AoA Issues Series: Export Subsidies
Susan Leetmaa and Karen Ackerman
USDA, Economic Research Service
Under the Uruguay Round Agreement on Agriculture
(AoA), countries that employed export subsidies for agricultural
commodities agreed to lower the volume and value of their subsidies
over the next 6 years (1995 to 2000). During the new agricultural
negotiations that began in 2000, export subsidies will be revisited
to try to minimize remaining market distortions attributable to
them.
Prior to the AoA, export
subsidies were an important policy tool in agricultural trade,
particularly for grains and dairy products. This practice contrasted
with international laws governing manufactured goods, which ban
export subsidies and allow importing countries to impose countervailing
duties if subsidized imports cause "material injury" to
domestic producers.
Before the AoA, the United States and the European
Union (EU) were the two largest users of export subsidies. Because
price supports to farmers keep domestic prices well above world
levels, the EU has continued to rely on subsidies to make agricultural
exports competitive.
During the late 1980's, the United States and EU engaged
in a "subsidy war" in which both countries battled to
undercut each other's prices in wheat export markets. In May 1985,
the United States had initiated the Export Enhancement Program,
an export subsidy program, as a targeted response to the high subsidies
provided by the EU. The United States also sought to reduce its
large grain stocks that had resulted from price supports that were
above competitors' prices in world markets.
U.S. gains in some markets were offset by losses to
the EU in others. Over the decade, U.S. market share declined while
EU market share increased dramatically. Other competitors such as
Argentina, Australia, and Canada were compelled to discount prices
in subsidized markets to remain competitive.
By 1998, EU subsidies had dropped to $6 billion, but
continued to dwarf those of other countries—the EU accounted
for about 90 percent of spending on export subsidies by all WTO
countries from 1995 to 1998. U.S. export subsidies are now well
below WTO commitment levels. For example, in 1998, U.S. subsidies
for dairy product and poultry export dwindled to $147 million from
a high of more than $1 billion in 1994.
Twenty-five members of the WTO agreed to reduce their
export subsidies. Developed countries must reduce budgetary expenditures
on export subsidies by at least 36 percent and the volume of subsidized
exports by at least 21 percent on a product-specific basis over
the 1995-2000 implementation period. These reductions are to be
made from the levels of the 1986-1990 base period. Developing countries
are also required to reduce their export subsidies, but they have
a 10-year implementation period and lower reduction requirements.
Export subsidy schedules of WTO members specify how much of each
commodity can be exported with subsidy and what subsidy expenditures
are permitted for each commodity. Under the AoA, countries may
not initiate subsidies for commodities that are not in their export
subsidy schedules.
The text of the AoA provides some flexibility for
subsidy reductions. If a country exceeds its commitments in any
of the years 2 through 5, it must reduce subsidy levels the next
year and must ensure that the total cumulative value of export subsidies
(and volume of subsidized exports) over the 6-year implementation
period is no greater than the totals that would have resulted from
full compliance with its subsidy schedules. However, members must
meet their commitments in the last year of the implementation period
(2000).
The chief users of export subsidies from 1995 to 1998,
as reported to the WTO, were the EU, followed by Switzerland, the
United States, and Norway. The United States accounted for 2 percent
or less of global export subsidies in 1995 through 1998.
Countries made substantial progress in reducing export
subsidies as a result of the AoA. For the current agricultural
negotiations, the United States and the Cairns
Group of countries is calling for the complete elimination
of export subsidies.
Issues for New Negotiations
What can be done to control circumvention of
export subsidy commitments? Where export subsidy limits
have been binding, some countries have adopted schemes that circumvent
them. For example, the EU exports some processed cheese under AoA
export subsidy commitments for skimmed milk powder and butter. The
EU claims that this is permissible through a modified version of
the "Inward Processing Relief" (IPR) system. Traditionally
under the IPR, third-country products are imported tariff-free,
processed in the EU, and then re-exported without subsidy. Initially
neither the finished product nor its components benefited from an
export subsidy. Beginning in February 1997, the EU implemented new
rules that recast traditional inward processing to allow processed
cheese to be exported using export subsidies for its components.
There is concern that such a policy of transferring
subsidies from one product category to another could spread,
such as using grain export subsidies to produce low-cost poultry.
This would jeopardize the WTO's export subsidy requirement that
countries subsidize only those commodities notified in their subsidy
schedules. Whether a country is permitted to use component subsidies
remains an issue.
In August 1995, Canada initiated a different scheme.
It introduced a two-tier price system that prices milk cheaper
when it is used in manufactured dairy products for exports than
when it is used domestically. Producers receive a "blended"
price that combines returns from domestic and export sales. New
Zealand and the United States complained to the WTO that Canada's
milk pricing system allowed it to circumvent its export subsidy
commitments. On October 13, 1999, the WTO Appellate Body affirmed
that Canadian dairy products benefited from export subsidies in
excess of Canada's WTO commitments. In December 1999, the United
States, New Zealand, and Canada agreed to a schedule for Canada
to meet its WTO obligations. Canada agreed to bring its dairy regime
into compliance with its WTO obligations by the end of December
2000.
Should the definition of export subsidy be expanded
to include export marketing practices not cited specifically in
the definition? The AoA defined several types of export
subsidies that are subject to reductions, including
- direct export payments contingent on export performance;
- sales or gifts of government stocks at prices lower than acquisition
prices;
- export payments financed through government action, including
payments financed by levies on producers;
- the provision of subsidies to reduce export marketing costs,
including handling and export-specific transportation; and
- subsidies on goods incorporated into export products.
The AoA also required countries to restrict their
use of other export marketing practices that could cause them to
circumvent their export subsidy commitments. Members agreed, however,
to exempt international food aid and widely available export market
promotion and advisory services from the list of export subsidies.
The criteria for international food aid also likely will be questioned
as grain stocks in major exporting countries mount.
As export price subsidies are reduced under
the AoA, the competitive aspects of credit guarantees have come
under increasing scrutiny. Most major exporting nations
guarantee commercial credit for export sales of agricultural products,
and, in some cases, insure sales on special terms if the sales are
viewed to be in the exporting country's "national interest."
Exporting nations offer to guarantee private bank loans with competitive
(commercial) interest rates, loan terms (more than 6 months to as
much as 10 years), and freight coverage in some cases. When importers
have difficulty obtaining foreign exchange, export credit guarantees
can expand importers' demand for agricultural products. Credit guarantees
can help stabilize economies in crisis by allowing countries to
continue importing agricultural products and obtain inputs such
as cotton and hides for export industries. Uruguay Round negotiators
agreed to continue talks in the Organization for Economic Cooperation
and Development to establish disciplines on agricultural export
credit guarantees, but have not yet reached agreement on export
credit guarantee disciplines.
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