Inside Agricultural Trade Baseball

"Inside baseball" conveys the idea that experts worry about different
things from the average guy in the bleachers. The Minnesota Twins and
the Montréal Expos know all about inside baseball, and how it can
deal some teams in and some out of baseball's fortunes. These are the
issues that experts--baseball bankers, lawyers and owners--deal with
everyday. In agriculture and trade policy, there is a corresponding
group of insiders--commodity groups, lobbyists, investment bankers,
trade lawyers and trade bureaucrats in ministries and at the WTO.
Many of these insiders are now busy trying to rationalize U.S. and
European agricultural subsidies, which threaten to scuttle entirely
the Doha Round of global trade negotiations at the WTO.

From the U.S. side, two seemingly incompatible arguments are now
heard about agricultural subsidies. The first is that the Farm Bill
will give the U.S. "leverage" in the trade negotiations because it
can bargain away the most egregious provisions as the negotiation
proceeds. And in truth, the United States has tabled proposals in
Geneva to end many of its subsidies, proposals that are
inconveniently totally at variance with the current farm bill. The
second argument is that these subsidies are "GATT-legal" anyway.

There are a number of problems with both of these arguments. First,
the subsidy payments under the 2002 bill are largely set in stone;
they are entitlements most of which can be bargained away only with
congressional action. To bargain them away, Congress and the
President will need to deal with the likes of Kenneth Hood, chairman
of the National Cotton Council. Mr. Hood, whose Mississippi farm
received $750,000 in subsidies last year, will get even more under
the 2002 bill. Costs of cotton production in the Mississippi Delta
average $600 an acre. As Mr. Hood said in the June 26, 2002 Wall
Street Journal: "Maybe farmers in Africa should be the ones not
raising cotton. . . . The Delta needs cotton farmers, and they can't
exist without subsidies." Even if the subsidies are rolled back in
future years, for at least the next seven years they amount to legal
contracts with commodity growers. This destroys the credibility of
claims that they can be bargained away--as what we have already seen
in the Doha Round shows.

And if the subsidies are GATT-legal, why bargain them away at all?
Unfortunately, their supposed GATT-legality turns on claims and
language that also defy credulity. The issues (which are very inside
baseball) revolve around whether the subsidies are "decoupled" and
therefore "non-trade distorting", but more fundamentally whether they
are "product specific." While no generally recognized definition of a
non-trade distorting or "decoupled" measure exists in trade law, the
basic idea is that a decoupled subsidy does not induce greater
production at an individual level--that is, does not artificially
inflate supply.

But all three of the bill's subsidy components are likely to affect
production incentives and to distort trade. While the United States
argues that these are decoupled payments, they nevertheless encourage
farmers to maintain and increase the acreage of subsidized crops in
anticipation of opportunities to update their eligibility for crop
subsidies in the future. Marketing assistance loans, especially
during periods of low prices, create incentives to produce crops
eligible for the loan payments. By raising loan rates for wheat and
corn, the 2002 Farm Bill will shift plantings in their direction.
Finally, counter-cyclical income payments linked to updated
production over 2002-07 will affect current production decisions.

While all three forms of subsidy under the 2002 bill are neither
production nor trade neutral, whether the Bill literally violates
U.S. GATT obligations under the Uruguay Round turns on an even more
arcane issue: whether the subsidies are "product specific." Under the
1993 Uruguay Round Agreement on Agriculture, subsidies (called the
Aggregate Measure of Support, or AMS) are limited for the United
States to $19.1 billion. The question is: what subsidies count toward
the $19.1 billion limit? Subsidy payments that are 5 percent or less
of the value of a specific product are not counted against the AMS.
And any subsidy payments that are not product specific are also not
counted if their overall value is 5 percent or less of total
agricultural production per year. If these requirements are met, the
subsidies are not subject to the AMS binding.

