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AGRICULTURAL SUBSIDIES
IN THE WTO GREEN BOX
Do the World Trade Organizations rules on green box farm subsidies
allow both rich and poor countries to achieve important goals such as
food security, or do they worsen poverty, distort trade and harm the
environment?
Current WTO requirements set no ceiling on the amount of green box
subsidies that governments can provide, on the basis that these payments
cause only minimal trade distortion. Governments are thus increasingly
shifting their subsidy spending into this category, as they come under
pressure to reduce subsidies that are more directly linked to production.
However, growing evidence nonetheless suggests that green box payments
canaffect productionand trade, harmfarmers indeveloping countries and
cause environmental damage. By bringing together new research and crit-
ical thinking, this book examines the relationship between green box sub-
sidies and the achievement of sustainable development goals, and explores
options for future reform.
ricardo mel endez-ortiz (co-founder and Chief Executive),
christophe bellmann (Programmes Director) and jonathan
hepburn (Programme Ofcer for Agriculture) are based at the Inter-
national Centre for Trade and Sustainable Development (ICTSD)
AGRICULTURAL SUBSIDIES
IN THE WTO GREEN BOX
Ensuring Coherence with Sustainable
Development Goals
Edited by
RICARDO MEL

ENDEZ-ORTIZ
CHRISTOPHE BELLMANN
JONATHAN HEPBURN
CAMBRIDGE UNIVERSITY PRESS
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So Paulo, Delhi, Dubai, Tokyo
Cambridge University Press
The Edinburgh Building, Cambridge CB2 8RU, UK
First published in print format
ISBN-13 978-0-521-51969-4
ISBN-13 978-0-511-67525-6
International Centre for Trade and Sustainable Development 2009
2009
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TABLE OF CONTENTS
List of contributors page viii
Preface xvii
Acknowledgements xxiii
List of abbreviations xxv
1 Overview 1
christophe bellmann and jonathan hepburn
part i The recent evolution of agricultural trade
policy reform 17
2 The historical context of the green box 19
n estor stancanelli
3 Doha Round negotiations on the green box and beyond 36
jonathan hepburn and christophe bellmann
4 The reform of the EUs Common Agricultural Policy 70
alan swinbank
5 Farm policy reform in the United States: past progress
and future direction 86
david orden
6 Agricultural trade policy reform in Japan 121
masayoshi honma
part ii The focus, extent and economic impact of
green box subsidies 135
7 An analysis of EU, US and Japanese green box spending 137
jes us ant on
8 Green box subsidies and trade-distorting support: is
there a cumulative impact? 239
carlos galper n and ivana doporto miguez
v
vi table of contents
9 The distributional structure of green box subsidies in the
European Union and France 258
vincent chatellier
10 The distributional structure of US green box subsidies 304
harry de gorter
part iii Green box subsidies and developing
countries 327
11 Agricultural subsidies in the WTO green box:
opportunities and challenges for developing countries 329
andr e nassar, maria elba rodriguez-alcal a,
cinthia costa and saulo nogueira
12 Use of green box measures by developing countries:
an assessment 369
biswajit dhar
13 A Chinese perspective on the green box 399
jianmin xie
14 African countries and the green box 412
abena oduro
part iv Green box subsidies and the environment 425
15 The environmental impact of green box subsidies:
exploring the linkages 427
ronald steenblik and charles tsai
16 The environmental impact of EU green box subsidies 468
ariel brunner and harry huyton
17 The environmental impact of US green box subsidies 496
jane earley
18 Biofuels subsidies and the green box 530
timothy josling and david blandford
part v Looking forward: how can change take place? 569
19 Improving monitoring and surveillance of
green box subsidies 571
andrea cerda
table of contents vii
20 EU subsidy reform: options for achieving change 583
teresa cavero
21 Subsidy reform in the US context: deviating from
decoupling 604
ann tutwiler
22 Agricultural trade policy reform in Japan: options for
achieving change 618
kazuhito yamashita
23 Towards a green box subsidy regime that promotes
sustainable development: strategies for achieving change 633
pedro de camargo neto and renato henz
Appendix: Text of Annex 2 of the WTO Agreement on
Agriculture (the green box) 647
Index 654
LIST OF CONTRIBUTORS
jes us ant on is a Senior Economist with the Organization for Economic
Cooperation and Development (OECD), where he has worked since 1998.
From 2005 to 2007 he was seconded to the Spanish Ministry of Agriculture,
Fisheries and Food, where he served as advisor to the Secretary General of
Agriculture and Food. He has published extensively on agricultural trade pol-
icy and economic issues, and in particular on the decoupling of agricultural
support from production.
christophe bellmannis the Programmes Director at the International Cen-
tre for Trade and Sustainable Development (ICTSD). He holds a Masters in
International Relations fromthe Graduate Institute for International Studies,
Geneva. Before joining ICTSD, Mr. Bellmann worked with the UNEconomic
Commission for Latin America and the Caribbean (ECLAC) and with the
Swiss Coalition of Development Organizations.
davidblandfordis a professor, andformer department head, inthe Depart-
ment of Agricultural Economics and Rural Sociology and professor in the
School of International Affairs at Penn State University. He was formerly a
division director at the OECD in Paris and a professor at Cornell University.
He teaches courses in agribusiness at Penn State and conducts research into
food and agricultural policies, including their environmental, trade and rural
development aspects.
ariel brunner is EUAgriculture Policy ofcer with the environmental NGO
BirdLife International. His main work is in advocating CAP reform and
better implementation of the EU rural development policy. Before moving
to Brussels he was following the implementation of EU nature conservation
legislation in Italy for LIPU, the local BirdLife partner. As part of this work
he has been involved in debates around the 2003 mid-term reform and
national implementation of cross compliance and rural development as well
as in designation of the countrys Special Protection Areas (Natura 2000)
network.
viii
list of contributors ix
teresa cavero is a senior policy researcher with OxfamInternational, where
she has worked since 2004. She is responsible for Interm on Oxfams research
on Economic Justice (trade, agriculture and climate change), the strategic
planning of research, supervision of implementation and nancing, and
development of concrete research pieces.
andrea cerda is a senior ofcial in the Ocina de Estudios y Politcas Agrarias
(ODEPA), a subordinate agency of the ChileanMinistry of Agriculture, where
she has worked since 1996. Her eld of expertise is related to international
trade agreements, international trade rules, the World Trade Organization
(WTO) and agricultural trade. In March 2008, she was appointed Deputy
Director for International Affairs at ODEPA, inwhichcapacity she has partici-
pated inmultilateral and bilateral trade negotiations onbehalf of the Ministry
of Agriculture; represented the interests of the agricultural sector and advised
the government on negotiating options; coordinated the participation of the
Ministry of Agriculture in international organizations and fora such as the
FAO, IICA, APEC and OECD; and supervised the production of statistics,
analysis and publications relating to trade agreements and agricultural trade.
She has also worked as a consultant for the FAO and as a university lecturer
in international economics.
vincent chatellier is a research engineer at the French Institute for Agri-
cultural Research (INRA). His research interests include the consequences of
the successive reforms of the EUs Common Agricultural Policy, agricultural
subsidies and the way in which these are allocated to farmers, and analysis of
the diverse forms of French and European agricultural production. He has
published widely on CAP reform, subsidies and agricultural policies.
cinthia c. costa received her Ph.D. in Applied Economics from the Univer-
sity of S ao Paulo. Currently she is a professor at the University of S ao Carlos,
Sorocaba campus (UFSCar) in S ao Paulo, Brazil. Until January 2008 she
worked as a senior researcher at the Institute for International Trade Nego-
tiations (ICONE). As part of ICONEs team she worked on several projects
with the World Bank, OECD and IDB. Her main eld of study includes
quantitative analysis focusing on Brazils international trade negotiations,
particularly the WTO.
pedro de camargo neto previously served as Secretary of Production and
Trade with the Brazilian Ministry of Agriculture. During his time in ofce, he
was responsible for agricultural negotiations in the WTO, FTAA, Mercosur
x list of contributors
and other bilateral agreements from 2000 to 2002. He is currently President
of ABIPECS, the Brazilian Association of Pork Producers and Exporters, and
has also served as President of the Sociedade Rural Brasileira, Brazil.
harry de gorter teaches and conducts research on the political econ-
omy and applied welfare economics of agricultural trade policy at Cornell
University. Much of his recent work has been on agriculture and the WTO
negotiations, especially the impact on developing countries. Prior to Cornell,
he worked for the International Trade Policy Division of the Canadian Gov-
ernment. He has long been actively involved in advising many governments
and organizations on issues related to agriculture trade policy, including the
EU, FAO, G-20, IMF, OECD, UNCTAD, WTO and the World Bank.
biswajit dhar is a professor and head of the Center for WTO Studies at the
Indian Institute of Foreign Trade. Dhar received his Masters degree and Ph.D.
in Economics fromJawaharlal Nehru University, NewDelhi. He has served as
Senior Fellow at the Research and Information System for the Non-aligned
and Other Developing Countries, New Delhi; and as a Senior Consultant to
the Planning Commission of the Government of India, June to August 1997.
He has also worked as a lecturer at the Institute for Studies in Industrial
Development, New Delhi, and in the Corporate Studies Group of the Indian
Institute of Public Administration, NewDelhi. Dr. Dhar has published widely
on a range of international trade and development issues.
ivana doporto miguez is an economist at the Centro de Economa Interna-
cional (CEI), Buenos Aires, Argentina, where she has worked since 2005. Her
areas of specialization are agricultural economy and multilateral agricultural
trade within the framework of the Doha Round. She was awarded a Bachelor
of Science degree in Economics fromthe University of Belgrano, and nished
a Postgraduate course in Economics at the Torcuato Di Tella University. She
is currently attending a Master of Science in Finance at the CEMAUniversity.
jane earley currently works for the Earley and White Consulting Group in
Alexandria, USA. Previously, she served as Director and Senior Manager of
Agriculture Markets work for the World Wildlife Fund, where she focused on
international agriculture and trade policy-oriented work on standards and
certication of commodities ranging from biofuels to sugarcane. Ms. Earley
is a former trade negotiator in the Ofce of the US Trade Representative,
with wide experience in environmental and trade issues affecting emerging
markets and developing economies.
list of contributors xi
carlos galper n is a senior economist at the CEI, Buenos Aires, Argentina,
where he has worked since 1998. His areas of specialization are trade policy,
economic impact of trade agreements, agricultural trade and environmental
economics. He is also a researcher at the University of Belgrano, and lec-
tures on undergraduate and graduate courses at the University of Lomas
de Zamora, CAECE University, National Technological University and the
University of Buenos Aires. Galpern has a Bachelor of Science degree in
Economics from the University of Buenos Aires, and a Master of Science
degree in Economics and Business Administration from the Escuela Superior
de Economa y Administraci on de Empresas (ESEADE), Argentina.
renato antonio henz works in the Agricultural Policy Secretariat of the
Brazilian Ministry of Agriculture (SPA/MAPA). From 1995 to 2007 he served
as an advisor on the agricultural trade component of negotiations in the fol-
lowing international fora: WTO, MERCOSUL, bilateral free trade agreements
and the FTAA. He was also the Ministry of Agriculture representative in the
Brazil Trade Defense Technical Group (GTDC) and in the MERCOSUL Trade
Defense and Safeguards Committee (CDCS). He currently works as General
Coordinator of Studies and Agricultural Information at the Secretariat.
jonathan hepburn is Programme Ofcer for Agriculture at the Interna-
tional Centre for Trade and Sustainable Development (ICTSD). Before join-
ing ICTSD, he represented Oxfam International to the World Bank and IMF
in Washington DC, and led Oxfams global campaign on aid, debt and the
Millennium Development Goals. Previously, he worked on trade, develop-
ment and human rights issues with the Quaker UN Ofce, Geneva. He has
written on various issues related to politics, rights and public policy, includ-
ing on trade and development issues, development nancing, intellectual
property rules, and food, agriculture and biodiversity.
masayoshi honma is a professor at the Department of Agricultural and
Resources Economics, in the Graduate School of Agricultural and Life Sci-
ences, at the University of Tokyo. He graduated from Obihiro University of
Agriculture and Veterinary Medicine (BSc.), completed his Masters Degree at
the Graduate School of Agriculture of the University of Tokyo, and completed
his Doctorate at the Graduate School of Economics, Iowa State University,
USA (Ph.D).
harry huyton is currently a policy advisor at the Environment Agency,
the environmental protection agency for England and Wales, a member of
xii list of contributors
the Network of European Environmental Protection Agencies. He works
on land use, climate change and renewable energy policy. Previously, he
was agriculture policy ofcer for the RSPB, BirdLife International partner
in the UK, where he led on CAP reform policy and was the Chair of the
BirdLife International agriculture taskforce. He has anMSc. inEnvironmental
Technology and a BSc. in Natural Sciences.
timothy josling is Senior Fellow at the Freeman Spogli Institute for Inter-
national Studies, Stanford University, and Professor Emeritus at Stanfords
FoodResearchInstitute. Professor Joslings work focuses onagricultural trade
and food policy issues, as well as economic integration, with a special empha-
sis on the World Trade Organization, the EU Common Agricultural Policy
and US-EU trade relations. Before taking his current positions at Stanford
University, he has held positions at the London School of Economics and the
University of Reading in the United Kingdom.
ricardo mel endez-ortiz is co-founder and Chief Executive of the Inter-
national Centre for Trade and Sustainable Development (ICTSD). His pre-
vious experience encompasses responsibility in a diverse range of capacities
at the interface of international trade and sustainable development. These
include: General Director and co-founder, Fundaci on Futuro Latinoameri-
cano (1994 to 1996, Quito); Charg e dAffaires, Counsellor and First Sec-
retary, Colombian Mission to the International Organizations in Geneva
(1990 to 1994); Principal Advisor, Colombian Minister of Economic Devel-
opment (1988 to 1990, Bogot a); Consultant to UNDTCP (1988, Bangkok);
and Chief of Administration, Ofce of the President of Colombia (1987
to 1998, Bogot a). Mr Mel endez-Ortiz was a negotiator and delegate for
Colombia in the Uruguay Round, the UNCED process, UNCTAD VIII, the
Climate Change Convention, Intergovernmental Panel on Climate Change,
the Montreal Protocol and bilateral trade and investment-related negotiation
processes. He also acted as Spokesperson for the G-77 in several fora and
served as Chair of the UN Standing Committees on Commodities and Trade
Preferences.
andr e nassar is Director-General of the Institute for International Trade
Negotiations (ICONE), Brazil. His main elds of work at ICONE have
includedmultilateral, regional andbilateral negotiations; modeling of quanti-
tative scenarios and supply and demand long-termprojections of agricultural
products; agricultural trade policies in developed and developing countries;
and WTO disputes. He was a Member of the Brazilian Technical Group
list of contributors xiii
for the Doha Round agricultural negotiations coordinated by the Ministries
of External Relations and Agriculture of the Brazilian Government, and a
Collaborator for the G-20 as an expert in agricultural world markets, at the
request of the Brazilian Government. He served as an expert in projections
and international market analysis for sugar and ethanol of COPERSUCAR
(2002 to 2003), and has conducted a number of consultancies and research
projects with the Inter-American Development Bank, the World Bank, FAO,
UNDP and other international organizations.
saulo nogueira is a senior researcher and coordinator for emerging mar-
kets at the Institute for International Trade Negotiations (ICONE). He is the
coordinator of the Asia LatinAmerica Agri-FoodResearchNetwork(ALARN)
project, and works on agricultural trade policies in developing countries, as
well as the WTO negotiations. He was a researcher at the Institute for Trade
and Commercial Diplomacy (ITCD) in Washington; a trade analyst and
manager at the Brazilian Machinery Manufacturers Association (ABIMAQ);
and did internships at various international organizations like the OAS
(Organization of American States), the CTBTO (Comprehensive Nuclear
Test-Ban-Treaty Organization), and UNIDO (United Nations Industrial
Development Organization).
abena oduro is a Senior Lecturer in the Department of Economics at the
University of Ghana, Legon, where she has worked since 1989. She teaches
macroeconomic theory and international economics at the undergraduate
level, and international trade theory and international economic relations at
the postgraduate level. From1999 to 2004 she worked at the Centre for Policy
Analysis (CEPA), Ghana, rst as Project Ofcer and later as a Core Research
Fellow; in 2003, she also served as visiting lecturer at the Council on African
Studies at Yale University. Oduro has published widely on trade, poverty and
development, undertaken a number of research consultancies, and delivered
public lectures on the areas of her expertise.
david orden is professor and director of the Global Issues Initiative of
Virginia Techs Institute for Society, Culture and Environment, Alexan-
dria, Virginia, and Senior Research Fellow at the International Food Policy
Research Institute (IFPRI), Washington DC. He is engaged in active research
and public policy education programs on the economics and political econ-
omy of domestic support policies, international trade negotiations and tech-
nical barriers to trade. Orden has been a Visiting Fellow at the University
of New South Wales in Australia (1990), chairman of the International
xiv list of contributors
Agricultural Trade Research Consortium (1996 and 1997) and Visiting
Professor at Stanford University (1998 to 1999).
maria elba rodriguez-alcal a is currently an instructor and Assistant
Director of Undergraduate Studies in the Department of Agricultural Eco-
nomics at the University of Missouri-Columbia. Until December of 2007
Maria worked as a senior researcher at the Institute for International Trade
Negotiations (ICONE), Brazil. As a member of the research team in ICONE,
Maria also coordinated a regional project in partnership with the Inter-
American Development Bank (IDB) and the agricultural private sector in the
MERCOSUR countries, Argentina, Brazil, Paraguay and Uruguay. Prior to
joining ICONE, she worked as an academic coordinator in the Department
of Agricultural and Resource Economics at Washington State University.
n estor stancanelli is a former negotiator who represented Argentina dur-
ing the Uruguay Round. He is currently Director of the Centro de Economa
Internacional (CEI), Buenos Aires, Argentina. Ambassador Stancanellis pub-
lications have addressed a range of issues related to trade liberalization, and
include various papers on the effect of the Uruguay Round on economic
development in Latin America.
ronald steenbliks professional career spans three decades, in industry,
academia, the US federal government and inter-governmental organizations,
generally on policy issues related to natural resources, the environment or
trade. At the time of writing the chapter for this volume he was Direc-
tor of Research for the Global Subsidies Initiative (GSI), a program of the
International Institute for Sustainable Development which aims to improve
information on the extent and effects of subsidies (especially those that are
harming developing countries or the environment). Prior to joining the IISD,
he was a Senior Trade Policy Analyst in the Trade Directorate of the OECD. In
that capacity he made important contributions to the WTO negotiations on
environmental goods and services, both through the research he undertook
on specic topics and as a participant in WTO symposiums and meetings of
the WTOs Committee on Trade and Environment.
alan swinbank is Professor of Agricultural Economics and Director of the
Centre for Agricultural Strategy at the University of Reading. His research
focuses onthe farmandfoodpolicies of the EU, andthe process of agricultural
and food trade liberalization in the WTO. Recent papers have appeared in the
European Review of Agricultural Economics, Comparative European Politics,
list of contributors xv
Journal of Common Market Studies, Journal of World Trade and the Estey
Centre Journal of International LawandTrade Policy. His most recent book, co-
edited with Richard Tranter, is ABond Scheme for Common Agricultural Policy
Reform (CABI Publishing, 2004). Recent research has been funded by the
European Commission (under Frameworks Vand VI), the UKs Department
for International Development (DFID) and the Commonwealth Secretariat.
charles tsai holds degrees fromthe University of California, Davis, the Lon-
don School of Economics and the Monterey Institute of International Studies
in California. His professional experiences span the Committee on Regional
Trade Agreements of the World Trade Organization (WTO); the Board of
Foreign Trade in Chinese Taipei working with WTO accession-related issues;
the Agency for International Trade Information and Cooperation (AITIC)
in Geneva assisting less-advantaged countries to advance their interests in
WTO negotiations; and the Organization for Economic Cooperation and
Development (OECD), where his research has resulted in publications span-
ning agriculture, regional trading arrangements, regulatory reform, trade in
healthcare services between developed and developing countries and issues
relating to trade and structural adjustment.
ann tutwiler is the Managing Director for Trade and Development at
William and Flora Hewlett Foundation. Prior to joining Hewlett, she was
President and Chief Executive Ofcer of the International Food and Agri-
culture Trade Policy Council, an organization that she co-founded in 1987.
The International Policy Council is dedicated to developing and advocating
policies that support an efcient and open global food systemand sustainable
production and distribution of safe, accessible food supplies. She served as
Associate Director of the Council from its inception until 1992. She has pub-
lished dozens of articles and edited two books on international agriculture
policies, and speaks widely on a variety of agricultural policy issues.
jianmin xie is a Counselor for Agriculture Negotiations in the Permanent
Mission of China to the World Trade Organization in Geneva. Previously, he
worked as the Division Director of the Investment Planning Division under
the Department of Development and Planning in the Ministry of Agriculture,
mainly in charge of Agriculture Investment Planning and Policy Analysis on
agriculture. He studied economics at the Peoples University of China in
Beijing from 1982 to 1986, where he later obtained his Masters Degree in
Economics in 2002. He studied at the University of Oxford under a visiting
scholarship in 1991.
xvi list of contributors
kazuhito yamashita graduated fromthe Faculty of Lawat the University of
Tokyo, before earning masters degrees in public administration and applied
economics from the University of Michigan, and a doctorate in agriculture
from the University of Tokyo. He has held a number of senior positions in
government, including serving as Director of the GATT Affairs Division,
Director of the Rural Development Division, Deputy Director-General of
the Rural Development Bureau in the Ministry of Agriculture, Forestry and
Fisheries, and as Counsellor in the Japanese Mission to the European Union.
He is currently a Senior Fellow at the Research Institute of Economy, Trade
and Industry (RIETI).
PREFACE
Agriculture remains the main source of livelihood for more than
2.6 billion people in the world, the majority of whom are located in
developing countries. Rising incomes, urbanization and shifting con-
sumption patterns have increased food consumption in most areas of
the world. However, despite spectacular increases in food production per
capita, major distributional inequalities in access to food persist. In 2006,
the proportion of children under ve who are undernourished declined
from 33 per cent in 1990 to 26 per cent in 2006, and more than 140
million children in developing countries were underweight suggesting
that governments may well miss the target of halving, between 1990 and
2015, the proportion of people who suffer from hunger.
1
At the same time, according to the Millennium Ecosystem Assessment,
the prospect of providing sufcient food to sustain another 2 billion
people by 2020 has rightly focused attention on the very real threats to
food security if the productivity of agricultural systems cannot keep pace
with this demand. As these systems are under increasing pressure to meet
the growing need for food, it is also vital that the environmental chal-
lenges associated with food production are addressed effectively water
pollution, pesticide use, land degradation and greenhouse gas emissions,
amongst others.
It is widely recognized that government policies are signicant drivers
of food production and consumption patterns, both locally and glob-
ally. Massive production and export subsidies, notably in the EU and
US, continue to stimulate over-production, while imports of politically
sensitive products remain heavily protected through an armada of tariff
and non-tariff measures. Such policies have in turn undermined develop-
ing countries ability to promote rural development, develop their export
sectors andto protect their vulnerable rural populations fromunfair com-
petition. While budgetary concerns, political controversy and demands
from trading partners have initiated a move away from the most dam-
aging types of subsidies, a signicant proportion of developed country
spending remains linked to farm production levels.
1 UN Millennium Development Goals 2008 report.
xvii
xviii preface
The reform of the global agriculture trading system initiated during
the Uruguay Round with the objective of establishing a fair and market
oriented trading system plays a major role in this process. The establish-
ment during the Uruguay Round of a special category of subsidies that
are exempt from reduction commitments on the grounds that they have
no, or at most minimal, trade-distorting effects or effects on produc-
tion was arguably a critical moment in moving towards a new consensus
on agricultural trade policy. Developed countries would be allowed to
retain subsidies that deliver various kinds of public goods in exchange for
bringing agriculture within the WTO system and committing to future
reductions of trade-distorting support. Subsequently, the green box has
been increasingly seen as representing the future direction of agricul-
tural trade policy, with governments announcing that they will decouple
support from production, and notifying an ever-greater share of subsidy
spending as green box.
However, there are now also growing concerns that payments being
notied in the green box do not necessarily always fulll the criteria of
causing not more than minimal trade distortion concerns raised by
many developing countries, but also by a number of developed country
exporters. At the same time, critics have argued that the current green box
criteria essentially address developed country concerns and do not nec-
essarily accommodate the types of minimally trade-distorting programs
prevailing in the South. Developing countries have thus called for the
rules on green box subsidies to be changed so as to minimize effects on
production, and to ensure that their own current and future needs are
properly covered. To what extent are the fears of the green boxs critics
justied? And to what extent is the rhetoric of its defenders borne out by
reality?
If agricultural trade policy is indeed to be transformed so that it truly
promotes equity, food security and sustainable livelihoods, a wider com-
munity of stakeholders needs to be involved in the policy formulation
process inboth developed and developing countries. Accurate, up-to-date
and reliable information needs to be made available on the issues at stake,
and policy-oriented, ground-breaking research needs to be produced.
This book aims to contribute to this process by bringing an authorita-
tive collection of research and opinion pieces to the attention of a wider
audience. It is the result of a two-year enquiry process involving a wide
range of trade and agriculture ofcials, independent thinkers, experts and
activists through a rich and open dialogue.
The chapters presented here are intended to move away from a
debate which has been too often characterized by the ritual repetition of
preface xix
well-worn negotiating positions, and towards a reinvigorated discussion
that is informed by empirical evidence, considered opinion and creative,
critical thinking. By bringing this analysis to the attention of decision-
makers, negotiators and a wider audience in both developed and devel-
oping countries, we hope to ensure that trade policy-making in this area
more effectively addresses broader public policy goals.
The book is divided into a number of different sections. The rst part
seeks to examine the recent evolution of agricultural trade policy reform,
looking in particular at developments in the EU, the US and Japan, and
seeking also to situate the green box within the context of these historical
reform processes. Part 2 examines the focus, extent and economic impact
of green box subsidies, using empirical evidence to characterize the scope
andnature of current programs. Parts 3 and4 examine greenbox subsidies
and their relationship with development objectives and the environment,
while a nal section provides ve different perspectives on how future
change can take place.
Part I: The evolution of agricultural trade policy reform
This section opens with a chapter by Ambassador N estor Stancanelli,
who represented Argentina during the 19861994 Uruguay Round nego-
tiations: this chapter sets out the origins of the green box during these
negotiations, explores the political processes and economic context that
led to its genesis and discusses its current signicance in the context of
the movement towards a fair and market-oriented agricultural trading
system. A chapter by Jonathan Hepburn and Christophe Bellmann then
describes the current state of negotiations on the green box under the
Doha Round, looking at the different interest groups that are involved,
and examining the various stages through which the debate at the WTO
has evolved. Three chapters then examine the recent evolution of trade
policy reforminthe three WTOmembers whichmake greatest use of these
payments the EU, the US and Japan. Professor Alan Swinbank traces the
history of European policy reform in recent decades, and explores efforts
to decouple agriculture from production, looking at both the internal
and external context of policy evolution. Professor David Orden exam-
ines current and future issues facing US farmpolicy ina historical context,
and examines the ways in which the 19951996 reforms of the main com-
modity programs have since beenreversedwiththe re-institutionalization
of counter-cyclical payments in 2002. He also analyzes the relevance of
WTO disciplines for trade policy reform in the US, and explores a num-
ber of possible future trends. Completing the analysis of the evolution of
xx preface
farm policy reform in these three WTO members, Professor Masayoshi
Honma examines the restructuring of Japanese agriculture inrecent years.
He focuses in particular on the challenges involved in moving away from
an agricultural sector that is heavily characterized by large numbers of
part-time farmers operating on relatively small areas of land, towards one
which is more competitive in the global economy.
Part II: The focus, extent and economic impact of green
box subsidies
In Part 2, Jes us Ant on seeks to map out an objective overview of the state
of green box subsidy spending in the EU, the US and Japan, by looking at
green box spending in the wider context of subsidy spending as a whole.
Argentinean economists Carlos Galpern and Ivana Doporto Miguez then
examine whether greenboxsubsidies, whenprovidedincombinationwith
those categorized elsewhere at the WTO, have a cumulative effect which
ultimately leads to signicant effects on production and trade. Finally,
two chapters analyze the distributional structure of green box subsidies:
one, by Vincent Chatellier, examines the situation in the EU and France,
and another, by Harry de Gorter, looks at the US. The chapter by Vincent
Chatellier analyzes the distribution of payments under different types
of green box programs, including both historical trends and expected
future patterns following the implementation of the 2003 reform of the
EUs Common Agricultural Policy, and looks at the implications of this
distributional structure for the achievement of broader public policy
goals. Professor Harry de Gorter then explores the distribution of green
box payments in the US, providing an estimate of the distribution of
payments by commodity as well as by farm size.
Part III: Green box subsidies and developing countries
In a wide-ranging overview, four researchers from the Brazilian Instituto
de Estudos do Comercio e Negociac oes Internacionais (ICONE) offer their
insights into the opportunities and challenges faced by developing coun-
tries in this area. Andr e Nassar, Maria Rodriguez-Alcal a, Cinthia Costa
and Saulo Nogueira present an analysis of the historical experience with
green box subsidies, discuss some of the theoretical issues that need to
be addressed and review the main negotiating proposals that have been
put forward during the Doha Round. Complementing this analysis, the
chapter by Biswajit Dhar provides a wealth of data on the extent to which
preface xxi
developing countries currently use the various types of green box pro-
grams, and examines a number of signicant trends that emerge. Dhar
also puts forward some initial suggestions on how the existing criteria
might be modied in order better to reect developing country needs.
Two further chapters in this section explore the relevance of the green box
for China and for African countries. A chapter by Jianmin Xie explores
some of the key issues at the national and global level, discusses trends
in both developed and developing country spending, and examines the
future role of the green box in achieving public policy objectives in China.
Finally, the chapter by Abena Oduro looks at green box subsidies fromthe
perspective of African countries: she examines in particular the specic
conditions that characterize African agriculture in order to determine the
extent to which existing green box criteria, and proposals to modify them,
provide adequate policy space for countries in this region to address the
particular problems that they face.
Part IV: Green box subsidies and the environment
In Part 4, a chapter by Ron Steenblik and Charles Tsai examines the
environmental effects of green box subsidies, and points to paths which
decision-makers could explore in order to minimize negative impacts and
maximize positive ones. Two further chapters look more specically at the
environmental impacts of green box subsidies in the EU and US. A chap-
ter by Ariel Brunner and Harry Huyton demonstrates how, while some
green box subsidies are closely targeted at the achievement of concrete
environmental goals, others remain little more than disguised income
support payments, and some may even provide support for activities that
are damaging to the environment. Complementing this analysis, Jane
Earleys chapter on the US situation provides an exhaustive analysis of
the different types of environmental impact that are associated with the
12 primary categories of green box programs, and concludes by provid-
ing a number of recommendations for mitigating these effects. Finally, a
chapter by Professor Tim Josling and Professor David Blandford explores
the complex web of issues in the area of biofuels, looking at the green box
in the larger context of WTOrules on subsidies, as well as current practice
and policy frameworks in a number of countries.
Part V: Looking forward: how can change take place?
In the nal section, a number of experts provide their perspectives on
how the current subsidy regime can be reformed. Three chapters again
xxii preface
examine the situation in the EU, the US and Japan. A chapter by Teresa
Cavero explores the political relationships between key actors involved in
the CAP reform in the EU, examining in detail the inuence of different
interest groups and the implications this could have for rural develop-
ment, the environment, developing countries, climate change and migra-
tion. Looking at the US, Ann Tutwiler uses the debate over the 2007 Farm
Bill to provide a snapshot of the different interest groups, coalitions and
constituencies that are seeking to inuence agricultural trade policy in
the US over the coming ve years and beyond. The author provides an
overviewof the mainissues aroundUSgreenboxpayments andthe decou-
pling process in the US, and situates the current ongoing efforts at reform
inthe context of debate inrecent decades. For Japan, a chapter by Kazuhito
Yamashita demonstrates the extent to which moves to decouple support
from production have only been partially successful in Japan, particularly
in the case of rice, and shows how the signicant political inuence of
part-time farmers, through agricultural cooperatives, has inuenced the
decisions of political parties and trade policy-makers. Two other chap-
ters examine some of the systemic issues facing the existing international
framework. One of these, by Andrea Cerda, presents concrete practical
options for reforming the existing monitoring and surveillance system so
that it functions more effectively, given that major subsidizing countries
have repeatedly lagged several years behind with their subsidy noti-
cations, and the difculties in matching notied spending with actual
programs in individual countries. Finally, a chapter by Pedro de Camargo
Neto and Renato Henz proposes options for subsidy reform, with a view
to achieving the fair and market-oriented agricultural trading system
which WTOmembers have agreed to establish. Recognizing that the green
box must eventually form the core of the permanent domestic support
disciplines in agriculture, after the elimination of other trade-distorting
measures, the authors emphasize the need for the integrity of the criteria
in this area, whilst also pointing to the role of litigation as a tool for
enforcing rules and disciplines that have already been agreed.
Ricardo Melendez-Ortiz, Christophe Bellmann
and Jonathan Hepburn
ACKNOWLEDGEMENTS
First and foremost, ICTSD would like to thank all of the authors who
contributed to this volume. Without their painstaking research, patience
and commitment, this book would never have been possible.
ICTSD also owes a debt of gratitude to all of those who reviewed chap-
ters, provided comments and analysis, sent us relevant information and
backgroundmaterial, andpassedonthe names of other experts who could
assist us with the project. We would like to thank in particular Lars Brink
(Agriculture and Agri-Food Canada), who provided us with comments
on early ICTSD analysis of the issue; as well as Rebecca Berendt (formerly
with the Permanent Mission of New Zealand), Carmel Cahill (OECD),
Pam Cooper (Permanent Mission of Canada), Jenny McGregor (Perma-
nent Mission of New Zealand), Catherine Moreddu (OECD), Elizabeth
Stuart (Oxfam International) and Jack Thurston (Farmsubsidy.org).
The immediate catalyst for the production of this volume was a multi-
stakeholder dialogue that ICTSD convened from 15 to 17 April 2007 in
Montreux, Switzerland. We are deeply indebted to all of the participants
at this dialogue for their insightful comments and active involvement in
the project. ICTSD would particularly like to thank the chairs, presenters
and discussants, as well as all those who shared papers with other par-
ticipants at the event. ICTSD is especially grateful to Panos Konandreas
(independent consultant), Maria AlbertoCHAU-HUU(formerly withthe
Permanent Mission of the Philippines), Anastassios Haniotis (European
Commission), Harmon Thomas (UNCTAD), Alan Matthews (Trinity
College Dublin), Peng Tingjun (China Agriculture Trade Promotion
Centre), Soa Bonilla (independent consultant), Gonzalo Fanjul
(Interm on Oxfam), Dimitris Diakosavvas (OECD), Kenneth Cook
(Environmental Working Group), Niall Meagher (Advisory Centre on
WTO Law) and Rajesh Aggarwal (International Trade Centre). We would
also like to thank Soa Bonilla and TingjunPeng for the researchthey con-
ducted in this area, and which they made available to other participants
at the dialogue.
The ICTSDteamresponsible for the editorial process for this book con-
sistedof Ricardo Mel endez-Ortiz (Chief Executive), Christophe Bellmann
xxiii
xxiv acknowledgements
(Program Director) and Jonathan Hepburn (Program Ofcer, Agricul-
ture). Coordination with publishers was overseen by Deborah Vorhies
(Managing Director), who was assisted by CaitlinZaino. Ammad Bahalim
and Marie Chamay of the agriculture teamprovided valuable support and
assistance, while Malena Sell laid the foundations for the research project
and conducted early analysis of some of the key issues. Cecile de Gardelle
led on the logistical organization of the April 2007 dialogue: her ef-
cient and professional planning helped to ensure the success of this event.
Other ICTSDstaff made signicant contributions to the project invarious
capacities.
ICTSDwouldlike tothankthe donor agencies that fundedthis research:
the UK Department for International Development (DFID), the Dutch
Ministry of Foreign Affairs (DGIS) and the Hewlett Foundation. ICTSD
would also like to recognize the important contribution made by English
Nature (nowknown as Natural England) in supporting our early research
in this area.
