European Affairs

Summer 2001

 

Special Report: Agricultural Policy in the WTO
Transatlantic Farm Conflicts Will be Hard to Resolve
Jane Earley
President, Earley Initiatives

 

Central to the Bush Administration's agricultural policy agenda is the creation of a new farm bill that would revisit the Federal Agriculture Improvement and Reform (FAIR) Act of 1996, which made substantial changes to U.S. farm policy.

The 1996 legislation replaced traditional subsidy payments to farmers with a fixed but declining level of "transition" payments, and ended federal authority to hold farmland out of production through annual set-aside programs.

It suspended the Farmer-Owned Reserve program,1 reduced funding for commercial agricultural exports, eliminated dairy price support starting in 2000, and created two new institutions, a National Natural Resources Conservation Foundation and a new food safety panel. The legislation expires after the 2002 crop year.

It is clear that the FAIR legislation succeeded in divorcing support payments from crop production decisions. But it did not end subsidies to producers. The payments that were scheduled to decline steadily through 2002 were instead supplemented in 1998, 1999 and 2000 with ad hoc "emergency" payments to offset falling prices.

These constituted some of the largest payments in history to farm producers ($22 billion last year), and this year Congress has also added $5.5 billion to cover potential emergencies. Some assert that farmers' dependence on federal money is higher now, in both percentage terms and in real dollars, than it was at the depth of the Great Depression.

While there is little support for a return to the old policies, there is ample support for the continuation of the subsidies - 19 of 21 producer groups recently testifying before the House Agriculture Committee requested higher deficiency payments to support farm incomes.

With over half of all net farm income coming from government payments, pressure is building to maintain funding levels. There is also support for cutting the subsidies when farmers receive higher prices for their crops - a "counter-cyclical approach."

Regardless of the mechanism used to deliver the money, there is growing recognition that the program's main beneficiaries are among the largest and most successful of the nation's farmers.

In 2000, eight percent of the country's farms produced 72 percent of the country's harvest. Sixty-one per cent of the payments are received by ten percent of the farmers. But there has to date been little debate on this subject in the Congress.

There has also been little debate on the relationship between the subsidy payments and future commitments that might be made in negotiations in the World Trade Organization.

The House Agriculture Committee requested testimony on estimates of the costs of the producer groups' proposals and their effects on trade, and clearly wants to pass a WTO-consistent bill. But its calculations are being made on the basis of current WTO commitments that allow "decoupled income support" payments to producers, as long as they are not tied to current prices.

The Committee has no jurisdiction over the Trade Promotion Authority legislation that the Bush Administration must obtain before it can conclude an agreement in the WTO. But the support of the agriculture community will be necessary to ensure passage of this legislation, which the Administration will try to achieve in the current Congress.

Europe, in the meantime, has been fighting its own battles, with payments to farmers and rural areas resulting in high budget outlays, and difficult negotiations still to come over the extension of the Common Agricultural Policy to new members of the European Union in Central and Eastern Europe.

Next year will be the third year of the so-called Agenda 2000 reform of the Common Agricultural Policy (CAP), which has led to fundamental shifts in policy, from price to income support, linked to production restraints. That shift, combined with the struggle against "mad cow" and foot and mouth disease, has required increased expenditures in the farm sector.

The European Commission has proposed a budget of $41 billion (a46.2 billion) for farm programs in 2002, an increase of 5 percent over last year. Agriculture accounts for about 46 percent of the suggested EU budget for 2002.

Agenda 2000, which also puts a high priority on rural development, is due for a mid-term review next year. In 1991, as much as 90 percent of Europe's agricultural budget went to export subsidies and market intervention. But from 2004 onward, once Agenda 2000 has been fully implemented, an estimated 70 percent will be available for direct aid to farmers and for rural development.

In the mid-term review, the Commission expects that consumer concerns will be an important part of the discussion, provoked in part by the "mad cow" and foot-and-mouth crises.

In the WTO, efforts to launch a new round of multilateral negotiations are intensifying in advance of the Ministerial meeting due to be held in Qatar in November. So far, agriculture negotiations have been proceeding in Geneva as part of the "built-in agenda," mandated at the end of the Uruguay Round in 1995. More than two thirds of the WTO's 140 members have submitted proposals in these talks.

