Research Reports
An Analysis of Agricultural Subsidy Implementation, Disputes, and Policy Reforms under the WTO Litigation
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AuthorSong, Jooho
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Publication Date2013.06.30
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Original
This research has three objectives. First, it aims to examine how member countries have implemented their agricultural domestic support under the Agreement on Agriculture, which have been regularly monitored and discussed by the Committee on Agriculture (CoA) in the World Trade Organization (WTO). Second, it is to analyze formal trade dispute cases related to domestic and export subsidies among WTO member countries and derive their implications in terms of policy reforms or directions. Finally, it is to review on-going reform talks of the Common Agricultural Policy (CAP), the European Union by giving close attention to the policy proposals’ compatibility with the current WTO disciplines.
An examination of the minutes of the CoA meetings reveals that close to 700 questions and replies were made on agricultural subsidies over the 2010-12 period. Among the four major agricultural subsidies, namely Aggregate Measurement of Support (AMS, or Amber Box), Blue Box, de minimis, and Green Box, inquiries about Green Box measures were in the majority. This is partly because these measures are of no ceilings and are not subject to reductions, typically notified with insufficient information.
With respect to Korea’s notifications, the United States, Canada and Australia sought for clarifications on the legitimacy of the fixed payment scheme for paddy fields and public stockholding program for rice as Green Box measures. It is thus important to pay attention to Green Box criteria when the country considers the possibility of increasing target prices for direct payments and specifying land use requirements for the payments.
Since 1995, there have been six dispute cases regarding agricultural subsidies under the Dispute Settlement Body of the WTO. They include EU-Sugar, Canada-Dairy, US-Cotton, China-Brand Products, US-Corn, and Korea-Beef. Among others, WTO rulings on EU-Sugar and Canada-Dairy disputes were substantial and significant because they were on economic grounds of the so-called cross-subsidization effects. The cross-subsidization incidence refers to the case when domestic price subsidies within production quotas (EU-sugar) or revenue pooling mechanisms (Canada-dairy) have spillover effects on or play as export subsidies. If this argument is further generalized, various forms of decoupled direct payments applied to a limited volume of farm production could be challenged as a trade distorting instrument.
The US-Cotton case highlighted that the ban on planting fruits, vegetables and wild rice on base acres disqualifies the US direct payment program as a Green Box measure, because it is to place a restriction on land use. Consequently, the 2013 US Farm Bill is forecast to rectify these payment requirements. Being cast in the sugar case, the EU drafted and implemented the 2006 sugar reform, which was targeted at phasing out production quotas by October 2015, eliminating of public intervention and thus minimum price guarantee and counting re-exports of the imported sugar from the ACP countries and exports of over-quota production (C-sugar) in export subsidies.
The 2013 CAP reform proposals presented reformulated direct payment schemes as the basic payments and the green component. But there is the rise of concern about the eligibility for such payments as decoupled income support under the Annex 2 of the Agreement on Agriculture.
First, there are many empirical evidences that even decoupled payments cause distortion albeit smaller than other types of subsidies. Second, the condition that payments must be tied to “maintained in good agricultural and environmental condition” or cross compliance may render challenge of litigation. By influencing production or farm inputs uses, such cross compliance requirements may create difficulty with the Article 6(d) in Annex 2, which states that payments should not be “related to or based on the factors of production employed in any year after the base period.” Likewise, the fact that eligibility of payments is limited to “active farmers” seems at risk of the same criterion. Finally, it is noted that the environment component cannot fall into the Article 12 for payments under environmental programs since the payments are not “limited to the extra costs or loss of income involved in complying with the government program.”
In sum, the CAP reform proposals are far from being substantial from the WTO perspectives. Unlike the proposed US Farm Bill, the new direct payments are forecast to be in much the same vein, leaving the current litigation at risk.
The 2008 US Farm Bill expired in Sept. 2012 and was extended 1 year. The Senate approved its version of a new five-year farm bill on June 10, 2013. But the House failed to pass a House version of the farm bill on June 13, 2013. The Senate bill eliminates program supports for US upland cotton growers and replaces it with a stacked income protection insurance plan, in an effort to finally put to rest a dispute by Brazil against what it says are illegal subsidies to US cotton producers. Also revised to meet Brazil's objections is an upland cotton-marketing loan program. To receive marketing loans, farmers must agree to comply with conservation and wetlands requirements. Similar language is contained in the House version.
Researchers: Joo-Ho Song, Song-Soo Lim, Da-eun Jung and Su-ji Kim
Research period: 2012. 12.~2013. 6.
E-mail address: jhsong@krei.re.kr
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