Ricardo Melendez-Ortiz, Christophe Bellmann
and Jonathan Hepburn
LIST OF ABBREVIATIONS
ABARE Australian Bureau of Agricultural and Resource Economics
ABIMAQ Brazilian Machinery Manufacturers Association
ACP African, Caribbean and Pacic group
ACRE Average Crop Revenue Election program
AFBF American Farm Bureau Federation
AFL-CIO American Federation of Labor and Congress of Industrial
Organisations
AIE Analysis and Information Exchange
AITIC Agency for International Trade Information and Cooperation
ALARN Asia Latin America Agri-Food Research Network
AMS Aggregate Measurement of Support
AMkS Agricultural Marketing Service
AMTA Agricultural Market Transition Act
AMTAcc Agricultural Market Transition Accounts
ANOVA analysis of variance
AoA WTO Agreement on Agriculture
APEC Asia-Pacic Economic Cooperation
APHIS Animal and Plant Health Inspection Service
ARS Agricultural Research Service of the United States Department
of Agriculture
ASAP Alliance for Sensible Agricultural Policies
ASCM Agreement on Subsidies and Countervailing Measures
ASEAN Association of South-East Asian Nations
AWU Agricultural Work Unit
CAD Contrat dAgriculture Durable (Sustainable Agriculture
Contract)
CAE Conseil dAnalyse Economique
CAFOs Concentrated Animal Feeding Operations
CAITEC Chinese Academy for International Trade and Economic
Cooperation
CAP Common Agricultural Policy of the European Union
CAssP Commodity Assistance Programme
CBD Convention on Biological Diversity
CBI Caribbean Basin Initiative
CBO US Congressional Budget Ofce
CCC Commodity Credit Corporation
xxv
xxvi list of abbreviations
CCIA Climate Change Initiative for Agriculture
CCP countercyclical payments
CEAP Conservation Effects Assessment Project
CEC Commission of the European Communities
CEI Centro de Economa Internacional
CENTAD Centre for Trade and Development
CEPA Centre for Policy Analysis
CG-18 Consultative Group of 18
CIDE Contribuic ao de Intervenc ao do Domnio Econ omico
C.i.f. cost, insurance and freight (price)
CMO Common Market Organisation
CNPP Centre for Nutrition Policy and Promotion
COP C er eales, ol eagineux, prot eagineux (cereals, oilseeds, pulses)
COPA-COGECA Committee of Professional Agriculture Organisations General
Confederation of Agricultural Cooperatives in the European
Union
CPC Communist Party of China
CPE Coordination Paysanne Europ eenne
CRP Conservation Reserve Program
CRS Congressional Research Service
CSP Conservation Security Program
CSREES Cooperative State Research, Extension, and Education Service
CTBTO Comprehensive Nuclear Test-Ban Treaty Organization
CTE Contrat Territorial dExploitation (Territorial Contracts of
Farming)
DDT Dichloro-Diphenyl-Trichloroethane
DFID UK Department for International Development
DG Competition EU Directorate-General for Competition
DGAGRI EU Directorate-General for Agriculture and Rural Development
DGIS Dutch Ministry of Foreign Affairs
DP Democratic Party (Japan) opposition party
DSB Dispute Settlement Body
EAGGF European Agricultural Guidance and Guarantee Fund
EC European Community
ECLAC Economic Commission for Latin America and the Caribbean
EEC European Economic Community
EFTA European Free Trade Association
EIS Act Energy Independence and Security Act (2007)
EPA Environmental Protection Agency
EQIP Environmental Quality Incentives Program
ERS Economic Research Service of the United States Department of
Agriculture
list of abbreviations xxvii
ESEADE Escuela Superior de Economa y Administraci on de Empresas
ESU European Size Unit
EU European Union
EU12 the 12 original member countries in the EU
EU15 the 15 member countries in the EU prior to the accession of ten
candidate countries on 1 May 2004
EU27 the 27 countries currently members of the EU
EWG Environmental Working Group
FADN Farm Accountancy Data Network
FAIR Act Federal Agriculture Reform and Improvement Act (1996)
FAO United Nations Food and Agriculture Organisation
FAPRI Food and Agricultural Policy Research Institute
FCE Act Food, Conservation and Energy Act (2008)
FCS Food and Consumer Services
FDA Food and Drug Administration
FFI Family Farm Income
FGIS Federal Grain Inspection Service
FNS Food and Nutrition Service
F.o.b. free on board
FSA Farm Service Agency
FSIS Food Safety and Inspection Service
FSRI Act Farm Security and Rural Investment Act (2002)
FTA Free Trade Agreements
FTAA Free Trade Area of the Americas
FY scal year
G-10 Group of countries with highly protected agricultural sectors
G-20 Group of developing countries seeking reform of developed
country agriculture
G-33 Group of developing countries seeking to protect farmers
livelihoods and food security
G-77 Group of developing countries at the UN which collaborate on
economic and development issues
GAEC good agricultural and environmental condition
GAO General Accounting Ofce
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
GEF Global Environment Facility
GIPSA Grain Inspection, Packers and Stockyards Administration
GM genetically modied
GSI Global Studies Initiative
GSP Generalised System of Preferences
ha hectare
xxviii list of abbreviations
HEL highly erodible land
HNIS Human Nutrition Information Service
HNV High Natural Value
IATP Institute for Agriculture and Trade Policy
IATRC International Agricultural Trade Research Consortium
ICHN Ind emnit es Compensatoires de Handicap Naturels
(Compensatory Allowances in Disadvantaged Areas)
ICONE Instituto de Estudos do Com ercio e Negociac oes Internacionais
(Institute for International Trade Negotiations)
ICTSD International Centre for Trade and Sustainable Development
IDB Inter-American Development Bank
IEEP Institute for European Environmental Policy
IFOAM International Federation of Organic Agricultural Movements
IFPRI International Food Policy Research Institute
IICA Inter-American Institute for Cooperation on Agriculture
IISD International Institute for Sustainable Development
IMF International Monetary Fund
IRNA French Institute for Agricultural Research
IOE International Ofce of Epizoonoses
IPI Imposto sobre Productos Industrializados (Tax on
Industrialised Products)
ITCD Institute for Trade and Commercial Diplomacy
IUCN International Union for Conservation of Nature
JAs Japanese Agricultural Cooperatives
kcal kilo calorie
kg kilogram
LDCs Least Developed Countries
LDP Liberal and Democratic Party (Japan) ruling party
LDPt loan deciency payment
LFA Less Favoured Area
LIPU Lega Italiana Protezione Uccelli
m&s monitoring and surveillance
MAAPP Making American Agriculture Productive and Protable
MEP Member of the European Parliament
MERCOSUL Mercado Comum do Sul
MERCOSUR Mercado Com un del Sur
MFN Most Favoured Nation
MLA Market Loss Assistance
MPS Market Price Support
NAL National Agricultural Library
NASS National Agricultural Statistics Service
NEPA National Environmental Policy Act
list of abbreviations xxix
NGO non-governmental organization
NMS New Member States
NOP National Organic Program
NRCS Natural Resources Conservation Service
OAS Organization of American States
ODEPA Ocina de Estudios y Politcas Agrarias
OECD Organization for Economic Cooperation and Development
OMB Ofce of Management and Budget
OTDS overall trade-distorting support
PDRN Plan de D eveloppement Rural National (National Rural
Development Plan)
PEM Policy Evaluation Model
PFC Production Flexibility Contract
PHAE Prime Herbag` ere AgroEnvironmentale (agro-environmental
grassland payment)
PMPOA Programme de Matrise de la Pollution dOrigine Agricole (farm
pollution management programme)
PPLPI Pro-Poor Livestock Policy Initiative
PSA Packers and Stockyards Administration
PSE Producer Support Estimate
R&D Research and Development
RBCDS Rural Business and Cooperative Development Service (grassland
premium)
REPS Rural Environment Protection Scheme
RFIS Rice Farming Income Stabilisation
RFS Renewable fuel standard
RIETI Research Institute of Economy, Trade and Industry
RMB rembini (Chinese currency)
RSPB Royal Society for the Protection of Birds
RUPRI Rural Policy Research Institute
SAFER Societe dAmenagement Foncier et dEtablissement Rural
SARE Sustainable Agriculture Research and Education
S&D Special and differential treatment
SCMS Sub-Committee on Monitoring and Surveillance
SDT special and differential treatment
SFP Single Farm Payment
SGM standard gross margin
SMR statutory management requirement
SPS Single Payment Scheme
SPS Agreement Agreement on the Application of Sanitary and Phytosanitary
Measures
TAMS Total Aggregate Measurement of Support
xxx list of abbreviations
TBT Agreement Agreement on Technical Barriers to Trade
TEFAP Temporary Emergency Food Assistance Programme
TNC Trade Negotiations Committee
TRQ tariff rate quota
TSE total support estimate
TVA Tennessee Valley Authority
UAA usable agricultural area
UAE United Arab Emirates
UAL usable agricultural land
UK United Kingdom
UN United Nations
UNCED UN Conference on Environment and Development
UNCTAD UN Conference on Trade and Development
UNDP UN Development Programme
UNDTCP UN Development Training and Communication Planning
UNEP United Nations Environment Programme
UNIDO UN Industrial Development Organization
URAA Uruguay Round Agreement on Agriculture
US United States
USC United States Code
USDA United States Department of Agriculture
USTR United States Trade Representative
VEETC Volumetric Ethanol Excise Tax Credit
WAEMU West African Economic and Monetary Union
WAOB World Agricultural Outlook Board
WIC Special Supplemental Nutrition Program for Women, Infants
and Children
WRP Wetland Reserve Program
WTO World Trade Organisation
WWF World Wide Fund For Nature
WWII World War Two
1
Overview
christophe bellmann and jonathan hepburn
In 1957, at the twelfth session of the GATT Contracting Parties, held
at Ministerial level, a Panel of Experts, chaired by Professor Gottfried
Haberler, was established to review trends in international trade. The
Panel was asked to examine the effect of agricultural protectionism, uc-
tuating commodity prices and the failure of export earnings to keep pace
with import demand in developing countries. The 1958 Haberler Report
stressed the importance of minimising the effect of agriculture subsi-
dies on competitiveness, and recommended replacing price support by
direct supplementary payments not linked with production, anticipating
discussion on green box subsidies.
1
Three decades later, the simple notion of a shift from price support to
producer support was to become the backbone of an ambitious reform
of the global agriculture system. As Stancanelli notes, in the 1980s, high
administered prices paid to agriculture in industrialised countries led to
self-sufciency and the generation of large surpluses, which were chan-
nelled to the world market by means of export subsidies. As a conse-
quence, the scal cost of protective measures increased, both through
lower receipts from import duties and higher expenditure. This bud-
getary burden was further compounded by direct subsidies and the cost
of storing non-export surpluses.
At the global level, after two successive oil crises in 1973 and 1979, the
global economy hadentereda cycle of stagnationandrecession, combined
with mounting foreign debt in the developing world. The perception that
trade liberalisation could contribute to reversing this downward trend led
to calls fromacademic and political circles for a newround of multilateral
trade negotiations. The roundwouldopenupmarkets inservices andhigh
technology goods, and ultimately generate much-needed efciency gains.
With a view to engaging developing countries in the negotiations, many
1 See Stancanelli in this volume.
1
2 agricultural subsidies in the wto green box
of which were demandeurs of newinternational disciplines, agriculture,
textiles and clothing were added to the grand bargain.
2
In the run-up to the 1986 Punta del Este Ministerial Conference of
the Contracting Parties to the GATT, developed country farm groups
that had beneted from past protectionist policies strongly opposed any
specic compromise onagriculture. Inthis politically chargedcontext, the
idea of exempting production and trade-neutral subsidies fromreduction
commitments was rst proposed by the US in September 1987, echoed
one month later by the EU. The proposal appeared to have the merit of
providing an adjustment mechanism that could offset the potential losses
that farmers might incur as a result of the agricultural reform process. By
guaranteeing farmers a continuation of their historical level of support, it
also contributed to neutralising opposition to the round.
3
In exchange for
bringing agriculture withinthe disciplines of the WTOand committing to
future reduction of trade-distorting support, developed countries would
be allowed to retain subsidies that caused not more than minimal trade
distortion, on the basis that these could deliver various kinds of public
policy objectives.
In a eld so heavily riddled with controversy, this one fragile point
of consensus has been the hinge upon which an extraordinary reform
project has depended. Developed countries have indeed reduced their
trade-distorting subsidies since the end of the Uruguay Round, although
not by as much as their trading partners had hoped. At the same time,
domestic policy-makers have taken a number of tentative and precarious
steps down the road of decoupling agricultural support from produc-
tion, despite complex and fraught negotiations with constituencies at
home.
The 1992 MacSharry reform in the EU, which for the rst time intro-
duced set-aside schemes for crop production and agri-environmental
payments, was the rst illustration of this process. Since then, agriculture
support in the EUhas been signicantly decoupled from production, and
its focus has switched fromagriculture to the wider rural economy and the
protectionof the environment.
4
In2003, the CAPreformtargetedthe blue
box as an anachronismthat a number of the EUs trading partners wished
to see eliminated. As Swinbank notes, EU Agriculture Commissioner
Franz Fischlers response was to press for a further decoupling of area and
headage payments with the creation of the Single Payment Scheme (SPS).
A farmers entitlement would be based upon historic patterns of area and
2 Ibid. 3 Ibid. 4 See Swinbank in this volume.
overview 3
headage payments, but future payments would no longer be linked to
crops grown or animals kept.
5
In the US, the economic philosophy of decoupling began to play a role
in farm policy as early as 1981, culminating with the 1996 Freedom to
Farm legislation. Driven by high prices, strong exports, budget decits
and a Republican majority that eschewed government involvement in
the economy, the 1996 farm bill completely decoupled a portion of farm
payments fromproduction. The bill, which coincided with the conclusion
of the Uruguay Round, called for these payments to decline over a ve-
year period, in theory to give farmers time to adjust to market forces.
6
Since then, decoupled payments have remained an important part of US
farm policy even if the move toward decoupling has been stalled or even
reversed in the 2008 farm bill.
7
Overall, after 15 years of implementation of the WTO Agreement on
Agriculture (AoA), green box payments represent an increasing share of
agricultural support in the EU, the US and Japan.
8
Since the start of
notications in 1995, countries have been shifting support between the
boxes that were established in the Uruguay Round. By and large, these
shifts are in the direction implied by the AoA, namely from amber box to
blue box and fromamber and blue box to green box.
9
However, as an ever
greater proportion of subsidies are notied as green box, the success of
the Uruguay Roundbargainbecomes increasingly dependent onthe actual
and perceived integrity of the principles enshrined in the box system.
Green box subsidies must indeed cause not more than minimal trade
distortion if other WTO members are to accept the transfer of support
intothis category. Developedcountry citizens must alsoremainconvinced
that their governments are genuinely advancing environmental, social
5 Ibid. 6 See Tutwiler in this volume.
7 Tutwiler argues that: Green box measures in the United States have been increasing
and will continue to increase as a share of overall budget assistance to the US food and
agricultural sector . . . However, in terms of policy structure and payments to farmers, US
farmlegislation is continuing to move away fromdecoupled income support to re-coupled
income safety nets in WTO speak, away from green box and toward amber box, or
box shifting in reverse . . . after nearly 20 years of slow, steady, incremental moves toward
decoupling, it appears that the move toward decoupling may be stalled or may be thrown
into reverse by the 2008 farm bill.
8 The situation in Japan has been slightly different, as explained by Yamashita and Honma.
Japan had established an agricultural policy dominated by price support and high tariffs
on key products such as rice. While Japan has been allocating high levels of green box
subsidies in the form of general services, it still has to make a decisive shift away from price
support and towards direct payments to farmers.
9 See Ant on in this volume.
4 agricultural subsidies in the wto green box
and developmental objectives through the subsidies received by farmers,
if they are to provide the policy framework with their continued political
support.
In short, as green box subsidies come under closer international and
public scrutiny, policy makers will have to answer a series of questions
that are summarised by Ant on Lopez as follows:
Do impacts on production remain . . . in green box measures? If so, and
in the context of relatively high levels of green box expenditure, do these
impacts on production generate spill-over effects on other countries, par-
ticularly developing countries? Do developing countries have room in the
green box to develop policies that meet their own sustainable development
objectives? Can the green box rules be improved in order to reduce the
impacts on production? Is it always possible to achieve domestic objectives
with at most, minimal trade-distorting effects or effects on production?
Finally, it is also important to ask whether domestic objectives are
achieved with current green box programmes, and whether these objec-
tives are themselves well dened. The following sectionseeks to shed some
light on those issues.
Are green box subsidies trade-distorting?
A major concern surrounding green box subsidies is that payments may
not respect the fundamental requirement described in paragraph 1 of
Annex 2 of the AoA. As Nassar, Rodriguez, Costa and Nogueira point
out, the ndings of the WTO Panel in the cotton dispute between the US
and Brazil proved, for example, that direct payments for cotton farmers
a decoupled income support programme in the US did not qualify as
green box subsidies because farmers planting fruit, vegetables and wild
rice were not eligible for such payments. In other words, the scheme
discriminated among producers or agricultural products and therefore
could not qualify as a green box payment. According to Nassar et al, the
2003 CAP reformestablished similar restrictions on fruits and vegetables,
seemingly conrming some of the developing countries concerns.
Beyond the issue of compliance with green box criteria, the quanti-
cation of the economic impact of green box subsidies is an empirical
question which requires an analysis specic to each type of measure and
even each specic programme. As Ant on points out, there are solid argu-
ments in favour of the more decoupled payments based on land and
with more production freedom. However, a broad consideration of the
overview 5
economic effects of such programmes suggests that the absence of pro-
duction and trade effects is very unlikely. As Galpern and Doporto point
out:
box shifting of one dollar, for example, from the amber to green box will
have a smaller impact on production and trade. But the total amount of
the more decoupled support also matters: the impact of a reduction of one
dollar in a less decoupled subsidy may be more than compensated for by
the impact of a larger increase in a more decoupled subsidy.
While some programmes have remained relatively uncontroversial,
such as the provision of general services or domestic food aid, others such
as decoupled income support payments have attracted much criticism.
Looking at the 2003 Fishler reform in the EU, for example, Swinbank
notes that, for any particular year, payments under the Single Payment
Scheme are related to: the land area at a farmers disposal in that year; the
recipients status as a farmer; whether the land has been kept in good
agricultural or environmental condition; and whether various cross-
compliance requirements have been respected. All of these reinforce the
notionthat payments are relatedto, or basedon, the factors of production
employed.
The mechanisms through which decoupled payments may have trade-
and production-distorting effects have been studied in the literature.
10
These include wealth effects, when a guaranteed stream of income inu-
ences a producers willingness to plant; risk/insurance effects, which
reduce the perceived income risk from agricultural production activities;
or dynamic effects, including farmers expectations about future govern-
ment decisions on agricultural policy. Beyond green box programmes
themselves, de Gorter raises concerns related to cross-subsidisation: the
risk that subsidies on a production base indirectly nance losses on other
production, thereby generating an exit deterrence effect. In a similar vein,
GalpernandDoporto analyse the cumulative effect of greenbox subsidies
when producers receive simultaneously support classied under different
boxes, and argue that: Intuitively, one can expect that the accumulation
of subsidies may present a cumulative impact on the producers decision
of what and how much to produce. They also echo the proposal made
by the G-20, which argues that in the presence of distorting payments,
green policies do not properly perform their function. On the contrary,
10 See Ant on, Galpern and Doporto, de Gorter or Nassar, Rodriguez, Costa and Nogueira
in this volume.
6 agricultural subsidies in the wto green box
their neutral nature is being abused and they merely follow the general
orientation of the distorting policy.
Green box as a tool for development?
For several decades, agriculture in developing countries has suffered from
unfair competition due to heavily subsidised exports in developed coun-
tries, anti-competitive practices by multinationals and chronic under-
investment in infrastructure, research and development. The sudden
increase in food prices in 2007 and early 2008 has highlighted the need
to enhance agricultural production to generate the supply response nec-
essary to stabilise prices. With a vast share of their population depend-
ing on agriculture for their livelihood, developing countries face a set
of major challenges in this area. In short, they will have to produce
more food to meet the changing diet of a growing population, with less
water as urbanisation leads to more water being used in cities and,
in several cases, with lower productivity resulting from climate change,
including less precipitation, more extreme weather events and changes in
temperature.
An analysis of agriculture subsidy notications by developing countries
to the WTO shows that a large portion of their total domestic support
falls under the green box, and in particular under general services.
11
Nonetheless, the total amount spent and the amount this represents as
a share of agriculture GDP remains very low compared to developed
countries. In addition, most developing countries (and Cairns Group
members in particular) have decreased their green box spending over the
period for which they have submitted notications. Finally, as Dhar notes,
payments are highly concentrated among a few countries:
with the advent of China, the share of the top ve went up to more than
90 per cent, with China alone representing around 80 per cent of the
green box expenditure of all developing country members. An important
corollary of the above-mentioned observation is that the spending on this
form of domestic support was relatively insignicant for most developing
country members.
According to Xie, Chinas green box support in 1998 amounted to
US$18.35 billion very close to the ECs expenditure of US$18.5 billion
in 2001. However, support at the individual farmer level averaged only
11 See Nassar et al, Dhar, Oduro and Xie in this volume.
overview 7
US$280. This amount is not only far belowthe per capita support of devel-
oped countries, but is also lower than that of some developing countries,
including Argentina, Mexico and South Africa. From the perspective of
general economic theory and sustainable development, Xie argues that
Chinas green box subsidies have been unevenly distributed, and highly
concentrated on infrastructural services and on public stockholding for
food security purposes. While this structure was appropriate for improv-
ing comprehensive production capacity and ensuring food security, it
was relatively inefcient, and delivered comparatively limited benets to
farmers. In spite of these shortcomings, green box support is likely to play
a major role in Chinese agriculture policy. As income disparity between
cities and the countryside increases, this support will be critical in avoid-
ing massive migrations to the cities and in helping China to feed its
22 per cent of the worlds population with only 7 per cent of global
arable land.
African countries are spending less on agriculture than other develop-
ing countries, despite the possibilities that the green box measures offer
for increased spending. Generally, the less intensive use by developing
countries has been attributed more to a lack of resources and lack of
ongoing domestic reform processes than to constraints imposed by the
green box criteria on policy design.
12
Interestingly, Oduro notes that this
declining trend in agricultural spending is occurring within the context
of rising total public sector spending in many African countries. She
attributes this declining share to the emphasis that poverty reduction
strategy papers place on social sector spending as opposed to agriculture.
In this respect, several authors concur in saying that developing coun-
tries have been constrained not only by real nancial constraints, but also
by certain disciplines that have prevented them from designating their
support as green box compliant.
13
These constraints apply particularly
to provisions governing the use of public stockholding for food security
purposes, disaster relief or regional assistance programmes. Such pro-
grammes are of critical importance to most developing countries, and
have nonetheless only been used by a few members.
14
12 See Oduro in this volume. 13 See Dhar and Oduro in this volume.
14 Oduro argues, for example, that, in the case of payment for relief from natural disasters,
the initial requirement that the production loss should exceed 30 per cent is particu-
larly stringent for small-scale farmers for whom a much smaller production loss could
have a signicant impact on their incomes and welfare. She also recommends exempt-
ing developing countries from the condition that payments under regional assistance
programmes can only be made when a disadvantaged region is a clearly designated
8 agricultural subsidies in the wto green box
Do green box subsidies help to protect the environment?
Thriving wildlife, beautiful landscapes upon which rural tourism
depends, clean water and well-functioning watersheds are all products
of agriculture. As Brunner and Huyton point out, wider society values
these services, but they have no market value. This results in a market
failure in which suboptimum levels of these public goods are delivered,
resulting in biodiversity decline, water pollution and degraded landscapes
and soils. In this context, the question is not so much whether govern-
ment intervention is needed, but rather whether green box subsidies are
the most effective tools in delivering these public goods?
Since the 1980s, agricultural subsidies have become a large compo-
nent of farmers incomes and consequently of land-use decisions. The
way in which these subsidies are allocated plays a major role in shap-
ing land-use patterns, particularly in the EU and US, and therefore
has important impacts on the environment in rural areas. According to
Steenblik and Tsai, amber box subsidies often create the strongest incen-
tives for increasing outputs, intensifying the use of chemical inputs, and
thus negatively affecting the environment. In principle, reducing amber
box expenditure and increasing green box expenditure should be good
for the environment. As described by Cavero, modern agricultures con-
tribution to greenhouse gas emissions is symptomatic of this reality. The
production of fertiliser is not only an energy-intensive process; it also
acidies the soil, requiring the regular application of lime by farmers,
the production of which in turn produces more carbon dioxide. Fur-
thermore, fertilisers have the effect of suppressing microorganisms in
the soil that otherwise break down methane in the atmosphere. Organic
agriculture is probably one of the best alternative production methods
available to farmers, insofar as it potentially allows them to reduce their
greenhouse gas emissions, whilst at the same time enhancing sustainable
agricultural practices. In most cases, however, these production methods
are not economically viable and require support from the government.
In the EU, the 2003 reform was the most important for the envi-
ronment. The decoupling of agricultural support from production not
contiguous geographical area with a dened economic and administrative identity. She
advocates explicit provision for spending to address land reform and farmer settlement
programmes in general and proposes, in the case of public stock holding, the striking out
of the requirement that the difference between the acquisition and external reference be
included in the calculation of the Aggregate Measure of Support. Proposals along these
lines have indeed been under extensive consideration at the WTO, and appear likely to
be adopted as part of an eventual Doha Round agreement.
overview 9
only removed the perverse incentive to over-produce, but established sev-
eral schemes with explicit environmental objectives. For Brunner and
Huyton, such environmental programmes are only effective if they have
clear objectives that are expressed in terms of measurable outcomes and
targets, in order to promote greater understanding of agricultural support
and assess its effectiveness. The authors argue that: It is clear from the
agri-environment experience in the EU that without strict rules to ensure
its proper use, the tool will be abused both accidentally and wilfully, as a
means for disguising income or even production support. This applies
particularly to cross-compliance payments, which ostensibly are made to
farmers for conforming to certain minimal environmental requirements:
in most cases, the demand these standards place on farmers, and con-
sequently the benets they deliver, are disproportionately small relative
to the size of the payments. The authors report that, on a 181-hectare
arable farm in Cambridgeshire, England, it was calculated that the costs
of implementing cross-compliance were approximately 75, although the
farmnonetheless received some 27,000 indirect payments. It is therefore
easy to conclude that the direct payment scheme as currently congured
is much less focused on maintaining environmental standards than it is
on improving farm incomes.
Looking at US green box payments, Jane Earley goes further and argues
that:
US green box payments may have perpetuated environmental problems if
they have not actually been themselves the source of environmental harm,
in that:
r
direct payments stimulate some production (even if unintended),
including on marginal lands, and reward annual row crops over peren-
nial ones;
15
. . .
r
regularly awarded disaster assistance most likely encourages continued
production on marginal lands, as perhaps does some farm credit;
r
Conservation Security payments have been awarded without a showing
of additionality from producers and the program has been chronically
underfunded;
r
most conservation payments go to large producers who are more likely
to use them to maintain production than to retire land, and perpetuate
grain and oilseed cropping.
15 Earley notes, however, that: while it is likely that increased production will have these
effects, it is not likely that direct payments will have as much of an effect on increased
production as other market forces, like high commodity prices. These have most recently
been associated not with direct payments, but with energy, specically biofuels mandates,
and high oil prices.
10 agricultural subsidies in the wto green box
In this context, Earley argues that green box programs for reduced
adverse environmental effects could be approached by additional limita-
tions on green box programs, or by redesign of the programs themselves.
She adds that these programmes are not for the most part the subject
of environmental impact assessment in terms of their domestic effects,
and assessment of extraterritorial or transboundary effects are totally
lacking.
In the same vein, several authors
16
have highlighted limitations in
the green box criteria from an environmental perspective. For Steenblik
and Tsai, some policies are less cost-effective than they might otherwise
be, because they have been designed to conform with green box criteria
rather than to achieve an environmental objective. Similarly, Brunner and
Huyton note that traditional or organic farming will continue to require
some form of direct payment if they are to remain economically viable
and thus continue to deliver the environmental and social benets which
they normally provide. However, the green box requires environmental
payments to be based exclusively on the extra costs or loss of income
involved in complying with the government programme. Although this
formula canwork inintensive agricultural landscapes where payments are
being made for some formof extensication, it is much harder to apply to
situations where the benets are already being delivered and there is very
little income in the rst place. In other words, it is also good economic and
environmental sense tofocus conservationefforts onmaintaining existing
biodiversity rather than losing it and paying to recreate it in the future.
The same logic is applied when Earley argues that such limitations on
greenbox criteria are not helpful tofuture efforts torewardenvironmental
performance, in particular for carbon sequestration.
Examining environmental payments from a developing country per-
spective, Nassar et al ask a more fundamental question:
As farmers in developed countries receive payments to adhere to envi-
ronmental restrictions . . . their governments are assuming environmental
damages (i.e. negative externalities) for farmers, while for other sectors
this is usually not the case in those countries. It is also not the case for
farmers in developing countries.
A similar concern is raised by Josling and Blandford on the issue of
biofuels. As they point out, biofuel subsidies have an uncertain place in
the WTO, falling somewhat between agricultural and industrial subsidies.
16 See Brunner and Huyton, Earley or Steenblik and Tsai in this volume.
overview 11
The a priori assumption is that subsidies that expand corn and soybean
production are ill-suited for the green box, insofar as they are targeted at
specic crops.
However, stepping back from that argument gives a different perspec-
tive. In fact, as they note:
payments that take crops off the food market and into the energy mar-
ket would in normal circumstances be seen to be helping to reduce
the oversupply of farm products and raise agricultural prices. From this
point of view, why should other activities that are included under rural
development policies (for example, the development of ecotourism) be
encouraged and rewarded but biofuel production penalized?
Arguably, the green box was designed for the support of public goods.
Josling and Blandford ask whether the case could be made that ethanol
and biodiesel are benecial to society and should be encouraged. The
question then becomes howto encourage biofuels without discriminating
against importedsources of, say ethanol fromBrazil, or without providing
an incentive to export biofuels.
17
WTO members would thus need to
consider whether to allow countries to include in the green box those
biofuel subsidies that cause minimal distortion of production and trade,
while excluding other forms of subsidies.
18
Rural development and equity
The shift towards decoupled supports designed to sustain farm incomes
and the wider rural economy responds partly to a genuine public concern
for the welfare of small farmers and the need to promote equity. Put
bluntly, direct payments should ensure that more of the money spent
by taxpayers reaches farmers. As green box support comes under closer
public scrutiny, this raises the issue of the distributional structure of
green box subsidies. As Cavero argues, it is difcult politically to defend
to taxpayers a system that absorbs 50 per cent of the European budget,
17 Josling and Blandford also note that even if the distortions created by such payments in
agricultural markets are not great, they promise to create distortions in global energy
markets and consequently threaten the global trading regime.
18 Josling and Blandford suggest, for example, that: Expenditures on research and develop-
ment that benet feedstock production and use would already be eligible for inclusion in
the general services category. Investment grants, loan guarantees and other similar mea-
sures designed to promote investment in the production and use of biofuel feedstocks
and biofuels could also be dened to be green-box compatible, even though these will
inevitably have an impact on the production of feedstocks.
12 agricultural subsidies in the wto green box
benets roughly 2 per cent of the population and concentrates 80 per
cent of support on 20 per cent of farmers. Honma provides an interesting
viewpoint on this issue, arguing that if Japanese agriculture is to become
competitive, direct payments should be targeted to large-scale farmers, as
these producers are expected to become the core of Japanese agriculture
in the future.
To the contrary, others have advocated focusing payments on small
farmers who really need them. Examining the US payment structure, de
Gorter nds, for example, that:
the distribution of farm payments is skewed towards the large farm that
needs the government payments less. Large farms derive a disproportionate
share of their farm income from government payments in total . . . Large
farms make signicant income from farming and so should not need
taxpayer support as much as small farmers, yet the former receive by far
the largest share of payments.
Interestingly, de Gorter notes that there is no clear pattern of regressivity
in regard to environmental payments. Overall, the pattern of payments
is far less distorted than that for the other subsidies. Recent assessments
of the CAP reform tend to show that in most EU countries the benets
of farm programmes were, de facto, passed on to the owners of primary
factors such as land or production rights, whereas labour only keeps a
fraction of the support.
19
In this context, Cavero argues that to tackle properly the needs of
small farms, direct payments should not be based on historical acreage
or anticipated crop yields, but rather on the basis of a farmers nancial
need. She notes that a cap on payments, imposing upper and lower
limits, is one obvious measure that can be taken such as the 300,000
maximum subsidy per recipient suggested by EU Agriculture and Rural
Development Commissioner Mariann Fischer Boel. Cavero points out
that this would affect 0.04 per cent of farms, mostly in Germany and the
UK, releasing close to 1billion.
The way forward
As levels of overall trade-distorting support come down further, subsidis-
ing governments are inevitably going to have to agree to a more rigorous
and detailed discussion of green box criteria. Insofar as they relate to the
19 See Bureau and Mah e, CAP Reform beyond 2013: An Idea for a Longer View, Notre
Europe, Studies and Research No 64 (2008).
overview 13
economic, social and environmental basis of agricultural production, the
emerging framework of rules in this area will continue to affect a cross-
section of interest groups in both rich and poor countries. The WTO
mandate for a review and clarication of green box criteria as part of
the Doha Round of trade negotiations can be interpreted as a concern
to maintain the integrity of the green box category. Fears that the green
box was becoming a mere front for governments who simply wished
to provide unlimited amounts of income support to their agricultural
producers, albeit beneath a veneer of respectability, have in fact found
expression in a multitude of calls for revision, reform and change. These
included proposals for capping, reducing or eliminating different kinds
of green box support; expanding the green box to include non-trade con-
cerns such as animal welfare; or allowing developing countries to include
support to products representing less than a certain percentage of world
trade.
20
As negotiations evolved:
the resistance of importing countries to many of the more far-reaching
proposals put forward by exporting countries, combined with the resis-
tance of the latter to any dramatic expansion of the green box to address
additional non-trade concerns, has meant that the negotiations have in
the end focused heavily on relatively non controversial modications that
will provide greater exibility to developing countries.
Clearly, proponents of further liberalisation in agriculture such as the
Cairns group or the G-20 have allocated most of their negotiating capi-
tal to the reduction of the more trade-distorting subsidies. While many
negotiators admit that their country has decided to drop some of these
proposals in the interests of obtaining a Doha Round agreement, there
are reasons to believe that many of the underlying concerns remain and
will have to be addressed in the future, perhaps as part of a post-Doha
built-in agenda.
21
In the short term, given that improvements in the disciplines are not
likely to take place in the Doha Round, Nassar et al argue that green box
criteria could be reinforced through panels and litigation. Similarly, for
de Camargo and Henz, litigation, although not considered a preferred
way to build a multilateral system of rules and disciplines, must be an
integral part of developing countries strategies in the quest for a less
distorted, more sustainable trade environment. In fact, as an increasing
proportionof subsidies are being categorizedas greenbox payments, poor
20 See Hepburn and Bellmann in this volume. 21 Ibid.
14 agricultural subsidies in the wto green box
compliance with existing criteria is at least as important as the adequacy
of the criteria themselves. For Cerda, the combination of inadequate cuts
indomestic support and shortcomings inthe noticationand monitoring
mechanism make the existing system particularly inefcient.
Deciencies in the current monitoring mechanismrelate both to delays
in notications and the type of information provided by members on
their green box programmes. In the case of the EU, for example, Chatel-
lier stresses that notication reports do not specify how the green box is
divided between Member States, and there is no information provided
on the method used by Member States and/or organisations of the Com-
mission in declaring how certain national payments come to be included
in the green box. Comparing these gures with national data in the case
of France, he also nds that national public expenditures which theoreti-
cally should fall into the green box appear to be higher than those found
in EUnotications. For Cerda, an effective monitoring mechanismwould
require:
full transparency, by making explicit all eligibility criteria and the specic
ways in which these are respected, and by providing as much information
as possible on type, volume and area of production of payment recipients,
starting from base levels. For example, countries should be able to prove,
with evidence, that all relevant land uses are allowed for recipients of
green box payments, or, in the case of adjustment programmes involving
resource retirement, that the amount of resources expected to leave the
sector do effectively leave it.
She also suggests stronger provisions establishing clear schedules,
incentives to meet deadlines, punishment for non-compliance and
enhanced responsibilities for the Secretariat and the Committee on
Agriculture.
In the longer term, several authors
22
consider that any signicant
reform implies a new approach to domestic support as a whole, mov-
ing away from the existing three independent categories (amber, blue and
green). The Uruguay Round only achieved limited results in reducing
trade-distorting subsidies, but it managed to bring agriculture under the
disciplines of the newly created WTOand set the stage for progressive lib-
eralisation with the objective of establishing a fair and market-oriented
agricultural trading system. As trade-distorting measures are phased out,
including export subsidies and the amber and blue boxes, the subsidies
chapter of the AoAshould progressively be inserted into the general WTO
22 See Nassar, Rodriguez, Costa and Nogueira or de Camargo and Henz in this volume.
overview 15
framework, these authors argue. The remaining domestic support would
thus include green box measures, paragraph 6.2 (special and differential
treatment) and a de minimis clause: these would be inserted in the
Agreement on Subsidies and Countervailing Measures (ASCM). Under
this scenario, de Camargo and Henz argue that a reviewed and improved
green box classied as non-actionable subsidies in Part IV of the ASCM
would become the central element of the WTO agriculture disciplines as
the only support accepted at the end of the reform process.
This approach raises a fundamental question about the underlying
purpose of the greenbox. Are greenbox subsidies a temporary adjustment
tool designed to allow farmers to adapt to the market and facilitate the
reform process? In which case government programmes should probably
be time-limited. Or do they instead perform a permanent function of
correcting market failures and delivering essential public goods associated
with agricultural activities?
Tutwiler notes that:
the concept that tax revenue should provide for public goods that are
available to the citizenry as a whole and not be transferred to a few private
citizens or public money for public goods has become a mantra in
European policy reform circles, but did not take hold in the United States.
The notion that public spending be used to support the economic vitality
of rural areas or to promote environmental sustainability did not garner
sufcient support either.
Under the 1996 Freedom to Farm legislation, considered as the golden
age of decoupling in the US, direct payments were supposed to provide
farmers witha transitiontothe market, declining over time andeventually
falling to zero. While hailed as a victory for decoupling, Freedom to Farm
did not last long, as Tutwiler points out. When prices began to fall in
1998, the farm community demanded emergency relief. The 2008 farm
bill arguably continued to reverse the trend towards decoupling. As Orden
notes, a large-scale buyout was not on the political agenda for the near
term when the 2008 farm bill was considered by Congress. Instead, the
prospect was for incremental reforms along the messy cash-out line or
for possible reversion to support programs more coupled to production
incentives.
From a sustainable development perspective, the notion of targeted,
non-trade-distorting state interventions to address market failure and
deliver essential public goods is clearly more attractive. It does, how-
ever, raise a few questions. Firstly, are direct payments the best tool for
16 agricultural subsidies in the wto green box
achieving social and environmental goals? And should it be permissible
for subsidies such as decoupled income support payments or investment
aids to continue to subsidise production on some of the worlds largest
and most protable farms? Secondly, the possibility of permanent gov-
ernment support linked to the provision of public goods inevitably raises
the issue of inequity between developed and developing countries, given
that the latter probably will not have the resources to deliver those public
goods. This calls for a wider debate at the multilateral level going beyond
trade negotiations per se and involving the notion of cross-border nanc-
ing mechanisms as an integral part of any future international institu-
tional arrangements. Unless governments are able to provide meaningful
answers to these kinds of questions, they arguably risk undermining the
entire structure of agricultural policy reform on which the long-term
stability of the broader multilateral trading system depends.
PART I
The recent evolution of agricultural
trade policy reform
2
The historical context of the green box
n estor stancanelli
Some history
The International Economy
The long-termgrowth and compositionof international trade depends, at
the economic level, upon changes in demand and, ultimately, production
patterns, and at the political level, onthe interactionof conicts of interest
and cooperative efforts among different national states and regions. The
General Agreement on Tariffs and Trade (GATT), from its inception
after the Second World War, and the World Trade Organization (WTO),
from 1994 onwards, are clear examples of the struggle to reign over these
conicts of interest and, at the same time, toadapt multilateral institutions
to the changing patterns of the international economy. Agriculture by
itself is an ideal eld of research to test these changes in demand and the
political interaction already referred to.
