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WTO / Doha Issues
Reuters news reported on Thursday (via DTN) that, “Multibillion-dollar subsidies for U.S. farmers will face their widest challenge yet next week as the world trade court convenes a new case against controversial supports critics argue distort global markets.
“The World Trade Organization court is expected to formally set in motion a challenge from Canada and Brazil, who argue that the United States, a major crop exporter, has violated world trade rules with farm subsidies in recent years.
“At the heart of the challenges from Brasilia and Ottawa, which may be merged, are allegations that U.S. subsidies topped $19.1 billion, the current limit for U.S. supports that heavily distort trade, in several recent years.”
The Reuters article noted that, “Defenders of U.S. subsidies point out the allegations go after spending dating back to 1999, when price-triggered supports compensated for weaker commodity markets.
“With today’s strong prices, crop supports are much lower.
“But the challenge takes on a new gravity after Brazil’s victory in another WTO case against U.S. cotton subsidies.”
The Reuters article also explained that, “The new challenges center around how nations interpret WTO rules on categorizing crop supports that in the United States go to producers of wheat, corn, rice and other crops.
“Earlier this year, the Bush administration released its own calculations of ‘amber box,’ or most trade-distorting, support in recent years, showing no rules had been broken.
“That doesn’t square with the sums by Brazil and Canada, who argue that direct payments to farmers, now considered ‘green box,’ or non-trade-distorting, belong in the amber box.”
(Note: related FarmPolicy.com updates on this issue are available here- “U.S. Notifies WTO on Domestic Support” and here- “More Technical Background on the U.S. Classification of Direct Payments.”)
Recall that the administration’s Farm Bill proposal (pages 32-33) stated that, “Under World Trade Organization (WTO) rules, direct payments can be classified as non-trade- distorting or ‘green box’ support if, among other conditions, they are not ‘related to, or based on, the type or volume of [current] production’ by the recipient. In the Brazil cotton case, the WTO ruled that direct payments provided under the 2002 farm bill could not be classified as ‘green box’ support, because of the limitations on planting flexibility that currently prohibit the planting of fruits, vegetables, and wild rice on base acres eligible for payments. The WTO reasoned that because direct payments are conditioned on the recipients’ avoiding production of certain crops after the base period, they are related to current production and thus do not meet the criteria for decoupled income support as defined in the WTO Agreement on Agriculture.
“Although the WTO rulings and recommendations in the cotton dispute were limited to particular claims made by Brazil in that case, the reasoning in Cotton would suggest that it is desirable to remove the planting flexibility limitations.”
The administration proposal added that, “To ensure that direct payments will be considered to be non-trade distorting green box assistance, the Administration proposes that the provision of the 2002 farm bill that limits planting flexibility on base acres to exclude fruits, vegetables, and wild rice, should be eliminated.”
However, neither the House nor Senate version of the Farm Bill contains such a provision.
In other WTO / Doha related news, Greg Rushford penned an Op-Ed that was posted at The Wall Street Journal Online on Friday, which sated in part that, “At the World Trade Organization’s headquarters in Geneva, there’s a growing sense that a global trade deal is finally possible. The negotiations are now mostly characterized as serious. Big players, notably including the United States and the European Union, want to move forward. But that still doesn’t mean a deal is necessarily probable. This six-year, on-again-off-again process is now being threatened by a country that can least afford the collapse of the Doha Round: India.
“Last week, the Indians were back to the rhetoric that has marked their negotiating style throughout the Doha process. The latest spat was over a newly circulated draft negotiating text on ‘rules,’ including possible reforms of protectionist antidumping laws. The measure is controversial, and even the Americans have voiced concerns on some issues. But whereas U.S. officials expressed willingness to negotiate, their Indian counterparts threatened to close the door. Ambassador Ujal Singh Bhatia, India’s top trade diplomat in Geneva, called the draft text effectively an insult. India has been committed to the Doha negotiations, the ambassador said, ‘but if, God forbid, a time comes when that price of engagement is unpayable by us, then we will have to stand up and say that.’”