Even at first inspection, all three types of U.S. farm subsidies
under the 2002 Farm Bill are based on acreages and yields in bushels
per acre of specific products: corn, wheat, soybeans, grain sorghum,
barley, oats, cotton and rice. This is true of all three subsidy
categories: direct payments, marketing assistance loans and
counter-cyclical income payments. Furthermore, certain specific
products such as fruits and vegetables are not allowed to be planted,
implying that other specific products not in these categories are
allowed. Within the class of these "program" commodities (such as
corn), farmers are free to choose what to produce. The subsidies, in
other words, are product specific in motivation and specific to a
narrow class of program crops in application.

The most intense debate surrounds the product specificity of the
counter-cyclical income support payments. With low prices, these
payments will balloon. Since the counter-cyclical payments replace
and institutionalize the "emergency" spending and market loss
payments during the last four years of the 1996 bill, the USDA
acknowledges that they related to (then) current prices, but it calls
them "non-product specific" because they were not tied to current
production. This claim, if sustained in relation to the 2002 bill,
would allow the new payments to be exempted from counting toward the
$19.1 billion AMS binding unless they amounted to more than 5 percent
of "total value", equal to about $10 billion.

But since the counter-cyclical payments are triggered by a gap
between market prices or loan rates and target prices (less direct
payments), there is no question that they relate to the current
prices of program commodities such as corn and wheat. When the USDA
reasons that this is not "product specific", in effect it argues that
the quantity of corn produced or demanded is unrelated to its
effective price, a claim that would surprise even most first-year
students of economics. The basis on which they make this claim is
that the payment does not require planting corn to receive a corn
payment. If this subsidy is not "product specific", we have entered
an Orwellian world in which the putative basis for calling a subsidy
"non-product specific" is that farmers might just plant another crop
in the restricted class of program commodities.

All three forms of U.S. subsidy payments are therefore subject to
challenge as product specific, and if the WTO recognizes them as such
it could put the United States well over the top of its AMS binding
and in violation of its Uruguay Round commitments. This is the inside
baseball game. But the real significance of the issues lie in its
wider implications for multilateral trade liberalization.

The Future of Trade Liberalization

Players of the farm subsidy game described above may find myriad
excuses to subsidize large landowners, just as the commissioner of
baseball may defend collusion and monopoly and nevertheless
characterize it as competition. But to the outside world, rich
countries struggling to rationalize financial transfers to large
landowners are as transparent as the collusion, venality and just
downright corruption of some baseball owners. Two distinctive
messages are sent by U.S. actions that belie its commitment to trade
liberalization--one to the EU, the other to developing countries.

To the EU, U.S. actions say that, despite a carefully constructed
U.S. negotiating strategy during the Uruguay Round that paired
reduced levels of domestic support through lower loan rates and
planting flexibility with pressure on the EU to move in a similar
direction, all bets are now off. In effect, we have rewarded those in
the EU (notably the French, of all people...) who have steadfastly
resisted internal reforms of the bloated Common Agricultural Policy
(CAP). We have also convinced many in the EU that this is yet another
form of U.S. unilateralism in which no account is taken of the
negative impacts of U.S. policy on the rest of the world. The French
historically termed the English "perfidious Albion." Perfidious
America is now an easy charge, helping the EU justify a continuation
of its own wildly excessive export subsidies.

To the developing countries, there is a double message. The first is
stark. For families in Africa, Asia and Latin America struggling to
survive on a dollar or two a day, the insulation offered from market
competition to U.S. producers may be literally lethal to them.
Returning again to the example of cotton, U.S. overproduction, driven
by expanded subsidies, has driven global cotton prices into the
sub-basement. In Mali, one of the poorest African states, cotton
prices have declined 10 percent in the last year alone. Mali is a
Muslim country where, despite U.S. foreign aid spending of $40
million on education and health, the decline in cotton prices has
imposed a $30 million deficit on the state cotton company,
effectively wiping out three-quarters of the value of U.S. aid. What
the United States gives to rich cotton farmers in the Mississippi
Delta thus takes away from the poor in a country like Mali. To these
disaffected Muslim farmers, the words of a farm union leader ring
true: "The Americans know that with their subsidies they are killing
so many economies in the developing world."

Essay Types: Essay