Most observers agree, however, that there will not be an optimal result from these negotiations unless they can be related to a wider negotiating agenda in a new Round. This is both because there is no deadline for their conclusion, and because many countries will not make concessions on agriculture unless they win trade-offs in other areas.

In the meantime, the "peace clause" will expire in 2003, unless it is renewed before then. The clause protects countries using subsidies that comply with the WTO Agriculture Agreement from being challenged under other WTO provisions.

The WTO process is further complicated by the discontent of developing countries, which are not likely to support a new round unless their concerns are addressed. In agriculture, these may include, in addition to special and differential treatment, the repeal or amendment of specific sanitary and phytosanitary disciplines.

The Uruguay Round laid the foundations of a market-oriented agricultural trading system by setting new rules on subsidies and reducing non-tariff barriers, trade-distorting domestic supports, export subsidies and tariffs. But there is still much work to be done, particularly in terms of further reduction or elimination of export subsidies and domestic support.

Quite apart from the concerns of the developing countries, it will not be possible to start a new round without agreement between the world's two largest exporters, the United States and the European Union. Each of the two farm giants, however, continues to chastise the other's policies.

Europe worries that U.S. farm policy is destructive to world prices for major commodities, that the United States has allowed its farmers to "farm the programs" rather than the products, and that the U.S. will continue to shield its producers from market signals through the use of "counter-cyclical" payments.

With payments so high that they cover fixed costs, agricultural commodities sold abroad at low prices have been charged with depressing world prices, to the disadvantage of many developing country producers.

Aggressive U.S. export policies have also been criticized as destructive to developing country efforts to achieve food security. The United States is sometimes accused of being generally unconcerned about agriculture in the developing world, and interested only in advancing its own export interests.

Likewise, continued American efforts to promote biotechnology are seen in some European circles as insensitive to legitimate consumer and developing country concerns, and to the environment.

The timing of U.S. farm legislation also raises fears in Europe that realistic WTO disciplines on support payments will not be possible to negotiate, since domestic legislation is likely to claim precedence in the minds of U.S. legislators charged with approving a WTO result.

While Europe often takes a dark view of U.S. agricultural policy, Americans are equally critical of Europe's farm trade policies and of its efforts to reform the CAP. U.S. negotiators want the Europeans to exercise greater discipline over their export subsidies, arguing that it is European, not American, policies that are responsible for impoverishing third world agriculture and causing widespread environmental damage.

Americans also worry about Europe's insistence that agriculture is "multifunctional" - that it must be seen as serving other ends, such as protecting and populating the countryside, in addition to simply producing food.

U.S. officials fear that if such an approach were adopted, it could validate a multitude of protectionist programs. They are concerned that taking care of European consumers' fears about new technologies will force a wholesale abandonment of support for science-based agricultural biotechnology and other promising approaches to feeding the world's poor.

They also worry that the European CAP reform process will leave its negotiators with no flexibility. They remember the "take it or leave it" position Europe took before the conclusion of the Uruguay Round, and hope that the experience will not be repeated.

If these fears sound similar, that is because they share many of the same elements. Some mutual Transatlantic concerns stem from differences in procedure, others from different ways of implementing shared policy objectives. Indisputably, both Europe and the United States want to maintain healthy farming sectors able to export and grow with the benefit of new technology and policies protecting the rural environment and the health of consumers.

Beyond a certain amount of mutual suspicion and pre-negotiation posturing, there are also shared hopes and expectations. There is hope that domestic policymakers on both sides will be able to implement domestic policies that will allow negotiators flexibility in crafting meaningful agricultural trade liberalization.

There is an expectation that a new agreement will provide greater market access, lower tariffs, new export disciplines and meaningful reforms in domestic support policies. There is also agreement on the areas of focus, and real interest in tackling some issues not addressed by the Uruguay Round, such as the dairy and sugar sectors, and state trading.

Finally, there is hope on both sides that the WTO will continue to be a vital multilateral institution capable of successfully tackling tough problems, and there is an expectation that negotiators will come to the table in good faith, ready to resolve their differences.