Doha Progress & Farm Bill Implications:

A Fresh Assessment

Robert L. Thompson

Gardner Professor of Agricultural PolicyUniversity of Illinois

27 July 2006

Outline

• Status of Doha Round– Is it dead? On life support? Delayed?– Whose fault?– Key issue: When is a cut a cut?

• If it’s dead or delayed several years– Expect more litigation– Expect more FTAs

• Prospects for 2007 Farm Bill

Why Increased Market Access Is Most Important Objective

• Increase standard of living by obtaining goods that others can produce at lower cost in exchange for things we can produce relatively cheaper– By lowering the cost of living, makes a

household’s purchasing power stretch further– Increases a country’s GNP by employing its

land, labor & capital where they are most productive

Markets of the Past Are Shrinking• Other high income countries’ food demand

shrinking– Declining populations

• Europe’s population projected to fall by 10% by 2050• Japan’s population projected to fall by 22% by 2050• Russia’s population projected to fall by 24% by 2050

– Aging populations (Older people eat less.)– High income consumers don’t eat more when

their incomes rise further

Why the Development Focus in the Doha Round?

• It’s in our economic self-interest:– 50% more population by 2050 -- all in low income

countries; high income countries shrinking.– Half the current population lives on less than $2/day.– They are the only potential growth market for

agricultural products, but only if and when they can afford to eat meat, fruits, vegetables; edible oils.

• Trade is a more powerful engine of growth than aid.• Persistent poverty can have adverse geopolitical effects

(Doha soon after 9/11) and cause illegal immigration• Developing countries are now the majority of WTO

members; there will be no agreement until they perceive something of value in it to them (unlike the past).

Uruguay Round Agreement on Agriculture: Accomplishments

• Increased market access as % of consumption• Reduced export subsidies (value & volume)• Converted all non-tariff barriers to tariffs• Required scientific basis for all SPS barriers• Acknowledged that some domestic agricultural subsidies

can distort trade and categorized them by degree of trade distortion:– “Green box” = non trade distorting investments in public goods

and decoupled income transfers– “Amber box” = trade-distorting (bound and reduced)– “Blue box” = trade-distorting, but offset by production controls or

set-asides

American Leadership Was Key in Uruguay Round Ag Negotiations, but the 2002 Farm

Bill Hurt Our Credibility Abroad

• While telling the rest of the world to cut farm subsidies, we increased budget authority for ours.

• Retreated on decoupling: By allowing bases to be updated, U.S. farmers know that “fixed payments” are not necessarily “fixed.”

• Counter-cyclical payments will reduce U.S. farmers’ responsiveness to (downside) market signals.

• Marketing loans are effectively export subsidies, as are some forms of food aid and export credits.

WTO Framework Agreement July 31, 2004

• Eliminate all forms of ag export subsidies• Reduce trade-distorting domestic subsidies

(highest the most, but exceptions possible)• Reduce tariffs (highest the most, but exceptions

allowed if increase minimum market access)• Tighten definition of what subsidies are “non-

trade distorting”• Allow developing countries smaller cuts over

longer period (definition? exempt LDCs completely? exempt “sensitive products”?)

Hong Kong Accomplishments

• Not judged a failure• Date certain (2013) set for elimination of all ag export

subsidies; in-kind food aid to be disciplined; “safe box” for bona fide food aid

• Trade-distorting subsidies: Countries categorized into three bands, with highest to be cut the most.

• Tariffs: Countries to be categorized into four bands, with highest to be cut the most.

• Development: LDCs to get tariff- and quota-free access to high income country markets for 97% of tariff lines plus more aid for trade capacity building.

• Very tight timeline for huge amount of remaining work:– Modalities by 30 April 2006– Tariff schedules by 31 July 2006.

The Iron Triangle

• EU ag market access– How much & how many exceptions?– Force more CAP reform

• US domestic ag supports– Any real cuts in trade-distorting domestic

support

• Market access for manufactures & services in developing countries– Definition of “developing”

What the U.S. Proposed for Itself(10 October 2005)

• Reduce URAA cap of Total AMS by 60%• Cap Overall Trade-Distorting Support at 53% of

1995-2000 average.• Cap Blue Box payments at 2.5% of total value of

historical production of the ag sector• Reduce cap on product-specific de minimis from

5.0 to 2.5% of current value of production of each product

• Reduce cap on non-product-specific de minimis from 5.0 to 2.5% of current value of production of the ag sector

• Cap product-specific AMSs at 1999-2001 levels

US Proposal Misunderstoodby Many American Farmers

• The proposed 60% cut is from the cap on, not actual, trade-distorting payments

• That 15-year full phase out is only on trade-distorting payments, not all farm program payments

• They don’t understand blue box, but if putting the CCPs there avoids reducing them, they support it.

• They have no idea what de minimis means.• An “overall” reduction commitment is from a very

high number, so reduction percent would have to be very large to have any impact on the actual farm program payments they receive.

• Don’t understand the importance of this being a successful development round.

“Canadian Simulations”

• “Agriculture Negotiations – Agriculture Domestic Support Simulations,” 22 May 2006.