From an economic point of view, for more than 60 years after the crisis
of 1929, farming production was affected by decreasing income elasticity
of demand, meaning that its share in total consumption diminished at
the same time as income grew. This process, which can be called the
autonomous trend of demand, led to changes in world relative prices
(terms of trade) between agriculture and manufactured goods.
The adjustment in supply that should have followed as a result of this
change was nevertheless not automatic, depending on the commercial
policies followed at the national level. Where there was an organized
resistance by social groups to defend their positions and the means by
which the state and society met the relevant costs thereof, the results
were different from the decrease in production that should have ensued
as a result of falling prices. In industrialized countries, the resistance
of farmers and connected groups thereto, together with political, secu-
rity, environmental and employment reasons, led to acceptance of the
19
20 agricultural subsidies in the wto green box
demand for protection, thus shirking the structural adjustment which
would otherwise have resulted from the change in demand patterns. This
process that has strong political content may be described as a trend
induced by protectionism.
The isolation of markets resulting from the adoption of protective
measures raised the domestic prices of agricultural products. At the inter-
national level, the decline in demand as a result of closing markets exac-
erbated the deterioration of the relative prices of agricultural products in
comparison with those of manufactured goods, energy and services. This
situation is clearly illustrated by the protective policies adopted during
the 1929 crisis, which was preceded and accompanied by various forms
of legislation specically aimed at agriculture. The GATT prolonged the
situation of the 1930s in the agricultural sector by allowing domestic
markets to be isolated from the world market, including the possibility of
setting prices beyond the level required to achieve self-sufciency through
the escape valve of export subsidies.
The consequences of the induced trends were not evident until the
end of the 1950s due to the reconstruction of the European and Japanese
economies following the Second World War. They then intensied in
the two subsequent decades, and became glaringly obvious during the
1980s and 1990s. The high domestic prices paid to agricultural producers
in industrialized countries generated large surpluses, which were chan-
nelled to the world market by means of export subsidies. This caused a
steady decline in the foreign currency earnings of developing countries
dependent on agricultural exports, through lower prices and the discour-
agement of their domestic production. In the case of the countries that
imported food and raw materials, their dependence on imports increased
and the deterioration of the external sector and the misallocation of
economic resources heightened. Since price support and subsidies were
directly related to production and exports, as the isolation of markets
led to self-sufciency and the generation of surpluses, the scal cost of
protective policies increased, both through lower receipts from import
duties and higher expenditures demanded by support aimed at bridging
the widening gap between rising domestic prices and production and
falling world prices. This budgetary burden was further compounded by
direct subsidies (deciency payments) and the cost of storing non-export
surpluses.
The cost of supporting agricultural production, which reached consid-
erable dimensions in most of the OECD countries, had an inationary
effect both directly and indirectly through the distortion of resource
the historical context of the green box 21
Table 2.1 World trade by sector (US$ 000,000,000 and percentage of
total world exports)
1950 1990
Sector Value % Value %
Agriculture 28.0 45.9 449.0 12.0
Mining and Energy 9.0 14.8 448.0 12.0
Manufactures 24.0 39.3 2,834.0 76.0
Total 61.0 100.0 3,731.0 100.0
Source: International Trade and Development Statistics 19501992
(UNCTAD); International Trade Statistics 1992 (GATT).
allocation in the economy. The inationary impact of these and other
distortions in the economy had to be curbed by means of restrictive mon-
etary policies, which led to higher interest rates and increasing debt pre-
miums for the countries with external sector difculties. It was precisely
these countries, basically exporters of agricultural products and primary
commodities, whose foreign-exchange earnings traditionally declined as
a result of the trends induced by protectionism. During the 1970s and
the beginning of the 1990s, periods of high international liquidity and
the possibility of getting into debt, with the nancial market acting to
offset the decline in export earnings, provided the means for maintaining
their levels of imports and domestic economic activity. Once this possi-
bility was exhausted, those countries began adjustment processes based
on lower domestic and import demand, adversely affecting the growth of
the international economy as a whole.
This scenario, which overhung the negotiations during the Uruguay
Round, was very different from what present trends in international
demand suggest. For the rst time in decades, consumer demand for
food and other agricultural products is growing faster than supply as a
consequence of the irruption of China, India and other high-populated
Asian countries as big importers.
The dynamics of the long-term trends in agricultural trade up to the
Uruguay Round can be observed in tables 2.1 and 2.2 on the evolution of
world trade by sector and on the changing structure of net agricultural
importers and exporters, respectively.
As table 2.1 shows, from being the largest export sector in 1950, agri-
culture had by 1990 come to represent only slightly more than one-sixth
22 agricultural subsidies in the wto green box
Table 2.2 Net importers and exporters of agricultural products
(US$ 000,000,000 and percentage of total imports)
Net Effect
on Demand
1970
(i)
1990
(i)
1990
(i)
Value % Value % Value %
1. Developed Countries 11.3 16.2 6.7 1.5 65.7 14.7
United States 1.7 2.4 23.7 5.3 13.0 2.9
EEC 12.7 18.2 17.4 3.9 63.9 14.3
Japan 5.5 7.9 47.8 10.7 12.5 2.8
EFTA 0.2 0.3 1.8 0.4 3.1 0.7
Other 5.4 7.8 33.0 7.4 1.8 0.4
2. East and Central
Europe & China 0.5 0.7 10.8 2.4 7.6 1.7
3. Developing Countries 11.8 16.9 17.5 3.9 58.1 13.0
Africa 3.7 5.3 3.6 0.8 27.3 6.1
Asia 1.7 2.4 7.2 1.6 17.9 4.0
Latin-America 6.4 9.2 28.3 6.3 12.9 2.9
4. World 0.0 0.0 0.0 0.0 0.0 0.0
Source: Yearbook of International Commodity Statistics 19861992 (UNCTAD).
(i)
The minus sign () in the rst two columns indicates net imports. When there
is no sign, the numbers refer to net exports.
of the value of industrial exports, falling from a share in total world trade
of 45.9 per cent in 1950 to 12.0 per cent in 1990. This was the result
both of a decline in the terms of trade in comparison with manufactured
goods and lower volume growth. In the four-decade period after 1950, the
growth in the volume of agricultural trade was well below the average for
all goods, and much lower than that of manufactured goods. The same
applies to output, reecting the evolution of demand on a long-term
basis. A major point arising from the comparison with mining products
and manufactured goods relates to the ratio between the rate of growth of
agricultural trade and production, which was also the lowest for the three
aforementioned sectors. This coincides with the enforcement of policies
of self-sufciency and the creation of surpluses, particularly in place after
the 1960s.
Table 2.2 illustrates the net effect on agricultural trade by value in the
19701990 period adding up imports and exports. The gures show that
the historical context of the green box 23
the industrialized economies integrated in the OECD, which accounted
for 16.2 per cent of net imports in 1970, dropped to a mere 1.5 per cent
in 1990. In terms of import values, this latter gure was US $65.7 billion
less for 1990 compared to the value that would have been generated if the
share recorded in 1970 had been maintained. The EU alone diminished
its share as net importer of agricultural products from18.2 to 3.9 per cent,
giving way to lower net imports of US $63.9 billion for 1990 in respect
of its participation in 1970. On the other hand, developing countries
saw their share as net exporters fall from 16.9 to 3.9 per cent between
1970 and 1990. Thus, they lost, only in the latter year, US $58.1 billion in
comparisonwithwhat wouldhave beentheir positionif they hadmanaged
to keep their participation of 1970. African developing countries suffered
the highest loss, shifting from a solid position as net exporters in 1970
to net importers. A similar change was observed in Asian developing
countries, although a little more moderate. Latin America, in spite of
losing one-third of its share, continued to be a substantial net exporter in
1990.
The net effect in the nal column has been calculated by multiplying
the difference between shares in 1970 and 1990 by total imports during
the latter year. The minus sign () indicates loss of demand because of
a smaller share in imports or a higher share in exports. When there is
no sign, the numbers indicate increasing demand due to lower share in
exports or higher share in imports.
The trading system
The consequences derived from protectionist and distorting policies in
agriculture and the need to redress them have been an object of study and
debate since the beginning of the GATT, but it was not until the Uruguay
Round that comprehensive negotiations were held and a concrete result
was achieved. In 1957, at the twelfth session of the contracting parties,
a Panel of Experts, chaired by Professor Gottfried Haberler, was set up
to examine international trade trends, assess their future and prepare a
report and suggestions for furthering the objectives of the multilateral
trading system.
The report of the panel highlightedthat a small reductionof production
or increase inconsumptionof agricultural products inNorthAmerica and
Western Europe, by a moderation of their protectionist policies, would
enable them to increase their imports considerably, in view of the size of
their domestic markets. It criticized their domestic and export subsidies
24 agricultural subsidies in the wto green box
policies, which had an adverse impact on competitive producers around
the world.
The report stressed the importance of structural adjustment measures
to minimize the harmful effects of agricultural protectionism on con-
sumption. It recommended replacing price support by direct supplemen-
tary payments not linked with production, anticipating what the green
policies under discussion in years to come would be.
It concluded by saying that the entire system of liberalization of inter-
national trade based on the GATT would be seriously jeopardized unless
a solution to the problems of primary producers was found, which was
almost exclusively in the hands of the highly industrialized countries.
The intensive work carried out as an aftermath of this report did
not produce practical results, and for more than two decades its recom-
mendations were not examined or thoroughly analyzed. In the rounds of
multilateral negotiations that followed(Dillon, Kennedy andTokyo), agri-
cultural concessions were negotiated among contracting parties, without
touching the policies in force. The Agreement on Subsidies and Counter-
vailing Measures signed in the Tokyo Round included disciplines on the
use of subsidies in the agricultural sector, but their lack of precision led
at a later stage to divergent interpretations among members.
In1982, the Ministerial Conference of the contractingparties decidedto
instrument a programme of work that, among different subjects, included
trade in agriculture. It called for recommendations on all measures affect-
ing trade, market access, competition and supply, taking into account the
need for a balance of rights and obligations under the GATT and the sit-
uation of developing countries. To attain these objectives, the Ministerial
Declaration established a Committee on Trade in Agriculture, which was
to submit recommendations to the contracting parties at their Fortieth
Session in 1984.
The Committee carried out an in-depth analysis of the problems of
the agricultural sector and formulated proposals to resolve them. It made
a number of recommendations, contained in document L/5753 of 1984,
which were adopted by the contracting parties. Among these was the sug-
gestion that all subsidies affecting trade in agriculture should be brought
within the purview of strengthened GATT rules and disciplines.
The work programme of the 1982 Ministerial Declaration and the
implementation of the undertakings made came to nothing. From 1983
onwards, there was a growing movement to launch a new round of
multilateral negotiations. As this movement gained strength, it sapped
the progress of the work carried out within the framework of the 1982
Ministerial Declaration. Nevertheless, the Ministerial undertakings served
the historical context of the green box 25
as a basis for establishing the scope of the negotiations, which, for the rst
time, focused on non-tariff questions; in other words, on the structural
aspects hindering the development of international trade. After almost
three decades, agriculture acquired a central role in multilateral negotia-
tions.
The political economy of the negotiations
Before going into the specics of agriculture and green policies in the
Uruguay Round, it is worthwhile to consider briey the economic envi-
ronment and the purposes of the main political forces behind the push
for a new multilateral trade exercise.
After two successive oil crises in 1973 and 1979, a cycle of stagnation
and recession started and extended itself over the next 10 years. It espe-
cially impacted on developing nations, particularly the countries of Latin
America and Africa that registered average annual falls in their respective
GDPs of 0.5 and 0.9 per cent during the 1980s. The main features of the
situation were the high unemployment of production factors (physical
capital and labour), the scarcity and concentration in few markets of
nancial capital, the huge twin decits (scal and current account), and
the mounting foreign debt of developing countries and the deterioration
of the scal and balance of payments positions in some of the major
economies, namely the US.
One important point differentiated the US from the other economies
of the OECD: the role of the dollar as reserve currency and instrument
for international trade and nancial transactions. Due to the conicting
objectives of the Federal Reserve ghting ination and promoting full
employment frequent movements of interest and exchange rates were
produced, negatively impacting on investment expectations and adding
up to the general economic uncertainty.
This evolution of the international economy prompted academic and
political discussions with a view to facing the downturn and reverting the
negative cycle. The role that trade could play onthis led to a push for a new
round of multilateral negotiations; it was argued that the opening up of
markets would give more predictability and condence to business, and
would thus help to restore growth. The round was seen in political and
business circles as an opportunity to expand the world market, especially
for high-technology goods and services where the central economies had
a competitive edge. A bigger scale of production was necessary to gain in
efciency and generate additional rent. The problem was how to engage
developing countries in negotiations that included said sectors when
26 agricultural subsidies in the wto green box
there was a programme of work launched by the Ministerial Conference
of GATT of 1982 concentrating on trade in the traditional sectors. It
was imperative to offer developing countries something meaningful in
exchange for liberalization in the new sectors. The reduction of import
barriers anddistortions inagriculture, textiles andclothing was the logical
trade-off considering that developing countries, being the most efcient
producers, had a clear interest in that area.
The movement towards the multilateral trade negotiations presented a
three-pronged strategy, at the domestic, bilateral and multilateral levels.
Domestically in developed countries, the building up of support for the
round was sustained on adjustment and compensatory policies that cov-
ered the losses incurred by farmers, entrepreneurs and workers employed
in agriculture and other traditional sectors. The purpose was to neutralize
their opposition to the change in policies by guaranteeing their historical
amount of receipts. The MacSharry Reform in the EU, approved late in
the round, was a clear demonstration of this. The action by the offen-
sive domestic interests to convince parliaments and the public opinion of
the advantages of opening up high-tech and service markets around the
worldsupplementedthe former defensive action. Indeveloping countries,
the traditional sectors played the offensive role, while the representatives
of the new sectors did not form constituencies strong enough to deter
authorities from joining the upcoming negotiations.
Bilaterally, the US exerted a strong leadership promoting and pressing
in favour of a new round. The Congress and the business sector (farming,
industrial and service coalitions) accompanied the Administration in the
persuasion task aimed at the main commercial partners. Japan and the
EEC helped this process, albeit not as enthusiastically as the US due to
the misgivings of their respective farming communities towards trade
negotiations.
On the multilateral front, the nancial multilateral institutions, the
IMF and the World Bank, supported the GATT Secretariat with analysis
and research on the advantages of a new round for the world economy.
The three institutions developed a gradually closer relationship that man-
ifesteditself, amongst other things, inthe regular study of the interrelation
between trade, nance and monetary policies. The Consultative Group of
Eighteen,
1
chaired by the Director General of GATT, Arthur Dunkel, was
1 The CG-18 was created in 1975 to follow international trade developments and forestall
sudden disturbances to the multilateral trading system. It met at ministerial and high
ofcials level. Amongst its members were Australia, Canada, the EU, Japan, Switzerland,
the Nordic Countries, Korea, Argentina, Brazil and India.
the historical context of the green box 27
instrumental in the consideration of this connection, leading to impor-
tant and targeted discussions on the matter. From these discussions, two
main visions were elaborated.
One of them analyzed the trading system and world economic affairs
froma static point of view. It stated that trade benets arose fromchanges
in the productive mix towards technological sectors less exposed to com-
petition and hence rendering monopolistic or oligopolistic prots. The
main questions posed to this model related to the amount of resources
needed to nance technological change and the receptive market for
high-tech products and services in a context of low growth and serious
imbalances of income distribution between countries. Some participants
pointed at the risk of tensions and bilateralism that this kind of approach
to trade negotiations would have implied if pushed ahead.
The second vision stressed the point of viewof economic dynamics and
the importance of expanding markets to further trade specialization and
increase the participation of developing countries in the world economy.
It pervaded the spirit of the Uruguay Round, but was an unnished busi-
ness, as can be seen from the present Doha negotiations. The substantial
reduction in support and protection in agriculture, and the preservation
of policy space for developing countries to instrument industrial poli-
cies are still matters of contention, regardless of their positive effects on
income, growth and import demand.
The confrontation between short- and long-term interests of partici-
pants seemedtobe at the headof the difculties toreacha commonunder-
standing to advance multilateral negotiations. It was so in the Uruguay
Round and continues to be the main hurdle in Doha, which has been
protracted so far by strong mercantilist interests linked to the static vision
of the political economy.
The Uruguay Round
Mandate and proposals
The Ministerial Declarationof Punta del Este of 20 September 1986, which
launched the Uruguay Round, included comprehensive negotiations in
agriculture for the rst time in a multilateral round. The relevant terms of
reference aimed at achieving greater liberalization and bringing all mea-
sures affecting import access and export competition under strengthened
and effective GATT rules. With relation to domestic support, it proposed
increasing discipline in the use of all direct or indirect subsidies.
28 agricultural subsidies in the wto green box
The rst meetings of the Negotiating Group on Agriculture were pri-
marily devoted to discussions on the situation of production, agricultural
trade and the principles on which proposals should be based. The sub-
mission of the US proposal at the third meeting, held in September 1987,
marked the transition to the stage of discussing specic solutions to the
problems affecting the sector. That submission speeded up the negoti-
ating process, so that at the fourth meeting, held in October, the EEC
and the Cairns Group also submitted proposals. At the end of 1987, the
Nordic countries and Japan came up with other negotiating documents.
The US submission (MTN.GNG/NG5 /W/14), dated 7 July 1987, pro-
posed to eliminate border protection, domestic support and export subsi-
dies in a period of ten years. It made reference to a limited set of domestic
support policies to be exempted fromreduction commitments. Such poli-
cies either have to be production-neutral and trade-neutral, or must have
such a small effect as to be inconsequential. Specically, it mentioned:
(i) direct income or other payments decoupled from production and
marketing, including those that provide a safety net against natural disas-
ters or other extraordinary circumstances; and (ii) bona de foreign and
domestic aid programmes.
The EU in its proposal (MTN.GNG/NG5/W/20), dated 26 October
1987, referred to the importance of reducing the uncertainty, disequilib-
riumand instability prevailing on world agricultural markets through the
balanced implementation of concerted farm policy reforms, including:
(i) better control of production by appropriate means, including the
phased reduction of support which directly or indirectly affects trade in
agricultural products; (ii) an increase in the sensitivity of agriculture to
market signals; and (iii) a recourse to methods of income support for
farmers making, as appropriate, greater use of direct aid not linked to
output.
The Cairns Group, which tabled its document (MTN.GNG/NG5/
W/21) on the same day as the EEC, stated that GATT rules and disci-
plines should be agreed upon to prohibit the use of all subsidies and other
government support measures, including consumer transfers, having an
effect on agricultural trade.
It was more explicit than the US and the EEC regarding the measures
to be exempted from reduction commitments on domestic support. It
indicated that these measures would be permissible only if their effects
on output and trade were negligible. They would be excepted under cer-
tain prescribed and tightly circumscribed conditions in relation to the
following elements: (i) direct income support which is decoupled from
the historical context of the green box 29
production and marketing; (ii) adjustment or resource redeployment
assistance which has a negligible impact on production and trade or
which acts to reduce production/export levels; (iii) non-commodity spe-
cic aidfor infrastructure development covering research, extension, edu-
cation, market information, inspection, grading, pest and disease control;
(iv) specic, natural disaster relief measures; (v) assistance to people in
need through the supply of food for domestic consumption in a way so
as not to impede trade or discriminate against imports; and (vi) foreign
food aid for humanitarian purposes which respect obligations equivalent
to those applying to surplus disposal transactions.
A year later, on 13 September 1988, the US addressed the question
of an aggregate measurement of support (AMS) in a new document
(MTN.GNG/NG5/W/75), suggesting that it could be developed in a way
that reected the level of support provided by whatever policies the con-
tracting parties decided to address through the Uruguay Round. On this
matter, it was the viewof the US that notable exclusions would be support
to producers not affecting production and bona de food aid. Further-
more, for certaindeveloping countries, non-commodity specic subsidies
for long-term economic development could be excluded from coverage.
For its part, the EEC took up this issue in three successive documents
dated 21 October of the same year, 10 July 1989 and 20 December 1989.
2
In the rst of them, it suggested that it appeared appropriate to keep the
policy coverage as comprehensive as possible until the discussions led to
greater clarity on the measures to be excluded. In any case, it was useful to
decide on monitoring the support measures which would not be included
in the aggregate measurement.
In the second document, the EEC more explicitly commented on the
AMS and compared it with the PSE
3
estimates of the OECD, which divide
the policy measures intomarket price support, direct payments, reduction
of input costs, general services, sub-national support and other measures.
The EECsaid that, for the purpose of devising a negotiating instrument, it
was sufcient at that stage to limit the policy coverage of the AMS system
to policies having the most signicant impact on a farmers decision to
produce. These policies were identied as those included under market
price support, direct payments and input costs.
The last document did not add any other specicity to the separation
of support measures between distorting and neutral from the point of
2 MTN.GNG/NG5/W/82, MTN.GNG/NG5/W/96 and MTN.GNG/NG5/W/145.
3 Producer Subsidy Equivalent, i.e. the amount necessary to compensate farmers for the
abolitionof consumer transfers (protectionat the border) andsubsidies fromgovernments.
30 agricultural subsidies in the wto green box
view of production and trade. It was interesting from the point of view
of how the EEC qualied at that time the other policies under the PSE.
It said that development of aid unlinked to production might contribute
to solving agricultural problems, but it could not be conceivable to set up
a general decoupled support arrangement, which without an adequate
price-stabilization mechanism would have the same perverse effect on
production as the regimes currently in place.
This last point was relevant in the discussions of the Negotiating Group
on Agriculture, chaired by Art de Zeeuw from the Netherlands. In fact,
some members of the Cairns Group, particularly Argentina, raised the
issue of a cap on total domestic support, including those policies that
wouldbe exemptedfromreductions. It was proposedtoleave it tonational
governments todecide howtoorientate domestic support withina general
obligation to reduce substantially the most distorting policies, and not
to exceed an overall limit based on the PSE average for the most recent
period. The research being conducted by the OECD on less distorting
policies was an important input behind this idea as it showed that no
policy could be considered neutral and having no impact on agricultural
production and trade.
In July 1990, after three-and-a-half years of negotiations, Mr. de Zeeuw
produced a text on agriculture (MTN.GNG.NG5/W/170), which was put
forward as a basis for an agreement. On domestic support, it listed a
number of policies to be exempted from reduction commitments, which
were similar to those already referred to in the US, EEC and Cairns group
proposals. There was no indication as to a ceiling or limit to overall
domestic support.
In spite of the failure of the Brussels Ministerial Conference in Decem-
ber 1990, the de Zeeuw text continued to be a guide for negotiations on
agriculture. It served later on as a basic material to elaborate the Dunkel
text of December 1991, which contained the preliminary results leading
to the nal Act of the Uruguay Round.
OECD research
After the launch of the Uruguay Round, the Agriculture Ministers at the
OECD, during their Ministerial Meeting of 1987, asked the Secretariat to
instrument a work programme aimed at facilitating agricultural policy
reform so as to make the sector more responsive to market signals. The
termdecoupling was used for the rst time in the 1988 Communiqu e of
the Agriculture Ministers, implying the intention that policy measures
should have minimal trade-distorting effects or effects on production.
the historical context of the green box 31
The research undertaken by the Secretariat led to two different deni-
tions of decoupling: a less restrictive one, when a policy measure did not
result in different production or trade levels from those that would have
occurred in the absence of that measure; and another more restrictive
one, requiring, in addition to the previous condition, that the quantity
adjustment due to any external shock should not be altered in any way.
As regards the practical application of these denitions, it considered that
hardly any policy measure was in a position to give full satisfaction to said
conditions or requirements.
Farmers, being naturally risk-averse people, would tend to evaluate any
measure reducing risk or increasing farm incomes as a positive signal to
keep on producing. In a certain way, they would be positively responding
to government behaviour supporting their activities.
One of the research documents concluded that:
the fact that programmes beneting farmers are replaced by new pro-
grammes which also benet farmers conrms the impression that one
needs to be a farmer in order to benet. The pay-off for continuing to
farm may be uncertain but has a positive expected value. Farmers may
perceive that the probability of receiving future payments depends on
present production. For example, the decision to introduce area payments
calculated by reference to a base year area and yield could create an expec-
tation that, some time in the future, the policy will adjust and that current
land use and yields could be the basis for the change. This might be a
logical assumption given observed government behaviour.
In spite of the fact that no policy measure was in a position to be con-
sidered as fully decoupled, the Secretariat engaged in empirical research
that led to demonstrate that price support, deciency payments and input
subsidies were the policies with the most signicant effects on produc-
tion, in contrast to those linked to decoupled income support and general
services. It proceeded to elaborate a set of criteria and a specic list of
policies that was used later on to dene and detail the support policies
exempted from reduction commitments in the nal Agreement of the
Uruguay Round.
The Final Act
Two more years of negotiations
On 20 December 1991, the Chairman of the Trade Negotiations Commit-
tee tabled the Draft Project of the Final Act encompassing the result of
the multilateral trade negotiations. The EEC and some other contracting
32 agricultural subsidies in the wto green box
parties
4
rejected the specic text on agriculture on the grounds that it
was exacting an exaggerated price from them. The EEC insisted that the
commitments put forward went well beyond the reform of the Common
Agricultural Policy (CAP) by reducing the coverage of permitted (green)
policies and, thus, imposing severe constraints on the reform process.
During the rst semester of 1992, the EECengagedina series of bilateral
discussions with the US seeking an understanding on the pending issues
that, in its view, impeded a nal agreement. It considered that once a deal
was reached with the US, the other contracting parties would join.
Among the requests put forward by the EEC was the acceptance as a
permanent green policy of hectare and cattle head payments, a measure
that was at the core of the CAP reform just approved by the Council
of Ministers. Besides, the EEC demanded the possibility of introducing
non-food crops in the set-aside areas.
After more than one-and-a-half years of negotiations and an interim
arrangement already signed (the Blair House Agreement), the US and
the EEC closed a nal deal based on the above-mentioned requirements.
On top of this, it was decided to alleviate the reduction commitments on
distorting domestic support and export subsidies. The EEC accepted, as
way of compensation, to consider the deciency payments used by the
US that were based on xed hectares and yields as a permitted policy.
Additionally, it compromised to set aside 10 per cent of crop land and
relinquished any rebalancing (increase in import duties for oilseeds and
by-products up to those applied to cereals).
The Agreement on Agriculture
The main provisions on permitted policies (green box) are included in
Article 6 (Section IV) of and Annex 2 to the Agreement on Agriculture.
The basic criteria for exempting policies from reduction commitments
follows on the line developed by the OECD and taken up by some of the
contracting parties proposals and the reports of the GATT Secretariat.
It establishes that these policies have no, or at most minimal, distorting
effects on production and trade; that the pertinent support must be
provided through a publicly funded government programme (including
government revenue foregone) not involving transfers from consumers;
and that the support in question must not have the effect of providing
price support to producers.
4 Japan, Switzerland, Norway and Korea.
the historical context of the green box 33
Annex 2 includes the following list of permitted measures, subject to
the above-mentioned criteria and to specic attached conditions: (i) gov-
ernment service programmes (research, pest anddisease control, training,
extension, inspection, institutional marketing andpromotion, andinfras-
tructure public works); (ii) domestic food aid and public stockholding for
food security purposes; (iii) direct payments to producers; (iv) disaster
relief; (v) income safety nets; (vi) structural adjustment assistance to exit
production; (vii) investment aid for restructuring; (viii) environmental
programmes; and (ix) regional assistance.
Direct payments are contemplated in their purest form; that is to say,
totally decoupled without requiring production. Besides, they can be
linked to past production areas and yields, following the criteria agreed
upon by the EEC and the US.
The special and differential treatment for developing countries in the
eld of domestic support includes agricultural and rural development as
an integral part of the developing countries development programmes. It
contemplates that, in addition to the general exemptions from reduction
commitments available under the green box, support policies which are
within these programmes and fall into the amber category may also be
exempt from reduction. In the same way, investment subsidies generally
available to agriculture in developing countries and support to producers
to encourage diversication from the growing of illicit narcotic crops are
also exempt.
Conclusions
As was seen in the previous paragraphs, if the gap between the different
positions on the permitted policies (green box) had not been bridged,
it would have been impossible to build the pillar of domestic support
and hence to nish the agriculture negotiations and the Uruguay Round.
Reaching agreement on the green box was one of the necessary condi-
tions for the OECD countries to overcome the strong domestic resistance
against reform arising in the farming sector and related interests thereto.
The agreement nally achieved in agriculture was based on a complex
architecture reected in the three pillars (domestic support, market access
and export subsidies). These pillars are closely connected and should
be worked out in parallel so as to reduce support and protection and
eventually take agriculture to the same level of liberalization as trade in
non-agricultural goods.
34 agricultural subsidies in the wto green box
The path ahead, as the protracted Doha Round shows, is very difcult
and full of obstacles. Agriculture is again the central area of negotiations;
and domestic support is a eld of controversy.
In spite of the changes produced in budgetary payments in OECD
countries from1994 onwards, there is still a long road to travel as the total
level of support continues to be extremely high. Furthermore, the impor-
tant lack of balance between the different sets of policies is noticeable. In
2006, support to agricultural producers in the OECDwas estimated at US
$268 billion, 27 per cent either of farm receipts or of the value of world
agricultural exports. The share of the most distorting forms of support,
those based on prices and input subsidies, was still at 64 per cent of total
PSE. Part of the reduction from the 86 per cent share in 1986 to 1988 was
due to the increase in international prices of commodities.
In more precise terms, the present cycle in commodity prices that
appears to be long lasting constitutes an important incentive to pursue
the reform process in agriculture and foster the increasing participation
of developing countries in world trade.
References
I. Uruguay Round documents
Arthur Dunkel Draft of a Final Act (December 1991).
Domestic Support: The basis for exemption from the reduction commitment
(green box, MTN.GNG/AG/W/1/Add.3) (August 1991).
Note by the Chairman, Options in the Agriculture Negotiations (MTN.GNG/
AG/W/1) (June 1991).
The De Zeeuw Text on Agriculture (MTN.GNG.NG5/W/170) (July 1990).
The Ministerial Declaration of Punta del Este (20 September 1986).
Uruguay Round Final Act, Marrakesh (April 1994).
II. Uruguay Round proposals
Cairns Group
Cairns Group Proposal to the Uruguay Round Negotiating Group on Agriculture
(MTN. GNG/NG5/W/21) (26 October 1987).
EEC
An Approach for a Concerted Reduction of Support in the Long Term
(MTN.GNG/NG5/W/82) (21 October 1988).
European Communities Proposal For Multilateral Trade Negotiations on Agricul-
ture (MTN.GNG/NG5/W/19) (26 October 1987).
the historical context of the green box 35
Global proposal on the Long Term Objectives of the Negotiations (MTN.GNG/
NG5/W/145) (20 December 1989).
The EEC Approach on the Aggregate Measure of Support (MTN. GNG/
NG5/W/96) (10 July 1989).
United States
Elaboration of the United States Proposal on Agriculture. The Aggregate Measure
of Support (MTN.GNG/NG5/W/75) (13 September 1988).
United States Proposal for Negotiations on Agriculture (MTN.GNG/NG5/W/14)
(7 July 1987).
III. GATT reports
The Evolution of International Trade (Haberler Report) (October 1958).
Trade Policies for a Better Future (The Leutwiler Report) (1987).
International Trade Statistics (several years).
IV. OECD documents
Decoupling: a Conceptual Overview (Jes us Ant on) (1999).
Decoupling Open Questions (Jes us Ant on) (2005).
OECD, Agricultural Reports (19882007).
Policy Brief. Decoupling Agricultural support from Production (November
2006).
The impact on investment and production of different agricultural policy instru-
ments. Principal Findings (Jes us Ant on) (June 2005).
V. Other publications
Agriculture and the GATT: Rewriting the Rules, Institute for International Eco-
nomics, Geneva (September 1987).
Foreign Trade in the Present and a NewInternational Economic Order, University
of Fribourg (1988).
IMF And World Bank Annual Reports.
Trading for Growth: The next Round of Trade Negotiations, Institute for Inter-
national Economics, Geneva (September 1985).
3
Doha Round negotiations on the green
box and beyond
jonathan hepburn and christophe bellmann
1
Introduction
The WTO Doha Round negotiations on green box subsidies
2
were widely
seen as having stabilised by mid-2008, meaning that, after a long period
of ne-tuning, the compromise language proposed by the chair was being
viewed by many as a realistic basis for agreement. While some coun-
tries may still have specic concerns with particular elements, a broad
consensus on the modications to be made had emerged.
For much of 2007 and 2008, negotiators had focused primarily on
a limited number of issues, with particular attention being devoted to
dening the exceptional circumstances under which governments might
be allowed to update the xed and unchanging base periods they use to
determine the amount of direct payments they provide to their producers.
However, as recently as 2006, members were concerned about a far wider
array of issues, many of which have not found reection in the likely Doha
outcome. The draft modalities text circulated that year by the chair of the
agriculture negotiations bears witness to the heterogeneity of demands
for reformthat were on the table. While many negotiators admit that their
country has decided to drop some of these proposals in the interests of
obtaining a Doha Round agreement, there is reason to believe that many
of the underlying concerns remain.
Further back still, a wide range of ideas, concerns and proposals were
discussed by members. The overview document
3
prepared in December
1 This chapter draws in part on earlier analysis prepared as a draft background paper for an
ICTSD dialogue held in Montreux, Switzerland, from 15 to 17 April 2007.
2 i.e. those covered by Annex 2 of the Agreement on Agriculture. These are exempt from
reductioncommitments onthe basis that they have no, or at most minimal, trade-distorting
effects or effects on production.
3 TN/AG/6.
36
doha round negotiations on the green box and beyond 37
2002 by the chair of the agriculture negotiations includes a summary of
members proposals and statements on the green box, and gives some idea
of the breadth of issues that were under consideration at that time. The
document indicates that members had put forward numerous proposals
that did not nd their way into subsequent draft modalities documents
circulated by the chairs of the agriculture negotiations: these included, for
example, various proposals for capping, reducing or eliminating different
kinds of green box support; expanding the green box to include non-
trade concerns such as animal welfare; or allowing developing countries
to include support to products representing less than a certain percentage
of world trade.
However, it is conceivable that countries and negotiating groups may
at some future point decide to raise issues that were set aside early in
the negotiations. These could, for example, be brought up again either
in a subsequent round of multilateral trade talks or as part of a built-in
agenda of negotiations aimed at continuing a process that would achieve
the long-term objective of agricultural trade reform. An assessment of
the recent negotiating history on the green box can therefore provide a
guide to some of the issues that may yet resurface in future talks.
Negotiating mandates
The immediate negotiating mandate for work on the green box in the
Doha Round was provided by paragraph 16 of the July 2004 Framework,
WT/L/579. This specied that:
Green Box criteria will be reviewed and claried with a view to ensuring
that Green Box measures have no, or at most minimal, trade-distorting
effects or effects on production. Such a review and clarication will need
to ensure that the basic concepts, principles and effectiveness of the Green
Box remain and take due account of non-trade concerns. The improved
obligations for monitoring andsurveillance of all newdisciplines foreshad-
owed in paragraph 48 below will be particularly important with respect to
the Green Box.
The mandate therefore aims to ensure, amongst other things, that green
box measures conform to the fundamental requirement set out in para-
graph 1 of the Agreement on Agriculture.
4
4 Agreement onAgriculture, Annex 2, para. 1: Domestic support measures for whichexemp-
tion from the reduction commitments is claimed shall meet the fundamental requirement
that they have no, or at most minimal, trade-distorting effects or effects on production.
38 agricultural subsidies in the wto green box
At the Hong Kong Ministerial in December 2005, ministers then added
that this review should ensure that developing country programmes were
alsoeffectively coveredby the criteria:
5
GreenBox criteria will be reviewed
in line with paragraph 16 of the Framework, inter alia, to ensure that
programmes of developing country Members that cause not more than
minimal trade-distortion are effectively covered.
However, in the period prior to the agreement on the July 2004 Frame-
work, members had already circulated a number of formal proposals
and other informal submissions on the green box. While there was no
explicit mandate for work on the green box in the 2001 Doha Declaration
that launched the current trade round, members did agree to substan-
tial reductions in trade-distorting support; that special and differential
treatment for developing countries shall be an integral part of all ele-
ments of the negotiations; and that non-trade concerns will be taken
into account in the negotiations as provided for in the Agreement on
Agriculture. The early proposals on green box support presumably were
intended to contribute towards the achievement of some or all of these
objectives.
The Doha Declaration also recognises the work undertaken in the
built-in agenda of negotiations under Article 20 of the Agreement on
Agriculture,
6
including the large number of negotiating proposals sub-
mitted by members. Many of these related to the green box. Even before
the 1999 Seattle Ministerial, numerous proposals on the green box had
already been tabled, and at members request were summarised in an
October 2000 Secretariat document.
7
5 WT/MIN(05)/DEC, para. 5.
6 Art. 20, Continuation of the Reform Process: Recognizing that the long-term objective
of substantial progressive reductions in support and protection resulting in fundamental
reform is an ongoing process, Members agree that negotiations for continuing the pro-
cess will be initiated one year before the end of the implementation period, taking into
account:
(a) the experience to that date from implementing the reduction commitments;
(b) the effects of the reduction commitments on world trade in agriculture;
(c) non-trade concerns, special and differential treatment to developing country
Members, and the objective to establish a fair and market-oriented agricultural
trading system, and the other objectives and concerns mentioned in the preamble
to this Agreement; and
(d) what further commitments are necessary to achieve the above mentioned long-term
objectives.
7 G/AG/NG/S/18.
doha round negotiations on the green box and beyond 39
Table 3.1 Main focus of proposals on the green box
Tighten Expand
disciplines Substantial Revise some exibility to
to ensure no new exibility provisions to reect new
trade-distorting for developing reect implemen- non-trade
effects countries tation experience concerns
G-10
EU
US
Canada
Cairns Group
G-20
Developing
country
like-minded
group
African Group
Political dynamics and coalitions
The specic negotiating priorities of different WTO members, as well as
the coalitions in which they have chosen to pursue them, have changed
over the course of the Doha Round and in the years leading up to its
launch. While there are inevitably risks in attempting a simplied descrip-
tion of political trends and groupings, a number of broad contours can
nonetheless be dened (see table 3.1, above).
