EC’s wheat subsidies raise a warning flag

The star­tling pro­pos­al from the EC Com­mis­sion to “elim­i­nate all export subsidies”: this round of nego­ti­a­tions seems to solve most of the prob­lems about “cir­cum­ven­tion” that plagued the Urur­guay Round agree­ment on the reduc­tion of export sub­si­dies. The zero end-point com­bined with a fixed date for elim­i­na­tion seems to put an end to con­cerns about the ‘start­ing point prob­lem’ that seri­ous­ly under­mined the cred­i­bil­i­ty of the Uruguay Round commitment.

The starting point problem

The OECD coun­tries used, on aver­age, less than one third of the total vol­ume of wheat and flour sub­si­dies that they were per­mit­ted to use under the Uruguay Round agree­ment because they did­n’t need to use any more. They picked a ‘start­ing point’ (1986–88) where the lev­el of sub­si­dies was at an his­tor­i­cal record. So meet­ing a com­mit­ment to cut vol­umes of sub­si­dies by 30 per­cent from that point was not as hard as it looked. In the case of wheat and flour, for exam­ple, OECD coun­tries used only about one third of the vol­ume of sub­si­dies that was per­mit­ted under the agree­ment, thanks to the very gen­er­ous ‘base’ lev­els they had allowed themselves.

Percent use of total volume commitments (all OECD economies)

Wheat and wheat flour8272639

Source: “Export Sub­si­dies and WTO Trade Nego­ti­a­tions on Agri­cul­ture”, Har­ry de Gorter Mer­lin­da Ing­co Lil­ian Ruiz, World Bank, 2002 With a fixed end-point as pro­posed for the Doha agree­ment, the start­ing point for the elim­i­na­tion of sub­si­dies is not cru­cial, as long at the imple­men­ta­tion peri­od is not very long. But if the imple­men­ta­tion peri­od is long then start­ing from the ‘bound’ rate at the end of the Uruguay Round will give both the EC and the USA sig­nif­i­cant ‘head room’ for addi­tion­al sub­si­dies in the ear­ly part of the imple­men­ta­tion peri­od of the Doha agree­ment that could be sig­nif­i­cant, for the rea­son that the EC’s action this week has demonsrated.

Plenty of headroom

To be spe­cif­ic: bq. The Unit­ed States has a ‘bound’ lev­el of sub­sidy in 2000 (at the end of the Uruguay Round imple­men­ta­tion peri­od) of $600 mil­lion for all prod­ucts. As the “Upland Cot­ton case”: sug­gests, and the July Frame­work agree­ment con­firms, the Unit­ed States export cred­it pro­grams GSM-102 and GSM-103 pro­vide export sub­si­dies that will have to be elim­i­nat­ed dur­ing the Doha round imple­men­ta­tion peri­od (because the term of the cred­its exceeds 180 days). The cur­rent val­ue of these sub­si­dies is approx­i­mate­ly $223 mil­lion. bq. The USA is cur­rent­ly offer­ing almost no oth­er export sub­si­dies, so there would be ‘head­room’ of approx­i­mate­ly $370 mil­lion in its ini­tial sub­sidy oblig­a­tion if the cuts start­ed from the ‘bound’ rate at the end of the Uruguay Round imple­men­ta­tion peri­od. The US Con­gress is due to adopt anoth­er Farm Bill to being in 2008. If there were a long imple­men­ta­tion peri­od for the sub­sidy elim­i­na­tion com­mit­ment – cre­at­ing by impli­ca­tion a shal­low slope in the rate of cut in cur­rent sub­sidy levels—this ‘head­room’ would, in prin­ci­ple, give the USA the oppor­tu­ni­ty to expand its use of export sub­si­dies for (poten­tial­ly) most of the peri­od of the next Farm Bill (to 2012). bq. The Euro­pean Com­mu­ni­ties has a bound final rate of $US 9400 mil­lion and actu­al expen­di­tures less than 60% of that amount. It too would have room, dru­ing the first part of a long imple­men­ta­tion peri­od com­pris­ing equal cuts to sub­si­dies in each year to raise it’s export sub­sidy expen­di­ture by almost $4 bil­lion in the first year The like­ly decline of the val­ue of the US dol­lar against the Euro over the next year or so—as the real­i­ty of the US fis­cal posi­tion sinks in—will raise the temp­ta­tions in Europe to return to their bad old habits. In turn, this will raise the pres­sure on the USA to retail­i­ate. The prob­lem of ‘head­room’ could be reduced by
* Start­ing from actu­al sub­sidy lev­els rather than bound lev­els
* Adopt­ing a short­er imple­men­ta­tion peri­od with a ‘steep­er’ rate of cut to zero
* ‘Shap­ing’ the cut to elim­i­nate the ‘water’ in the bound rates of sub­sidy that remain from the Uruguay Round agreement

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