Stop, Look and Listen! – Farm Subsidies and the WTO Traffic Lights

Before trying to make this debate slightly more intelligible to those not familiar with the vast jungle of terminology that is often used (myself included), I thought I’d lighten the mood with a short joke:

Q: Why did the farm subsidy cross the road?
A: Because the WTO’s red light didn’t work.

OK, I know it’s not a very funny joke so what the hell am I getting at? Whenever I read any document on the subject of farm subsidies the writers always seem to refer to a curious array of different coloured boxes. Here’s a little something I found on the WTO’s website:

“In WTO terminology, subsidies in general are identified by “boxes” which are given the colours of traffic lights: green (permitted), amber (slow down — i.e. be reduced), red (forbidden). In agriculture, things are, as usual, more complicated.”

You’re damned right they are! For a start, when it comes to agricultural subsidies, there is no red box, i.e. no type of subsidy that is entirely prohibited. What’s more, there’s a blue box under which subsidies can also be classified. Wait a second, that doesn’t sound like any traffic light I’ve ever seen! The blue box is an exception to the normal rules and allows subsidies that are not de-coupled from production (and as I mentioned in my last post this type of support normally leads to over production and ‘dumping’). Countries are supposedly phasing out subsidies in the amber box which are generally accepted to be ‘trade distorting’ such as price supports. However, unlimited amounts of green box subsidies are currently allowed. In order to qualify for the green box, subsidies “must not distort trade, or at most cause minimal distortion.”

The terminology above is used to classify domestic support for farmers. A further cause of trade distortion has been the use of export subsidies which enable producers in the EU, as well as other rich countries, to continue ‘dumping’ i.e. exporting excess output at below cost price. As noted in my previous post, this puts downward pressure on international prices for agricultural goods that many developing countries rely on as their main source of income. Negotiations to end this practice started over 20 years ago with the Uruguay Round of WTO negotiations. However, it wasn’t until the WTO’s Hong Kong Ministerial in December 2005 that a commitment was finally made by all members to completely remove export subsidies. The date set for this reform to be fully enacted is 2013.

So, at least on paper, it would seem that progress is being made. Export subsidies are on the way out (albeit at a snail’s pace) as well as other forms of trade-distorting domestic support (from the amber box). That just leaves the green and blue boxes to worry about then.

A recent report by the international NGOs ActionAid and Cafod argues that even if export subsidies are completely abolished and the EU continues to phase out support from the amber box, the practice of dumping by EU producers is almost certain to continue. First of all, that grand declaration that came from the Hong Kong meeting is mostly symbolic. Even without the pressure of WTO legislation, export subsidies as a proportion of total EU agricultural spending fell from 50% in 1980 to just 5% in 2006. That said, complete elimination of export subsidies should still be a high priority. As the report shows, one of the greatest injustices of the Uruguay Round was not only that it allowed developed countries to maintain around two thirds of their export subsidies for agricultural products but that in also allowed them to negotiate very favourable reference years in which to frame future cuts. In other words, they chose years when export subsidies were even higher than normal and then said “we’ll reduce from those levels”. As well as promising a total reduction by 2013 the declaration promised to bring about substantial reductions before 2010. However, they’re still using these inflated levels in their calculations which means that, in practice, there is unlikely to be any change in the real levels of export subsidies before 2010. This doesn’t sound much like progress to me.

What about the supposedly kosher domestic support (the green and blue boxes)? Since the other types of subsidies are being phased out this is increasingly where the money is being channelled. The reforms to the CAP in 2003 introduced decoupled direct payments which qualify for the green box and are hence not subject to any of the reduction commitments. However, in response to protests from many member states (mentioning no names) some direct payments are still allowed to be coupled (i.e. farms get more money if they produce more) and hence fall into the blue box. So far only the UK, Ireland, Germany and Luxembourg have introduced full decoupling. The report estimates that about €30 billion of direct payments will be made in 2013, of which €25 billion will be in the green box and €5 billion in the blue box.

So what’s the punch line? First of all, even without embroiling ourselves in the finite details of what it means for payments to be ‘coupled’ or ‘decoupled’, it should be noted that dumping from the US market has been ongoing even though decoupling was introduced over 10 years ago, in 1996. The UK introduced decoupled payments last year but export prices for goods like wheat and barley were, respectively, still about 30% and 45% below the cost of production. Secondly, since world prices are not expected to rise significantly over the period 2006-2014 EU producers are likely to continue producing at a loss. They are able to do this by using the single (decoupled) payment to cover their losses. As long as this system is in place we shouldn’t expect any significant changes in production levels. This means that goods from the EU will continue to flood international markets and destroy possibilities for more efficient producers in developing countries. The EU commission itself does not predict any significant reduction in exports for many major farm products. Where reductions do occur they are more than offset by increases in other goods.

In conclusion then, “to decouple or not to decouple?” does not seem to be a very significant question. We need to give the CAP the red light. The only solution is to CEASE subsidy payments completely!