade distorting" in the WTO and they are not subject to a cap or to reduction disciplines. If Green Box (GB) subsidies were removed, it is estimated that the agricultural exports of the United States, European Union and Canada would decrease by 40-50%. Production would also fall in many developed countries while developing countries' output would rise by $42 billion. These conclusions and estimates in a paper by the UNCTAD India team have major implications for the current Doha negotiations of the WTO. The talks were suspended last July when other countries rejected the offer of the United States to cap its "trade distorting" agricultural subsidies at $23 billion. If a new commitment is made by the US to lower the cap to below $20 billion (which is the amount actually spent on the trade-distorting subsidies), it may spark a resumption of the Doha talks. However, it can be seen from the findings of the UNCTAD paper that the expected new offers of the US will not be meaningful if it does not reduce its Green Box subsidies, or if it shifts even more subsidies to the supposedly "non trade-distorting" Green Box. In order for positive effects for developing countries, it becomes important that new and effective disciplines are also put on Green Box subsidies. The paper, "Green Box Subsidies: A Theoretical and Empirical Assessment" was prepared by the UNCTAD India Team under a research project jointly hosted by the Indian Commerce Ministry, UNCTAD and the United Kingdom's international aid department (DFID). The latest draft was prepared after a "critical appraisal" by several outside economists, including the Nobel Laureate former World Bank chief economist Joseph Stiglitz. Among the paper's major findings are that: -- Removal of GB subsidies would cause a drop of 40-50% in the agricultural exports of the US (39% decrease), EU (45%) and Canada (46%) and even larger drops for Japan (66%) and Switzerland (78%). In contrast, developing countries would see an increase in their agricultural exports by 22% on average. Major gainers include India (22% increase), Brazil (21%), and South Africa (25%). -- Removal of GB subsidies would also change the global production scene. Production would fall in the EU (by $53.8 billion), US (by $20.9 billion) and Canada (by $8.1 billion), while it would rise in developing countries by $41.9 billion, with significant gains in Brazil (by $5.3 billion), Mexico ($4.4 billion) Argentina ($2.5 billion), India ($2.0 billion), Indonesia and Thailand ($1.8 billion), South Africa ($1.6 billion) and Malaysia ($1.4 billion). -- The Green Box subsidies have a very significant effect in reducing the cost of production in agriculture in the developed countries that most use them, thus showing that they are production and trade distorting. Without the GB subsidies, the cost would rise by 17% in the EU, 15% in the US, 31% in Switzerland and 16% in Canada and 24% in Japan. -- Eliminating GB subsidies would also benefit not only agricultural exporters among developing countries but also the net food importing countries. Their agricultural output would rise 4%, imports would decline by 10% and exports increase by 23%. -- The removal of GB subsidies would lead to an increase in agricultural employment in developing countries by 4% on average, with major gains in Malaysia (11%), South Africa, Chile and Thailand (7%), Brazil and Morocco (6%), Argentina (5%) and Indonesia (4%). In contrast, there would be declines in the agricultural workforce of the EU (by 5.8%), USA (2.4%), Canada (9.9%) and Switzerland (8%), while there would also be an increase in some developed countries (especially Australia and Norway). Commenting on the empirical findings, the paper says: "Therefore, it can safely be concluded that GB subsides offered by developed countries are production enhancing and trade distortive." The paper explains the connection between GB subsidies, production cost, and levels of output and exports. Reduction of GB subsidies will raise the costs of production which in turn will increase export prices of countries providing large amounts of GB. Export prices of EU, USA, Japan, Canada, Korea and Switzerland are hiked up by the amount of their cost increase subsequent to the reduction of GB. The increased prices will reduce the demand for their exports, whose share in the world market will thus fall. In making the estimates - most of which refer to the year 2000 - the paper takes care not to exaggerate the distortive effects of the Green Box. It does not take the entire amount of GB subsidies in the calculations, but excludes certain types of the GB which it considers may be justifiable to maintain. "Subsidies provided as food aid for food security purposes or those for government procurement or natural disaster relief have been removed from the calculations to arrive at an adjusted Green Box subsidy estimate," explains the paper. "These subsidies provided largely for humanitarian reasons or to address the food