After more detailed analysis, the opinion item concluded by saying, “Since the economic logic is so powerful, one would think that India’s trade negotiators would be eager to bargain away tariff walls that hurt the country’s competitiveness. Wrong. In the Doha talks, India wants to retain ‘policy space’ — a code word for protectionism — to raise tariffs any time it might find it convenient to prop up this or that uncompetitive domestic industry, like Brazil has been doing. Somehow it doesn’t occur to the Indians that their models on tariffs, instead of Brazil, should be the likes of Singapore and Hong Kong, where tariffs are negligible and economic growth is rampant.
“India, of course, is hardly the only major WTO player that is playing brinksmanship games as the Doha negotiations lurch toward an end. Mr. Nath [Trade Minister Kamal Nath] is right to complain that the EU’s infamous farm subsidies, which inflict hardships on poor countries, shouldn’t have existed in the first place. He isn’t the only trade minister to lament rising protectionist sentiments in the U.S. And other developing countries in the Doha process — Brazil, to name the most notable — have been busy raising their own tariffs while ostensibly negotiating in Geneva to lower them.
“Despite India’s overall intransigence, Mr. Nath declared in late October that ‘We are in the last mile’ in reaching some sort of Doha consensus. Key to further progress will India’s recognition that it stands only to benefit from freer trade.
“Walk that last mile, Mr. Nath.”
U.S. Farm Income Analysis- Crop Acres
On Thursday, the U.S. Department of Agriculture’s Economic Research Service released a report entitled, “Agricultural Income and Finance Outlook,” which provided a detailed analysis of key economic indicators from the U.S. farm sector.
In part, the report stated that, “Led by record crop and livestock production expected for 2007, U.S. net farm income is forecast to reach $87.5 billion, up $28.5 billion from 2006 and exceeding the 2004 all- time high. The anticipated rise in net farm income occurs as large increases in the value of crop and livestock production are expected to more than offset a decline in direct government payments and record-high farm production expenses.”
The authors noted that, “This large boost is primarily the result of the increased demand for biofuels and agricultural exports, which has increased farm prices for corn, soybeans, milk, and other farm commodities. The value of crop production is expected to increase by $30.5 billion in 2007, the largest annual increase since 1984. The value of livestock production is expected to increase almost $20 billion.”
“The average household income (from farm and off-farm sources) of principal U.S. farm operators is projected to be up 7.7 percent in 2007, to $83,622. About 13 percent of the average farm operator household income is expected to come from farm sources in 2007. Income from farm sources increased by more than 30 percent in 2006-07, in contrast to a more moderate 5-percent increase in off-farm income,” the report said.
In addition, the ERS provided this broad-based background regarding farm income, “For every year since 1996, average income of farm households has exceeded average U.S. household income. In fact, just the off-farm income component of average farm operator household income has exceeded the average U.S. household income from all sources since 1998. For the 15 major agricultural States where data are available, the average income of farm operator house- holds in 2006 exceeded the average income of all households in those States. In addition, farm households have significantly more net worth than the average U.S. household.”
The ERS report contained an abundance of interesting graphs, tables and figures. Average farm income, including proportions derived from off-farm sources, varies significantly by farm operation specialization; click here to see a graphical breakdown of this issue.
Farm size is another interesting variable with respect to farm income, for more details on income distributions and size of farm operation, see this graph from the ERS report.
Also in the report was this graphical depiction of farm income compared to U.S. average household income; note the higher relative farm income starting in 1996.
Reuters writer Carey Gillam reported yesterday that, “Gordon Wassenaar has his eye on a $300,000 combine harvester to replace the 1990 model he repairs each winter in the workshop on his farm. And he just bought more land to add to his 1,600-acre spread.
“Sky-high prices for corn, soybeans and wheat, and a jump in the value of farmland across the U.S. heartland, have boosted the fortunes of farmers this year and breathed fresh life into rural communities.