Efcient agricultural exporters such as those in the Cairns Group have
expressed concerns about the extent to which green box programmes may
be causing more than minimal distortion to production and trade, and
the possibility that existing green box criteria may need to be tightened
in order to ensure consistency with the fundamental requirement set out
in paragraph 1. A number of developing countries have also expressed
similar concerns, with the G-20 in particular emphasising these after its
formation in 2003. Both the Cairns Group and the G-20 have historically
sought to establish a cap or reductions on green box subsidies.
In contrast, members of the import-sensitive G-10 group of coun-
tries, which includes Japan, Norway and Switzerland, have argued that
there is only a limited mandate for changes to the green box. They have
40 agricultural subsidies in the wto green box
emphasised the role of green box programmes in addressing countries
non-trade concerns, and have argued that agriculture has a multifunc-
tional role in delivering other public goods in parallel.
The EU and US have also resisted substantial reform of the green
box. The EU has taken positions that are close to those espoused by the
G-10, in the past suggesting that, if anything, the green box should be
expanded in order to take into account issues such as animal welfare.
Like Canada, however, the US has supported modest changes to the green
box to cover, for example, experience with implementing disaster relief
programmes.
A number of developing countries, including G-20 members and the
African Group, have consistently underscored the need for the green box
to be amendedso as better to reect developing countries concerns. Many
have argued that the green box, in the formin which it was devised during
the Uruguay Round, primarily reects developed country programmes
and is therefore ill suited for developing countries to use. They have
pushed for specic changes to rectify what they see as imbalances in the
existing text.
Broadly speaking, the resistance of importing countries to many of
the more far-reaching proposals put forward by exporting countries,
combinedwiththe resistance of the latter toany dramatic expansionof the
green box to address additional non-trade concerns, has meant that the
negotiations have in the end focused relatively heavily on modications
aimed at providing greater exibility to developing countries.
Likely outcomes of the green box negotiations
The July 2008 draft modalities text provides a fairly good idea of what the
ultimate outcome of the green box review and clarication can probably
be expected to entail, assuming that no new issues are introduced at this
stage in the negotiations. Five major areas can be identied:
1. a new sub-paragraph 2(h) on general services covering an additional
set of developing country policies and services;
2. under paragraphs 3 and 4 on public stockholding for food security
and domestic food aid, developing countries would be granted addi-
tional exibility for purchases from low-income and resource-poor
producers;
3. detailed language on the exceptional circumstances in which otherwise
xed and unchanging base periods can be updated for decoupled
income support, investment aids and regional assistance programmes
doha round negotiations on the green box and beyond 41
(paragraphs 6, 11and13), plus explicit provisions for members wishing
to establish new programmes under these categories;
4. a longer time period used to assess maximum allowable levels of com-
pensation for disaster relief (paragraph 8), as well as additional exi-
bility for developing countries, and specic new criteria covering crop
insurance schemes and compensation for crops or animals that are
destroyed to control pests or disease; and
5. for developing countries only, an exemption from the requirement
in paragraph 13 that disadvantaged regions must form a contiguous
geographical area in order to qualify for assistance.
The countries or groups that originally proposedthe changes that the chair
has includedcanbe quite easily identied. The possible newsubparagraph
2(h) draws essentially on language put forward by the G-20 and the
African Group, while the modications to the text on domestic food aid
and public stockholding for food security incorporate proposals made by
the G-20. The G-20 had also called for developing countries to be exempt
from the requirement in paragraph 13, a change subsequently supported
by the African Group and the US.
The G-20, Cairns Group and Canada had proposed that base periods be
xed and unchanging, while other members such as the EU and Switzer-
land reportedly made informal proposals clarifying when exceptional
updates could be made. The new language on disaster relief incorporates
changes proposed mainly by the US and Canada, with some exibilities
proposed by the African Group.
Evolution of the negotiations
Although a number of proposals had already been made in the run-up to
the 1999 Seattle Ministerial conference,
8
negotiations began in earnest in
2000 under the mandate of Article 20 of the Agreement on Agriculture. A
large number of formal proposals were tabled that year
9
on the green box,
8 See G/AG/NG/S/18 for a summary of these.
9 These included proposals by: a group comprising Cuba, the Dominican Republic, Hon-
duras, Pakistan, Haiti, Nicaragua, Kenya, Uganda, Zimbabwe, Sri Lanka and El Salvador
(G/AG/NG/W/14); the Cairns Group (G/AG/NG/W/35); ASEAN (G/AG/NG/W/55); a
transition economies group comprising Albania, Bulgaria, Croatia, the Czech Republic,
Georgia, Hungary, the Kyrgyz Republic, Latvia, Lithuania, Mongolia, Slovak Republic and
Slovenia (G/AG/NG/W/56); the EU (G/AG/NG/W/90); Switzerland (G/AG/NG/W/94);
Canada (G/AG/NG/W/92); and Japan (G/AG/NG/W/91). While some of these include
detailed proposals on the green box, others mention members positions as part of a
broader submission on domestic support or agricultural reform more generally.
42 agricultural subsidies in the wto green box
with many more in 2001
10
and 2002.
11
While for the most part countries
staked out their initial positions in the rst two years, the launch of the
Doha Round in November 2001 led to a number of more detailed drafting
proposals being made the following year.
The circulation of draft texts by the chair of the agriculture talks, Stuart
Harbinson, was a signicant rst attempt to dene possible common
ground between members, ahead of the initial March 2003 deadline for
agreement on modalities. Later that year, the emergence of the G-20 in
response to a joint EU-US proposal can be seen as a tectonic shift in the
negotiations that irrevocably changed the geopolitical landscape of the
round. Green box issues seem not to have been examined again in much
detail until 2005: mandates in the 2004 July Framework and the Hong
Kong Declaration guided subsequent discussions, which picked up again
in 2006 with further submissions from key players.
Most recently, the various iterations of Crawford Falconers draft
modalities text have narrowed the focus of the negotiations to a handful
of issues, of which the question of base period updates has dominated.
While a limited number of G-20 and Cairns Group proposals to tighten
green box criteria were still included in the 2006 draft, subsequent revi-
sions dropped these for the most part. Figure 3.1 below summarises the
evolution of the negotiations.
Countries stake out initial positions
Particularly signicant was an early proposal
12
by a cross-regional group
of 11 developing countries (sometimes referred to as the like-minded
group). This constructed a detailed argument for wholesale green box
reform on development grounds, and argued that many green box pro-
grammes do cause signicant trade distortion. It proposed establishing
one general subsidies box, with a permitted level of subsidies dened
in terms of countries volume of production; called for a development
box to address developing countries rural employment and food security
10 These includedproposals by Korea (G/AG/NG/W/98); India (G/AG/NG/W/102); Norway
(G/AG/NG/W/101); Turkey (G/AG/NG/W/106); Morocco (G/AG/NG/W/105); Mexico
(G/AG/NG/W/138); Jordan (G/AG/NG/W/140); Namibia (G/AG/NG/W/143); and the
African Group (G/AG/NG/W/142).
11 These included proposals by China (JOB(02)/104); the Philippines (JOB(02)/111);
Korea (JOB(02)/125); Chinese Taipei (JOB(02)/126); Canada (JOB(02)/127); the Cairns
Group(JOB(02)/132); Norway (JOB(02)/165); the Kyrgyz Republic (JOB(02)/179); Japan
(JOB(02)/164); seven members of the cross-regional developing country like-minded
group (JOB(02)/174); and the African Group (JOB(02)/187).
12 G/AG/NG/W/14.
doha round negotiations on the green box and beyond 43
A
u
g
Chairs report to TNC (JOB(08)/95)
J
u
l
y
Modalities draft (TN/AG/W/4/Rev3)
M
a
y
Modalities draft (TN/AG/W/4/Rev2)
2
0
0
8
F
e
b
Modalities draft (TN/AG/W/4/Rev1)
A
u
g
Modalities draft (TN/AG/W/4)
2
0
0
7
M
a
y
Challenges paper 2
J
u
n
e
Modalities draft (TN/AG/W/3)
G-20 (JOB(06)/145)
M
a
y
Reference paper rev1
African Group (TN/AG/GEN/15); US (JOB(06)/80)
A
p
r
Reference paper
G-10 (JOB(06)/12)
2
0
0
6
J
a
n
D
e
c
Hong Kong Declaration
(WT/MIN(05)/DEC)
US; EU
O
c
t
A
u
g
Groser status rpt (TN/AG/19)
G-20
J
u
n
e
Canada
2
0
0
5
M
a
y
2
0
0
4
A
u
g
July Framework (WT/L/579)
AU-ACP-LDC (WT/MIN(03)/W/17);
Jamaica (WT/MIN(03)/W/11);
G-20 (JOB(03)/162 + Rev.1, WT/MIN(03)/W/6+Add.1 and 2)
S
e
p
t
Derbez draft text
(JOB(03)/150/Rev.2)
Kenya (JOB(03)/175); Norway (JOB(03)/169);
Bulgaria, Chinese Tai pei, Iceland, Korea, Liechtenstein and
Switzerland (JOB(03)/167);
Japan (JOB(03)/165); African Group (TN/AG/GEN/8);
EU-US (JOB(03)/157)
A
u
g
Perez del Castillo/Supachai draft
(JOB(03)/150/Rev.1)
2
0
0
3
M
a
r
Harbinson text rev1
(TN/AG/W/1/Rev.1)
Figure 3.1 Timeline of green box negotiations
44 agricultural subsidies in the wto green box
Switzerland (JOB(03)/37); EU (JOB(03)/12)
F
e
b
Harbinson text (TN/AG/W/1)
D
e
c
Chairs Overview (TN/AG/6)
African Group (JOB(02)/187);
Developing country like minded group (G/AG/NG/W/14);
Kyrgyz Republic (JOB(02)/179);
Norway (JOB(02)/165); Japan (JOB(02)/164)
N
o
v
Canada (JOB(02)/131); Cairns (JOB(02)/132)
O
c
t
China (JOB(02)/104); Philippines (JOB(02)/111);
Korea (JOB(02)/125); Chinese Tai pei (JOB(02)/126);
Canada (JOB(02)/127)
2
0
0
2
S
e
p
t
N
o
v
Doha Declaration
(WT/MIN(01)/DEC/1)
Namibia (G/AG/NG/W/143);
African Group (G/AG/NG/W/142);
Jordan (G/AG/NG/W/140); Mexico (G/AG/NG/W/138);
M
a
r
Turkey (G/AG/NG/W/106); Morocco (G/AG/NG/W/105)
F
e
b
India (G/AG/NG/W/102);
Korea (G/AG/NG/W/98); Norway (G/AG/NG/W/101)
2
0
0
1
J
a
n
Canada (G/AG/NG/W/92); Japan (G/AG/NG/W/91);
Switzerland (G/AG/NG/W/94); EU (G/AG/NG/W/90)
D
e
c
ASEAN (G/AG/NG/W/55);
Transition countries (G/AG/NG/W/56)
N
o
v
O
c
t
Secretariat summary of proposals
(G/AG/NG/S/18)
Cairns Group (G/AG/NG/W/35)
S
e
p
t
Developing country like minded group (G/AG/NG/W/14)
2
0
0
0
J
u
n
e
2
0
0
3
Figure 3.1 (cont.)
needs; and argued that the due restraint peace clause should apply only
to developing countries.
In a similar vein, the Cairns Group also proposed
13
that those green
box measures not subject to reduction and elimination be reviewed to
ensure that they meet the fundamental requirements of having no, or at
most minimal, trade-distorting effects or effect on production.
Another detailed proposal from India
14
claimed that the green box was
ill suited to developing country needs. This argued that direct payments
13 G/AG/NG/W/35. 14 G/AG/NG/W/102.
doha round negotiations on the green box and beyond 45
continued to distort trade for a number of reasons, and proposed that
payments under paragraphs 5, 6 and 7 of the green box (direct payments,
decoupled income support, and income insurance and income safety-net
programmes) be notied under the amber box and subject to reduction
commitments. The Africa Group also proposed
15
that green box criteria
be tightened to ensure that they cause not more than minimal trade
distortion.
In contrast, proposals from the EU,
16
Japan,
17
Switzerland,
18
Korea
19
and Norway
20
emphasised the need to expand the green box in order to
ensure that non-trade concerns were taken into account, although the
EU concurred with the need to revisit the green box to ensure that it
caused no more than minimal trade distortion.
In November 2001, the Doha mandate then provided a fresh impetus
to the talks, tying them into a broader package of negotiations on other
issues.
The rst detailed drafting proposals
The rst detailed drafting proposals were made in 2002. The Cairns
Group,
21
building heavily on a submission by Canada,
22
proposed tight-
ening green box criteria: clarifying that base periods were xed and
unchanging, allowing circumscribed additional exibility for disaster
relief payments; and clarifying that certain programmes must be unre-
lated to production volumes or inputs. The group also argued that direct
payments should be capped, and that members should agree on reduc-
tions for direct payments in paragraphs 5, 6, 7 and 11. More dramatically,
seven members of the developing country like-minded group
23
instead
sought to eliminate these programmes for developed countries, restrict-
ing their use to developing countries only; like the Cairns Group, they also
sought to time-limit structural adjustment payments under paragraphs 9
and 10. The AfricanGroup,
24
China
25
and the Philippines
26
also proposed
classifying various direct payments under the amber box.
In contrast, Norway
27
called for no quantitative ceilings on the
green box and, along with Japan,
28
proposed lifting restrictions on the
compensation that countries are allowed to provide under their income
15 G/AG/NG/W/142. 16 G/AG/NG/W/90. 17 G/AG/NG/W/91.
18 G/AG/NG/W/94. 19 G/AG/NG/W/98. 20 G/AG/NG/W/101.
21 JOB(02)/132. 22 JOB(02)/127. 23 JOB(02)/174. 24 JOB(02)/187.
25 JOB(02)/104. 26 JOB(02)/111. 27 JOB(02)/165. 28 JOB(02)/164.
46 agricultural subsidies in the wto green box
insurance and income safety net programmes. Korea
29
sought to incorpo-
rate twonewparagraphs inthe greenbox, allowing payments toproducers
of staple crops for food security purposes and to small family farms in
order to maintain rural viability and cultural heritage, as well as allowing
countries to dene compensation levels for income insurance and income
safety net programmes, disaster relief and environmental programmes
(paragraphs 7, 8 and 12).
Submissions from the African Group
30
and the like-minded group
31
also aimed to make the green box easier for developing countries to
use. Both groups proposed, for example, that developing countries be
exempted from various regional assistance provisions under paragraph
13. The African Group also proposed deleting a requirement for certain
developing country food stockholding purchases to be counted in the
amber box, and allowing developing countries to make disaster relief
payments more easily. The like-minded group sought to exempt devel-
oping countries from reduction commitments for products representing
less than 3.25 per cent of world trade, together with the internal transport
costs of staple foods, and also proposed allowing developing countries
to determine the production loss required for compensation under para-
graphs 7 and 8. Chinese Taipei
32
and the Kyrgyz Republic
33
also called for
greater exibility for developing countries.
Harbinsons draft modalities text
In December 2002, the chair of the agriculture negotiations, Stuart
Harbinson, released an overview
34
of the various submissions tabled
to date, in preparation for the March 2003 deadline for agreement on
modalities. He suggested that green box proposals could be classed into
those seeking to tighten existing criteria, enhance them or clarify them.
Key outstanding issues, he said, included the following: whether a ceil-
ing on some or all green box spending should be established; whether
the green box should be subject to reduction commitments; whether it
should be amended so as better to address developing country needs; and
whether changes should be made allowing it to cover various non-trade
concerns such as animal welfare.
The chair appended a running list of over 60 separate proposals on
individual green box criteria, covering the existing criteria, proposed
29 JOB(02)/125. 30 JOB(02)/187. 31 JOB(02)/174.
32 JOB(02)/126. 33 JOB(02)/126. 34 TN/AG/6.
doha round negotiations on the green box and beyond 47
new paragraphs, disciplines such as spending limits or non-actionability,
transparency and notication requirements, and special and differential
treatment for developing countries. This then became the basis for the
more limited set of proposals annexed to the draft modalities text known
as the Harbinson draft, issued on 17 February 2003,
35
and its subsequent
revision, produced a month later.
36
These texts organised the propos-
als into two parts: one covering those addressing special and differential
treatment for developing countries; and the other covering other pro-
posed changes. The draft also specied that green box provisions shall be
maintained, subject to these possible amendments.
Members continued to seek convergence on modalities after failing to
reach agreement by the end-of-March deadline. Harbinsons July report
to the TNC
37
intended to assist with this process in advance of the
Canc un Ministerial Conference in September nonetheless included as
an annex the March revision of his modalities document with no further
changes.
The 2003 Canc un ministerial conference
A joint EU-US proposal
38
that was released in mid-August galvanised
a series of signicant events which have had a far-reaching impact on
the dynamics of the round. The proposal, which made no mention of
the green box, scandalised developing countries who felt that it failed to
take into account their interests on a range of different issues. An African
Group response
39
to the EU-US submissionlamented that, amongst other
things, it proposes a complex set of rules that appear to formalize the
continued use of the Green Box without new disciplines and a general
cap. Another counterproposal
40
from a group of countries that included
a number of Cairns Group members, plus China and India, eventually
led to the formation of the inuential G-20 developing country coali-
tion: this proposed that green box direct payments (paragraphs 5 to 13
of Annex 2 of the AoA) shall be, as appropriate, capped and/or reduced
for developed countries. Additional disciplines shall be elaborated and
agreed upon. Finally, a grand coalition comprising the African Union,
the African, Caribbean and Pacic (ACP) group of countries and the
35 TN/AG/W/1. 36 TN/AG/W/1/Rev.1.
37 TN/AG/10. 38 JOB(03)/157. 39 TN/AG/GEN/8.
40 JOB(03)/162, later reissued with more cosponsors as JOB(03)/162/Rev.1; and then as
WT/MIN(03)/W/6, WT/MIN(03)/W/6/Add.1 and WT/MIN(03)/W/6/Add.2.
48 agricultural subsidies in the wto green box
Least-Developed Countries (LDCs) called for the trade-distorting
element of Green Box support measures to be capped.
41
Subsidising countries remained equally rmin their desire to maintain
the green box essentially unchanged, with no cap or reduction commit-
ments: Norway
42
and Japan
43
both took this position, as did a group of
six countries that included Switzerland and Korea.
44
A draft text
45
sent to ministers before the Canc un meeting by the chair
of the General Council, Carlos P erez del Castillo, and WTO Director-
General Supachai Panitchpakdi simply stated that Green Box criteria
remain under negotiation, with no further detail. The revised Derbez
text
46
that was circulated at the ministerial, and which ultimately failed
to garner consensus, stated that: Green Box criteria shall be reviewed
with a view to ensuring that Green Box measures have no, or at most
minimal, trade-distorting effects or effects on production. Polarisation
of members on agriculture amongst other things ultimately led to the
collapse of the meeting.
From Canc un to Hong Kong
In what appears to have been an indication of exibility, the Cairns
Group told a March 2004 negotiating meeting that the Doha mandate for
substantial reductions in all forms of trade-distorting support meant
Amber Box, Blue Box and de minimis support . . . as well as strengthened
disciplines on the green box:
47
seemingly, the group had decided to
relax their calls for cuts in green box support, in the interest of achieving
reductions inthe other boxes. Other groups, suchas the LDCs, nonetheless
continued to press for quantitative restrictions.
48
The July 2004 Framework
49
established a clear mandate for the review
and clarication of green box criteria, as described above: however, mem-
bers continued to remain divided over whether the review should be sim-
ply a healthcheck, as subsidising countries argued, or, as reform-oriented
countries such as those in the Cairns Group and G-20 preferred, a more
substantive reappraisal of existing provisions.
In mid-2005 both Canada
50
and the G-20
51
circulated drafts suggesting
amendments to specic paragraphs, after a prolonged pause of more
41 WT/MIN(03)/W/17. 42 JOB(03)/169. 43 JOB(03)/165.
44 JOB(03)/167. 45 JOB(03)/150/Rev.1. 46 JOB(03)/150/Rev.2.
47 TN/AG/R/11. 48 TN/AG/R/14. 49 WT/L/579, para. 16.
50 Informal non-paper, May 2005.
51 Informal non-paper annexed to the document, Two Years of Activity of the G-20:
Moving Forward the Doha Round, available at http://www.g-20.mre.gov.br/conteudo/
19082005 Breviario.pdf.
doha round negotiations on the green box and beyond 49
than two years since the previous detailed drafting proposals. The G-
20 submission also included a theoretical critique of the alleged trade-
distorting effects of greenbox direct payments, linking these to the wealth
effects identied in OECD analysis.
Both proposals shared some signicant similarities, especially in the
extent to which they sought to discipline potential trade distortion,
although the G-20 focused also on expanding exibilities for develop-
ing countries. Both, for example, called for base periods to be xed and
unchanging, and were subsequently relatively important in inuencing
the future direction of the debate on green box reform.
While Canadas draft would have eliminated the possibility for new
types of direct payment under paragraph 5, thus retaining this paragraph
only as a chapeau to paragraphs 6 to 13, the G-20 proposed that direct
payments would have to conform to all of the specic requirements for
decoupled income support in paragraph 6. Canada also reiterated ear-
lier Cairns Group demands for structural adjustment payments under
paragraphs 9 and 10 to be time-limited; for the structural disadvantages
faced by producers receiving investment aids to be clearly dened in para-
graph 11; and for the reference to compensation for loss of income to
be deleted from the eligibility requirements for environmental payments
under paragraph 12. Unlike the G-20, the Canadian proposal would have
provided additional exibility to both developed and developing coun-
tries for disaster relief payments (paragraph 8).
The G-20 proposed different ways in which existing criteria could
be tightened. Again building on earlier Cairns Group proposals related
to specic types of direct payments, the group proposed a new clause
specifying that all such payments should not be linked to production
or inputs. In another development that could have implied signicant
restructuring of the distributional structure of EU and US subsidies,
the G-20 proposed requiring decoupled income support payments to
be based on low levels of income, land-holding and production. Two
other potentially far-reaching proposals from the group would have pre-
vented governments from requiring factors of production such as land or
labour to be in agricultural use in order to receive payments, and would
have prohibited them from making decoupled income support payments
under paragraph 6 if, together with amber box support, these jointly
represented more than a given share of value of production of a given
product.
Other changes suggested by the G-20 would have provided additional
exibility for developing countries. A number of these proposals suc-
cessfully found reection in later drafts of the modalities text: these
50 agricultural subsidies in the wto green box
included a new general services paragraph covering developing coun-
try programmes for food and livelihood security and rural development,
such as land reform, and increased scope for developing countries to cover
various domestic food aid and public food stockholding purchases in the
green box. Other inuential proposals included provisions for developing
countries that had not previously made use of various kinds of direct pay-
ment programmes, and a clause exempting developing countries fromthe
requirement in paragraph 13 that disadvantaged regions form a contigu-
ous geographical area. The G-20 also suggested that developing countries
themselves be allowed to specify how much compensation should be
provided under paragraphs 7 and 8.
An August 2005 status report
52
prepared by the chair of the agricul-
ture negotiations, New Zealand ambassador Tim Groser, described the
basis of a political deal on the green box: existing heavy users of Green
Box payments examine sympathetically some proposals for clarifying the
criteria that would not undermine their reforms, while at the same time
members agree to develop some new provisions that would meet the
realities of developing country agriculture so long as these caused no
more than minimal trade distortion.
However, pre-Hong Kong submissions from the EU
53
and the US
54
suggested that heavy subsidisers were not particularly willing to con-
clude any such deal. While the EU simply reafrmed its willingness to
review and clarify the criteria, the US proposal bluntly stated no mate-
rial changes in Green Box, specically no expenditure caps. A Novem-
ber 2005 report
55
by the new agriculture negotiations chair, Crawford
Falconer (also of New Zealand), conceded that the review had led to no
discernible convergence: on one side was a rm rejection of anything
that is seen as departing from the existing disciplines, and on the other,
an enduring sense that more could be done to review the Green Box
without undermining ongoing reform. Members were, however, open to
making the green box more development friendly, the chair reported.
The nal Ministerial Declaration
56
from Hong Kong ultimately con-
tained only the mandate referred to above, specifying that the green box
review must ensure that developing country programmes are effectively
covered.
52 TN/AG/19.
53 Making Hong Kong a Success: Europes Contribution Brussels, 28 October 2005.
54 US Proposal for WTO Agriculture Negotiations, 10 October 2005.
55 TN/AG/21. 56 WT/MIN(05)/DEC.
doha round negotiations on the green box and beyond 51
By mid-2006, the process moved into a more informal stage. Table 3.2
belowsummarises the mainnegotiating positions takenby members, sim-
plifying in some cases the more nuanced arguments around the various
issues.
Falconers modalities drafts: the text stabilises
Specic drafting proposals from both the African Group
57
and the
US
58
in early 2006 concentrated primarily on dening the scope of
additional exibility for developing countries. Both submissions pro-
posed changes along these lines to the provisions relating to general
services and regional assistance, although the Africa Group also made
suggestions on public stockholding, disaster relief, investment aids and
environmental programmes. The US proposed changes to the provi-
sions on income insurance and income safety net programmes, and to
those on disaster relief, that were broadly similar to earlier Canadian
proposals.
An April 2006 reference paper from Falconer described the state of
the debate at that point in time, and identies a number of key areas
for further discussion. These include the proposal that base periods be
xed and unchanging; a possible newgeneral services sub-paragraph to
address developing country programmes such as land reform; additional
exibility for developing countries on public stockholding and domestic
food aid; and G-20 proposals to tighten requirements for direct payments
anddecoupledincome support payments. However, subsidising countries
in the G-10 and EU continued strongly to oppose the latter. The chair
noted opposition to the proposal to require direct payments not to be
linked to production or inputs; a rm view that direct payments under
paragraph 5 (including new payment types) should not be required to
conform to all of the decoupled income support criteria in paragraph 6;
and rm resistance to all of the G-20s proposals on decoupled income
support payments in paragraph 6.
Falconer also noted that members had not yet discussed in detail pro-
posals for paragraphs 7 to 13 and suggested that they needed to decide
whether or not to begin an expert review of these. He recommended
that members instead focus in the rst instance on the other issues
discussed in his paper.
57 TN/AG/GEN/15. 58 JOB(06)/80.
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doha round negotiations on the green box and beyond 53
The G-20 response
59
to the reference paper reiterated their position on
the trade-distorting effect of green box payments when these are made
in conjunction with amber and blue box support. However, in a sign
of exibility, the group did also acknowledge that if members were to
full the mandate for substantial reductions of trade-distorting domestic
support, with a combination of cuts, disciplines and monitoring, some
of the G-20 preoccupations would be partially met. Falconer later issued
a revised version of his reference paper, reecting discussion on green box
criteria and the G-20 submission, and incorporating a list of proposed
changes for paragraphs 7 to 13.
In June 2006, the rst Falconer modalities draft
60
was issued, a text
which contained hundreds of square brackets, each indicating a lack of
consensus on a proposed clause or gure. On the green box, it included
a detailed list of proposals on most paragraphs, covering primarily those
submitted in 2005 and 2006 by the G-20, African Group, US and Canada
(see Table 3.3 below). The text also included a few of the earlier Canadian
proposals that had been submitted in 2002, although other elements from
the Harbinson draft were not reected. When members were unable to
agree on the draft, the Doha negotiations were suspended, with no further
talks until the following year.
In April and May 2007, the chair issued two challenges papers, the
second of which addressed the green box amongst other issues. Falconer
indicated that the long list of proposals that had been included in the 2006
modalities draft did not reect the convergence that had taken place in
informal discussions. He proposed that members consider a limited sub-
set of changes: a new subparagraph on general services, greater exibility
for developing countries under the public stockholding anddomestic food
aidparagraphs, newlanguage onxedandunchanging base periods, and
modications aimed at clarifying that newcomers would be allowed to
set up green box programmes with new base periods. However, the chair
wrote that beyond that, I have the impression that there is a strong
reluctance to entertain much more by way of amendments to Annex 2. Of
course a number of Members would prefer things otherwise, but I doubt
that view will prevail.
Falconer nonetheless suggested that, as a consequence, members would
need to establish much more precise and effective provisions on trans-
parency, monitoring and surveillance one of the demands of the G-20
and Cairns Group.
59 JOB(06)/145. 60 JOB(06)/199, later reissued as TN/AG/W/3.
Table 3.3 Origins of proposals on the green box reected in Falconers June
2006 Draft Possible Modalities on Agriculture (JOB(06)/199), Annex H
Paragraph Origin of proposals
General Services (paragraph 2) (i) G-20; US (minus the language in
square brackets)
(ii) Language emerging from informal
consultations
(iii) African Group
Public Stockholding for food security
purposes (paragraph 3)
(i) African Group
(ii) G-20
Domestic food aid (paragraph 4) (i) G-20
Direct payments to producers
(paragraph 5)
(i) G-20
(ii) Canada (May 2005 and March 2006)
(iii) Canada (September 2002)
(iv) US
Decoupled income support
(paragraph 6)
(i) G-20
(ii) Canada (September 2002)
Government nancial participation
in income insurance and income
safety-net programmes (paragraph
7)
(i) G-20
(ii) Language emerging from informal
consultations
(iii) Canada (March 2006)
(iv) Canada (May 2005)
(v) US
Payments (made either directly or by
way of government nancial
participation in crop insurance
schemes) for relief from natural
disaster (paragraph 8)
(i) G-20
(ii) Language emerging from informal
consultations
(iii) African Group
(iv) Canada (March 2006)
(v) Language emerging from informal
consultations
(vi) US
Structural adjustment assistance
provided through investment
assistance (paragraph 11)
(i) G-20; African Group
(ii) Text without square brackets is from
Canada, May 2005. Text with square
brackets is from Canada, March 2006
Payments under environmental
programmes (paragraph 12)
(i) African Group
(ii) Canada (March 2006)
Payments under regional assistance
programmes (paragraph 13)
(i) G-20
(ii) African Group
(iii) US
(iv) Canada ((March 2006 and May 2005)
doha round negotiations on the green box and beyond 55
A revised draft modalities text was issued in July 2007,
61
including a far
narrower set of proposed changes. Proposals in the June 2006 draft that
were not incorporated in the 2007 one include six major areas:
1. The G-20 and Canadas proposed changes to direct payments in para-
graph 5. While the G-20 had proposed that these not be linked to
production levels, and that any new payment types conform to all
paragraph 6 criteria, Canada had simply deleted the possibility for
new payment types.
2. The G-20s proposed changes to decoupled income support payments
under paragraph 6: establishing a closed criteria list; specifying that
eligibility for payments must be based on low levels of income, land-
holding andproductionlevel; precluding governments fromrequiring
factors of production such as land and labour to be in agricultural use;
and prohibiting direct payments if, when made jointly with amber box
payments, these exceed a certain share of the value of production for a
given product.
3. Proposals on income insurance and income safety nets (paragraph 7):
the G-20 had wanted developing countries to be able to determine per-
mitted compensation levels in national legislation (as well as for dis-
aster relief compensation under paragraph 8); Canada had suggested
that developing countries be allowed to base income loss calculations
on the agricultural sector as a whole rather than on an individual basis;
and Canada and the US had proposed using a longer reference period
to calculate compensation due to producers.
4. On investment aids (paragraph 11), Canada had proposed requiring
that structural disadvantages faced by producers be clearly dened,
and prohibiting payments from being based on factors of production.
5. Proposals on environmental payments (paragraph 12) were dropped:
there was an African Group proposal to exempt developing countries
from the requirement in this area and a Canadian proposal to pre-
vent payments from being based on the loss of income incurred by
producers.
6. In all paragraphs, references to notication were removed: the chair
indicated that these were to be addressed under a separate dedicated
heading in the text.
Most of the more ambitious proposals for tightening existing green box
criteria were therefore dropped from the revisions that followed the 2006
61 JOB(07)/128, later reissued with corrections as TN/AG/W/4.
56 agricultural subsidies in the wto green box
draft. Members focused the bulk of their attention on the issue of when
exceptional updates to xed and unchanging base periods might be
allowed, with detailed discussions onthis issue taking place during a series
of informal technical discussions chaired by Falconer from September
2007 onwards.
Falconer then issued further revisions of his modalities draft in
February,
62
May
63
and July
64
2008. A series of changes were made to
the paragraphs on domestic food aid and public stockholding, eventu-
ally coming full circle back to proposals made by the G-20. Increasingly
complex legal language on the exceptional updating of base periods left
some Cairns Group countries wondering whether these revisions had
in reality moved in the direction they had hoped to go. The green box
was by this stage seen by most members as having largely stabilised,
with large parts of the chairs text remaining essentially unchanged over
a two-year period. Signicantly, the green box review was not one of
the priority areas discussed at a mini-ministerial meeting held in July,
aimed at reaching agreement on modalities for agriculture and industrial
goods, nor was it mentioned in an August 2008 report
65
on the state
of the negotiations by the chair. While some trade analysts raised the
possibility that some countries might still raise green box concerns at a
later stage such as those that were not party to the small-group negoti-
ations that had achieved convergence on the most controversial issues
most assumed that no further major changes to the green box would be
discussed.
Specic green box measures
The following section analyses the proposals made by members, looking
at each paragraph in turn. While many proposals addressed green box
reform more broadly, several also included specic drafting proposals or
recommendations about particular paragraphs (see table 3.4 below).
Paragraph 2: General services
The general services provision currently covers a range of different
government programmes, such as research, pest and disease control,
62 TN/AG/W/4/Rev.1. 63 TN/AG/W/4/Rev.2.
64 TN/AG/W/4/Rev.3. 65 JOB(08)/95.
doha round negotiations on the green box and beyond 57
Table 3.4 Proposals and texts covering specic green box measures
Green box paragraph
Proposal/text 2 3 4 5 6 7 8 9 10 11 12 13
2008 July Falconer modalities
draft Rev3

May Falconer modalities
draft Rev2

Feb Falconer modalities
draft Rev1

2007 Aug Modalities draft W/4
May Challenges paper 2
2006 June Falconer modalities
draft W/3

May G-20
May Reference paper rev1
Apr Reference paper
Apr US
Apr African Group
2005 June G-20
May Canada
2003 Sept G-20
Mar Modalities rev1
Feb Modalities draft
2002 Dec Overview
Nov African Group
Nov Developing country
like-minded group

Nov Norway
Oct Cairns Group
Sept Canada
Sept Chinese Taipei
Sept Korea
Sept Philippines
Sept China
2000 Dec Japan
58 agricultural subsidies in the wto green box
training services, extension and advisory services, inspection services,
marketing and promotion services and infrastructural services. Members
have proposed adding a new clause (a new subparagraph 2(h)) in order
to cover a range of developing country policies and services, such as land
reform and other programmes related to livelihood security and rural
development.
The July 2008 revision of the Falconer modalities included a clause
along these lines, based heavily on the G-20s June 2005 proposal and the
AfricanGroups April 2006 submission. The G-20 hadoriginally proposed
covering agrarian, land and institutional reform, as well as any other pro-
gramme related to food and livelihood security and rural development.
Services related to such reform would also be included, as would settle-
ment programmes, issuance of property titles, employment assurance,
provision of infrastructure, nutritional security, poverty alleviation, soil
conservation and resource management, and drought management and
ood control.
An April 2006 US proposal largely supported the G-20 language,
although it would have allowed developed countries to provide such
programmes as well. It would also have removed references to food
and livelihood security and rural development, and the provision of
infrastructure.
Days before the US proposal was circulated, the African Group pro-
posed language that was similar to that put forward by the G-20, but with
some minor differences. Although the different proposals appeared side
by side in the 2006 draft modalities text, together with an alternative pro-
posal made informally by Canada, the language was merged together in
the 2007 draft, and has since remained unchanged. As currently drafted,
it would apply to developing country programmes only.
Paragraph 3: Public stockholding for food security purposes
This provision covers the accumulation and holding of stocks as part of a
food security programme identied in national legislation.
The changes to the language on public stockholding for food secu-
rity purposes would mean that developing countries would no longer
be required to account for purchases from low-income or resource-poor
farmers as part of the aggregate measurement of support (AMS). This
would mean that these purchases would no longer count as part of the
total support levels which, in the negotiations, developing countries will
doha round negotiations on the green box and beyond 59
have to reduce. The G-20
66
and Africa Group
67
have submitted proposals
on this, the former explicitly stating that developing countries food-
stuff acquisitions which have the objective of supporting low-income
or resource-poor producers should not have to be accounted for in the
AMS, and the latter simply eliminating the current requirement that such
purchases be accounted for in this way.
The chairs April 2006 reference paper suggested that developing coun-
tries should not have to notify this expenditure as AMS if they are still
below their permitted de minimis support limit of 10 per cent of the value
of production in any given year,
68
although in the May revision of this
paper he acknowledged that the proponents sought more than simply not
being required to notify this support when it exceeds the de minimis level.
The August 2007 and February 2008 draft modalities texts nonethe-
less incorporated language along these lines, the former proposing that
such support count as de minimis and the latter disciplining the extent
of support by linking it to the value of production. Subsequent revisions,
in May and July 2008, reverted to the original G-20 proposal, exempt-
ing developing countries from the requirement to count this support in
their AMS when it is aimed at supporting low-income or resource-poor
producers.
Paragraph 4: Domestic food aid
This provision covers domestic food aid to sections of the population in
need.
In 2005, the G-20 proposed that, if developing countries obtain food-
stuffs at subsidised prices from low-income or resource-poor farmers in
order to ght hunger and rural poverty, these purchases should be con-
sidered to be in conformity with the requirements set out in paragraph 4
on domestic food aid and in paragraph 3 on public stockholding.
In his second 2007 challenges paper, the chair recorded some concern
among members who fear that the proposed amendments could allow
other kinds of support to be included, although he also suggests that this
matter could be addressed if the amendment is set out in the right terms.
66 Informal non-paper annexed to the document Two Years of Activity of the G-20:
Moving Forward the Doha Round, available at http://www.g-20.mre.gov.br/conteudo/
19082005 Breviario.pdf.
67 TN/AG/GEN/15; and also an earlier 2002 proposal, JOB(02)/187.
68 Art. 6.4 of the Agreement on Agriculture.
60 agricultural subsidies in the wto green box
In his rst reference paper, the chair also emphasises some of the inher-
ent contradictions in the language on domestic food aid in the current
text.