security of lower income groups, even if trade distorting, may need to be retained. Hence, only the adjusted GB subsidy has been used in the computations in this paper." Despite taking into account only part of the GB subsidies, the paper finds very considerable distortive effects. It concludes that the elimination of Green Box subsidies would redistribute global output in favour of competitive agricultural producers especially developing countries. "Further, the paper showcases how exports from developing countries and even the least developed countries can register an increase while overall global trade goes down on account of decline in exports of EU, US, Canada etc. Competitive developed countries such as Australia also stand to gain from removal of Green Box subsidies. "United States, EU, and Canada would find their exports decline by about 40% or more, whereas Switzerland and Japan would see their exports decline by over 60%. Most developing countries would find that their exports register an increase of about 20%. Even LDCs would find their exports go up by 20%. Australia would see its exports go up by over 16%." The changing pattern of international trade would also help to meet the development objectives of the Doha Work Programme and in addition have positive livelihood effects. Agricultural employment would rise in almost all developing countries, while that in developed countries, especially those providing Green Box subsidies would fall. At the global level, the rise in employment of unskilled labour would lead to poverty mitigation. Least Developed countries could also see their employment of skilled and unskilled labour go up. The consequent increase in employment in most developing countries is estimated to range between 3-5% which is far above the rate of natural increase of the labour force. Wages would also rise by about 1% on an average in developing countries with LDCs registering the highest increase. This implies that the poverty attenuating effects of the reduction of Green Box subsidies would be positive and significant. The study also used data for 1975-2004 to study the effects of Green Box subsidies on five major crops in the US. It found that if GB subsidies were to be removed, the cost of production would go up by 16%. As far as specific components are concerned, if general services and environment services were to be removed, the cost of production would increase by 11% and 16% respectively. If decoupled payments were to be removed, the cost of production would increase by 4.6%. "To sum up, this paper shows that Green Box subsidies are production and trade distorting. The effects of the reduction of Green Box subsidies would be positive for developing countries including the LDCs. Further, these effects would lead to poverty alleviation as it would impact the most vulnerable sections of society positively. It is therefore necessary that the current negotiations address the issue of eligibility of criteria of Green Box subsidies in developed countries on an urgent basis with a view to restricting them." A very interesting set of data showing the highly significant effects of overall US domestic subsidies was presented in the UNCTAD paper, which cited other papers. It says: "Studies show that under the existing US policy, the cost of producing major crops has been much higher than the prices realized for them. "In the year 2001, market prices were 23% below the cost of production for corn, 48% for wheat, 32% for soybean, 52% for cotton, and 45% for rice. In 2001, the US had a significant share in world exports in these commodities which is as high as 35% in cotton, more than 20% in wheat and around 10% in rice." The paper also provides data on the changing nature of domestic subsidies in the major developed countries, confirming that there has been "box shifting" from the types of subsidies (particularly the amber box) which the WTO rules say must be reduced towards the Green Box subsidies which do not face the same disciplines. The paper cites studies showing that GB subsidies constitute 50.4% of total domestic support of the developed countries. In 2001, the US, EU and Japan provided $96 billion in GB support, of which $59 billion was granted for general services and various types of direct payment to producers. Among the WTO members, by far the largest GB providers in 2001 were the US ($50,672 million), the EU ($20,962 million) and Japan ($22,216 million). In contrast, most developing countries have low levels of GB expenditure. "The pattern of domestic support in the US, EU and Japan has changed significantly over the past few years, with the proportion of GB component increasing in the total domestic support, commonly referred to as box shifting," says the report. The US has increased its GB spending by a large amount. In 1986-88, programmes that would have qualified for the GB had total expenditures of, on average, $26 billion. From 1996 to 1998, GB spending had increased to