“‘These are the best couple of years I’ve probably ever had,’ said Wassenaar, who has lived in the same weathered white farmhouse and raised corn and soybeans in the surrounding Iowa fields for 52 years.”
The article added that, “Good times in rural America are in stark contrast to the rest of the country, where homeowners fret over foreclosure on subprime loans, corporations wrestle with a credit squeeze and retailers suffer from a slowdown in consumer spending.”
The Reuters article also stated that, “Across rural America, farmers are using their higher incomes to pay off existing loans, invest in new equipment, and buy more land, according to economists, giving a boost to their communities.
“Climbing land values are also part of the picture, with both farmland and ranchland seeing gains of more than 13 percent over a year ago.
“And with crop shortfalls continuing to pinch supplies abroad, along with surging demand for ethanol as an alternative fuel, farm price prospects look strong for next season.”
***
Gary Wulf, writing in today’s Wall Street Journal, reported that, “Soybeans are the new corn.
“The economic and market dynamics that prompted U.S. farmers to raise a record corn crop in 2007 appear poised to produce a shift toward greater soybean plantings in 2008. (see related graph from article)
“Farmers abandoned their traditional corn/soybean crop rotation in the spring to capitalize on more than 10-year highs in corn prices, which were spurred in part by ethanol demand. The U.S. Department of Agriculture said producers planted 93.6 million acres of corn and harvested a record 13.167 billion bushel crop this fall, while sowing soybeans on 63.7 million acres that yielded 2.59 billion bushels.”
The Journal article added that, “‘The battle for acres is real. High energy prices and soaring input cost structure for corn [are] creating an incentive for farmers to return to a more normal crop rotation,’ said Top Farmer analyst Bryan Doherty. ‘Response from producers suggests they will move back toward a 50/50 corn/bean rotation, after heavy corn planting in 2007.’
“Just as $4-a-bushel corn prices lured farmers in March, near-record soybean prices, which are currently above $11.50 a bushel, are piquing their interest. This interest comes as production costs for thirsty, nutrient-hungry corn are rising at a far faster pace than that for soybeans — halving the economic advantage of growing corn. ‘When you look at today’s corn/soybean relative prices, it would project a shift back towards soybean. My first shot at 2008 corn plantings is for a six-million-acre shift back out of corn, following the 15.3-million-acre shift to corn in 2007,’ said agricultural economist Jim Hilker at Michigan State University in East Lansing. ‘Planted soybean acres will increase by six million acres.’”
EU – Africa Economic Partnership Agreements
Recall that last month, a FarmPolicy.com update highlighted how a somewhat complicated debate over trade policy issues between the European Union and some its former colonies, could possibly enhance the EU export market, while simultaneously stifling U.S. agricultural exports in some sectors.
Alan Beattie and Andrew Bounds reported on Thursday at The Financial Times Online that, “Early in 2005, just a few weeks after taking office as European Union trade commissioner, Peter Mandelson set out a grandiose ambition: to ‘put trade at the service of development’.
“Before him lay the chance to help assuage Europe’s postcolonial guilt. Special EU trade deals with half the world’s developing countries, which expire at the end of this year, needed to be renewed. Brussels could therefore take the opportunity to open its markets more to its former colonies and use aid to help them export.
“But with less than three weeks to go, it has not quite worked out that way. The neatly stitched together regional deals that the EU envisaged have disintegrated into a thing of shreds and patches. At the EU-Africa summit last weekend, some African leaders reiterated complaints that have been made for months – that Brussels has acted in the interests of its exporters rather than the world’s poor, rushed developing countries into premature liberalisation and, in some of the more heated contributions to the debate, acted with imperial arrogance.”
The FT writers explained that, “The 79 countries of the African-Caribbean-Pacific (ACP) grouping, mainly former European colonies, have for decades enjoyed preferential access to European markets – a legacy of imperial trade arrangements. They face lower – frequently zero – tariffs selling into the EU than those encountered by most other developing countries. For some producers, such as Namibian and Botswanan cattle farmers, this preferential treatment is the difference between being able to sell into the European market at all and being swamped by more efficient producers from the likes of Brazil and Argentina.