The G-20s proposal was included in the June 2006 draft modalities
text, but dropped from the August 2007 and February 2008 revisions:
however, it was then reinstated in the May and July 2008 versions.
Paragraph 5: Direct payments to producers
This provision underscores that direct payments must meet the funda-
mental requirement for green box payments set out in paragraph 1, as
well as meeting specic criteria for the different individual types of direct
payment set out in paragraphs 6 to 13 decoupled income support pay-
ments, income insurance and safety net programmes, natural disaster
relief payments, producer retirement programmes, resource retirement
programmes, investment aids, environmental programmes and regional
assistance programmes.
The paragraph also species that existing or new types of direct pay-
ment other than those set out in paragraphs 6 to 13 must meet four of
the ve criteria for decoupled income support payments (paragraph 6).
The four requirements specify that the amount of payments must not be
related to the type or volume of production in any year after the base
period; nor must it be related to domestic or international prices after
the base period; nor must it be related to factors of production employed
after the base period; nor shall production be required in order to receive
these payments. However, these existing or new types of direct payment
do not explicitly have to conform to the requirement for eligibility to be
determined by clearly-dened criteria such as income, status as a pro-
ducer or landowner, factor use or production level in a dened and xed
base period.
Many members have seen direct payments as one of the most problem-
atic aspects of the green box, with several early proposals calling for a cap
on support in this category or reductions. In 2002, proposals were made
by Canada
69
for an overall cap on domestic support of all types, includ-
ing amber support, Blue Box support and Green Box direct payments to
producers; and by the Cairns Group,
70
for a mechanism that will cap the
amount of expenditure allowed ondirect payments inAnnex 2 and reduce
the expenditure in paras 5, 6, 7 and 11. A more far-reaching proposal was
69 JOB(02)/131. 70 JOB(02)/132.
doha round negotiations on the green box and beyond 61
tabled by the developing country like-minded group,
71
which proposed
that measures provided under paragraphs 5, 6, 7 and 11 be eliminated:
only developing countries would be allowed to have access to these as part
of the special and differential treatment to be extended to them. A year
later, the G-20
72
proposed that Green box direct payments (paragraphs
5 to 13 of Annex 2 of the AoA) shall be, as appropriate, capped and/or
reduced for developed countries.
More recently, in the face of opposition from subsidising countries to
any cap or reduction commitments, attention has focused on disciplines
that would tighten the existing criteria in the paragraph. Canada has
proposed deleting the language requiring existing or new types of direct
payment to conform to all but one of the criteria in paragraph 6; in a
similar move, the G-20 has proposed explicitly requiring these types of
payment to conform to all paragraph 6 criteria.
The G-20 proposal from June 2005 also put forward specic language
on the notication of direct payments to producers, which would require
members to notify the base period and all other relevant criteria, includ-
ing laws, regulations and administrative decisions. Further notications
would then include regular and periodic information on how the pro-
grammes under this provision achieve the stated objectives. Notication
has subsequently been addressed under a separate part of the draft modal-
ities text, as it has been seen as a broader cross-cutting issue.
A G-20 proposal requiring direct payments not to be linked to pro-
duction, including input levels, has been more controversial. Although it
was included in the 2006 draft modalities text, it did not nd reection
in subsequent versions.
Paragraph 6: Decoupled income support
This provision covers decoupled income support payments which con-
form to certain criteria.
The criteria specify that the amount of payments must not be related
to the type or volume of production in any year after the base period;
it must not be related to domestic or international prices after the base
period; it must not be related to factors of production employed after the
base period; and no production shall be required in order to receive these
payments. Furthermore, eligibility for these payments must be deter-
mined by clearly-dened criteria such as income, status as a producer
71 JOB(02)/174. 72 WT/MIN(03)/W/6.
62 agricultural subsidies in the wto green box
or landowner, factor use or production level in a dened and xed base
period.
As for direct payments more generally, the criteria for decoupled
income support payments have been particularly controversial during the
Doha Round. In the early stage of the negotiations, a number of mem-
bers and negotiating coalitions called for these payments to be capped,
reduced or eliminated for developed countries: these included the Philip-
pines, Canada, the Cairns Group, the developing country like-minded
group and the G-20.
73
The Cairns Group,
74
building on an earlier Canadian proposal,
75
also
originally proposed that payments to individual producers should be
available for no more than three years, after which they ought not to be
renewed.
The G-20 made a number of other proposals that would have tightened
the eligibility criteria for payments inthis category. As indicatedabove, the
G-20proposedrequiring decoupledincome support payments tobe based
on lowlevels of income, landholding and production a suggestion with
potentially signicant implications for the current distributional structure
of such payments in the EU and US, which tend disproportionately to
favour large producers and companies. The group also proposed that
governments must not require factors of productionsuchas landor labour
to be in agricultural use in order to receive payments which they later
claried was intended to mean active commercial production, and was
not meant to preclude minimal usage in order to avoid environmental
degradation. The group also proposed that decoupled support payments
must not be made if, together with amber box support, they jointly
represent more than a given share of the value of production of a given
product.
These proposals were met with rmopposition fromsubsidising coun-
tries in the EU and G-10, and were not reected in versions of the draft
modalities text from 2007 onwards.
The green box proposal that has perhaps generated the most discus-
sion in the Doha Round was for the insertion of the word unchanging
as a requirement for base periods. The original text in the Agreement
on Agriculture specied that base periods should be dened and xed:
however, some members were concerned that this could still allow gov-
ernments to encourage farmers to take certain production decisions in
73 JOB(02)/111, JOB(02)/131, JOB(02)/132, G/AG/NG/W/14 and WT/MIN(03)/W/6.
74 JOB(02)/132. 75 JOB(02)/127.
doha round negotiations on the green box and beyond 63
anticipation of future updates and payments, by regularly updating the
base periods which are used as the reference point for payments to pro-
ducers. This would then effectively re-establish a link between payments
and production.
The concern, which had initially been sparked by the updating of base
periods for some commodities in the 2002 US farm bill, led to proposals
from Canada, the Cairns Group and the G-20 to prevent similar updates
from occurring again in the future.
76
At the same time, the G-20 proposed that developing countries that
had not previously made use of decoupled income support payments
shouldnot be precludedfromestablishinganappropriate base period. The
chair later suggested that negotiators should consider whether developed
country newcomers should also be covered by this clause.
Switzerland and the EUraised concerns that the inclusion of unchang-
ing could conceivably mean that they might never again be able to revise
their base period gures, even far into the future when the original pro-
gramme may have become irrelevant. In response to these objections,
Canada proposed that new base periods could be allowed for new sub-
sidy programmes, if it could clearly be shown that these were substan-
tially different from their predecessors. This would allow governments to
restructure their subsidy programmes as needed.
The EU also suggested that it might not be appropriate to introduce
this new language under the paragraphs on investment aids and regional
assistance (11 and 13), as had been proposed by the Cairns Group and
G-20. The EU warned that, if applied to these paragraphs, the proposed
new clause could affect their plans to decouple support from production
under the Common Agricultural Policy (CAP).
77
Successive revisions of the chairs draft modalities text explored a vari-
ety of possible compromises. The July 2008 text now includes over 500
words of relatively complex legal text aimed at dening the exceptional
circumstances in which updates can be made to what are otherwise
dened and xed base periods. It also includes language which would
allow both developed and developing countries that have not previously
made use of these payments to do so, drawing on the language proposed
by the G-20.
76 JOB(02)/127, JOB(02)/132 and the 2005 G-20 and Canadian proposals. Other members
and groups also proposed similar language for other paragraphs.
77 See AG negotiators haggle over base periods for green box payments, Bridges Weekly
Trade News Digest, Vol. 11, No. 36, 24 October 2007, available at http://ictsd.net/i/news/
bridgesweekly/7849/.
64 agricultural subsidies in the wto green box
The proposed compromise includes a number of ingredients that had
been proposed by different members and groups. It mentions the need to
ensure that any update does not affect producer expectations and produc-
tion decisions, a key G-20 and Cairns Group demand. It species that the
updated base period must be a signicant number of years in the past;
and also states that the newbase should be determined and promulgated
by the administering authority in a way in which producers could not
reasonably have anticipated, such that their production decisions could
not have been materially altered. It requires that any updating is not to
be made in conjunction with a decision to increase the uniform unitary
rate per crop, or otherwise amounts de facto to a decision to do so.
Finally, the update must not have the effect of circumventing members
obligations under paragraph 1, such as the requirement to cause not more
than minimal trade distortion.
Paragraph 7: Income insurance and income safety-net programmes
This provision covers requirements for government nancial participa-
tion in income insurance and income safety-net programmes. Amongst
other things, it sets out the conditions for producers to be considered eli-
gible for payments under these programmes and the maximum amount
of compensation.
While some members proposed that the eligibility criteria or maxi-
mum permitted compensation under this provision were too strict, oth-
ers sought to tighten the requirements, or even count such support in the
amber box. Japan,
78
Korea,
79
Chinese Taipei
80
and Norway
81
all proposed
making the existing requirements more exible, whilst China,
82
Canada,
83
the developing country like-minded group,
84
the Cairns Group
85
and the
G-20
86
focused primarily on making existing disciplines more restrictive,
or even capping or establishing reduction commitments for payments
under this category. Subsequent proposals from Canada and the G-20
dropped some of their earlier demands on this paragraph.
The proposals made by Canada and the Cairns Group in 2002 would
have specied that governments could provide compensation for the
loss of income derived from agriculture, thereby excluding off-farm
income from calculations. Canada, the US and the Cairns Group all
78 G/AG/NG/W/91. 79 JOB(02)/125. 80 JOB(02)/126. 81 JOB(02)/165.
82 JOB(02)/104. 83 JOB(02)/127, see also 2005 proposal.
84 JOB(02)/174. 85 JOB(02)/132. 86 WT/MIN(03)/W/6, see also 2005 proposal.
doha round negotiations on the green box and beyond 65
proposed extending the existing reference period for calculating com-
pensation from three to ve years, on the basis that this would enable
governments better to take account of market conditions. The G-20 pro-
posedproviding additional exibility to developing countries, by allowing
them to dene eligibility criteria and compensation in their own national
laws.
However, despite the large number of proposals on this paragraph, and
the fact that many of these were reected in the chairs 2006 modalities
text, noproposedchanges were includedinany of his subsequent revisions
of the draft.
Paragraph 8: Disaster relief
This provision covers disaster relief payments for natural disasters as well
as other events with similar implications, such as nuclear accidents or war.
It includes both direct payments and those made by way of government
nancial participation in crop insurance schemes. It includes require-
ments on eligibility for such payments, and maximum permitted com-
pensation, together with other conditions.
The chairs July 2008 draft modalities text reects a proposal by Canada
toestablishtwonewsubparagraphs explicitly covering cropinsurance and
the destruction of animals or crops to prevent pests and disease. Both the
Cairns Group and the US later supported this revised structure.
Canada had suggested that crop insurance payments be based on pro-
ductionloss ina periodthat is demonstratedtobe actuarially appropriate,
rather than on the average production loss in the previous three to ve
years. Trade delegates familiar with the negotiations suggested that this
would allow countries to reect a longer term for the calculation of losses
which may be more appropriate than a xed short period for certain types
of crop production.
The Canadian proposal also suggested allowing governments to com-
pensate production losses of less than 30 per cent in the event of the
destruction of animals or crops to prevent pests, diseases or disease-
carrying organisms. Negotiators indicated that this could be important
in allowing governments to compensate for outbreaks of diseases such
as mad cow disease, avian u or foot and mouth disease, and maintain-
ing incentives for producers to report outbreaks of such diseases to the
government while an outbreak is still at an early stage.
Along with the US, Canada had also recommended extending from
three to ve years the reference period for calculating compensation levels
66 agricultural subsidies in the wto green box
in the event of other kinds of disasters. Again, this proposal was reected
in subsequent revisions of the chairs draft text.
A number of groups and individual countries proposed making the
requirements for developing countries more exible.
87
The AfricanGroup
in 2006 proposed that developing countries be allowed to provide disaster
relief for production losses of less than 30 per cent of the average in pre-
ceding years the benchmark that would otherwise apply to developed
countries. The G-20 and also the developing country like-minded group
had similarly proposed allowing developing countries to dene eligibility
criteria for compensation in their own national legislation. The African
Group proposal ultimately found reection in the chairs draft modalities
text, as did a proposal to allow developing country members to deter-
mine the production loss of the affected sector or region on an aggregate
basis.
Paragraphs 9 and 10: Producer and resource retirement programmes
These provisions cover structural adjustment assistance providedthrough
producer and resource retirement programmes. They set out eligibility
requirements and, in the case of producer retirement, stipulate that pay-
ments must be conditional on the total and permanent retirement of the
recipients from marketable agricultural production.
None of the Falconer draft modalities texts, from 2006 onwards, has
includedany specic proposals oneither of these twoprovisions. However,
a May 2005 submission from Canada would have included a requirement
in both paragraphs to the effect that payments shall be time limited
echoing earlier proposals from the Cairns Group and the developing
country like-minded group. A subsequent Canadian submission, from
March 2006, nonetheless did not include this language.
Paragraph 11: Investment aids
This provision covers structural adjustment assistance provided through
investment aids. It includes eligibility requirements relating to the exis-
tence of objectively demonstrated structural disadvantages, prohibitions
on relating such payments to the type or volume of production after the
base period (as well as to prices relating to this production) and other
requirements and conditions.
87 Such as TN/AG/GEN/15, G/AG/NG/W/14, the 2005 G-20 proposal and JOB(02)/187.
doha round negotiations on the green box and beyond 67
Negotiations on this paragraph have essentially mirrored those on
the possibility of exceptional updates of base periods for decoupled
income support payments under paragraph 6. The discussions in this area
have therefore moved in parallel, together with those on paragraph 13,
and are summarised above.
Canada and the Cairns Group have also proposed language stipulating
that such structural disadvantages must be clearly dened and that pay-
ments must not be related to, or based on, factors of production in any
year after the base period.
88
After 2006, however, these proposals have not
found reection in the chairs revised draft modalities texts.
Paragraph 12: Environmental programmes
This provision covers payments under environmental programmes, and
includes eligibility requirements and limitations on the amount of pay-
ment that may be provided.
Specic proposals on the green box criteria for environmental pro-
grammes were made by the African Group,
89
Canada
90
and the Cairns
Group.
91
The African Group proposal would effectively have exempted
developing countries fromthe criteria for payments under environmental
programmes, whereas the Canadian proposal would have eliminated the
reference to compensation for the loss of income incurred in complying
with a government programme, restricting compensation to the extra
costs of compliance only. Canada proposed adding a requirement that
payments under environmental programmes not be related to or based
on the volume of production.
In May 2005, Canada had also proposed deleting a requirement for
payments to be dependent on the fullment of conditions in government
programmes related to production methods or inputs.
As with paragraphs 9 and 10, after 2006 none of these proposals was
reected in subsequent revisions of the chairs draft modalities text.
Paragraph 13: Regional assistance programmes
This provision covers payments under regional assistance programmes,
and includes eligibility requirements, prohibitions on linking payments
to the type or volume of production after the base period or to the prices
of this production and other requirements and conditions.
88 JOB(02)/132, JOB(02)/127 and Canadas 2005 proposal. 89 TN/AG/GEN/15.
90 Canadas 2005 proposal; see also JOB(02)/127. 91 JOB(02)/132.
68 agricultural subsidies in the wto green box
Various individual countries andgroups have made proposals for devel-
oping countries to be granted additional exibility in dening what con-
stitutes a disadvantaged region under this paragraph. An early China
proposal suggested that a clear denition be established, taking the aver-
age poverty level of developing country members as the criterion.
92
The
developing country like-minded group proposed that it be allowed to tar-
get assistance to predominantly lowincome and resource poor producers
in the concerned region,
93
and another early Africa Group proposal sug-
gested that various other criteria in the paragraph should not apply to
developing country members.
94
More recently, in 2005, the G-20 proposed that developing countries
be exempted from the condition that disadvantaged regions must con-
stitute a clearly designated contiguous geographical area with a denable
economic and administrative identity language echoed the following
year in proposals from the African Group and the US.
95
The chairs draft
modalities text eventually reected language very similar to this, although
excluding the clause relating to the regions economic and administrative
identity.
As noted above, the discussion around base period updating under this
paragraph essentially mirrored that concerning paragraphs 6 and 11, and
is described in the section on decoupled income support payments.
Conclusion
The debate on green box criteria at the WTO has evolved considerably
over the course of a few years, narrowing down to a handful of measures
that members feel are politically feasible. Ambitious proposals to either
expand or constrain domestic support under this category have been put
aside, as negotiators focus on those issues that they believe are capable
of commanding consensus in the context of a broader Doha Round deal.
However, there are reasons to believe that the negotiating history in this
area may still provide a valuable guide to the future. Some of the issues
raised by negotiators early on in the round may still resurface for
example, in future negotiations on agricultural trade reform insofar as
they reect deep-seated underlying concerns about the nature of support
in this category.
92 JOB(02)/104. 93 G/AG/NG/W/14.
94 JOB(02)/187. 95 JOB(06)/80 and TN/AG/GEN/15.
doha round negotiations on the green box and beyond 69
To a great extent, the discussions around green box criteria have to be
seen in the broader context of the negotiations on levels of overall trade-
distorting support (OTDS), and indeed also of agricultural market access
and the other issues that members seek to address in the Doha Round.
If members are indeed successful in achieving their goals in these other
areas, they may choose to focus future attention on the criteria for green
box support, and their effectiveness both in disciplining trade-distorting
effects and in achieving broader public policy goals.
4
The reform of the EUs Common
Agricultural Policy
alan swinbank
1
Introduction
From its inception in the 1960s through to the early 1990s, the Euro-
pean Unions common agricultural policy (CAP) was little changed. The
archetypal CAP tried to raise farm incomes through market price sup-
port mechanisms involving variable import levies, intervention buying,
export subsidies, etc. as described in Harris, Swinbank and Wilkinson
(1983). Structural policy was barely developed: in 1988 it amounted to
only 5.1 per cent of budgeted spend on market price support, for exam-
ple (Commission, 1989: T/83).
2
For most Member States the purpose
of structural policy was to aid the modernisation of European agricul-
ture, or to provide additional support in marginal areas. Paying farmers
to produce (or manage) countryside was a relatively novel idea when in
1985 largely on UK urging Member States were authorised to grant
EU subsidies to farmers in environmentally sensitive areas in order to
contribute towards the introductionor continueduse of agricultural prac-
tices compatible with the requirements of conserving the natural habitat
and ensuring an adequate income for farmers (Potter, 1998: 84, directly
quoting the EU regulation).
Two decades later, the CAP is rather different. In the context of this
chapter, exploring the EUs use of the WTOs green box, there have been
two changes. First, there has been a signicant decoupling of the support
designed to sustain farm incomes and, second, there has been an attempt
to switch support from agriculture to the wider rural economy and to
1 Sections of this chapter were rst presented at a workshop on The Political Economy of
Agri-environmental Policies in the US and the EU in Grass Valley, California, 2728 May
2005, and some paragraphs were subsequently incorporated into Swinbank (2008).
2 Guidance and guarantee expenditure respectively.
70
the reform of the eus common agricultural policy 71
protection and enhancement of the environment (from the so-called
Pillar 1 to Pillar 2, to use the EUs jargon).
3
In the following sections we discuss rst the decoupling of EU farm
income support, and then the switch from Pillar 1 to Pillar 2. The chap-
ter then takes a more detailed look at the EUs green box declarations
before moving on to a discussion of the WTO compatibility of the EUs
green box policies and a brief review of the EUs aborted attempts to
negotiate an enlarged green box that would embrace the concept of
multifunctionality.
Decoupling support for European farmers
Two major changes in supporting European farmers have taken place
since the end of the 1980s. First, in 1992, the EU adopted the MacSharry
Reforms (Swinbank and Tanner, 1996, chapter 5). This involved a reduc-
tion in the intervention prices for cereals and beef, and to compensate
farmers for the implied revenue loss farmers became entitled to area
payments on the land sown to cereals and set aside under the scheme,
and a complex array of headage payments on the number of beef cat-
tle kept. The area payment scheme also embraced oilseeds and certain
other eld crops, and the existing headage payments on sheep and goats
were brought into the package. Following the conclusion of the Uruguay
Round, these area and headage payments were declared as blue box pay-
ments, while the lower support prices for cereals and beef were reected
in a reduced level of amber box support for cereals and beef, as reected
in gure 4.1.
The Agenda 2000 reforms, agreed in March 1999, continued this trend.
Further cuts in support prices for cereals and beef were partially compen-
sated by increases in area and headage payments. The EU also decided
on a reform of the milk regime, to apply from 2005, which involved a
cut in intervention prices and compensation payments to holders of milk
quota payments the EUclaimed would also fall within the blue box (but
see Swinbank, 1999: 402).
The second major change centres on the Fischler Reforms of 2003,
which is not yet reected in the data in gure 4.1. It was recognised
that the compensation payments introduced by the MacSharry Reforms
of 1992 had become entrenched as a permanent, or semi-permanent,
3 Pillar 1 funds price andincome support, while Pillar 2 is concernedwithrural development.
72 agricultural subsidies in the wto green box
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Base 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04
Amber Blue Green
Figure 4.1 EU amber, blue and green box declarations
Base period: EU12
1995/962003/04: EU15 1,000 ecu
Source: base period WTO (2000a: 1718); subsequent years EU submissions in
G/AG/N/EEC/ document series. The last submission was in December 2006. De
minimis payments excluded.
form of income support (but, perversely, focused on larger, rather than
smaller, farm businesses), and as such could not be denied to farmers in
the acceding states from Central and Eastern Europe. However, a much
simpler, more decoupled scheme would be more appropriate in the new
Member States: a simple area payment scheme not tied to crops grown or
animals kept.
As the Doha Round of WTOtrade negotiations got under way, the blue
box was targeted as an anachronism that a number of the EUs trading
partners wished to see eliminated. Franz Fischlers response was to press
for a further decoupling of area and headage payments with the creation
of the Single Payment Scheme (SPS). A farmers entitlement would be
based upon his or her historic pattern of receipts of area and headage
payments, but future payments would no longer be linked to crops grown
or animals kept. However, the farmer would still have to have control of
the appropriate area of farmland to claim the annual subsidy payment,
and this land would have to be kept in good agricultural or environmental
the reform of the eus common agricultural policy 73
condition with various cross-compliance conditions met (Swinbank and
Daugbjerg, 2006).
4
The 2003 decoupling package, which included the new dairy cow pre-
mium already decided in the Agenda 2000 reforms of 1999, was quickly
expanded to include direct payments for cotton, tobacco, olive oil and
hops in 2004; a compensation package for sugar beet producers agreed
in 2005; bananas; processed fruits and vegetables; and wine. The 2007
reform of the fruit and vegetables regime also abolished the planting
restrictions on fruit and vegetables that had originally applied in the 2003
package (see below). Thus, the SPS has quickly become the dominant
form of farm income support in the EU.
In its 2003 deliberations the Council of Ministers decided that it would
review certain aspects of the reform package in 2007 or 2008; and this
commitment became known as the Health Check. The European Com-
missions initial thinking was set out in a discussion document in Novem-
ber 2007, and its formal proposals were tabled the following May. The
current (August 2008) thinking is that the Council will decide what parts
of the package it will accept or reject by the end of 2008. Some further
decoupling of support is proposed: in particular that most of the par-
tially decoupled payments that emerged from the 2003 reform be fully
incorporated into the SPS. In addition, more funding would become
available for rural development, by diverting money away from SPS pay-
ments through a taxation device known as modulation; and the scope
of the Rural Development Regulation would be extended to include pro-
grammes to tackle climate change, promote sustainable water use and halt
the decline in biodiversity (Commission of the European Communities,
2008).
Franz Fischlers original proposal for the SPS was undoubtedly
prompted by the WTO negotiations and the perceived need to reduce
the EUs reliance on blue box support (Cunha, 2004). The European
Commissions viewis that the reforms push the bulk of blue box expendi-
ture into the green box. In addition, the sugar and milk reforms will have
reduced amber box support on these commodities, while the offsetting
compensation payments under the SPS will appear in the green box; and
direct payments to cotton, olive oil, fruit and vegetables, etc., which pre-
viously were declared as amber box support, will now switch to the green
4 However, Member States were given the option of keeping some support linked to produc-
tion, e.g. 25 per cent of the arable area payment; and some other direct payments remained
linked. This was dubbed partial decoupling.
74 agricultural subsidies in the wto green box
box, provided the green box criteria can be met. Understandably, some of
the EUs critics view these developments as box shifting and want to know
how decoupled these decoupled policies really are. They may even query
the green box status of these policies: an issue to which we will return
below.
The switch from Pillar 1 to Pillar 2
Many analysts view the European Commissions 1988 discussion docu-
ment, The Future of Rural Society, as a key step in the reorientation of
agricultural policy. It pointed out, for example, that although agriculture
was once rural societys main source of income and employment, this
was no longer so. In 71 per cent of the then EUs regions, fewer than
one in 10 of all jobs are those of farmers or farmworkers; and in only
10 per cent of the EUs regions did agriculture account for more than
10% of the regional product (Commission of the European Commu-
nities, 1988: 17). Agricultural restructuring would continue, and rural
society was in a state of ux: these considerations gave rise to the Com-
missions concern to avoid serious economic and social disruption and to
preserve a European rural development model based on the promotion
of family farms and on balanced regional planning (p. 67).
In 1992, as part of the package of CAP reforms, the EU agreed an
agri-environmental programme and other accompanying measures on
forestry and early retirement, which obliged Member States to intro-
duce a variety of schemes (Potter, 1998: 117). In 1999, in the Agenda
2000 reforms, these measures were repackaged as part of a new Rural
Development Regulation, dubbed the Second Pillar of the CAP (Lowe,
Buller and Ward, 2002: 4). That Regulation expired at the end of 2006,
and was replaced by Regulation 1698/2005, covering the period 2007
to 2013.
During the debate over the contents of the new rural development
package from 2007, a key EU ofcial said that it should be centred on
three core objectives:
First: It should contribute to increase the competitiveness of agriculture
and forestry through support for restructuring, modernisationand quality
production.
Second: It should help improve the environment through support for land
management and remuneration of environmental services.
Third: It should contribute to enhance the quality of life in rural areas and
to promote diversication of economic activities (Ahner, 2004: 6).
the reform of the eus common agricultural policy 75
Quite what weight (and hence funding) should be given to each of these
core objectives, or thematic axes, was the subject of considerable debate.
Some Member States viewed axes 1 and 3 as their priority, whereas others
majored on axis 2. The funding debate related not only to the overall
size of the rural development budget (which in turn was inuenced by
the overall size of the EU budget for the period 2007 to 2013), but also
to the distribution of funds between Member States (which had largely
been dictated by historical precedent) and the balance of co-funding of
projects between EU and Member State budgets.
Although it has long been the EUs stated intent to switch funding
from Pillar 1 to Pillar 2,
5
in the event the funding package agreed at
the European Council meeting in December 2005 failed to deliver on this
objective. The package was very complex. Broadly speaking, it maintained
the Pillar 1 budget in nominal terms, up-rated by no more than 1 per
cent per annum (the limit agreed at the December 2002 meeting of the
European Council), which with ination at 2 per cent per annum
results in a budget in 2013, for an EU of 27, some 7 per cent less in real
terms than the budget for 2006. The Pillar 2 budget, by contrast, will be
14 per cent less. Given that in the 12 new Member States Pillar 2 funding
is relatively more important than it is in the old Member States (Poland
has been allocated 15 per cent of the funding compared to 7.3 per cent in
France, for example), the much-canvassed switch from Pillar 1 to Pillar 2
support is not readily apparent.
As a result of the 2003 reform, Pillar 1 direct payments above 5,000
per farm were subject to a deduction at a marginal rate of 5 per cent
(modulation) with the proceeds diverted to additional Pillar 2 support
(with 80 per cent or more retained in the Member State), but this too
hardly redressed the imbalance between Pillar 1 and Pillar 2. The Decem-
ber 2005 meeting of the European Council did agree that Member States
could apply a voluntary modulation rate of 20 per cent, with the monies
retained in the Member State concerned, but disagreement between the
EuropeanParliament andthe other EUinstitutions meant that implemen-
tation of this provision was delayed, and in the end it was only applied
in Portugal and the UK. As we saw above, the European Commission has
proposed a further extension of modulation in the Health Check.
5 e.g. ina carefully worded article inthe Financial Times inMay 2001, Fischler (2001) claimed
that the EU still spends too much on production, while doing too little to preserve the
environment and the farming landscape, pointing out that only 10 per cent of the CAP
budget was devoted to rural development.
76 agricultural subsidies in the wto green box
Table 4.1 Annual average of the EU15s green box declarations, 1995/96 to
2003/04
Annual average
Green box measure Million ecu/euro
General services 5,485.0
Public stockholding for food security 17.3
Domestic food aid 292.9
Decoupled income support 270.6
Income insurance 2.8
Relief from natural disasters 431.8
Structural adjustment through producer retirement 712.1
Structural adjustment through resource retirement 467.7
Structural adjustment through investment aids 5,275.8
Environmental programmes 4,734.0
Regional assistance programmes 2,661.1
TOTAL green box: 20,351.0
Green box expenditure as a % of the value of
agricultural production: 8.8%
Source: EU submissions to the WTO.
The EUs green box declarations
Table 4.1 summarises the EUs green box declarations from 1995/96 to
2003/04, following the listing of Annex 2 of the Agreement on Agriculture
(for further detail, see Ant on, chapter 7, in this volume). It will be recalled
that the SPS is not yet reected in these declarations, and it should also
be noted that the green box has a wider coverage than decoupled income
support (such as the SPS) and the Pillar 2 expenditure discussed so far in
this text. One of the largest items in the list, for example, is general services,
which includes R&D, pest and disease control, marketing and promotion,
and infrastructural services (e.g. drainage, irrigation, farm roads, etc.).
Another big item is structural adjustment through investment aids.
Over these nine years, total EU spend on green box measures has
remained reasonably stable at about 20.4 billion,
6
but shows a slight
6 It is not entirely clear how the 9.2 billion ecu green box spend in the base period (1986
1988), as reported by the WTO Secretariat for the EU12 (WTO, 2000a: 17) and shown in
gure 4.1, jumped to 18.8 billion for the EU15 in 1995/96. However, we believe that the
base period reported only green box expenditure funded through the EUbudget, excluding
the co-nancing of the Member States.
the reform of the eus common agricultural policy 77
decline as a percentage of the value of EU farm production over time,
whereas the spend on environmental programmes has doubled from
2.8 billion in 1995/96 to peak at 5.7 billion in 2000/01, subsequently
falling back to 5.2 billion (ranging from 14.8 to 27.4 per cent of green
box expenditure). The resource retirement heading includes payments
under the pre-1992 set-aside programme, whereas the 1992 programme
payments were declaredunder the blue box. Payments inthe less-favoured
areas (LFAs), a controversial policy, both pre and post the Agenda 2000
reforms, are classied under regional assistance programmes.
Note that these declarations cover expenditure incurred both by the
EUs budget and those of the Member States. Co-nancing applies to
the Rural Development Regulation. Thus, attempts to relate data from
the EUs agri-environment reports to its WTO submissions are difcult.
For example, the European Commission (2005: 5) reports that EU budget
spend on agri-environment measures was about 2 billion per year in the
period 2000 to 2003, whereas the WTO declaration of total EU spend was
over 5 billion in 2000/01 and 2001/02.
By 2002, two Member States (Luxembourg and Finland) had just about
all of their agricultural area enrolled in agri-environment schemes, and
Sweden and Austria had over 80 per cent. No other Member State had
more than 40 per cent (France). By contrast, the Netherlands and Greece
had less than 5 per cent. The EU15 average was about 15 per cent (Euro-
pean Commission, 2005: 7). These widely divergent gures reect dif-
ferent historical practice (Austria, Finland and Sweden being the 1995
entrants, with Austria providing the EU Commissioner for Agriculture
and Rural Development from1995 to 2004), topographical features, pref-
erences and budget allocations for rural development funding.
The concept of LFAs was rst incorporated into the CAP in 1975 to
allow the newly acceded UK to continue to pay its hill livestock compen-
satory allowances, a long-standing feature of British farmpolicy to sustain
agriculture in disadvantaged regions (Harris, Swinbank and Wilkinson,
1983: 224). By 1996, 55 per cent of the EU15s agricultural area was
classied as LFA (Cardwell, 2004: 29) as vested interests captured the
benets of LFA status. For many years this included the possibility of
paying headage payments, as originally secured by the UK. This sys-
tem was heavily criticised, in part because it led to over-stocking and
environmental degradation (Potter, 1998: 48). The 1999 Agenda 2000
reform swept the LFA regime into the new Rural Development Reg-
ulation, and abolished headage payments. Instead, Member States are
entitled to make area payments, on an expanded LFA base, to main-
tain farming in the LFAs. Stricter environmental constraints are applied,
78 agricultural subsidies in the wto green box
including an optional minimum stocking rate (Cardwell, 2004: 2257).
The Commissions attempts tointroduce further change tothe LFAregime
for the new Rural Development Regulation post-2006, in particular to
reduce the area covered, proved highly controversial (Agra Europe, 2005)
and ultimately unsuccessful.
The WTO compatibility of the EUs green box policies
Green box policies have to meet the fundamental requirement that they
have no, or at most minimal, trade-distorting effect or effects on pro-
duction (paragraph 1). There is, however, no indication of how the word
minimal might be calibrated inthis context. InUpland Cotton,
7
the panel
decided on grounds of judicial economy that it need not rule on Brazils
claim that the Unites States measures at issue fail to conform with the
fundamental requirement of paragraph 1 (it had already decided that
the US had infringed one of the policy-specic criteria of paragraph 6).
This was not appealed, and so the Appellate Body does not indicate how
it might have ruled on this issue (WTO, 2005: 126, footnote 331).
Green box policies must be provided through publicly funded gov-
ernment programmes, and not programmes that push the burden of
support onto consumers, and they must not have the effect of provid-
ing price support to producers. Annex 2 then goes on to list a series of
policy-specic criteria andconditions, under the headings listedearlier in
table 4.1.
In Upland Cotton, a question at issue was whether certain US
payments could qualify as decoupled income support under paragraph 6
of Annex 2. The panel (supported by the Appellate Body) determined
that paragraph 6(b) had been infringed. This was not because the US
legislation required production, but rather because it insisted that land
used to growfruit and vegetables could not be enrolled in the programme
(see also Swinbank and Tranter, 2005). Whether this interpretation of
paragraph 6 was what all WTO members thought they were agreeing to
back in 1994 is a moot point. Furthermore, in rehearsing its arguments,
the Appellate Body implied that each provision of paragraph 6 had to be
met in full:
Paragraph 6(a) sets forth that eligibility for payments under a decou-
pled income support program must be determined by reference to certain
clearly-denedcriteria ina denedandxedbase period. Paragraph6(b)
7 United States Subsidies on Upland Cotton, dispute DS267, http://www.wto.org/english/
tratop e/dispu e/cases e/ds267 e.htm.
the reform of the eus common agricultural policy 79
requires the severing of any link between the amount of payments under
such a program and the type or volume of production undertaken by recip-
ients of payments under that program in any year after the base period.
Paragraphs 6(c) and 6(d) serve to require that payments are also decou-
pled from prices and factors of production employed after the base period.
Paragraph 6(e) makes it clear that [n]o production shall be required in
order to receive . . . payments under a decoupled income support program
(WTO, 2005: 12021).
As originally agreed in 2003, the SPS imposed a similar restriction on the
planting of fruits and vegetables on eligible land, which raised questions
about the green box compatibility of the new scheme. However, the EU
abolished this restriction in its 2007 reform of the fruit and vegetables
regime; and in the Health Check the EU is discussing full decoupling
(the abolition of many of the remaining links with production) and the
abolition of set-aside entitlements. Would this make the SPS safe?
Swinbank and Tranter (2005) suggest not: payments in any particular
year are related to the land area at a farmers disposal in that year, in
potential conict with paragraph 6(d). The recipient has to be a farmer,
the land has to be kept in good agricultural or environmental condition
and various cross-compliance provisions apply, all of which reinforce the
notion that the payment is related to, or based on, the factors of produc-
tion employed in the year of claim. In addition, the EUs contention that
the SPS involves a decoupled payment would not be enhanced in any dis-
pute settlement proceedings by suggestions from senior members of the
EUs policy community that the payments do impact on production (see,
for example, Agra Europes report on the European Parliaments opposi-
tion to a 20 per cent voluntary rate of modulation, because of the MEPs
fear of distortion of competition between the Member States; 2007).
Similarly, if there were to be a WTO challenge to the green box sta-
tus of any environmental programme declared under paragraph 12, the
Appellate Body would expect each of the parts of paragraph 12 to be met
explicitly. The criteria are that:
(a) Eligibility for such payments shall be determined as part of a clearly-
dened government environmental or conservation programme and be
dependent on the fullment of specic conditions under the govern-
ment programme, including conditions related to production methods or
inputs.
(b) The amount of payment shall be limited to the extra costs or loss of
income involved in complying with the government programme.
These are strict; and in its 2005 review of agri-evironmental measures the
European Commission more or less conceded that they are not met. The
80 agricultural subsidies in the wto green box
European Commission (2005: 21) said that: The calculation of premia is
based on costs incurred and income foregone by the farmer for partic-
ipating in the agri-environmental measure. So far, so good, but it went
on: In duly justied circumstances, an incentive payment of up to 20%
may be paid.
8
It is difcult to see howthis additional 20 per cent matched
the criteria of paragraph 12(b) (see also Cardwell, 2004: 360). However,
the new Rural Development Regulation (1698/2005) was crafted more
carefully, presumably with a view to WTO considerations.
9
Article 39(4)
reads: The payments shall be granted annually and shall cover additional
costs and income foregone resulting from the commitment made. Where
necessary, they may cover also transaction cost.
Furthermore, the European Commission (2005: 22) noted:
Many Member States and regions have schemes covering a fairly large
geographical area, and payment rates that do not vary. This has the advan-
tage of simplicity and low administrative costs, but has the disadvantage
of creating infra-marginal producer rents . . . some evaluators raised the
issue whether it could be more cost-effective, in certain circumstances, to
differentiate payment levels, for instance through auctioning systems.
