AoA Issues Series: Domestic Support Policies
Frederick Nelson, Edwin Young, Peter Liapis, and Randall Schnepf
USDA, Economic Research Service
Domestic support policies were recognized as one source of market
and trade distortions in negotiating the Uruguay Round Agreement on
Agriculture (AoA). Countries, therefore, agreed to limit domestic
policies presumed to be the most trade distorting but to exempt other
policies from any limitations. A key issue in the next round of trade
talks is identification of further limits or exemptions for domestic
policies. A critical question is whether, and to what extent, policies
exempt from limitations actually alter production and trade. The continuing
challenge for WTO negotiations is obtaining effective commitments
about domestic support policies to reduce world market distortions
in agricultural trade while allowing countries the flexibility they
need to achieve their unique national priorities.
Domestic and trade policies are interrelated, change in one has
implications for accomplishing the goals of the other. Trade policies,
by directly influencing imports and exports, facilitate domestic
price and income goals; domestic price, income, and production policies
by changing production and prices affect a country's ability to
compete in world markets.
Limits of any kind on domestic agricultural policies are unprecedented
in a trade agreement. But, because of the interrelationships among
policies, limits on domestic policies were thought to be essential
to the success of the primary WTO goals of increased market orientation
and reduced protection in world trade. Under the Uruguay
Round Agreement on Agriculture (AoA), support levels from domestic
policies presumed to be the most trade distorting are subject to
upper limits that decline over time.
Negotiators of the AoA recognized the need for individual countries
to use domestic policies to address certain issues, especially those
related to
- equity (e.g., aid to the needy),
- market failure (e.g., environmental programs), and
- the absence of risk markets (e.g., income safety net programs).
As a result, expenditures on selected policies were
exempt from reduction commitments, as long as these policies were
considered to be no more than "minimally distorting"
of production and trade.
A traffic light analogy is used to categorize types
of policies. WTO strategies for limiting support were tailored
to the different categories or "boxes." Red
box policies must be stopped or eliminated. Amber
box policies are subject to limitations. Green
box policies are exempt from any limitations. An additional
category, blue box, was created
especially for payment programs that limit production and meet
specified criteria.
Red box policies were prohibited. No domestic
support policies are prohibited or scheduled to be phased out
under the current AoA.
Amber box policies are subject to reductions.
Support levels from nonexempt (or amber box) domestic policies
are quantified, according to the AoA, by calculation of an aggregate measure of support (AMS), which combines
estimated support levels from all nonexempt policies for all commodities
into one overall measure. Nonexempt policies in the AMS include
- commodity-specific market price supports based on administered
prices,
- government payments to producers related to current production or prices,
- other commodity-specific transfers, and
- non-commodity-specific measures of support received by producers,
such as capital, input, and insurance price subsidies.
| A traffic light analogy is used to catergorize WTO domestic support policies and to place them in one of four colored policy boxes |
 |
Prohibited policies that must be stopped (an empty red box, as no domestic policies were prohibited) |
 |
Policies subject to careful review and reduction over time are amber box policies (includes market price support, payments related to current production or prices, and input subsidies) |
 |
Payments made in conjunction with production-limiting programs are in the blue box (includes the 1986-95 deficiency payments in the U.S.) |
 |
Green box policies are considered nontrade-distorting and are not subject to any limitations (includes domestic food aid and environmental programs) |
As a domestic measure, the AMS excludes export subsidies
and the impacts of import restrictions that are not also tied
to domestic administered price programs.
Countries that committed to reducing domestic support
(see table 1) agreed to reduce their AMS below the level that
existed during the 1986-88 base period, a period of relatively
high support resulting from depressed market prices. Small levels
of support (less than 5 percent of the value of production in
developed countries (10 percent in other countries) do not have
to be disciplined under the so-called de
minimis rule. Developing countries were given "special
and differential" treatment through special policy exemptions
and by lower reduction commitments that are implemented over a
longer period of time. Least developed countries were not required
to make any commitments to reduce domestic support.
|
Table 1—Distorting domestic policies
are limited
|
|
Country classification
|
Reduction
commitment
|
De
minimis
|
Deadline
(year) |
| Developed countries |
20%
|
5% |
2000
|
| Developing countries |
13%
|
10% |
2004
|
| Least developed countries |
0%
|
10% |
* |
| * Least developed countries agreed not to increase
domestic support policies from the base period. |
Green box policies are deemed non-trade-distorting and exempt
from reductions. Domestic policies presumed to have the minimal
impact on trade were excluded from the AMS and limits on support
levels.
To be considered in the green box, policies must
- have no, or, at most minimal, effects on production or trade
(decoupled);
- not increase market prices or consumer costs;
- be financed by the Federal budget; and
- meet other more detailed policy specific conditions (none of
which limit the level of subsidy per se).
Blue box policies have exempt status. Government
payments related to current production or prices and to production-limiting
programs are exempt if the payments are based on fixed production
levels
or
are made
on no
more than 85 percent of the base level of production. The production-limiting
features of such payments might or might not offset, to some extent,
expansionary production effects of the payments. Inclusion of the
blue box provision, however, was basically a political strategy
required to bring the negotiations to a close, and the specifics
primarily benefited the United States and the European Union.