“But the latest iteration of these deals, the Cotonou agreement (named after the main city in the west African state of Benin), turned out to be against World Trade Organisation rules as it discriminated between developing countries and did not require the ACP countries to lower their tariffs in return. A waiver from those rules expires at the end of 2007, after which they will be vulnerable to legal challenge in the WTO.”
The article noted further that, “The EU’s plan was for the ACP to break into six regional groupings, which would liberalise trade among themselves. They would then sign collective deals that gradually – over as long as 25 years – lowered trade barriers against the EU. In return, they would gain enhanced, almost completely free access to the EU market, a privilege currently enjoyed only by the very poorest, least-developed countries (LDCs) under a separate scheme, and laxer ‘rules of origin’ – the arcane but highly influential restrictions that prevent countries using inputs imported from elsewhere in production.”
“A fierce debate has developed over whether these trade deals will do much to help the ACP countries or, because ACP governments are required to open their own markets to European goods in return, the pacts merely represent traditional EU ‘mercantilist’ export promotion. Is all of this, in other words, a continuation of the colonial relationship rather than an attempt to escape from it?” the authors asked.
More specifically, the FT article indicated that, “An alliance of academics and analysts has joined in, arguing that, in the words of Susan Sechler, senior fellow at the German Marshall Fund think-tank, the EPAs represent a ‘huge market grab’.
“Economic modelling conducted at Sciences-Po, the Parisian university, and the International Food Policy Research Institute in Washington suggests that the ACPs would lose from the deals. ‘The EPAs would result in massive trade diversion in favour of the EU and away from the third-country WTO members in whose name the ‘Cotonou problem’ is supposedly being addressed,’ Ms Sechler says.
“A wide variety of European exports, ranging from beef to processed goods such as beverages and clothing, would gain preferential access to ACP markets and displace lower-cost competition from both rich and poor countries. Because those European companies would be shielded from competition from elsewhere, they could keep prices high. Thus, she says, ACP consumers and industries would be deprived of low-cost goods while their governments saw precious tax revenue shrink because of lower tariffs.
“The preferred solution of the Sciences-Po academics would be for the ACP to remain within WTO rules by reducing tariffs by less against a wider range of countries – an idea the EU has briskly dismissed as of merely ‘academic interest’”.
An editorial published last week at The Financial Times Online on this subject, noted that, “Arbitrary trade preference schemes based on accidental legacies of imperial history are not a good tool for promoting development. Far better are broader and simpler preference schemes based on genuine need, not geography or historical chance. Better, too, to recognise that the extraordinary export success of developing countries such as China is based not on exploiting trading privileges but on getting their domestic economies and infrastructure right. The EPAs could, no doubt, deliver more than the muddle that has emerged so far. But they can only do so much.”
Meanwhile, European Commissioner for Trade Peter Mandelson wrote a letter to the editor regarding the EPA issue, which was published last week in the Financial Times. Commissioner Mandelson stated in part that, “Sir, Your report ‘Poorer nations face import tariff rise as EU refuses to budge’ (December 11), on the European Union’s current trade and development negotiations with the African, Caribbean and Pacific (ACP) countries, fails to give an accurate picture of them. I hope your readers will bear in mind the following points: The EU is offering 100 per cent duty- and quota-free access to the ACP’s exports from January 1, far better than for other developing countries. Under World Trade Organisation rules we cannot offer access to the ACP unilaterally but on a WTO-compatible, reciprocal basis. If we do we will be challenged by other developing countries. Reciprocal ACP tariff liberalisation will be partial and gradual, with sensitive agriculture and industry products excluded or liberalised over very long periods of up to 25 years. Reform and adjustment will be assisted in ACP countries by €23bn over the next seven years. If, as sovereign nations, ACP nations choose not to use the terms of their access, the EU’s only legal alternative is to offer the general system of preferences used by other developing countries. All but a handful of African countries are likely to see no change to their tariff preferences on January 1.”
Keith Good