As Potter and Burney (2002: 43) observe:
Advocates of more strictly decoupled payments often assume that it is a
straightforward task to design environmental schemes which reward land
managers for observable improvements in environmental quality . . . In
order for the Tinbergen principle of efcient policy design to be observed,
these authors agree, each environmental attribute should be identied
and addressed by a separate policy instrument . . . In reality this rst best
approach is very hard to achieve, implying heavy transactions costs in
terms of scheme design, monitoring and assessment.
Herein lies a dilemma. Paragraph 12 of Annex 2 could be read to imply
a much more tightly dened regime: payments dependent upon the
fullment of specic conditions and limited to the extra costs or loss of
income involved. However, the more site-specic the policy, the higher
the administrative (transaction) costs; and governments understandably
wish to reduce their costs and the regulatory burdenborne by their clients.
8 Art. 24(1) of the then Rural Development Regulation (1257/99) reads: Support in respect
of an agri-environmental commitment shall be granted annually and be calculated on the
basis of:
income foregone,
additional costs resulting from the commitment given, and
the need to provide an incentive (emphasis added).
9 I am grateful to Janet Dwyer for drawing this to my attention.
the reform of the eus common agricultural policy 81
This potential difculty of reconciling the practical reality of designing
workable andcost-effective schemes withthe strict legalese of WTOagree-
ments is graphically illustratedby the contrast betweenbroad-but-shallow
approaches and more targeted, geographically limited approaches. In the
UK, for example, there is much support for a basic tier of environmental
resource payments . . . available to all land managers . . . carry[ing] some
obligations to manage biodiversity and countryside character over and
above the duty of care, and a higher tier of environmental payments,
targeted at locations and features and designed to subsidise the active
management and/or restoration of rural landscapes and their conserva-
tion resources (Potter and Burney, 2002: 42).
An expanded green box?
So, if the present green box is too narrow, should it be expanded? In the
run-up to Seattle, after pointing out that [i]n Norway . . . agricultural
producers face production costs far above the world average, the Norwe-
gian Government claimed that: to the extent that public goods are joint
products of the agricultural production, a combination of policy mea-
sures, including a certain degree of support coupled to the agricultural
production, seems tobe the most efcient way of ensuring the desiredpro-
duction level of public goods (WTO, 1999: paragraph 79). This suggests
that Norway was seeking a relaxation of the fundamental requirement
of Annex 2 that green box measures should have no, or at most minimal,
trade-distorting effects or effects on production.
Despite its past advocacy of multifunctionality, the EUs position was
less clear-cut. In its Comprehensive Negotiating Proposal of December
2000, the EU proposed that:
the criteria to be met by measures that fall into the green box be revis-
ited to ensure minimal trade distortion whilst at the same time ensuring
appropriate coverage of measures which meet important societal goals
such as the protection of the environment, the sustained vitality of rural
areas and poverty alleviation, food security for developing countries and
animal welfare (WTO, 2000b: 4).
However, no specic drafting amendments were submitted.
Subsequently, in its January 2003 submission, it suggested a specic
drafting amendment to paragraph 12 of Annex 2, which would have
enlarged that paragraphs scope to include animal welfare payments,
but otherwise would not relax the specic criteria contained therein
82 agricultural subsidies in the wto green box
(European Union, 2003: 12). On page 3 of its text the EU did refer to
the multifunctional concerns of developing countries, but this was the
only use of the word multifunctional in the text. Thus, despite (or perhaps
because of) the concerns of its trading partners in the late 1990s and early
2000s, the EU appeared to be eschewing the use of the term multifunc-
tionality, and had no concrete proposals on the table to expand the scope
of the green box (apart from the inclusion of animal welfare).
Although the EU was no longer proposing an expansion of the green
box (apart from the inclusion of animal welfare payments), its interna-
tional critics still wished to see a tightening of its conditions. Specic
concerns have been raised about the overall level of expenditure on green
box support, and over the provisions of paragraphs 5 and 6 (direct pay-
ments to producers and decoupled income support) and paragraph 7
(income insurance and income safety-net schemes) of Annex 2. Indeed,
at an early stage in the negotiations, India proposed that paragraphs 5, 6
and 7 should be excised from the green box (WTO, 2001: 13). However,
this proposal was never taken up in any of the draft modalities that were
circulated.
10
At the time of writing it is still unclear whether there will be a conclusion
tothe Doha Round. If the roundis nally abandoned, the existing Uruguay
Round Agreement on Agriculture, and all of the other WTO provisions
including the Dispute Settlement Understanding, will continue to apply;
and some of the EUs green box policies could be subject to scrutiny by its
trading partners. However, in this scenario, the green box compatibility
of the EUs SPS payments is not a particularly important issue, as the
EUs domestic support commitments are not binding. If, however, there
is a Doha deal, based on the latest Revised Draft Modalities for Agriculture
circulated by the chair of the agriculture negotiations in July 2008 (WTO,
2008), the green box status of the SPS payments will be important, for
both amber and blue box support will be severely constrained. Indeed,
the proposed 80 per cent cut in the EUs overall trade-distorting support
(OTDS), which includes both amber and blue, is said to be the absolute
limit the EU could accept, and is premised on adoption of the further
decoupling proposed in the Health Check (Agra Europe, 2008).
Concluding comments
Since the launch of the Uruguay Round at Punta del Este in 1986, the
CAP (and associated rural policies) has changed signicantly. In part,
10 Some tightening of the criteria is proposed in the latest draft (WTO, 2008: Annex B).
the reform of the eus common agricultural policy 83
these changes have been shaped and conditioned by the GATT/WTO
agenda. It is the view of this author that the MacSharry reforms of 1992
in particular the partial decoupling of support for cereal and beef
producers was prompted by impasse in the Uruguay Round, although
other analysts point to internal pressures. However, with the MacSharry
reforms agreed, and amendments to Dunkels draft text at Blair House,
the EU was enabled to accept the URAA. The Fischler reform of 2003,
and in particular the further decoupling of support with the creation
of the SPS, was conditioned by the EUs perception of the pressures it
faced in the Doha Round. However, whether the SPS will be accepted as a
genuine green box scheme, either in the existing URAA or any successor
agreement, remains an open question.
The green box is a curious beast. To many critics its provisions are
too widely drawn, whereas others think it too prescriptive. The EU has
used its provisions to shelter a large (20 billion per annum) spend on
farmsupport, broadly dened, but only a small proportion of this (23 per
cent over the period 1995/96 to 2003/04) has been spent on overtly agri-
environmental measures (paragraph 12) with a further 13 per cent under
regional assistance programmes (paragraph 13), particularly support for
farming in LFAs following the 1999 Agenda 2000 reforms. Over one-half
of the money (53per cent) has beendevotedtogeneral services (paragraph
2) and investment aids (paragraph 11).
In Upland Cotton, the US discovered that it could be difcult to shelter
decoupled income supports under the mantle of the green box; and,
post-Doha, the EU may yet nd the same with its SPS payments. The
provisions of paragraph 12 (agri-environmental measures) seem to be
tightly drawn, and it may even be that some of the existing EU spend
on agri-environmental schemes is incorrectly declared to be legitimate
green box expenditure.
11
This is a particular problem with broad-but-
shallow schemes. Curiously, the EU did not propose a relaxation of the
rules, although its earlier rhetoric about multifunctionality suggested it
would.
Of course, the inability to declare particular expenditures under the
green box would not in itself outlaw them in the WTO system. Instead,
by default, they would become amber box measures subject to the de
minimis clause and the reduction commitments on domestic support.
For the moment, the EU has scope to include its limited expenditure
11 The pre-1999 practice of declaring hill livestock compensatory allowances as green box
measures under regional assistance programmes (para. 13 of the green box) was particu-
larly dubious.
84 agricultural subsidies in the wto green box
on agri-environmental measures under either heading; but in aggre-
gate the overall level and structure of domestic support looks vulner-
able if the Doha Round is concluded and further WTO disputes are then
triggered.
At one stage it was suggested that CAP reform might lead to a double
dividend. The decoupling of support would reduce the pressure to farm
land intensively, while the diversion of budget funds from price and
income support wouldenable other policy initiatives to be mountedinthe
countryside. This has not happened, although the MacSharry (1992) and
Fischler (2003) reforms have resulted in a substantial (but not complete)
decoupling of support, and a partial switch of budget funds from Pillar 1
(price and income support) to Pillar 2 (rural development). The Health
Check proposals, if adopted, would continue these trends.
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5
Farm policy reform in the United States:
past progress and future direction
david orden
1
Introduction
Toward the end of its rst decade, a chaotic environment shaped US
farm policies for the twenty-rst century. Exchange rates had realigned
signicantly over the past decade, yet they remained skewed globally
compared to levels that might be necessary for sustainable balanced trade.
There had been ve years of disastrous expansion of armed conict in
the Middle East, with collateral effects on world oil prices. No one could
condently disentangle proximate short-term from longer-term supply
and demand determinants to say for certain where oil prices might settle.
The occurrence of global warming was broadly recognized even within
resistant circles in the US, but what was to be done about it? The call
for greater energy self-sufciency (called security, of course) was ying
high politically, but was it a viable economic strategy? Questions arose
in these circumstances about the traditional assumptions in agricultural
policy deliberations that farmprices will often be lowand that developed-
country subsidies will drive them down further.
In this chaotic environment, the US Congress wrote a new farm bill in
2008. The prospect of whether or not there would be a multilateral Doha
Round WTO agreement simmered in the background, but the domestic
farm bill debate paid little attention to multilateral rules or constraints.
1 Presentations of some of the material for this chapter were made at a policy roundtable at the
annual meeting of the International Agricultural Trade Research Consortium, Washington
DC (January 2008), a workshop of the Cordell Hull Institute, Washington DC (September
2007), an ICTSD workshop, Montreux, Switzerland (April 2007), the Annual Agribusiness
Forum, Arizona State University (November 2006), the Agricultural Outlook Conference,
Louisiana State University (January 2007) and a seminar in the Department of Agricultural
and Resource Economics, North Carolina State University (February 2007). I thank Ed
Young, Tim Josling, David Blandford, Lars Brink and many of the participants at these
presentations for helpful comments.
86
farm policy reform in the united states 87
Bioenergy enthusiasm (and subsidies) fuelled market optimism. Crop
prices were relatively high after 2005, as they were briey in 1995 to
1996, then shot up in 2008, with projections for continuation of high
prices through the decade. With high prices, even a substantial Doha
agreement might not impose severe cuts on declining traditional farm
support payments. Yet farm groups resisted giving up their traditional
policy instruments. The situation overall remained highly contingent
with lack of a clear reform impetus. Even continuation of the shift toward
subsidy payments decoupled from production decisions, as had occurred
in ts and starts over the past two decades, faced challenges. The stakes
were high in these decisions for US agriculture and for others who are
affected, as indicated in part by the difculties, and also the relevance, of
the WTO.
This chapter provides a broad examination of issues related to the
Food, Conservation and Energy (FCE) Act of 2008 and the future of US
farm policy. The attempt is to shed some light on how to think about
the direction taken by farm policy and to provide a framework in which
to learn about its dynamics. Farm constituents were able to count their
successes at preserving traditional subsidies in the 2008 FCE Act and
expanding their base of support. That has been true in every farm bill
for 50 years, yet substantial constructive policy reform has nonetheless
occurred, with prospects for further reforms uncertain.
The chapter is organized as follows. The next section reviews several
farm policy visioning exercises that preceded the 2008 farm bill debate,
nding endorsement of similar constructive long-term themes about a
liberalized world trade regime. The third and fourth sections bring some
historical observations about policy changes to bear on current farm
policy issues. Both the ebb and owof past decisions and alternative paths
to liberalizing reform are discussed. The fth section discusses a radical
reform whose time has not come that of ending the main price and
income support programs through a one-time buyout. The sixth section
returns to the challenges faced in domestic US farm policy deliberations
over the most recent farm bill. The seventh section examines US WTO
notications and the international constraints that may impinge on the
direction of future policies. In making an assessment, attention is paid to
questions that arise about the legal denitions of the multilateral subsidy
constraints and about the extent to which various intervention policies
raise or lower world production, demand and prices. These sets of issues
are germane to ensuring that the WTOgreen box plays a constructive role
in guiding farm policies.
88 agricultural subsidies in the wto green box
Policy visioning assessments
One point of reference for a long-tem vision of the policy regime for agri-
culture is my book with Robert Paarlberg and Terry Roe, Policy Reform in
American Agriculture: Analysis and Prognosis (1999). This book envisions
a market-oriented agricultural sector with reduced price and income sup-
port subsidies. We examine how the reform process around these types of
interventions unfolded in the US as agriculture evolved from a relatively
impoverished and populous sector in the 1930s to its modern relative
prosperity and limited number of commercial farms. We argue that the
reform process that proved politically feasible as this evolution occurred
was a slow and imperfect shift toward market-clearing prices comple-
mented with cash payments in lieu of supply controls and supported
price levels. The 1996 farm bill, enacted under high commodity prices
and with the rst Republican Party control of both houses of Congress
in 40 years, is described as a signicant step along this cash-out path.
However, as enacted it did not promise an end to farm subsidies, leav-
ing room for the reversion to more substantial subsidy levels on an ad
hoc basis when commodity prices declined sharply starting in 1998. The
increased subsidies were re-institutionalized in the 2002 farm bill, but the
increased production exibility introduced in 1996 was retained. Thus,
the 1996 farm bill deepened the slow cash-out that had been under way
since as early as the 1960s, but it did not put farmpolicy on a newstrategic
reform path.
A second visioning assessment of the future of agriculture and agricul-
tural policy comes from the American Farm Bureau Federations (AFBF)
study-group report Making American Agriculture Productive and Prof-
itable (MAAPP Study Group, 2005). Over a two-year period this group
of 23 purposefully diverse AFBF members (nominated by state organiza-
tions, selected by the AFBF president and approved by the AFBF Board)
held a series of hearings and closed sessions to hammer out their vision of
the policy regime for agriculture by 2019, the centennial anniversary of the
founding of their organization. Among its recommendations, the MAAPP
group envisioned freer world trade achieved through negotiations, but
warned that the US should resist internal and external calls for unilat-
eral disarmament to reduce only its own subsidies. Their report called
for a variety of policies to assist farmers to achieve environmental goals,
but for less environmental regulatory mandates. It called for increased
public-goods investments and development of new products, including
ethanol and other biofuels. The report also called for both continuation of
farm policy reform in the united states 89
the existing crop insurance programs and a new comprehensive revenue
insurance program consistent with international commitments under
the WTO and available across all of agriculture, not just to the tradi-
tional subsidy-receiving crops. An insightful question asked by the study
group in their deliberations was: How would we feel if another country
implemented the same program? (page 137).
Yet a third recent visioning assessment is provided in Delivering on
Doha: Farm Trade and the Poor (2006) by Kim Elliott, a senior fellow
at the Institute for International Economics and the Center for Global
Development. This book is in the spirit of the earlier classic A City-Mans
Guide to Farm Policy that made the sometimes arcane farm policy debates
accessible to a broad policy audience. Elliott examines the importance
of agriculture among heterogeneous developing countries (for example,
food exporters versus importers), then focuses on the subsidy and tariff
policies in the US and EU. She makes recommendations for provisions of
a substantive Doha agreement that challenged the then-prevailing nego-
tiating positions of each of the major participants: larger cuts in domestic
subsidies than the US had put on the table and deeper formula tariff
cuts and constraints on exceptions for special or sensitive products than
the EU or many developing countries had accepted. Again, the theme of
long-term movement toward a freer trade regime and less extensive use
of subsidies to agriculture underlies Elliotts policy vision.
Finally, consider the recommendations of the Agricultural Task Force
convenedby the Chicago Council onGlobal Affairs, co-chairedby Cather-
ine Bertini, August Schumacher Jr. and Robert L. Thompson and com-
prising 27 additional agricultural leaders from the private and public
sectors and academia. In the area of commodities, their report Modern-
izing Americas Food and FarmPolicy: Vision for a NewDirection (2006)
emphasizes the importance of world markets. As a consequence, the Task
Force recommendations called for a shift from existing trade-distorting
and product-specic price and income support programs toward forms
of support compliant with the WTO green box rules for allowable sub-
sidy programs. Specic recommendations included shifting to direct pay-
ments, some type of universal revenue insurance available to all of agricul-
ture at subsidized rates, land stewardship programs that paid farmers for
producing environmental goods, farmer saving accounts and increased
investments in public goods that support agricultural competitiveness.
These recommendations were parallel tothose of the MAAPPstudy group,
although they differ somewhat in emphasis, with the Agricultural Task
Force more inclined than MAAPP toward unilateral reform.
90 agricultural subsidies in the wto green box
What is apparent from these four visioning statements is that a range
of analysts approaching the issues in quite different contexts can share
much common ground in their vision of desirable long-term farm policy.
However, it is about the path and speed by which reform might occur
that differences arise and the long-term policy visions are easily set aside.
At the same annual meeting as the AFBF Board accepted the MAAPP
report, the membership also endorsed continuation of the 2002 farm
bill as its immediate policy prescription. Long-term visions of individual
academics, or even as diverse a group as the Agricultural Task Force, also
remain far from the centre of the most immediate farm bill debate.
Historical perspective
American agriculture today scarcely resembles the troubled sector of the
Depression-era 1930s that led to farm support programs. The modern-
ization of American agriculture has created a tri-modal farm sector. At
one end are the most efcient commercial farms producing the bulk of
food and bre. At the other end are various small farms that account
for most of the enumerated units, but produce only a small part of
output. In the middle are a group of farmers caught in the dynamics of
modernizationthe mid-sizedfarms onwhichthere have beensubstantial
investments and on which there remain full-time employment opportu-
nities, but which may lack an adequate resource base to be competitive in
face of continuing advances in technology and market integration. Amer-
ican agriculture is also tri-modal in terms of the protection and support
it receives from the government. A few commodities (for example, sugar,
dairy) are highly protected by tariffs and import restrictions. Another
group of commodities (wheat, corn and other feed grains, soybeans and
other oilseeds, rice and cotton) receive most of the subsidy payments. A
third group of commodities (fruits and vegetables, livestock and poultry)
receive little direct support.
Reforms of farm policy have been undertaken as the production and
income of farmers have undergone change. The basic direction of pol-
icy reform has been the shift in policy instruments from acreage sup-
ply controls combined with price supports above market-clearing levels
to less supply intervention and more direct income support, at least
for crops that are exported. This policy evolution toward direct pay-
ments began in the mid-1960s when price support levels were lowered
for corn, wheat and cotton to enhance US competitiveness, and farmers
were offered direct payments as compensation. Support payments from
farm policy reform in the united states 91
the government increased from less than 6 per cent of farm income in
the 1950s to over 20 per cent in the 1960s, but the farm programs also
remained dependent on idling land to control supply and boost market
prices. A second move toward direct payments came in the mid-1980s,
when price supports set too high in anticipation of ination and a low-
valued dollar that did not materialize were reduced, with direct payments
once again offered to farmers in lieu of higher prices. Still further steps in
the direction of replacing market interventions with direct payments were
taken in the 1996 Federal Agriculture Reform and Improvement (FAIR)
Act.
Unilateral farm policy reform in the 1996 FAIR Act
The 1996 FAIR Act initiated four unilateral changes in US farm policy
compared to previous legislation. First, under the FAIR Act, supported
farmers attained exibility to plant whatever crops they chose (except
most fruits and vegetables) on base acreage.
2
Second, authority ended
for the USDAtorequire annual acreage idling tolimit cropsupplies. Third,
farmers received xed income transfers, known as production exibility
contract (PFC) payments, which were based on past production and were
independent of current market prices and farmers planting decisions.
These xed income transfers replaced earlier deciency payments that
had required continued production of the crop for which payments were
received. Fourth, the price guarantees made to crop producers for any
amount of output through loan rates were capped under the FAIR
Act at nominal levels well below market prices prevailing at the time. By
1996, mechanisms had also been put fully in place for most crops that
allowed farmers to receive a cash payment (a marketing gain or loan
deciency payment (LDPt)) if market prices were below their loan rate
levels.
3
Farmers received these cash payments instead of forfeiting their
crops into government-owned storage. Thus, the loan rates continued to
support prices for producers, but market prices were freed from the loan
2 The term base acreage refers to the acreage on which payment eligibility is determined;
deciency payments refer to subsidies provided on most but not all of base acre output
when market prices were below a legislated target price and loan rates refer to price
guarantees for all output of the covered commodities. The 1990 farm bill had provided
limited exibility under which farmers could shift part of their base acreage among crops
without that land permanently losing payments eligibility, but eligibility for deciency
payments was suspended on that acreage during years that alternative crops were grown.
3 Loan rates are determined for each county for wheat, feed grains and oilseeds and by a
common effective adjusted world price for rice and upland cotton.
92 agricultural subsidies in the wto green box
rate as a oor level and the government was extricated from cumbersome
commodity stockpiling.
The changes to farm policy made in 1996 were further partial reforms
along the cash-out line of movement toward direct income transfers
instead of land idling or government stock-holding to push prices above
free market-clearing levels. Farmers responded to the increased exibility,
or freedom to farm, allowed by the FAIR Act with substantial move-
ments away from the crops to which deciency payments previously had
been tied, particularly reducing wheat acreage and expanding planting of
soybeans.
Despite its innovations, the extent to which the FAIR Act put farm
policy on a less-interventionist or less-costly path was uncertain from
the outset. The market-oriented policy innovations in the FAIR Act came
at a time of high crop prices in 1995 and 1996. It is unlikely that farm
policy would have abandoned annual acreage idling had market prices
not surged upward. As prices rose, agricultural proponents in Congress
were able to tout the end to acreage set-asides and introduction of xed
payments as deregulation of a large part of agriculture. Freedom to farm
had been a rallying point for the Republican Party since the 1950s, the
last time before 1995 that Republicans had controlled Congress and been
in a position to set the farm policy agenda. Yet even Republican propo-
nents of these agricultural policy changes knew full well that while the
FAIR Act gave farmers more cropping exibility, it also increased support
expenditures in the short termbecause deciency payments under the old
farm program were falling as prices increased. Farmers liked the short-
term outcomes of the FAIR Act of less regulation of their production and
more direct payments. When challenged that the new farm policy nev-
ertheless undermined longer-term support levels, proponent Pat Roberts
(R-Kansas), then chairman of the House Agriculture Committee, opined
that Congress itself was the long-term safety net. This turned out to be
the case.
Re-institutionalizing Higher Farm Support in 2002
After spiking upward in 1995 and 1996, crop prices began to fall in
1997 and remained low through to 2001. As prices fell, support expendi-
tures built into the FAIR Act increased automatically because of the price
guarantees provided by loan rates. The loan-rate-related expenditures
jumped up to $1.8 billion in calendar year 1998, then $6.8 billion in 1999,
$7.5 billion in 2000 and $6.2 billion in 2001.
farm policy reform in the united states 93
Once prices fell sharply, the PFC payments and built-in increased
expenditures for price guarantees under the FAIR Act provided less sup-
port to farmers than would have been available under earlier farm pro-
grams. Critics of freedom to farm decried it as freedom to fail with
low prices, reduced support and absence of a strong farm safety net. A
Congress closely divided on party lines could not resist responding to
the criticism. It stepped in with emergency legislation and then with
supplemental annual appropriations for additional payments, together
with new disaster relief and crop insurance subsidies. One effect was to
essentially double the PFC payments in 1999, 2000 and 2001.
The next farm bill, the Farm Security and Rural Investment (FSRI)
Act of 2002, incorporated three tiers of support for wheat, feedgrains,
oilseeds, rice and cotton. First, direct payments were continued at rates
similar to those provided by PFC payments under the FAIR Act and were
added for soybeans and other oilseeds which had not been included in
1996. Second, loan rates were continued and most were raised compared
to the maximum levels under the FAIR Act. Loan rates were added for
several additional crops (dry peas, lentils, small chickpeas) andfor mohair,
wool and honey. The FSRI Act also xed the loan rates in nominal terms,
removing discretionof the Secretary of Agriculture tolower the rates based
on an average of past market prices. That exibility was provided in 1985
when the government was still taking the supported crops into storage if
market prices fell below loan rate levels. Once LDPs and marketing gains
came into effect, so market prices below loan rates no longer resulted in
crops going into government storage, and the pressure to keep loan rates
below market price levels was lessened.
4
The third tier of support in the FSRI Act re-institutionalized the emer-
gency payments as new countercyclical payments (CCPs). The counter-
cyclical payments were to be made when the sum of the market price (or
loan rate if the market price was lower) plus the direct payment was less
than newly legislated target prices. Farmers retain exibility to plant a
range of crops thus, they did not have to produce the crops for which
they would receive direct and countercyclical payments. Both the direct
payments and countercyclical payments were set to be made on 85 per
cent of base acreage for payment yields determined under the bill. Each
participant was allowed a one-time decision about bases and yields, which
4 Although the Secretary of Agriculture was authorized to do so, loan rates had not been
changed under the FAIR Act. Such formula-based rates would have been lower than the
maximums specied in the law after market prices dropped sharply from 1998 through
2001.
94 agricultural subsidies in the wto green box
would then determine their payment eligibility for the duration of the
FSRI Act. The rules for determining base acreage were the same for the
direct and countercyclical payments, but rules for setting program yields
differed.
5
Setting of payment limits on individual program beneciaries has long
been a political issue in farmpolicy debate in the US. Payment limitations
have been raised as a matter of the fairness of scal policy and to focus the
support policies on smaller farm units. They also have had a regional and
commodity basis because per-acre payments are higher for cotton and
rice than for other crops. The FSRI Act included only modest payment
limitations for producers. A three-entity rule was retained that allows
any individual to receive a full payment for one farm entity and up to
a half payment from two additional units. For the payments related to
loan rates, the limitations on individual eligibility was undermined by
retaining special commodity certicates that enable producers who
faced payment limits to continue to benet from repayment rates below
the loanrates. Only a weak income-basedeligibility capwas imposed, with
producers having average adjusted gross income over three years of more
than $2.5 million ineligible for payments unless at least three-quarters of
their income came from agriculture.
Passage of the 2002 FSRI Act was met with derision by domestic pol-
icy critics and a barrage of international condemnation. Nobel laureate
Joseph Stiglitz derided the new farm support law as the worst form of
political hypocrisy, while Malloch Brown, head of the UN Development
Program, accused US policy of holding down the prosperity of poor peo-
ple in Africa and elsewhere for very narrow, selsh interests. In reply, the
5 Program payment yields for direct payments were unchanged in the FSRI Act for those
crops previously covered under PFC payments. However, those farmers who update their
base acreage were also given options to update yields for the countercyclical payments.
This distinction between the two support programs in part reected WTO considerations.
The xed payments had been reported to the WTOby the US as green box. By not allowing
yield updating, the US reduced the likelihood of a challenge to the classication of these
payments, even though updating of the base acreage was allowed. The countercyclical
payments were also to be made on a xed acreage and yield and did not require production
of specic crops. However, the countercyclical payments were explicitly linked to market
prices and were expected to be reported as WTOamber box. Thus, a claimof being exempt
from subsidy limit commitments was not being made and yield updating did not pose the
threat of a challenge to their classication. Despite these considerations, in the Brazilian
dispute case against the US cotton program, the direct payments were found not to qualify
for the green box because they were linked to production through precluding recipients
from growing fruits and vegetables on the base acreage.
farm policy reform in the united states 95
US House Agriculture Committee offered a strident defense of US farm
policy, arguing that it was important to national security, ensuring a safe,
abundant, and affordable domestic food supply. A document posted on
the Committees web page made the claim that: Critics of U.S. farm
policy would cede our food production to unstable places like the Third
World, and asked but in these times does any American want to depend
on the Third World for a safe and abundant supply of food and bre?
These disparate and sharply worded views of the US farm bill are
indicative of the global conict that has continued to fester over agricul-
tural trade and support policies. Yet severe critics of the 2002 bill and its
staunch defenders both overstated their cases. The 2002 US farm bill took
few, if any, constructive unilateral steps toward reduction of subsidies.
Nor did it expand the worst subsidy policies as abhorrently as sometimes
implied. Congress had already intervened to increase payments to farmers
when prices were low. The 2002 bill re-institutionalized these payments,
but farmers retained the planting exibility legislated in 1996, so the new
payments were more decoupled from production decisions than in ear-
lier legislation under which deciency payments required production of
specic crops. The FSRI Act also included a provision for the Secretary
of Agriculture to the maximum extent practicable, to adjust domestic
commodity program expenditures to avoid exceeding allowable WTO
domestic support ceilings.
Buyouts of peanut quotas and tobacco quotas and price supports
The cash-out reforms that have occurred for the main US support pro-
grams have served partially to decouple subsidies from production deci-
sions, but have not systematically reduced the level of subsidies provided.
Amore radical reformis a compensatedendtoa support programthrough
a buyout. A buyout would provide enhanced transition support initially
to farmers, provide consumers and taxpayers with lower market prices
or long-term scal savings and could pave the way for more substantial
agricultural trade reform.
In the US, contrasting recent policy outcomes among the historically
similar peanut, tobacco, sugar and dairy support programs provide some
evidence about the conditions conducive to a buyout andits costs.
6
A2002
6 Reform of the EU sugar regime and Australian reform of its dairy quota program also
include buyout dimensions. See Bureau et al. (2007) for discussion of the EUsugar reform.
96 agricultural subsidies in the wto green box
restructuring of the peanut program in the FSIR Act included a buyout
of production quota rights for the domestic market and lower domestic
prices together with new direct and countercyclical payments. In 2004, a
tobacco buyout under separate legislation ended quotas and eliminated
the loan rate program without implementing new payment mechanisms.
In contrast, there has been a lack of reform of US support programs for
sugar or dairy.
The two recent US buyouts do suggest that narrowly dened benets,
specically production quotas that generate explicit rents, are easier to
buy out than broader support policies. Binding quota rights were bought
out both for peanuts and tobacco, whereas sugar marketing allotments
that only intermittently have been binding have not been bought out.
Buyout reforms have tended to coincide with shrinking benets for
participants under the old programs. The pressure from reduced quotas
and revenue was most severe for tobacco and the tobacco buyout most
complete. Unique circumstances surrounding tobacco also explain why
the buyout was more complete than for peanuts. Domestic tobacco pro-
ducers had been less successful than peanut or sugar producers in secur-
ing restrictions on imports to protect their quota rents. The substantial
healthcare-related payments made by manufacturers and importers in
the tobacco 1998 Master Settlement Agreement were also unique to this
industry.
Buyout payments have provided quite lucrative compensation, espe-
cially given the declining benets to quota owners that triggered the
reforms. For peanuts, the $0.55/pound lump sum in the 2002 farm bill
was equivalent to average annual past rental payments, discounted at a
5 per cent rate, for a 24-year period (Womach, 2003; Orden, 2007). For
tobacco, the payments to quota owners were more than double the private
market prices that had prevailed for sales of quota rights before the buy-
out. They were equivalent to discounted average quota rental payments
for 15 to 20 years for ue-cured and burley tobacco.
The buyouts of peanut quotas and the tobacco quota and price sup-
port program have been costly, but ended previous government inter-
ventions. In contrast there has been relatively little reform for sugar and
dairy. For sugar, the cost of US protection, with prices often double or
triple world levels, is borne by consumers not taxpayers, as it was for
peanuts and tobacco. The sugar program remains dependent on bind-
ing import restrictions under TRQs. Domestic marketing allotments can
also be imposed, but these have only constrained domestic production in
farm policy reform in the united states 97
occasional years.
7
Domestic sugar producers have not seen their benets
erode dramatically as had peanut and tobacco quota owners, so there has
been no impetus for a buyout.
Instead, in1996, the FAIRAct continued the traditional sugar program.
Sugar could be forfeited at loan rates to USDAs Commodity Credit Cor-
poration (CCC) under non-recourse loans (for which the commodity
collateral is accepted in lieu of repayment). Thus, no basic liberalization
of the sugar market was achieved, and the loan rates continued to provide
a oor under domestic market prices.
In the 2002 FSRI Act, domestic producers succeeded in tightening the
provisions of the sugar support policies. The 2002 farm bill reinstated
an earlier stipulation that the sugar program be operated to the extent
possible at no net cost to the government. The combination of the no-
net-cost provision and a new constraint on use of domestic marketing
allotments if imports exceeded a level set in the legislation served, in
the words of the US producers, to ensure that the USDA and US trade
representative stood shoulder to shoulder with the domestic industry
in opposing loosening of import restrictions. Together these provisions
tied the hands of policy administrators: imports above 1,320,000 metric
tons could not be offset by domestic marketing allotments to sustain
the supported price, while allowing imports to exceed this level would
induce violation of the no-net-cost provision if CCC stockpiling were to
result. Thus, under the FSRI Act, the sugar programhad to continue to be
administered with tight import restraints, which set the farm bill rmly
against sugar trade liberalization.
For dairy products, import restrictions under TRQs remainthe primary
instrument for sustaining domestic prices above world levels. Related
dairy provisions of the domestic farm bill are among the most complex
of farm programs. Under the FAIR Act, the dairy price support program
was initially scheduled to end on December 31, 1999. Instead, the 2002
FSRI Act extended the two main dairy programs, purchases by the CCC
to support the price of milk used for various processed (manufactured)
products and federal milk marketing orders that regulate markets for
the uid milk consumed directly. To provide price support, the CCC
was authorized to buy necessary quantities of butter, cheddar cheese or
non-fat dry milk. The Secretary of Agriculture retained the authority
7 There is no established market price for rental or purchase of marketing allotments, as
there was for peanut and tobacco quotas before the buyouts of those programs.
98 agricultural subsidies in the wto green box
to adjust product purchase prices as deemed necessary. Milk marketing
orders dene the relationship between prices of uid and manufactured
dairy products and maintain a regulated geographic price structure. One
modest cash-out innovation under the FSRI Act involved a new national
dairy countercyclical payment program.
8
Conservation program subsidies
Conservation and environmental programs play an important role in
agricultural production decisions. Through these programs, producers
receive cost-share, rental and other direct payments in return for using
specied farming practices or for setting aside land in conserving uses.
The FSRI Act continued and, in most cases, expanded various conserva-
tion/environmental programs. The programs that retire environmentally
sensitive land from crop production were extended, but most new expen-
ditures were targeted for conservation measures for livestock operations
and land that stays in production.
Idling of farmland for 10-year periods under the Conservation Reserve
Program (CRP) has been the primary conservation and environmental
program in effect since 1985. This policy has a supply-repressing effect.
The FSRI Act increased the land-idling authority of the CRP to 39.2
million acres, compared to 36.4 million under the FAIR Act. An increase
in CRP acreage adds to its output-reducing impact.
The Environmental Quality Incentives Program (EQIP), which pro-
vides technical assistance, cost sharing and incentive payments to assist
livestock and crop producers with conservation and environmental
improvements, was expanded under the FSRI Act. Cost sharing (up to
75 per cent) or incentive payments were authorized for a wide range of
8 Under the Dairy Market Loss Payments program, countercyclical payments were to be
made to dairy farmers on a monthly basis when there were low market prices of uid
milk. Payments were limited to 2.4 million pounds of milk per year per operation, which
corresponded to the production from a relatively small dairy herd of about 135 cows. With
this limit, about 50 per cent of total national milk production was likely to be eligible
for the direct payments, but only about 30 per cent of the total production was from the
smaller operations that produce less than the 2.4 million pound limit. For these small
producers, the countercyclical payments created an incentive to expand production at the
margin because the per-unit price they receive was supported at the target price level. For
the larger farms producing about 70 per cent of the milk in the US, the payments program
was essentially decoupled from production it provided a variable payment on a xed
output that was inversely related to the price of milk. This was similar to the countercyclical
crop support program in the FSRI Act.
farm policy reform in the united states 99
practices, including nutrient management, livestock waste handling, con-
servation tillage, terraces and lter strips. EQIP is unique in its relative
focus on livestock producers.
Under the FSRI Act, a new Conservation Security Program (CSP) was
also initiated. The CSP focused on land-based practices and specically
excluded livestock waste-handling facilities. Producers would develop and
submit a conservation plan to USDA that identied the resources and
designated land to be conserved. The plan could include conservation
practices that fell within one of three tiers provided in the program.
Producers entering into rst-tier conservation security contracts would
receive a base payment for conducting the practices designated in the
conservation plan. Producers might also be eligible for bonus payments
for implementing additional (tier two and three) conservation measures.
The mix of conservation support programs under the FSRI Act called
attention to the policy discretion involved in US programs regarding
acreage idling for environmental purposes. While the US has maintained
the CRP and related long-term land-idling since 1985, it is not under
any international obligation to do so. Historically, the US has enacted
conservation land idling as a supply control measure during times of low
prices (the 1930s, the 1960s and again in 1985) and has let these programs
expire when market demand was relatively strong.
9
Competitors in world
markets do not object to land idling in the US, which reduces US pro-
duction and gives the foreign producers a competitive advantage, but the
CRP has occasionally been criticized for unnecessarily restricting output
and pushing world prices for basic grains higher than otherwise. Were the
US to shift more fully toward support for use of environmental practices
on land that continued in production in the future, along lines of the CSP,
output could expand, but competitors in world markets would have little
basis for objections under the WTO or other trade agreements.
The conservation programs of the FSRI Act also brought attention to
the effects of domestic environmental regulations on agricultural com-
petitiveness. Should EQIP or CSP payments be considered production
subsidies? Once domestic regulations are enacted requiring certain envi-
ronmental performance, producers are obliged to comply. The EQIP
expenditures reduce compliance costs of producers. Under an alternative
approach (the polluter pays), these could be viewed as costs that should
9 The CRP of the 1930s gave way to full-scale production during World War II, but supply
abundance in the mid-1950s brought another long-term land conservation program. This
second CRP enrolled a peak of 28.5 million acres in 1961, but was allowed to phase out in
the 1970s when US agricultural exports boomed.
100 agricultural subsidies in the wto green box
Speed of implementation
Compensation
Slow Fast
Yes Cash out Buyout
No Squeeze out Cut out
Figure 5.1 Alternative reform strategies
Source: Orden, Paarlberg and Roe (1999).
be borne by producers that might affect agricultural production levels.
Thus, the EQIP expenditures can be considered production subsidies,
but under WTO rules any subsidies that offset (but do not exceed) envi-
ronmental costs of measures undertaken by producers are eligible for
classication in the green box and are exempt from limit commitments.
Likewise, subsidies under the CSP are, in principle, offsetting costs related
to maintaining environmental quality, and thus qualify as being in the
WTO green box whether or not adoption of the supported practices is
required by domestic regulations.