an average of $50 billion. In the US, the GB accounted for 75% of the total domestic support in 1999, rising to 78% in 2001 , while amber box expenditure reduced to 22% from 25% in 2000. Because the GB spending is exempt from WTO limits, the US can continue to add to this total. In the EU and Japan, the phenomenon is more recent: from 1995 onwards, Amber and Blue Box expenditures have reduced, while GB spending has increased or remained at similar levels. In the EU, GB as a percentage of total domestic support has increased from 21% in 1995 to 25% in 2001. In Japan, the GB percentage increased from 46% in 1995 to 78% in 2000. It has been estimated that as a result of the CAP 2003 reforms, the EU would be in a position to shift about 75% of its subsidies from the Blue Box to the GB, says the paper. Further, the GB subsidies might remain partially coupled to the present or future production, leading to distortions in production. The partial coupling could occur because of two factors. -- The fact that the US and EU Acts have not defined an unchanging base period could lead to expectation effects that might lead to an increase in production. -- Further exclusion of direct payments to certain crops such as fruits and vegetables under both the Production Flexibility Contracts (PFCs) in the US and also under the CAP reforms in the EU could lead to a distortion in the production structure. "Supporting these theoretical arguments, certain assessments conducted for the EU find that decoupled payments would increase the production of most of the cereals in 2009 compared to 2002," says the paper. "To conclude, the likely shift in certain developed countries towards providing support through the GB would be a cause of concern; particularly because the decoupling is only partial and even decoupled subsidies can be production and trade distorting." Regarding farm reforms in the US, the paper points out that the Fair Act (Federal Agricultural Improvement & Reform Act) 1996 introduced production flexibility contracts or PFCs which ran from 1996 to 2002. These payments were based on past production and were independent of current market prices and farmers' planting decisions. A mechanism was also put in place for many crops that allowed farmers to receive a cash payment - a 'marketing gain' or 'loan deficiency payment' (LDP) - if market prices were below their loan rate levels. The Farm Act 2002 replaced PFCs by a very similar scheme of direct payments which were extended to cover more crops such as soybeans, other oilseeds, and peanuts. Fixed direct payments are not tied to production of specific crops, the amount of production, or the price of the crop. This bill also introduced counter-cyclical support payments, which are safety nets replacing the ad hoc market loss assistance payments that were provided to farmers during 1998-2001. Payments are based on historical production and are not tied to current production. The bill also retained the marketing assistance provisions from 1996 and extended it further to peanuts, wool, mohair, and honey. To support dairy farmers, a new market loss payments programme was developed to provide a price safety net and to replace ad hoc market loss assistance payments that were provided to milk producers in 1999, 2000, and 2001. Comments the UNCTAD paper: "It has been argued that the PFCs provided under the Act of 1996 and the direct payments under the Act of 2002 are not totally decoupled and might have production distortion effects. Given the limited data availability, production estimates are difficult to make. "However, evidence from the US on PFCs suggests that these subsidies have increased the total planted acreage. The Economic Research Service (ERS) predicts that under the PFCs the area of total plantings increased by between 225,000 to 725,000 acres. Further, under the 1996 Farm Act the PFC payment scheme excluded fruits and vegetables. "The provisions under the payment scheme which replaced the 2002 Farm Act are the same except for the fact that wild rice would also be treated the same as a fruit/vegetable. This exclusion is criticized for its distorting effect on the production decisions of producers in the US. The Acts have also been criticized on the basis that not defining an unchanging base period might create expectation effects among producers that would lead to an increase in the production." Concludes the UNCTAD India report: "Recent research shows that current GB subsidies do not meet the criteria of not or minimally distorting production and trade. And even the so called 'decoupled' programmes under GB do distort trade and production by affecting the wealth or risk behaviour of the producer or reducing costs of production or increasing productivity or acting as an insurance." (This is the second of a series of articles on the Green Box subsidies. The next article will deal with the WTO negotiations on the Green Box.)
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