• Not a public document, but available on Institute for Agriculture & Trade Policy website: http://www.tradeobservatory.org/library.cfm?refid=87952

• Source of U.S. data (p. 13): “Feb. 2006 President’s Budget and USDA, Office of Chief Economist estimates based on March 2006 World Agricultural Supply and Demand Estimates.”

Total AMS

• URAA Total AMS base = $19.1 billion– 2005 actual = $12.5 billion– 2003 actual = $7.2 billion

• 60% reduction means the new cap would be $7.6 billion upon full implementation of the DRAA (2013?)

Overall Trade-Distorting Domestic Support

• 1995-2000 base = $48.2 billion, so a 53% cut yields cap of $22.7 billion.

• In 2005, it was $19.7 billion.

New Blue Box

• 2.5% of 1995-2000 U.S. ag production gives $4.9 billion cap.

• Redefinition of blue box would allow Counter-Cyclical payments to be notified here.

• Counter-Cyclical Payments totaled– $5.2 billion in 2005, but– $4.2 billion in 2004.

Product-Specific de minimis

• Little used category by the U.S., as Product-Specific AMSs have been larger than the product-specific de minimis allowances.

• So, reducing cap from 5.0 to 2.5% wouldn’t make much difference.

Non-Product-Specific de minimis

• At 2.5%, the 2005 cap would have been $5.8 billion.

• Not counting Counter-Cyclical payments, in 2005, Non-Product-Specific AMS totaled $1.9 billion.

• Not constraining.

Product-Specific AMS Caps

• The sum of the product-specific AMSs in the proposed 1999-2001 base period was $16.1 billion.

• The largest total AMS ever reported was $16.9 billion (excluding almost no product-specific AMS as de minimis, which would give greater flexibility). – 2004 and 2005 totals were several billion less.

Green Box

• There is no cap now, and none is proposed.• Direct payments qualify for green box as long as

there is no link to current or future production of any specific commodity.– There can be no restrictions whatsoever on what is

produced on the land (or whether anything is produced on the land).

• What modest constraints might be imposed on trade-distorting domestic support in the U.S. could easily be offset by larger green box payments.

Implications of WTO Cotton Decision for 2007 Farm Bill

• Congress heeded Uruguay Round Ag Agreement cap on trade distorting subsidies when it wrote the 2002 Farm Bill– But it didn’t want to come in much under that cap– And ignored the fact that marketing loans can work as export

subsidies and depress world market prices.

• Need to change marketing loan, LDP and perhaps CCP provisions for cotton and for other program crops that have them – or risk losing them in WTO litigation and not getting anything for them (rice? corn? soybeans?).

• The fruit and vegetable production exclusion in qualifying for direct payments needs to be changed to avoid them being counted as amber. – This will bring huge political opposition from fruits & vegetables.

Prospects

• The next farm bill will be likely written in mid-2007 at about the same time as President Bush’s fast-track negotiating authority expires.

• U.S. farm organizations will support a Doha Round Agreement that significantly reduces trade-distorting domestic subsidies only if the Agreement includes significant increases in market access.

• Key sticking points: – Will the E.U. be able to offer more agricultural market

access than heretofore? – Will Brazil and India offer more market access for services

and non-ag manufactured goods?

• If not, the end of the Doha Round will not likely come during the Bush Presidency.

"Let me be clear, the Congress will be writing the next farm bill in 2007, and I am deeply concerned the administration is using the current (WTO) negotiations to reshape farm policy without the full input of Congress and grassroots support…. As Chairman of the Senate Agriculture Committee, I have a responsibility and duty to protect the farm safety net…”

Saxby Chambliss United States Senator 9 October 2005

Who Reelected President Bush?Rural America

Source: Univ. of Michigan

“Something Has to Be Done About the Federal Budget Deficit”

2007 Ag Market Conditions

• Every farm bill is influenced disproportionately by the current economic condition in the farm sector and commodity markets at the time the bill is written (myopic future expectations)

• While one cannot predict how crop conditions here and around the globe will evolve between now and 2007, we can predict with some assurance that whatever they are will affect the content of the next farm bill.

• The big jump in farm program payments from 2004 to 2005 will not go unnoticed. 2006?

Conclusion• Most likely outcome in 2007 Farm Bill is only

modest changes from 2002 Farm Bill• BUT, there are just enough forces for change

that you should be prepared that bigger change is possible– Federal budget deficit– WTO trade negotiations & prospect of litigation– Public perception that farm programs are not

achieving their objectives

• Most pressing concern: replace trade-distorting mechanisms for supporting farmers with non-trade-distorting alternatives – whether or not Doha Round is concluded by then.

Remember• The Uruguay Round Agreement on Agriculture

will continue to set the rules of the road for international agricultural trade until some future round of negotiations changes them.

• If this rounds fails or is delayed years, expect more cases to be files with WTO against U.S. commodity programs. (No Peace Clause)

• The U.S. risks losing marketing loans, LDPs and CCPs though litigation and get nothing for giving them up. If we give them up in the round, we get something for giving them up.

• The round is not so much about reducing farm subsidies as it is about moving them from trade-distorting to non-trade-distorting mechanisms.

Thank you