Strategic reform paths
The preceding section has highlighted some of the proximate circum-
stances that have driven US farm policy at particular junctures prior to
the 2008 farm bill. There also has been a systematic dimension to the
evolution of policy. That dimension has been a slow and imperfect shift
away from supply controls and supported prices toward direct payments
from government and less explicit intervention in markets. The support
policies have become increasingly if still far from perfectly decoupled
fromproduction decisions. In Orden, Paarlberg and Roe (1999), we char-
acterized this strategic reform path as a cash-out of slowly evolving and
compensated partial measures, as noted above.
The cash-out reform strategy can be contrasted with three alternatives
in terms of speed of reform implementation and whether past program
beneciaries are compensated for the policy change (see Figure 5.1).
Reading clockwise from the lower right corner, these alternatives reect
outcomes revealing the most to least loss of inuence by the farm lobby.
A cut-out would end farm programs abruptly and without compensa-
tion, as might be proposed by conservative scal groups or critics of
farm policy reform in the united states 101
the negative effects of US subsidies on poor countries. Such a draconian
reform mostly has not proven politically feasible in the last 70 years. A
slower squeeze-out occurs if the farm policy parameters are allowed to
erode to the point that effective support is curtailed. A squeeze-out has
not occurred during past commodity booms, such as when prices rose
in the 1970s and ination could have made the nominal price interven-
tions inoperative (instead, price support parameters were ratcheted up),
nor in the mid-1990s (when payments decoupled from prices replaced
price-linked deciency payments). Nor has a squeeze-out occurred over
the longer transition as the agricultural sector has systemically shifted to
being more prosperous than in the past.
A hypothetical buyout of the main farm support programs
Given the circumstances under which peanut and tobacco buyouts
occurred, it is unsurprising that no credible buyout proposal has been
made for the main US commodity programs, with this option being
discussed only at the fringe of the policy debate.
10
A buyout of the 2002 US farm programs could have focused on
direct payments, countercyclical payments and/or loan rate price guar-
antees (marketing loan benets). The direct payments provide a nar-
rowly dened benet which increases the feasibility of a buyout; however,
although their eventual elimination would ease concerns about continued
subsidization, it would accomplish the least economically or institution-
ally, as these payments (or a buyout replacement) are relatively decoupled
and (arguably) a WTO green box policy.
Buying out countercyclical payments, a particularly contentious form
of decoupling likely tohave production-stimulating effects, wouldaccom-
plish more: it could allow the US to abandon the WTO blue box, poten-
tially allowing simplication and improved transparency of multilateral
rules on agricultural trade. Abuyout of marketing loan benets could end
an amber box policy: the most directly production-linked of the main
commodity programs, these have an uncertain level of annual expendi-
tures depending on market prices and current production levels.
Table 5.1 summarizes the costs of a full 25-year buyout of direct pay-
ments, countercyclical payments and marketing loan benets at the level
10 See Stokes, 2007a, 2007b for examples. In the 2008 farm bill debate, the CATO Institute
(James andGriswold, 2007) proposeda very modest buyout essentially a cut-out delayed
by ve years. CITIGROUP, which had nanced lump-sum payments to tobacco buyout
recipients, made an innovative proposal for a voluntary buyout which was summarily
rejected in Congress.
102 agricultural subsidies in the wto green box
Table 5.1 Cost summary for a possible buyout of the main US 2002 farm
bill support programs (Buyout over 10 years of 25 years of future payments
at 2002 farm bill levels)
Fixed Marketing
Direct Countercyclical Loan
Payments Payments Benets Total
billion dollars
2002 Farm Bill Annual 5.256 2.356 2.595 10.207
Payments (FY 2002
FY 2007)
Buyout:
Annual Cost 9.593 4.300 4.736 18.629
Present Value 77.775 34.867 38.396 151.038
Innite Annuity 3.704 1.660 1.828 7.192
Equivalent
delivered by the 2002 farm bill. Buyout payments are assumed to be made
in equal nominal instalments over 10 years, as occurred for tobacco. The
rst row shows annual expenditures under the 2002 farm bill, based on
actual past expenditures and projections in the presidents scal year 2007
budget (December 2006). Row 2 shows the annual buyout costs required
to compensate for 25 years of annual payments at the average level of the
2002 farm bill roughly consistent with the compensation provided for
peanuts and tobacco. The last two rows show the present value of these
payments and the value of annual payments for which these costs are
equivalent as an innite annuity, using a 5 per cent discount rate.
The present value of a full buyout provides a measure of the economic
values that have been at stake with or without a buyout under legisla-
tion along lines of the 2002 farmbill. The estimate of the discounted value
of payments for 25 years such as the 2002 bill provided is $151 billion.
Much of this payment stream is capitalized into present farmland values.
The annual cost of a 10-year buyout is around $18.6 billion. This is high,
but not unprecedented, compared to past annual farmsupport payments.
Finally, the value of the buyout as an innite annuity is nearly $7.2 billion.
One view of the buyout illustrated in table 5.1 is that, once enacted, it
is equivalent to securing payments at this level forever, but without the
need for subsequent political battles over future payments.
farm policy reform in the united states 103
Buying out farm support payments raises short-term budget costs, but
reduces expenditures in the long run. Buyouts could also be shorter and
sharper than those illustrated above, with lower present value and annual
cost if compensation is paid for a reduced number of years. For example,
a buyout of 15 years of the 2002 farm bill payments shown in table 5.1
has a present value of $111.2 billion and an annual cost for 10 years of
$13.7 billion.
Any buyout of farm subsidy payments for the main crop programs
would also have to address the issue of enforcement. The record from the
post-1996 increase in support shows that new expenditures can easily be
enacted under existing farm program legislation. However, several steps
could improve the prospects for adherence to a buyout, however. Firstly,
the permanent legislation for farm support programs could be elimi-
nated. A strong WTO agreement might provide an enforcement mech-
anism. Furthermore, buyout legislation could stipulate that the acreage
concerned (and output from that acreage) becomes ineligible for future
support. To formalize this, buyout contracts could be modelled on those
by which some farmers sell their development rights to state and local
governments for the different purpose of their land remaining in rural
condition or agricultural use. No congress (federal or state) can unam-
biguously bindthe actions of a future congress. However, conditions could
be dened that would make it much more difcult to reinstate bought-out
farm programs than it has been to maintain the existing ones.
Continued support under the 2008 farm bill
11
A large-scale buyout was not on the political agenda for the near term
when the 2008 farmbill was considered by Congress. Instead, the prospect
was for incremental reforms along the messy cash-out line or for possible
reversion to support programs more coupled to production incentives.
At issue were what would be the policy instruments and who would be
the recipients. By 2006, commodity prices had strengthened from the low
levels of the early 2000s and were projected to remain high enough to
reduce the price-linked loan-rate and countercyclical subsidy payments
sharply. There was a high level of interest in a new farm bill in these
circumstances. The newbill was anticipated in2007, but the debate spilled
over into 2008, forcing Congress to pass ve short-term extensions of the
FSRI Act.
11 This section is drawn largely from Orden, Blandford and Josling (2008).
104 agricultural subsidies in the wto green box
One starting point for consideration of the farm policy issues in 2007
was a proposal made by the administration. Whereas the Democratic
administration in 1995 to 1996 and Republican administration in 2001
to 2002 had been relatively passive in formulating farm bill proposals,
throughout initial discussions of the 2007 bill the Secretary of Agriculture
called for policies that were equitable, predictable and beyond challenge.
In January 2007, despite the loss of control of Congress to the Democrats
in the November 2006 elections, the administration released a detailed
proposal to meet its criteria through a set of incremental reforms along
the decoupling path (USDA, 2007).
12
Several of the administrations key recommendations related primarily
to domestic aspects of farm policy. The administration endorsed direct
payments, but proposed that nearly $8 billion over 10 years be shifted
from commodity support to conservation programs through changes in
policy design. Part of the claimed savings came from converting coun-
tercyclical payments from a price-basis to a nationally calculated revenue
basis. This was asserted to lower expenditures by taking advantage of
the natural price-quantity hedge (when output is low, prices are higher
and vice versa), which partly stabilizes revenue. The administration also
proposed a strict means test with a $200,000 adjusted gross income limit
for support eligibility. In aggregate, the administrations proposal held
spending for agricultural commodity programs within the level projected
under a continuation of the FSRI Act. Spending was expected to be much
lower than during 2002 to 2007 because of the projected higher prices. In
short, under the administration proposal there was to be a squeeze-out
of traditional commodity subsidies with countercyclical payments and
loan-rate-based price support falling sharply.
Additional administration proposals related to improving US compli-
ance with WTO rules. For cotton, lower loan rates were recommended,
compensated by higher direct payments. This potentially addressed the
call for particularly strong reforms under the special cotton initiative
within the WTO Doha Round negotiations. The administration recom-
mended that cultivation of fruits and vegetables be permitted on base
acres. This would address the issue of whether US direct payments could
12 The 2007 USDA proposal, even with its reform provisions, was in many ways less reform-
oriented than proposals made by past Republican administrations. In part, this reected
anticipation prior to the November 2006 elections that Republicans would continue
to control Congress. This would have left the party accountable for the nal farm bill,
whereas past Republicanadministrations had knownthey could make whatever proposals
they chose with a Democratic congress eventually liable for the nal outcome.
farm policy reform in the united states 105
be counted in the WTO green box that had been raised by the Brazilian
challenge to the cotton program (WTO, 2005). Greater exibility in US
food aid programs was recommended, which would provide reform that
the EU was demanding in the Doha Round and defuse objections that US
food aid programs were implicitly subsidizing exports.
The House of Representatives acted next on the new farm legislation.
By July 2007, it had rejected most of the administrations reform recom-
mendations and drawn objections from the administration through pro-
posals for tax increases and the use of timing and other gimmicks to mask
spending increases. The House bill retained the direct, countercyclical and
loan-rate tiers of existing support, assuring farmers that the traditional
programs would be in place in the event that prices fell to lower levels than
being projected. The loan rate for sugar was increased and the dairy sup-
port program modied to establish price supports directly for processed
products rather than uid milk, potentially reducing substantially the
dairy support that would be reported in WTO notications while having
no real market effects. The House bill offered new demand-augmenting
support for fruits and vegetables, but did not allow production of these
crops on base acres, which was opposed by domestic growers.
13
Overall,
the House bill partly mitigated the squeeze-out of farm sector spend-
ing that higher prices were creating, but did not avoid the substantial
reduction anticipated for commodity support.
The Senate did not complete a farm bill until December 2007 as var-
ious groups squabbled over specic programs and their funding. The
Senate bill also retained the three-tiered support structure as an assur-
ance to farmers in the event of lower prices. It added an optional crop
revenue program in place of the existing loan rates and countercyclical
payments. The Senate proposal differed substantially from the revenue-
based program suggested by the administration because it linked the new
revenue guarantees to a moving average of actual market prices and crop
yields rather than to xed target prices and xed base-acreage production
levels. The Senate revenue insurance program was estimated to provide
similar benets to the existing programs for corn, wheat and soybeans
when prices were relatively low, but higher benets if prices remained
13 Domestic growers were worried about expanded supplies and lower prices if fruits and
vegetables could be grownonbase acres. Their concerns parallel the challenge being raised
within the WTO on the alleged decoupling of the direct payments notied in the green
box. The WTOchallenge rests on whether these payments are sufciently decoupled from
production, with possible adverse effect on prices of subsidized crops because planting
restrictions limit movement into fruits and vegetables.
106 agricultural subsidies in the wto green box
high (Zulaf, 2007). This was another step toward avoiding a squeeze-
out of commodity support. Even so, at anticipated prices the Senate
bill was expected to lead to a decline in projected commodity program
spending.
It took another six months for Congress to nalize the Food, Conser-
vation and Energy (FCE) Act of 2008. Calls intensied for farm program
reform and reduced commodity expenditures when prices of crude oil
and agricultural commodities shot upward early in the year. Congress
faced both continued internal disunity about specic provisions of the
legislation and its funding, and the threat of a veto by the administration.
The veto threat required Congress to either reach a compromise accept-
able to the administration or pass a bill with veto-proof majorities. The
administration reiterated its earlier proposals and criticized the congres-
sional bills for failing to enact reforms and disguising higher levels of
likely expenditures. When the administration showed little inclination to
negotiate, Congress passed a bill with enough support to be enacted into
lawover a presidential veto that the administration made almost no effort
to sustain.
In aggregate terms, the FCE Act distributes expected mandatory expen-
ditures for scal years 2008 to 2012 in a similar way to levels anticipated
under extension of the FSRI Act (Johnson, 2008). An increase of total
expected outlays of $5 billion and signicant shifts in spending among
categories at the margin reected the effort to attract a broad coalition
of congressional backers through increased expenditures for nutrition,
conservation, energy and a host of other programs targeted at specic
constituencies.
The projected commodity program spending was $41.6 billion under
the FCE Act, a projection that reected $1.1 billion of estimated ve-
year savings simply from postponed timing of anticipated payments for
2012. The projected commodity support was comprised almost entirely
of direct payments that traditional subsidy recipients defended against
reductions. Loan-rate-related and countercyclical payments were antic-
ipated to be minimal. With high projected prices, the authority for the
CRP was also reduced to 32 million acres by the FCE Act. Nonethe-
less, expected expenditures for conservation programs increased by
$2.7 billion to $24.1 billion, reaching almost 60 per cent of the projected
commodity support, compared to just one-quarter during the previous
ve years. In this sense, in the event of projected high prices a substantial
relative shift toward conservation will take place in farm program out-
lays. However, farmers remain well protected if prices turn out lower than
farm policy reform in the united states 107
projected through retention, and even a marginal strengthening, of the
loan-rate and countercyclical tiers of commodity support.
The FCE Act included only a small pilot program to allow production
on base acreage of certain fruits and vegetables (for processing on 60,000
acres in seven Midwestern states) with any such acreage planted ineligible
for support payments during that year. The FCE Act also extended sup-
port through dairy market loss payments and created new payments to
processors of domestic or imported cotton to replace the Step 2 pay-
ments to processors of domestic cotton that had been ruled in violation
of WTO rules in the case brought by Brazil.
14
Various other titles of the
farm bill expanded and added programs for biofuels, horticultural crops
and disaster assistance.
The FAIR and FSRI Acts demonstrated the responsiveness of US farm
policy to proximate market circumstances as well as movement toward
somewhat less market intervention. Throughout the 2007 to 2008 debate
most farm groups remained wary of any changes to existing programs,
despite the rising prices for oil and farm commodities in 2006 to 2007
and the boom that caused commodities to hit record price levels early
in 2008. Nor was there much of a budgetary incentive to change pol-
icy instruments. Relatively high prices were built into the 2007 baseline
budget projections of the cost of farm policies. Therefore, there was little
opportunity to capture projected expenditures that would not materi-
alize because of high prices, unlike in 1995 to 1996 when unexpected
higher prices were eliminating expected deciency payments and making
the switch to xed payments attractive. New instruments could deliver
higher spending in the FCE Act only if their scal cost was approved by
the Congress or misjudged in budget analysis, while holding on to the
existing loan rate and countercyclical programs bore little political cost
to the farm lobby.
One of the proximate causes of the 2007 to 2008 boom in commod-
ity markets was the US ethanol fuel tax credit and ethanol use man-
dates designed to promote corn-based fuel production. These are highly
product-specic policy instruments reinforced by a high import duty.
Initiated in 1978, the tax credit, together with other federal and state
incentives, had only induced a modest level of ethanol output (less than
2 billion gallons in 2005) until oil prices rose and new blending mandates
were enacted. The federal ethanol tax credit of $0.51 per gallon added
14 United States Subsidies on Upland Cotton, dispute DS267, http://www.wto.org/english/
tratop e/dispu e/cases e/ds267 e.htm.
108 agricultural subsidies in the wto green box
more than $1.50 to the break-even price that could be paid for corn
converted into ethanol (Tyner, 2007). The subsidy exceeded $3 billion
by 2007 and the Energy Policy Act of 2005 mandated that production
reach 7.5 billion gallons by 2012. As oil prices rose and the armed con-
icts dragged on in Iraq and Afghanistan, both political parties called for
increased energy security for the US in ways in which the US has long crit-
icized Japan and other food-importing countries for whenever they have
called for increased domestic food self-sufciency. In each case, the argu-
ment makes an exemption for strategic commodities to which general
trade and subsidy rules are not to apply.
15
The Energy Independence and
Security (EIS) Act of December 2007 expanded the mandate for ethanol
production to 36 billion gallons by 2022, of which 15 billion gallons were
to come fromcorn-based production. Model-based estimates of the effect
on corn market prices ranged from an increase of 25 per cent ($0.74 per
bushel) in 2006 due to the tax credit assuming the mandate was not bind-
ing (de Gorter and Just, 2007), to 12 to 14 per cent (by then also around
$0.70) in 2008 to 2009 (Babcock, 2008) or averaged for 2011 to 2017
(FAPRI, 2008) due to the mandates, tax credits and import duties. In a
circumstance of record oil prices stimulating ethanol production in 2008,
the new farm bill reduced the ethanol tax credit to $0.46 per gallon, but
extended the ethanol import duty until 2012.
Withhighfarmcommodity prices in2008, direct payments came under
intense scrutiny in the domestic policy debate. Decoupling is encouraged
by WTO rules as a way of providing an attractive non-trade-distorting
support option. However, with the direct payments making up by far the
largest share of the commodity support anticipated under the FCE Act,
proponents of alternative spending eyed a reduction in direct payments to
fund other priorities. The direct payments were retained only after a ran-
corous domestic confrontation, particularly in terms of income eligibility
limits for recipients. Payment eligibility criteria were tightened modestly
(to caps on non-farm income of $500,000 for all three commodity sup-
port programs and farm income of $750,000 for direct payments only).
Payments were also reduced by 2 per cent by limiting the base acreage on
which they were made from 85 per cent to 83.3 per cent through 2011,
then restoring the initial level in 2012 to retain a larger budget baseline
for future payment projections.
In one respect, the sharp rise in prices in 2008 shifted policy toward a
new instrument, as occurred in 1995 to 1996. In this case, however, the
15 See Lugar (2006) for just such an argument from a senator who otherwise mostly favors
open markets and global integration.
farm policy reform in the united states 109
shift was toward a program more closely tied to market prices. The FCE
adopted a modied version of the optional Senate revenue guarantee as
an optional new Average Crop Revenue Election (ACRE) program which
is likely to be considered product-specic trade-distorting support in the
WTO. Starting with the 2009 crop, farmers electing ACRE for all covered
commodities for the duration of the FCE Act incur a 20 per cent cut in
direct payments and a 30 per cent cut in their loan rates. In exchange,
if crop revenue for the state (yield per planted acre multiplied by the
national price) is below a guaranteed level and enrolled producers incur
a loss of revenue for the crop on their farm, they are assured of payments
of up to 25 per cent of the revenue guarantee. The guarantee is 90 per
cent of the revenue derived from the two-year national average of lagged
prices multiplied by the ve-year Olympic average of state average yields
(Committee on Agriculture, FCE Act Joint Explanatory Statement, 2008).
This guarantee covers 83.3 per cent of the acreage planted (or considered
to be planted) by a farmer to the covered commodities; thus, it is based on
current production. Once the initial guarantee is established for a farmer
entering the program, it cannot vary by more than 10 per cent from the
previous years guarantee, moderating any sharp revenue downturn.
In assessing the cost of the farm bill, the Congressional Budget Ofce
(CBO) concluded that only a relatively small fraction of farmers would
enrol in the ACRE program and that its cost would be modest. However,
with prices at historically high levels in the rst half of 2008, the admin-
istration argued that initiating ACRE on the basis of the moving average
of prices prevailing in 2007 to 2008 ran the risk of inducing subsidy pay-
ments at much higher price levels than under the target prices of the
countercyclical payments program. As an example, the administration
assumed that 90 per cent of farmers opted for the ACRE program and
found that payments for corn alone would be nearly $4 billion in 2009 at
prices as high as $4.00 per bushel, compared to no CCPpayments at prices
above the corn target of $2.63 per bushel (USDA, 2008b). Although the
ACRE payments decline once prices stabilize, this example illustrates that
ACRE ratchets up the price level at which subsidy payments would occur
during a transition period when high prices fall. The ACRE program
opened the most substantial opportunity within the FCE Act to avoid a
squeeze-down of subsidy payments due to high prices, as acknowledged
by its proponents (Brasher, 2008). Subsequently, Blandford and Josling
(2008) concluded that ACRE program payments would in some years
exceed commodity-specic caps under negotiation in the Doha Round if
prices of corn, wheat and soybeans during 2007 to 2012 followed a pattern
similar to that in the 1970s, 1980s or 1990s.
110 agricultural subsidies in the wto green box
Other than the ACRE program, which provides an optional new rev-
enue guarantee, the traditional crop and revenue insurance programs had
expanded at increased government costs in the early 2000s. The FCE Act
stipulated that total premiums be adjusted slightly to equal total indem-
nities payments over time (resulting in an expected loss ratio equal to
one) and reduced the administrative costs of delivering crop and revenue
insurance programs by lowering payments made to the insurance agents.
Larger claimed savings were again achieved simply by postponing the
timing of some payments.
Congress hadalsoappropriatedannual disaster relief toagriculture that
averaged about $2.5 billion annually during 2000 to 2005. The FCE Act
created mandatory funding for ve disaster relief programs by amend-
ing the Trade Act of 1974 to establish a mandatory program (of nearly
$4 billion over ve years) nanced from import duties. Again, this was a
step toward avoiding a squeeze-out of support to agriculture by ensuring
at least partial availability of funds for disaster relief without requiring
annual congressional appropriations.
Slight increases in loan rates and target prices contained in the FCE
Act strengthen policy instruments coupled to production. This will prove
innocuous (with the exception of raising the sugar loan rate) if prices
remain well above loan-rate levels as projected.
16
However, these param-
eter adjustments are another signal of the continued strength of the farm
lobby. The Democratic Party has generally been more inclined toward
market interventions than the Republicans. With the Democrats in con-
trol of Congress, the effort to increase rather than lower price support
parameters is not surprising. The argument made, and which will be
extended if farm price and income circumstances deteriorate from their
2008 levels, is that higher energy prices and related production costs
render inadequate the safety net that was good enough, indeed lauded
by many farm groups, from 2002 to 2006. Traditional price and income
support levels that were raised only slightly in 2008 could be increased
further in the future.
17
16 The loan rate for raw cane sugar rises from $0.18 per pound to $0.1875 by 2012. The
Secretary of Agriculture is required to set domestic marketing allotments at no less than
85 per cent of estimated quantities for domestic human consumption and to purchase
sugar to produce biofuels if necessary to avoid forfeitures of sugar to the CCC, thus insu-
lating domestic producers from pressure of increased imports under trade agreements.
17 In the early 1970s, rising oil and farm-gate prices were widely viewed as signaling the end
of the era of lowfood prices. Real oil prices were permanently stepped up inretrospect, but
not by nearly the degree that short-term nominal prices of the time led some observers to
farm policy reform in the united states 111
Despite all of these considerations, the high world prices that in early
2008 were straining the global food system and prompting defensive
policy reactions among exporters and importers worldwide had only
modest effects on the commodity support provisions of the US farm bill.
There was no signicant shift toward decoupled policy instruments as
had occurred when prices rose sharply in 1995 to 1996 nor calls for an
end to the permanent support legislation as had been articulated in the
earlier debate. Still, the farm lobby did not avoid, at least for the time
being, a projected squeeze-down of anticipated subsidy payments under
the price-linked support programs. Passing a bill proved difcult with
high prices prevailing, as it had with high prices in 1995 to 1996. In the
end, the veto-proof majorities assembled in Congress demonstrated the
ability of the farm lobby to secure a continuation of support programs
that largely serve the same purposes and benet the same interest groups
as earlier legislation. With this outcome, one can ask howwell the policies
adopted hold up to the MAAPP study-group test of how US agriculture
would feel if they were adopted by other countries.
Role of the WTO
It is uncertain (although still possible in September 2008) whether or
not there will be a WTO Doha agreement. Nonetheless, one can ask
whether the US is taking pre-emptive steps to align its policies more
closely with future WTO consistency. Doing so seemed to be the stated
beyond challenge objective of the Secretary of Agriculture, and was
endorsed as an explicit strategy by the Agricultural Task Force cited above.
Robert Thompson argues as well that the adjustments are not as severe
as some farm groups anticipate (even under early 2000s market price
levels), that such realigning of policy is desirable for US agriculture in the
long term and that there is room under the green box for various farm
programs, including income support subsidies. Moreover, farm groups
can be reminded of some tangible benets from the WTO. Even without
a Doha agreement, there are gains from Chinas accession, the possible
accession eventually of Russia and from a number of dispute settlements
that have gone in favour of the US.
Despite these arguments, the historical record is one of very little pre-
emptive movement of US policy in order to be consistent with anticipated
fear. Real farm commodity prices were already declining by the mid-1970s. The resulting
cost-price squeeze on farm returns led to just such ratcheting-up of the nominal levels of
loan rates and target prices.
112 agricultural subsidies in the wto green box
WTO constraints. Throughout the Uruguay Round, lack of progress in
the negotiations became a trigger for creating and maintaining policies
such as the Export Enhancement Program. That changed somewhat with
the Uruguay Round agreement. The multilateral agreement was not the
cause of the 1996 domestic farmpolicy reforms, but the 2002 farmbill that
raised subsidy spending included a WTO circuit breaker authorizing the
Secretary to make adjustments if necessary to maintain US compliance.
That provision was extended in the 2008 farmbill, but there was relatively
little discussion about remaining WTOcompliant. With high prices, there
seemed little appetite for making explicit changes to US policies designed
to re-position US programs so that conict with a potential agreement
was minimized.
Table 5.2 shows a synopsis of the US farm support program WTO
notications for 2000 and 2001, which were made in March 2004, and
for 2002 to 2005, which were made belatedly in October 2007. Several
points are evident from the table. First, the US claims to be compli-
ant with its Uruguay Round subsidy limit. This is shown by the total
counted product-specic AMS (in the amber box) being less in each
year than the US commitment limit of $19.1 billion, and by non-product-
specic AMS not counted toward the limit because it is less than the de
minimis 5 per cent of the total value of domestic agricultural produc-
tion. The table also shows substantial expenditures for disaster relief and
increasing environmental program expenditures, classied in the green
box, and for crop/revenue insurance, classied as non-product-specic
amber box spending. Overall, the period 2000 to 2005 was one of rela-
tively costly farm spending of $20 to $30 billion annually except for the
year 2003.
The notication by the US of its domestic support through 2005 sharp-
ened debate over whether the WTO commitments could serve to bind
its subsidy expenditures.
18
The US notications can be questioned on
the basis of misclassication of subsidies or on the grounds that some
subsidies are under-reported or not reported. Based on the ruling in
the Brazilian case against US cotton subsidies, it might be argued that
the direct income support payments are not sufciently decoupled from
production to warrant classication as green box. Counting these sub-
sidies as non-product-specic AMS raises its level above the de minimis
18 See Schnepf and Womach (2006), Sumner (2005) and Blandford and Josling (2007)
for earlier overviews of potential WTO challenges to the US program. Blandford and
Orden (2008) discuss the challenges to the US total AMS initiated by Brazil and Canada
in 2007.
farm policy reform in the united states 113
Table 5.2 Synopsis of US WTO domestic support notications ($ million)
Measure 2000 2001 2002 2003 2004 2005
Green Box (Selected Categories)
Income Support 5,068 4,100 5,301 5,267 5,260 5,219
Disaster Relief 2,141 1,421 2,121 1,694 1,964 169
Environmental Programs
(i)
1,785 1,916 2,505 2,450 3,039 3,400
AMS Commitment Limit 19,103 19,103 19,103 19,103 19,103 19,103
Product-Specic AMS (PS AMS)
Total Counted toward Limit 16,804 14,413 9,637 6,950 11,629 12,938
Market Price Support (MPS) 5,840 5,826 5,771 5,757 5,866 5,908
(Sugar and Dairy)
Loan Rate Payments and 10,964 8,587 3,866 1,193 5,763 7,030
Other Benets
Exempt by de minimis
(ii)
62 215 1,590 436 680 118
Non-Product-Specic AMS (NPS AMS)
Total 7,278 6,828 5,100 2,800 5,778 5,862
Crop and Revenue Insurance 1,396 1,770 2,888 1,862 1,123 756
Countercyclical Payments
(CCPs)
(iii)
5,463 4,640 1,804 544 4,288 4,749
Summations
Income Support + NPS AMS 12,346 10,928 10,401 8,067 11,038 11,081
Income Support + All AMS 29,150 25,341 20,038 15,017 22,667 24,019
(excludes PS AMS
de minimis)
Income Support + CCPs + 27,335 23,153 16,742 12,761 21,177 22,906
Counted PS AMS
Value of Agricultural
Production
189,520 198,502 194,572 216,478 235,688 236,001
5 per cent 9,476 9,925 9,729 10,824 11,784 11,800
2.5 per cent 4,738 4,962 4,864 5,412 5,892 5,900
(i)
Includes Conservation Reserve Program (CRP) which was reported as Struc-
tural Adjustment through Resource Retirement Programs for 2000 and 2001.
(ii)
2002 includes $1.1 billion Livestock Compensation Program.
(iii)
Includes Crop
Market Loss Assistance (MLA) Payments in 2000 and 2001 that pre-dated the
CCPs, then CCPs in 20022005.
114 agricultural subsidies in the wto green box
5 per cent in2000, 2001 and 2002, while bringing it within$1 billionof the
limit in 2004 and 2005. If a revised non-product-specic AMS were to
count in the total AMS, that limit would be exceeded in all ve of these
years. Alternatively, were direct income support and countercyclical pay-
ments to be included in notied product-specic support, the US would
have exceeded its AMS commitment in 2000, 2001, 2004 and 2005.
An obvious solution to this violation would be to modify the direct
payments legislation to allow production of fruits and vegetables on base
acres, as proposed by the administration in 2007. That would come at
a political cost that Congress was not willing to bear in 2008. Doing so
would restore WTO legitimacy to a program of payments that is at least
more decoupled than the policies it replaced. That would leave solely to
the domestic political debate the future fate of these direct cash transfers
to farmers as a legitimate use of public funds, as proved a contentious
issue in the debate over the FCE Act.
The US subsidy notications might also be challengedfor not including
some expenditures that could be ruled should be included. For example,
the crop/revenue insurance subsidies reportedare the indemnities subsidy
(indemnities paid less premiums paid by producer). Additional subsidies
are providedfor delivery costs that averagednearly $1billionannually over
2000 to 2005. Federal income tax breaks available specically to farmers
might also be judged as non-product-specic AMS and potentially there
are other measures that could fall into this category. The various other
subsidies not counted so far in the non-product-specic AMS category
would have to be quite large to push expenditures over the 5 per cent de
minimis under the Uruguay Round rules if direct payments are judged as
green box.
In terms of product-specic support, it also might be argued that
tax credits and mandates supporting corn-based ethanol be included
in the amber box (IPC, 2006; Blandford and Orden, 2008) so might
other ethanol investment incentives the farmbill could provide. Including
ethanol tax credits in the amber box would force a trade-off that does not
now exist between traditional AMS spending and the ethanol subsidies.
In contrast, the ethanol policies have mostly evaded WTO discipline so
far and it is not certain howthey would fare under greater scrutiny. Again,
under Uruguay Round rules, ethanol subsidies have probably not been
high enough to push the US over its product-specic commitment limits
in 2000 to 2005.
In the future, there will be different prices and therefore expenditures
for various support programs. There may be different WTO subsidy
farm policy reform in the united states 115
constraints, such as those being negotiated in the Doha Round. There
is room for re-legislating policy instruments to meet WTO classication
criteria and also for challenges along the lines described above.
Without undertaking a precise forecasting exercise over these mar-
ket and policy outcomes, a few observations are apparent. The Uruguay
Round limits do not look binding for the future, except as described
above. Under a possible Doha agreement, the WTO constraints would
be altered. Countercyclical payments may be counted in a new blue box
limited to 2.5 per cent of the total value of agricultural output during a
1995 to 2000 base period (making the limit about $4.8 billion). During
2000 to 2005, this limit was exceeded only in 2000, while in 2004 and
2005 countercyclical payments were again quite high and came close to
the limit in 2005. Similarly, the non-product-specic AMS de minimis
may be limited to 2.5 per cent of total agricultural output value. Without
the countercyclical payments counted, other spending in this category
did not exceed such a level in any year of the 2000 to 2005 period and it
would take counting quite a lot from other subsidies to do so.
In terms of product-specic AMS support, under the price levels that
prevailed during 2000 to 2005, the proposals being discussed for amber
box limits of $7to$8billionpotentially imply some constraints onexisting
US policy. That level was exceeded in ve of the six years. Facing such a
constraint would be a position that the US has generally not been in from
past negotiations the Uruguay Round proposals, for example, put more
pressure on the pre-1992 CAP than they did on the 1990 US farmbill. The
AMS constraint will be eased somewhat by the change in dairy support
policy in the FCE Act which Blandford and Orden (2008) estimate may
reduce the dairy market price support reported in the US AMS in the
future by as much as $3.6 billion.
Under higher market prices as prevailed when the 2008 farm bill was
written, the potential conict witha tighter WTOamber box limit of a new
Doha agreement is diminished, but does not completely disappear. Crop-
specic subsidy caps could impose more pressure on the US programs.
Still, a curious issue arises in a WTO negotiating context from high
prices. Are other negotiating parties prepared to accept the US meeting
new subsidy reduction commitments not by changing parameters of its
programs to reform policy, but simply because of favourable market
projections? A convenient WTO compliance along this line seemed to be
what the administration had in mind with its 2007 proposal. Loan rates
could even be raised in the US, as in the FCE Act, while it accepted new
WTO constraints.
116 agricultural subsidies in the wto green box
If a measure of overall trade-distorting domestic support (OTDS) is
imposed and subject to greater percentage cuts than its component amber
box, blue box and de minimis components, then the OTDS limit could
provide an additional binding constraint on subsidy opportunities. For
example, the OTDS could be reduced to a US cap of $14.5 billion, as dis-
cussed but not nalized in 2008 negotiations. If its amber box stays well
under the limit of $7 to $8 billion, there is substantial latitude for product-
specic and non-product-specic de minimis spending when prices are
high and new blue box countercyclical payments are low. However, even
in this event, both de minimis categories cannot go as high as their sep-
arate limits of 2.5 per cent of the value of production.
19
Furthermore,
lower prices/higher blue box spending cut into de minimis exibility. New
subsidies, as described above, could also push the US toward its domestic
support limit. Still, in the years 2000 to 2005 the sum of US countercycli-
cal payments and other subsidies counted as de minimis never exceeded
the $8 billion to which they would be limited by an OTDS reduction to
$14.5 billion and amber box spending as high as $6.5 billion.
Summary and conclusion
This chapter has examined the issues facing US farm policy in 2008
and beyond in a historical context. Long-term visions of lower subsidies
and a more open world market for agriculture are often articulated,
but have mostly been put aside when farm policy is legislated. Some
reforms along a cash-out and decoupling path have nonetheless occurred
as agriculture production and incomes have been transformed since the
1950s. This movement was initiated in the 1960s and extended in 1985 to
facilitate US products being more competitive in export markets. Under
fortuitous market conditions, the 1996 farm bill broke new ground in
this direction by separating direct payments from prices and production
decisions and by ending acreage set-aside requirements. Newprice-linked
countercyclical payments were re-institutionalized in the 2002 farm bill.
This was a setback to subsidy-reducing reform, but farmers retained the
planting exibility attained in 1996 and annual acreage set-asides were
not revived. For two specialty crops, peanuts and tobacco, buyouts have
19 As Brink (2006) points out, product-specic de minimis support is further limited below
2.5 per cent of the total value of agricultural production because it cannot be applied to
those products receiving support above the de minimis level.
farm policy reform in the united states 117
ended supply-control quota programs in 2002 and 2004, respectively.
These reforms were driven largely by declining quota production levels
and revenues. Proposals for a buyout of the main support programs
illustrate the cumulative value of the subsidies at stake, but have not been
endorsed in the absence of signicant pressure on the benets delivered
by these programs.
The 2008 farm bill was written at a time of a commodity price boom
and with projections that this one might persist, unlike those of the 1970s
and 1995 to 1996, despite similar projections at those times. Despite high
prices, and consequently small projected price support or countercyclical
payment expenditures, farm groups sought to retain their traditional
programs. With anticipated spending down, newavenues of expenditures
were also sought. Under budget pressure, the direct payments, those that
represent the most decoupled instrument of support of farm incomes,
came under scrutiny in the domestic debate because, as a famous outlaw
once remarked when asked why he robbed banks, that is where the
money is.
It is relevant with regard to farm groups seeking to retain the tra-
ditional support programs in the late 2000s to acknowledge that wars
are usually associated with high commodity prices and the ends of wars
with collapses of prices in commodity markets. This occurred after World
War I, World War II and the Korean War. It is not surprising that oil and
farm commodity prices are high with the expanded armed conict in the
Middle East after the US invasion of Iraq. This war is on a much smaller
scale than the others, but is concentrated in an oil-producing region of the
world. We do not know whether or when war in the Middle East will be
diminished. However, commodity price collapses after the end of armed
conicts have been accompanied by intense political debate about what
to do to support farmers.
Other historical experience also serves as a caution about anticipating
a long-term squeeze-out of farm support payments. It is possible that
traditional price and income support levels will be ratcheted up from
2008 levels. In the 1970s, a cost-price squeeze on farm returns attributed
in part to high energy prices led to a ratcheting up of the nominal levels
of loan rates and target prices. The early 1970s oil supply shock kicked
off a period of ination and macroeconomic instability that lasted for
more than a decade. It is fortunate for agriculture that at least so far
the oil price spike of the 2000s has not had as pronounced detrimental
effects. This has helped to keep farm support program parameters in
118 agricultural subsidies in the wto green box
check. High oil and other commodity prices might still create difcult
macroeconomic policy challenges and pressure could then materialize to
raise farm support parameters.