Blue
box policies are excluded from AMS calculations for 1995-2000,
but not from the base year AMS.
How has support from domestic policies changed since the
1986-88 base?
Governments have reduced domestic support levels relative to 1986-88,
as measured by the AMS. While intervention continues, there has
been a shift away from the use of market price support toward less
distorting payments. Information on AMS's reported in the
notifications provided by member
countries to the WTO shows that the level of domestic support expressed
as a percentage of the commitment ceilings varied widely among countries.
However, three-quarters of the country support levels were less
than 80 percent of their respective ceilings.
|
Table 2—Actual support (AMS) as
a percent of commitment levels, latest year during 1995-1998 *
|
Percent of
commitment levels |
Countries
|
| 0 to 19 % |
Canada, Colombia, Costa Rica, Czech Republic, Mexico, Morocco,
New Zealand, Poland |
| 20 to 39 % |
Australia, Brazil, Cyprus, United States, Venezuela |
| 40 to 59 % |
Hungary |
| 60 to 79 % |
European Union, Iceland, Japan, Slovak Republic, Switzerland,
Thailand |
| 80 to 100 % |
Argentina, Israel, Korea, Norway, Slovenia, South Africa,
Tunisia |
| * Last year notified as of April 2000.
Twenty-seven countries had notified for at least one year.
Bulgaria and Papua New Guinea had not yet notified. |
Unresolved Issues
Assuming future trade agreements will place further limits on
domestic support programs, there are several procedural and research
issues remaining:
- Effectiveness of current agreement. Support from trade-distorting
domestic policies has declined since the base period. Non-trade-distorting
green-box expenditures have increased. What have been the effects
on world markets and trade?
- Trade-off between market orientation and other goals.
The challenge for the future is to negotiate substantive reductions
in support from trade-distorting domestic policies while allowing
countries adequate flexibility to pursue non-trade-distorting
policy objectives. There are potential trade-offs between the
goals of reducing distortion and of pursuing non-trade concerns.
Countries disagree about the combination of support reductions
and restrictions that should be employed to achieve WTO goals;
namely more effective cuts in the amber AMS; equalization of amber
support levels, elimination of the blue box exemption, or tightening
up of the definitions of exempt green box policies.
- Future reductions in the aggregate measure of support.
While most countries are already well under their current support
reduction commitment ceilings, some countries might be very concerned
that future requirements will mean new or increased support reductions,
especially if blue box policies are reclassified as amber box.
Some countries appear to be looking to coupled domestic support
policies, instead of using green box policies, to help accomplish
nontrade goals related to rural communities, which would place
their national priorities squarely in conflict with WTO market
orientation goals.
- Definition and criteria for the exempt green box policies.
An issue concerns the current vague requirement that green box
policies must have, at most, minimal "trade-distorting effects
or effects on production." Exactly what this means quantitatively
is subject to judgment, challenge, and negotiation. All policies
involve some amount of subsidy to agriculture, otherwise it would
not matter if they were exempt or not.
- Limits on green box subsidies. There is currently no
limit on the total amount of subsidy that can flow through individual
green box policies. There is, also, no WTO limit on the
total amount of green box expenditures. What is the overall effect
of green box policies on world markets and trade?
- Decoupled payments. Decoupled payments increase the wealth
of farmers. Does this increased wealth affect farmers' production
decisions?
- Role of blue box. Blue box policies are not market oriented
because they reduce domestic and world output and increase prices
by idling resources. When such policies negatively distort production,
however, a country's export competitors may benefit. Product importers
may then have to pay higher prices with decreases in output. Production
may be increased in the future by these programs through risk
reduction and increased wealth, especially if payments are larger
than needed to compensate for resource idling. What is the
impact of blue box policies on production, prices, and trade?
- Adjustments for inflation. Support from nonexempt policies
are currently measured in nominal terms but member countries are
encouraged to "give due consideration" to countries
with significant inflationary problems when reviewing their compliance
with commitments. Ignoring inflationary trends in reporting support
measures complicates evaluation of policy effects. How would accounting
for inflation impact compliance?
- De minimis rules. The rules allow exclusion from the
AMS measure amber support that could amount to as much as 5 to
10 percent of the total value of agricultural production in developed
countries (10 to 20 percent in developing countries). Up to 5
percent of the value of production of each commodity in developed
countries, for example, could be excluded under the de minimis
rule, plus up to another 5 percent of the total value of production
in the country could be excluded by applying the rule to the non-commodity-specific
policy category. What are the overall effects of the de minimis
rules?
- Non-commodity-specific policy category. Policies can
be categorized as non-commodity-specific even if only a subset
of a country's commodities were actually involved in a program.
Are these policies really non-commodity-specific?
- Aggregate or commodity-specific AMS? The aggregate AMS
approach gives countries flexibility to seek competitive advantages
in one area while reducing subsidies in another commodity area.
This may be a problem for some countries faced with an increase
in commodity-specific subsidies by another country. Would
market impacts differ if commodity-specific limits were imposed?
- Relationship between domestic and trade policies. Market
price support programs depend on border restrictions and export
subsidies. If trade or border polices are substantially
constrained, how important are additional restraints on domestic
policies?
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