Export subsidies and the ‘peace clause’

[Some­what tech­ni­cal: but you can safe­ly ignore the jar­gon] The Lon­don “Times”:http://www.timesonline.co.uk/article/0„630–774864,00.html has an edi­to­r­i­al arti­cle today crit­i­cis­ing EU and the USA for their approach to the res­o­lu­tion of the out­stand­ing trade con­flicts in the Doha round. In the course of its crit­i­cism it notes the strong sus­pi­cion on the part of many devel­op­ing Mem­bers of WTO that the USA and the EU could agree at least on one thing: their mutu­al inter­est in main­tain­ing the ‘Peace Clause’ sanc­tion for the use of export subi­si­dies. I think this is wrong: the USA has far more inter­est in dis­com­fort­ing the EU over the Peace Clause than in safe­guard­ing its own much reduced export pay­ments. The ques­tions are: could a legal chal­lenge to export sub­si­dies suc­ceed in WTO? And what would be the effect of ‘win­ning’ such a case?
Here’s what the Times has to say: bq. The EU has been unbe­liev­ably com­pla­cent since it “reformed” its Com­mon Agri­cul­tur­al Pol­i­cy last June — reforms that will shave not a cent off the €48 bil­lion (£34 bil­lion) annu­al­ly spent on farm sub­si­dies. The Brus­sels line is that Europe has done its bit and it’s up to Amer­i­ca. The Com­mis­sion has not even deigned to pro­duce a WTO nego­ti­at­ing offer, but its approach is min­i­mal­ist. The US, although just­ly in the dog­house for a Farm Bill increas­ing sub­si­dies to $180 bil­lion over the next decade, has pub­licly put bold offers on the table — pro­vid­ed that the EU match­es them or comes close. Pri­vate­ly both sides are con­spir­ing to extend the “peace clause”, obtained dur­ing the Uruguay Round and due to expire on Decem­ber 31, that shields their agri­cul­tur­al mar­ket-rig­ging from legal chal­lenge. That would blunt the only sharp spur to reform. What is the “Peace Clause”? The WTO pro­vides an “explanation(link to WTO web­site arti­cle on the Peace Clause)”:http://www.wto.org/english/tratop_e/agric_e/negs_bkgrnd13_peace_e.htm. Briefly, Arti­cle 13 (“due restraint”) of the WTO’s Agri­cul­ture Agree­ment pro­tects coun­tries that use export sub­si­dies only to the extent per­mit­ted by the Agree­ment from being chal­lenged under oth­er WTO agree­ments. Once the ‘Peace Clause’ expires at the end of 2003, the gloves come off, at least in prin­ci­ple. But there’s a prob­lem: it’s noto­ri­ous­ly dif­fi­cult to chal­lenge export sub­si­dies on agri­cul­ture prod­ucts under the WTO sub­sidy rules: that’s one rea­son the sub­si­dies have spi­ralled out of con­trol in the past 30 years. This sor­ry history—and an inno­v­a­tive pro­pos­al for get­ting around the dif­fi­cul­ties using mod­ern data sets and econo­met­ric techniques—can be found in an arti­cle in the Jour­al of Inter­na­tion­al Eco­nom­ic Law by “Richard Stein­berg and Tim Josling(download PDF file approx 250kb from OUP Jour­nals website)”:http://www3.oup.co.uk/jielaw/current/060369.sgm.abs.html

*Josling argu­ment _in brief_*

The legal stan­dard for agri­cul­tur­al sub­si­dies boils down to whether spe­cif­ic action­able sub­si­dies have caused any “adverse effects” on trade result­ing in “seri­ous prej­u­dice” (iden­ti­fied in SCM Arti­cle 6.3.a — c) to the inter­ests of anoth­er WTO Mem­ber.

The dif­fi­cul­ty faced by com­plainants in most GATT Arti­cle XVI:3 cas­es was show­ing cau­sa­tion; the artic­u­lat­ed link between the sub­sidy and the prej­u­di­cial effect, allowin for all oth­er pos­si­ble fac­tors.  The Uruguay Round nego­tia­tors tried to dimin­ish that dif­fi­cul­ty in SCM Agree­ment Arti­cles 6.3(b) and 6.4, which—upon evi­dence of pri­ma facie cor­re­la­tion between sub­si­diza­tion and dis­place­ment of sales/exports—appears to shift the bur­den to the sub­si­diz­ing Mem­ber to per­suade a pan­el that fac­tors oth­er than sub­si­diza­tion caused the dis­place­ment.

The SCM pro­vi­sions do not, how­ev­er, direct­ly address—and so do not ful­ly solve—the prob­lem of demon­strat­ing at least pri­ma facie cau­sa­tion.  The best solu­tion to the prob­lem of cau­sa­tion is method­olog­i­cal: using mod­els and regres­sion analy­sis in apply­ing SCM Agree­ment Arti­cles 6.3 and 6.4

I have some reser­va­tions about whether the Steinberg/Josling approach is like­ly in fact to over­come the dif­fi­cul­ty of show­ing ‘cau­sa­tion’. A clever advo­cate can punch a lot of holes in regres­sion analy­ses that are being used to ‘fish’ for data as opposed to sup­port­ing an hypoth­e­sis. If they are cor­rect in their argu­ment that the SCM Agree­ment revers­es the ‘bur­den of proof’ on pro­vi­sion of at least some evi­dence of cau­sa­tion, then the USA and oth­ers may be able to cause the EU con­sid­er­able dis­com­fort. But it’s anoth­er ques­tion alto­geth­er what reme­dies the EU might be required to offer if found to be in breach of the SCM and whether any such find­ing, fol­low­ing an adver­sar­i­al ‘legal’ process, would in fact advance the reforms that need to be agreed in the WTO.

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