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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