Despite these considerations, inthe context of highprices in2008, ques-
tions arose about the traditional assumptions in agricultural policy delib-
erations that farm prices will often be low and that developed-country
subsidies will drive them down further. The move toward decoupled pay-
ments may come under challenge, but with curious results. With energy
security a potent political thrust in 2008, a combination of regulation,
high oil prices and tax-credit subsidies for corn-based ethanol worked
to keep agricultural prices higher than otherwise. This is one form of
policies coupled to production. Yet, in the attempt to avoid a squeeze-out
of past spending levels, various new programs may be initiated ACRE is
a prime example. Some of these might stimulate production, thus having
the traditional effect of pushing prices down. Nor was restrictive land-use
policy ever completely abandoned. The CRP has always been a supply-
reducing coupled policy. Reducing CRP acreage in light of high prices, as
has occurred historically, would again put downward pressure on prices.
In the event of these developments, could WTO commitments limit
US subsidies? Based on the notications for 2000 to 2005, the prospect
for binding limits appears to be modest. Once again, the direct payments,
those once expected to reduce tensions about farm support programs
because they have relatively limited trade-distorting effects, are at the
centre of the debate. If the direct payments program is eventually revised
modestly to qualify unambiguously for the green box, then WTO con-
straints onthe US policies are minimal. This is soevenif a Doha agreement
along lines being discussed, but not agreed, in 2008 is achieved. If direct
payments are off the table, without further challenges to the notication
decisions of the US, there is substantial room for subsidy spending.
These considerations do not diminish the value of potential new sub-
sidy constraints under the WTO, but simply illustrate the substantial
distance still to be crossed to achieve a more liberalized and rules-based
global trade system for agriculture. Tighter amber box and new OTDS
spending limits would be a valuable check to have inplace inthe event that
traditional US subsidy programs are ratcheted up or agricultural prices
return to the downward path that has characterized the past half a cen-
tury. Particularly germane to a focus on the green box is that if US policy
inches toward recoupled instruments with insurance or environmental
dimensions, scrutiny along green box lines will be an essential bulwark
against new forms of production and trade distortions.
farm policy reform in the united states 119
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6
Agricultural trade policy reform in Japan
masayoshi honma
Introduction
The Japanese economy is under restructuring to cope with globalization.
Agriculture is not exempt from this process. Rather, agricultural reform
should be encouraged because it has lagged behind other sectors that
have been liberalized relying on international trade. Japanese agricul-
ture, in particular rice farming, has been protected by border measures
and domestic price supports, but Japan is one of the largest agricultural
importers in the world. Despite the high level of agricultural protection in
Japan, the Japanese food self-sufciency ratio declined to 39 per cent on
a calorie basis in 2006. It appears that the protection policy has played no
role in strengthening Japanese agriculture and has impeded inter-sectoral
adjustment.
According to the Basic Law on Food, Agriculture and Rural Area
established in 1999, which replaced the 1961 Agricultural Basic Law, the
Japanese Government revised the New Basic Plan of Food, Agriculture
and Rural Areas in March 2005. This indicates guidelines for agricul-
tural policies 10 years from now. The plan contains, among other things,
the target level for Japans food self-sufciency ratio, policies for struc-
tural reform, stabilization schemes for agricultural income and ideas for
promoting effective use of agricultural land.
In 2007, a new agricultural policy scheme was launched in Japan to
introduce a direct payment for land-extensive farming under the Farm
Management Stabilization Programme. This aims to guarantee large-
scale farmers a certain level of income, regardless of the commodities
produced. Unlike previous policies, which gave support to all farmers
indiscriminately, the direct payment in this newly implemented scheme
is limited to those farmers whose operational farms are larger than a
certain size. Those who are targeted are termed principal farmers and
are expected to become the core of Japanese agriculture.
121
122 agricultural subsidies in the wto green box
Table 6.1 Basic statistics for Japanese agriculture
1960 1970 1980 1990 2000 2005
Agricultural GDP
(billion yen)
1,493 3,131 6,007 7,701 5,522 5,327
(i)
Ratio to total GDP (%) 9.0 4.2 2.4 1.7 1.1 1.1
(i)
Agricultural labour
force
(ii)
(millions)
11.96 8.11 5.06 3.92 2.88 2.52
Ratio to total labour
force (%)
26.8 15.9 9.1 6.2 4.5 4.0
Agricultural production
index (2,000 =100)
80.1 100.6 105.0 111.1 100.0 95.3
Agricultural land (000s
of hectares)
6,071 5,796 5,461 5,243 4,830 4,692
Farm household (000s) 6,057 5,342 4,661 3,835 3,120 2,848
Agricultural land per
farm household
(hectares)
1.00 1.08 1.17 1.37 1.55 1.65
(i)
Figures are for 2004.
(ii)
Workers engaged mainly in agriculture.
Source: JMAFF, Nogyo Hakusho Fuzoku Tokei-hyo (Statistical Appendix of
Agricultural White Paper), 2007, pp. 11619.
This chapter discusses the new direction of Japanese agriculture and
policy in the globalizing economy. Agricultural reform is inevitable to
make Japanese agriculture viable. The objective of this chapter is to pro-
vide trade negotiators, policy-makers and other stakeholders with an
understanding of agricultural policy reform in Japan and, more speci-
cally, of efforts to decouple support fromproduction. The chapter aims to
shed light on agricultural policy reform in the recent past, and the likely
progress of decoupling efforts in the future, in the context of World Trade
Organization (WTO) negotiations on subsidies. The analysis is based on
an understanding of the political economy of agricultural policy-making
in Japan.
Structure of Japanese agriculture
Before discussing agricultural policy, it is useful to look at the structure of
Japanese agriculture. Japanese agricultural production creates farm-gate
agricultural trade policy reform in japan 123
sales of 8.7 trillion yen and value-added of 5.3 trillion yen.
1
As shown
in table 6.1, in 2005 there were 2.52 million workers engaged mainly in
agricultural activities and 2.85 million farm households. The weight in
total economy, however, is declining. The share is 1.1 per cent of gross
domestic product (GDP) and 4 per cent of the labour force. It is noted
that the number of workers engaged mainly in agriculture is less than the
number of farm households. This means that in some farm households
there are no workers engaged mainly in agriculture. The numbers depend
on the denition of farmhousehold, which covers many small part-time
farm households.
Japans Agricultural Census denes a farm household as one that oper-
ates on 10 acres (0.1 hectare) or more of farmland, or with annual sales
of agricultural products of 150,000 yen or more. Thus, the term farm
household includes very small units of farmoperations inwhichthere are
no full-time farm workers. Indeed, full-time farm households in which
there are no workers engaged in other employment account for only
16 per cent of total farmhouseholds. On the other hand, non-commercial
farm households, which operate on less than 30 acres of farmland, or
with annual sales of less than 500,000 yen, account for 31 per cent of
total farm households. In addition, among part-time farm households,
the majority are type II part-time farm households whose income from
non-agricultural sources exceeds agricultural income;
2
these account for
42 per cent of total farm households.
As indicated in table 6.1, the number of agricultural workers declined
from 12 million in 1960 to 2.5 million in 2005, but the number of farm
households in 2005 is about half of that in 1960. Together with the
decreases in agricultural land, a small decline in the number of farm
households resulted in just a small increase in agricultural land per farm
from 1 hectare in 1960 to 1.65 hectares in 2005. The amount of agri-
cultural land per farm in Japan is small compared with other developed
countries. For example, it is only 1/120th of that in the United States (US)
and between 1/45th and 1/20th of that in European countries. This infor-
mationis indispensable whenconsidering the competitiveness of Japanese
agriculture interms of comparative advantage, particularly land-intensive
sectors.
It is true that Japanese farms are very small and do not take advantage
of scale economy, but this does not mean that Japanese farm households
1 Figures are for 2004.
2 Type I part-time farm households have income from farming which exceeds income from
non-agricultural sources.
124 agricultural subsidies in the wto green box
are poor. In reality, in 2003 the total income of an average Japanese farm
household was 7.7 million yen greater than that of an urban worker
household. Income from agricultural activities accounts for only 14 per
cent of the average total income in a farm household.
Part-time farm households have tended to concentrate on rice farming
because rice is a staple crop offering a high return on only intermittent
labour. Because rice marketing was carried out through the channels
determined by the Japanese Government until the former Food Control
Law was abolished in 1995, rice farmers were guaranteed a high price
and could easily sell their harvest through agricultural cooperatives. In
addition, agricultural research and extension services have traditionally
concentrated on the rice crop, to the extent that rice cultivation has
become highly standardized and there is relatively little difference in
productivity between part-time and full-time farmers. The fact that the
production of Japans staple crop has been geared to part-time farming in
this way is a major factor encouraging part-time farming and impeding
the consolidation of farms.
Recent development of agricultural policy reform
Recent agricultural policy reform is based on the Basic Law on Food,
Agriculture and Rural Areas (hereinafter referred to as the Basic Law)
established in 1999, which replaced the 1961 Agricultural Basic Law.
The objective of the Basic Law is to stabilize and improve lifestyle and
to develop the national economy through comprehensively and system-
atically implementing policies on food, agriculture and rural areas by
means of establishing basic principles and basic matters for realizing
themand clarifying the responsibilities of the state and local governments
(Article 1). The Basic Law has four pillar policies: (1) securing stable food
supply; (2) fullment of multifunctional roles; (3) sustainable agricul-
tural development; and (4) development of rural areas. The Basic Law is
expected to change Japanese agriculture and make it more efcient in a
global economy.
The Basic Law provides that the government shall establish a Basic
Plan for Food, Agriculture and Rural Areas (hereinafter referred to as
the Basic Plan) for the promotion of the comprehensive and systematic
implementation of policies on food, agriculture and rural areas (Article
15). The Basic Plan is subject to a process of review and revision roughly
every ve years. (The previous Basic Plan was approved by the cabinet
and submitted to the Diet on 24 March 2000.)
agricultural trade policy reform in japan 125
The Basic Law stipulates that the Basic Plan shall include: (1) basic
directions in formulating policies on food, agriculture and rural areas;
(2) targets for food self-sufciency ratios; (3) policies implemented com-
prehensively and systematically by the government with regard to food,
agriculture and rural areas; and (4) matters required comprehensively
and systematically to promote policies on food, agriculture and rural
areas.
Among the important contents of the Basic Plan in 2005 are the fol-
lowing:
r
It is proposed that targets for food self-sufciency ratios are established
at 45 per cent of the supplied-calorie basis in 2015 (the ratio in 2006 was
39 per cent). In order properly to evaluate domestic production activi-
ties of relatively low-calorie vegetables and livestock that are dependent
on imported grains, it is also proposed that food self-sufciency ratios
are presented in monetary values in addition to ratios on the supplied-
calorie basis. (Ratios in monetary value are as follows: in 2015, 76 per
cent; in 2006, 68 per cent.)
r
In addition to setting up targets for peacetime food-sufciency ratios,
the Basic Planemphasizes the importance of ensuring the domestic food
supply capacity through the maintenance of such areas as farmland,
irrigation and drainage systems, as well as the fostering of workforces
and agricultural technologies.
r
The Basic Planprovides a shift tonon-product-specic measures, focus-
ing on providing farm management support for principal farmers and
the promotion of intensive use of farmland by principal farmers.
r
The Basic Plan promotes measures to take into account environmental
consequences, including the establishment of conservation measures
for the environment, farmland, water and other resources.
r
The Basic Plan makes and manages the work schedules that specify
the processes of implementing measures, time periods, methods of
implementation and performance goals.
It should be recognized that the food self-sufciency ratio is not a policy
variable because it depends not only on domestic production, but also
on consumers preferences. The food self-sufciency ratio in Japan has
dropped to 39 per cent on a calorie basis in 2006, which is the lowest
among developed countries. Some Japanese people are very concerned
about this low level of self-sufciency from a food security viewpoint.
126 agricultural subsidies in the wto green box
However, raising this ratio cannot be achieved by policy alone. The main-
tenance and improvement of the ratio require the understanding and
active efforts of the agencies concerned, including farmers, food indus-
tries and consumers.
The issue that attracted much attention in the discussions on the Basic
Plan was the introduction of non-product-specic measures for farm
management support. To support farm income, it was once very com-
mon to use price policy by commodity. However, most measures used
to intervene in the markets are now considered amber box policy in the
WTO Agreement on Agriculture (AoA) and are supposed to be phased
out. Instead, farm income support measures are shifting to those that
do not affect the decision on production, such as direct payments. Such
payments are made only to targeted principal farmers who satisfy certain
conditions and are expected to become the core of Japanese agriculture.
This kind of direct payment sounds desirable in the light of the WTO
discipline. However, it should be recognized that the direct payment may
delay the structural reform in agriculture because it works as if the xed
costs were decreasedfor the recipients. It means that less efcient recipient
farmers can stand against the lower product prices, allowing them to stay
in farming, which impedes structural reform. Thus, it is important to
limit the payment to efcient farmers, and it is desirable to cease the
payment within a limited time period.
The debate of decoupled direct payment is not new in Japan, but price
polices have beendominant as measures toprotect farmers since the 1960s.
Correspondingly, border measures have also been essential for agricul-
tural protection policy. The decoupled direct payment was introduced
in policy proposals as a means of maintaining the multi-functionality
of agriculture after the Uruguay Round Agreement on Agriculture. The
importance of multi-functionality has been recognized since the early
1990s, but it has been discussed for maintaining the border measures.
Farmers also hesitated in the early stages of the debate to agree to receive
direct payments, and they preferred price supports to direct payments.
It is necessary for Japan to shift policy measures to direct payment from
price policy. At the same time, Japan has to undergo structural reform
in the agricultural sector. Thus, direct payment policy is supposed to
achieve two purposes: to support farmers in a less distorted manner, and
to promote increases in productivity and efciency in agriculture. This
means that Japanhas to seek a Japanese style of decoupled direct payment,
different from that of the European Union (EU) or the US, in order to
achieve the two policy purposes.
agricultural trade policy reform in japan 127
Table 6.2 Domestic support in Japan, the US and the EU (billion yen)
Japan (2003) US (2001) EU (2003)
Amber box (AMS) 641.8 1,751.6 4,042.8
De minimis 35.0 855.9 255.8
Blue box 68.2 0.0 3,244.4
Green box 2,086.5 6,158.2 2,889.9
Total (% of agricultural GDP) 2,831.5 (32.0) 8,765.7 (36.3) 10, 432.9 (29.8)
Source: JMAFF, Gurobarukano nakadeno nouseino tenkai (Development of
Agricultural Policy in Globalization), May 2007, available at http://www.maff.
go.jp/topics/epa wg/pdf/070509-1.pdf
Domestic support in decoupling policy
The WTOAoAsets rules for reducing domestic agricultural support poli-
cies. Domestic support policies are divided into three boxes amber, blue
and green depending on the effects on production and trade. Non-
trade-distorting policies are put into the green box and were exempt from
reduction during the implementation period of 1995 to 2000. Further
exemptions fall into the blue box, including the use by the US and EU of
direct payments based on xed area and yield. All other trade-distorting
support policies are put in the amber box. Developed countries commit-
ted to reduce the total value of these policies as measured by the Aggregate
Measurement of Support (AMS) by 20 per cent during the implementa-
tion period. However, product-specic domestic support that does not
exceed 5 per cent of the total value of production of a basic agricultural
product and non-product-specic domestic support that does not exceed
5 per cent of the value of the total production are not required to be
included in the AMS (de minimis).
Table 6.2 shows the recent level of domestic support in Japan by box in
comparison with the US and EU. Japans level of AMS was 641.8 billion
yen in 2003; this is much lower in monetary value than that of the US
or the EU, but it is comparable in terms of percentage of the domestic
value of production, which is in the range 30 to 36 per cent. Japans level
of AMS in the base period 1986 to 1988 was 4,966 billion yen, but it was
reduced drastically from 3,171 billion yen in 1997 to 767 billion yen in
1998.
This happened because the role of the government in purchasing rice
was applied strictly in order to maintain the grain reserve for shortage in
128 agricultural subsidies in the wto green box
the new rice policy implemented in 1998. The role of the government is
provided in the Staple Food Lawof 1995 to limit the purchasing of rice for
grainreserve operations. However, the government was forcedtopurchase
rice to support the market price of rice with rich harvests in the following
years. In the newrice policy, the government limits purchasing rice for the
reserve purpose alone and limits the amount of rice purchasing by variety.
Thus, the government deleted the amount of market price support for
rice from the amber box when calculating the AMS. The market price
support for rice was considered to be abolished because there was no
administered price to maintain it, although the gap between the domestic
and international rice price is maintained. The administered price of rice
itself was maintained until 2003; thereafter, auction became a common
method to purchase government rice, and the administered price of rice
was ofcially abolished.
In addition, the Japanese Government classied the rice farm manage-
ment stabilization scheme that was introduced in 1998 in the blue box. It
was a policy of direct payment under production-limiting programmes
that was made on 85 per cent or less of the base level of production. In the
rice farm management stabilization scheme, both the government and
the producers contributed to the fund by which producers were com-
pensated for a part of the difference between the reference price and the
market price when the rice price declined. This scheme was integrated
into the non-product-specic measures for farm management support in
2007.
The Japanese Government classies in the green box the expenses
for research and development, quarantine control, technology diffu-
sion, guidance for agricultural cooperatives, infrastructure in rural areas,
restructuring of wholesale markets, public grain reserve programmes,
school lunches, agricultural disaster compensation, agricultural pension
programmes, agricultural nance, subsidies for converting production
from rice to other crops and direct payments for handicapped areas.
3
Table 6.3 shows the details of expenditure of the green box in Japan
since 1995. Japanese expenditure on the green box was 2.09 trillion yen
in 2003, which was down from 3.17 trillion yen in 1995. A major part of
expenditure is general services, which accounted for 77 per cent of the
green box in 2003. General services consist of: (1) research; (2) facilita-
tion of management of agricultural organizations; (3) general services for
3 In addition, the de minimis is applied to expenses for stabilizing prices of vegetables and
chicken eggs, which are not counted in the AMS.
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.
agricultural trade policy reform in japan 131
livestock industry, including extension and infrastructure; (4) infrastruc-
tural services for agricultural sectors and rural areas; and (5) personnel
expenses for government ofcials and others. Above all, expenditure on
infrastructural services for agricultural sectors and rural areas dominates
expenditure on general services: 71 per cent in 1995 and 59 per cent in
2003.
The major components of infrastructure services for the agricultural
sectors and rural areas are construction of irrigation/drainage facilities
and rural roads, and land consolidation. These are very important in
order for Japanese agriculture to increase productivity. In particular, land
consolidation to enlarge a unit of paddy eld for efcient use of agricul-
tural machinery is essential, and so this has been conducted as a public
investment activity. The costs of land consolidation are usually shared by
the national government (50 per cent of the total), prefecture government
(25 per cent), municipal government (12.5 per cent) and farmland owner
(12.5 per cent).
The decline in expenditure on infrastructure services for the agricul-
tural sectors and rural areas is the main source of the decline in green
box expenditure in Japan. The decline resulted from ending the special
budgets introduced in 1995 for six years in order to make measures to
cope with increasing the market access based on the Uruguay Round AoA,
most of which were spent on infrastructural services for the agricultural
sector and rural area.
Among the other measures in the green box in Japan, the structural
adjustment through the producer retirement programme and the envi-
ronmental programme are important. The former spent 158 billion yen
andthe latter 195 billionyenin2003. The contents of the structural adjust-
ment through the producer retirement programme are farmers pension
programmes, which pay pensions to retired farmers on the condition
of transfer of the ownership of farm management. The environmental
programmes consist of two parts: one is payment for conversion from
rice production, maintaining paddy elds in an environmentally good
condition by growing any plants other than rice or other appropriate
management; the other is the support programme introduced in 1999 for
reductionof the environmental burdendue to dairy farming, paying dairy
farmers who practise appropriate management to tackle environmental
problems.
The last item on the list of measure types of the green box in table 6.3,
regional assistance programmes, is given special attention here. Intro-
duced in 2000, this was the rst direct payment in Japan. The expenditure
132 agricultural subsidies in the wto green box
was relatively small, at 23 billion yen in 2003. Direct payments are made to
farmers who are based in hilly and mountainous areas, and who continue
farming activities for at least ve years under the community agreements
in a group or individually promote multi-functionality of agricultural
land in a unit of at least 1 hectare of farmland in designated areas. Activ-
ities in an agreement include such items as making a master plan for the
future land use of the village or hamlet, cultivating and maintaining farm
land, keeping water channels and agricultural roads in good condition
and avoiding soil erosion. Payments depend on the degree of slope of the
land, the crops to be produced and the activities to be conducted. The
payments cannot exceed 1 million yen per farm household.
The programme was extended to the second period. The total direct
payments were 51.35 billion yen in 2006, made for 28,515 agreements on
663,000 hectares in 1,804 cities. The average number of participants was
23 for 23 hectares receiving 1.82 million yen per agreement in 2006.
Major policy change and its political economy
The major change in supporting measures for farmers from price policy
to direct payment appeared in the recent non-product-specic measures
of the Farm Management Stabilization Programme. This was designed to
support farm income by stabilizing the total value of sales, regardless of
the commodities produced. The programme consists of two components
of payments. First is the payment to compensate the gap in productiv-
ity between foreign exporting countries and domestic producers. This
applies to commodities whose tariffs are already low and are not pro-
tecting domestic producers if the price support policy is abolished. The
programme is currently applied to farmers who have produced wheat,
barley, soybeans, sugar beets or potatoes for starch. The direct payments
are made on the basis not of commodity-specic income, but of the total
income from producing one or a combination of these commodities.
Further, this payment for compensating the gap consists of two parts.
One is a lump sum based on the past production and shipment, and the
other is a variable payment based on the current quantity of production.
The former is decoupled from production and is classied in the green
box, but the latter is not decoupled and is classied in the amber box.
Farmers receive the sum of the payments of the unit value converted in
value per hectare multiplied by the average acreage during the base period
2004 to 2006, in addition to the payments of unit subsidy per kilogram
multiplied by the quantity of production.
agricultural trade policy reform in japan 133
The payment for compensating the gap is applied to relatively large
farmers. Those eligible to participate in the programme are farmers des-
ignated by the local government and operating farms with a size of at
least 4 hectares (10 hectares in Hokkaido). If small farmers join a farming
collective in a hamlet whose operating size is at least 20 hectares, then
the unit of collective farming is also eligible to join the programme if it
satises certain other conditions.
The second component of payments in the non-product-specic mea-
sures of the Farm Management Stabilization Programme is the payment
to stabilize the annual sales value of products. A fund was created with
contributions made by the government (75 per cent) and producers
(25 per cent). Producers are compensated by the fund for the gap between
the value of sales in the base period and the sales value in the current year
if the latter declines less than the former. The programme is currently
applied to those farmers who have produced rice, wheat, barley, soy-
beans, sugar beets or potatoes for starch. The payments are made on the
basis of the total income from producing one or a combination of these
commodities.
The number of applicants for non-product-specic measures for farm
management support was 72,431 as of August 2007, and the budget for
this programme is about 195 billion yen. Traditionally, Japanese rural
villages have been characterized by strong community solidarity, as they
consist of small family farms that are largely homogeneous in terms of
land holdings and income levels. They tend to repel policies which dispro-
portionately increase an individuals wealth and income relative to others
inthe village, seeing this as something that couldweakentheir community
solidarity and harmony. Leaders of agricultural associations and cooper-
atives consider this community solidarity as an asset for enhancing their
organizing power. From the standpoint of politicians, this solid farming
community represents an attractive group with which to develop and
maintain a close alliance for collecting votes. Thus, all of the stakeholders
of agricultural policies hesitate to install institutions and policies that may
promote polarization of rural communities between a small number of
efcient large-scale farmers and the majority of marginal farmers.
In this regard, the scheme has met strong resistance and has been forced
to make a compromise from the beginning. Originally, the programme
was designed to target mainly individual large farmers. Japanese agri-
cultural cooperatives (JAs), however, were strongly against such policies
targeted at only a small number of large farmers. JAs needed to maintain
the number of family farms in order to keep their political inuence,
134 agricultural subsidies in the wto green box
particularly on the ruling Liberal Democratic Party (LDP). In the end,
the political pressures by JAs opened the door for the direct payment to
small part-time farmers by allowing themtoparticipate inthe programme
if they organized themselves into collective farming units. Inclusion of
participants of collective farming erodes the original intention of the pro-
gramme (to promote structural changes by consolidating farmland into
the hands of efcient farmers and letting thempursue large-scale farming
to boost the nations overall agricultural productivity) because a large
number of small part-time farmers may form collective farming units in
order to become eligible for direct payments.
Concluding remarks
The new scheme of the targeted direct payment was initially considered a
better measure thanprice policy for strengtheningagricultural production
base, so that Japanese agriculture could survive without resorting to heavy
agricultural protection. Although the direct payment was designed as a
less-distorting alternative to border protection, the newscheme originally
planned to incorporate the mechanism inducing agricultural structural
reform. By limiting direct payments to large-scale farmers, it was expected
to encourage smaller farmers not eligible to participate in the programme
to leave their village communities when they found that their income was
insufcient to make a living in the village.
Despite the introductionof sucha targeteddirect payment programme,
the structure of Japanese agriculture may not change much in the short
run, since JA members can benet from this programme as members of
collective farms, which are eligible for the programme as a compromised
solution.
Nevertheless, under strong external and internal pressures, Japan has to
promote structural reform in agriculture in order to cope with globaliza-
tion more positively. We may expect changes in agriculture in two aspects.
One aspect is that the direct payments decoupled from production will
lead to declines in extremely high tariffs, such as on rice. It is expected
that the direct payments may be bargained against a decline in such high
tariffs as 778 per cent for rice. The other aspect to be expected is a decline
in the power of JAs due to large farmers leaving the cooperatives. This
means that inclusionof collective farms inthe direct payment programme
may be challenged in the future as the political power of JAs declines.
PART II
The focus, extent and economic impact of
green box subsidies
7
An analysis of EU, US and Japanese
green box spending
jes us ant on
1
Introduction
The URAA
2
has provided a framework to discipline support for agricul-
tural production. The domestic support pillar of the URAA has created a
set of rules for individual members to classify and notify domestic support
measures and an open mutual review process. The peace clause, which
prevented members from using the Dispute Settlement Process to chal-
lenge agricultural measures that do not comply with WTO provisions,
expired at the beginning of 2004.
The URAA framework is a legal structure derived from a complex
negotiation process and oriented to discipline support through rules that
need to be respected and applied. It is not meant to be an economic
or analytical framework that takes into account all kinds of economic
linkages, and it cannot be interpreted as a tool for the analysis of support.
The notication process to the WTO has generated a database of support
to agriculture in all member countries, which is classied according to
specic criteria in various boxes and sub-boxes. This is particularly the
case of the greenbox, whichlists a series of payment types that are oriented
to a briey dened objective and have to conform to some general and
specic provisions in Annex 2 of the URAA.
The purpose of this chapter is tolookwithsome detail at the agricultural
domestic support notications to the WTO by the three main providers
of support to agriculture: the EU, the US and Japan, which are called the
Trio in this chapter. This overview is focused on identifying trends and
1 Jes us Ant on is senior economist in the Organization for Economic Cooperation and
Development (OECD). The views expressed in this chapter are those of the author and
not necessarily those of the OECD Secretariat or its member countries.
2 The terms Uruguay Round Agreement on Agriculture and WTO Agreement on Agri-
culture are used synonymously in this chapter and are often denoted as URAA.
137
138 agricultural subsidies in the wto green box
patterns of support measures in each country, with particular attention
being paid to movements of expenditure from one box to another and
the underlying reform in the support programmes in order to identify
potential box shifting, and to patterns of green box spending. Emphasis
is placed on WTO provisions that may constrain potential impacts on
production and trade. It is not the purpose of this chapter to make any
legal assessments of the conformity of notied measures with URAA
provisions.
Why may some agricultural support measures have smaller impacts
on production and trade? How do WTO provisions help to prevent this
production effect from occurring? Has green box support increased at
the expense of the other boxes? What programmes have been affected by
these changes in box colour patterns? What types of green box mea-
sure are being used by the EU, the US and Japan? Have there been
changes in green box measures since the rst notications in 1995?
Can we expect further changes with the ongoing policy changes and
announcements?
The rst two questions are tackled in the second section about the pro-
duction effects of support programmes and WTOprovisions for different
boxes and sub-boxes. The third section reviews expenditure across boxes
in order to identify potential box shifting. The fourth section analy-
ses the green box expenditure of each of the Trio countries, identifying
trends and patterns. Finally, the fth section poses questions that remain
open.
The main source of data for the analysis in this chapter is the set of
notications to the WTO.
3
Unfortunately, these notications often suffer
from large delays of several years. Last notications at the date of writing
this chapter correspond to 2006 for Japan, 2005 for the US and 2003 for
the EU. This excludes information after the EUs 2003 reform. The WTO
World Trade Report 2006 has alerted us to the difculty in obtaining
updated information on agricultural domestic support notications and
inanalysing the difference betweenthe numbers inthese notications and
in other sources with different methodologies (OECD Producer Support
Estimate and national budget). In this chapter, data are expressed, as in
the original notications, in national currency and converted into US
dollars only for comparisons, using current yearly average exchange rates
from the OECD.
4
3 http://docsonline.wto.org/gen home.asp.
4 For the aggregate of all WTO notications across all WTO member countries, the source
used is the ERS database (http://www.ers.usda.gov/db/Wto/AMS database).
an analysis of eu, us and japanese green box spending 139
The economics of agricultural policy reform
Over the past two decades, the US and the EU have been involved in
a long process of reforming agricultural support. This reform has been
reinforced by the framework dened inthe WTOURAAand the processes
of General Agreement on Tariffs and Trade (GATT)/WTO negotiations,
particularly the Uruguay and Doha rounds.
The WTO URAA framework
Article 6of the URAAestablishes that member countries commit toreduce
their domestic support measures in favour of agricultural producers, as
expressed in terms of the total aggregate measure of support (AMS).
Paragraph 1 of Article 6 creates the main exception to this commitment:
the green box measures that conform to the criteria of Annex 2 of the
URAA are not subject to reduction commitments. The main underlying
idea behind this exemption is that the criteria imposed on green box
measures imply that these measures have no, or at most minimal, trade-
distorting effects or effects onproduction andmay allowthe achievement
of some domestic objectives. That is, the URAA creates a framework
for reduction of agricultural support measures through commitments
imposed on the AMS (amber box), but excludes from this reduction
measures that are supposed to have minimal effects on production and
trade. The agreement obliges members to reduce amber support, but
leaves the door open for them to shift support from the amber box
to the green box to the extent that new programmes comply with
the corresponding green box criteria while complying with reduction
commitments. There are no monetary limits on expenditure under the
green box.
Paragraphs 2, 4 and 5 of Article 6 create three additional exceptions of
support measures that do not need to be included in AMS calculations
and, therefore, are exempted from reduction commitments. Paragraph 2
refers togovernment measures that are anintegral part of the development
programmes of developing countries and therefore do not apply to the
Trio. Paragraph 4 creates the de minimis provisions that exclude from
AMS support product-specic measures up to 5 per cent
5
of the value of
production of a basic agricultural product (product-specic de minimis)
5 For developing countries, the de minimis measures may add up to 10 per cent of the value of
production of the basic agricultural product and the total value of agricultural production
for, respectively, product-specic and non-product-specic de minimis.
140 agricultural subsidies in the wto green box
and non-product-specic measures up to 5 per cent of the value of total
agricultural production. Apart from the monetary limit on support, no
other criteria or conditions are imposed on measures declared under de
minimis. The main underlying idea behind this exception is that relatively
small amounts of support can have only small impacts on production and
trade. Even if it may be in the nature of these measures to have an impact,
the impact will be small in quantitative terms. The possibility of shifting
support from the amber box to the de minimis is limited by the 5 per cent
bounds.
Paragraph 5 of Article 6 creates the remaining exception to domestic
support reduction commitments: the blue box. These are direct pay-
ments under production limiting programmes with three alternative
criteria: based on xed area and yields, made on 85 per cent or less of the
base level of production, or made on a xed number of head (for livestock
payments). This arrangement is the result of the negotiation procedure of
the URAA in a context where the 1992 reform of the EU CAP needed to
accommodate the compensatory payments. The underlying idea behind
this exception was to create a box between amber and green in order
to facilitate reform towards the green box. However, no mechanism was
foreseen to reduce support under the blue box as an incentive towards
reforming policies to conform to green box criteria.
The Peace Clause in Article 13 of the URAA has protected all support
measures that conform to the URAA disciplines and provisions from
complaints based on other WTOagreements and, particularly, the Agree-
ment onSubsidies andCountervailing Measures (ASCM). This protection
was exhaustive for green box measures, and only partial for amber and
blue box measures, but it expired in 2004. Since then, in principle, all
domestic support measures are actionable for litigation through all WTO
mechanisms. Steinberg and Josling (2003) describe this situation as legal
vulnerability of domestic support measures notied under the URAA,
particularly with regard to the ASCM. This has become evident in the
dispute US v. Upland Cotton, or the Cotton Case,
6
which was initiated
before the end of the Peace Clause. The WTO system of boxes is based
on notications by each country that decides, on its own, how to clas-
sify each domestic support measure. This notication can be challenged
in the mutual review process or through the WTO dispute settlement
6 United States Subsidies on Upland Cotton, dispute DS267, http://www.wto.org/
english/tratop e/dispu e/cases e/ds267 e.htm.
an analysis of eu, us and japanese green box spending 141
procedures, but it can change only by another correcting notication by
the country.
The economics of reducing the production and trade impacts of
agricultural support measures
The amber box must include any support to agriculture that does not
conformto the criteria in the other boxes (green, de minimis or blue). The
amber box is the only box subject to reduction commitments. That is, the
URAAcreatedincentives toreduce amber boxsupport while permittingits
substitution by blue or green support, which are not subject to monetary
limits. There are, then, two complementary directions in the domestic
support disciplines: reduction of amber box support, which potentially
can be production- and trade-distorting, and reforming support towards
measures that, in principle, have smaller impacts on production and
trade.
However, how can governments reform towards measures that have
smaller or even minimal impacts on production and trade? This process
has often been labelled as decoupling, even if in WTO legal terms the
word decoupled is applied only to a sub-box of the green box called
decoupled income support. The answer to this question is complex
due to the diverse and sophisticated economic mechanisms that may
transmit the signals from support to production and trade. The OECD
has worked in this area for several years; some of its publications can serve
as reference,
7
and are used in this sub-section of the chapter. Its Producer
Support Estimate (PSE) is an alternative quantication and classication
of support that has no simple correspondence with the legal WTO box
classication and methodology, but it is useful to assess this agricultural
policy reform process.
Inthe real worldof policy changes, the mainreforms that have occurred
with the aim of moving towards more decoupled programmes have been
characterisedby two mainstages (Ant on, 2006; Ant onandSckokai, 2006):
(i) payments or support are made on the basis of land rather than on
the basis of output or other inputs; and (ii) support is provided with
more freedom on what to produce rather than specically for individual
commodities. There are goodeconomic reasons toargue that, for the same
amount of support, these movements reduce the production and trade
7 See the set of papers inOECD(2005a) and, particularly, OECD(2001a) andOECD(2006a).
142 agricultural subsidies in the wto green box
response. If there is some substitution between land and other inputs,
as is normally assumed, then support to a more inelastic input such as
land generates a smaller production response. If the farmer has more
freedom in what to produce (or not to produce) on land beneting from
payments, then the alternative uses of land are reduced and, with them,
the land allocation response to payments. In the recent history of reforms
in the US and the EU, the rst stage corresponds to the rst step in time
(late 1980s for the US, early 1990s for the EU) and has supposed in WTO
terms movements towards the blue box. The second stage corresponds
to the US 1996 Fair Act and the EU 2003 CAP reform and generated
(observed or likely) movements into green box notications.
Even if there are solid arguments on the more decoupled nature of
payments based on land with more production freedom, this type of pro-
gramme can potentially have some impacts on production and trade, to
be investigated empirically. This is why in economic terms it is preferable
to talk about degree of decoupling and to link this quantication to a
body of empirical results.
In more general terms, what are the potential mechanisms that can
lead a support programme to have impacts on production and trade?
This section does not aim to develop these mechanisms in detail, as they
have already been developed and discussed elsewhere. However, it does
intend to acknowledge them
8
and to assess the extent to which trade-
distorting effects or effects on production are reduced or eliminated by
WTO provisions.
The best-known effects are the so-called relative price effects, which
consist of the direct incentive that support programmes may create on
the production of agricultural commodities through their direct inci-
dence on prices. This includes output prices plus output payment, or
prices of inputs used for agricultural production minus the input pay-
ment. These relative price effects are affected directly by the conditions
stating the activities required, allowed or forbidden when receiving the
payment. These conditions may include retirement of some resources
from agriculture, or maximum quantities of inputs or outputs that can
benet fromsupport. Inthis context, empirical evidence shows signicant
8 Some other effects are mentioned in the literature, but are not mentioned specically in
this section, even if normally they are included under one of the three types of effect
mentioned. These include, for instance, the effects due to xed cost that may be covered
by support measures, and the effects through labour and leisure decisions that may have
positive or negative impacts on production.
an analysis of eu, us and japanese green box spending 143
differences inthe productioneffects of different types of support measure,
and generally price support and output payments are considered as the
reference for large impacts, while payments based on land, particularly
with freedom on what to produce, have smaller impacts (i.e. are found to
be more decoupled).
Risk effects occur when support programmes reduce the perceived
income risk from agricultural production activities. This may induce
farmers to produce more, because the risk associated with agricultural
activities is lower than that compared with non-agricultural activities.
This can be due to support that is, by design, countercyclical with farm
income, prices or yields,
9
or by ad hoc government decisions that respond
to farm income circumstances. In both cases, farmers decisions on pro-
duction would be affected by this insurance effect whenever these farmers
dislike risk (are risk-averse), as it is commonly assumed and found in
the empirical literature. However, risk effects could also occur, because
support programmes make farmers wealthier with some secure sup-
port and, therefore, less sensitive to income variability from farming.
These wealth effects may occur even if support is not countercyclical.
Risk-related effects have been found to be empirically signicant in sev-
eral studies, and they can potentially occur with many types of support
measure, including price support.
Dynamic effects refer to impacts that are somehow deferred over time;
that is, the impacts on production and trade do not occur simultane-
ously with the implementation of the payment. There can be price and
risk effects that are dynamic in nature because they are delayed due
to lags in programme implementation, but there are also dynamic spe-
cic effects associated with investment and expectations. Investment in
agriculture may be facilitated by support measures under certain cir-
cumstances. Available limited evidence shows relatively small investment
effects on production. Expectations related to payments, programmes
and policy may also affect production decisions in a dynamic way. For
instance, ad hoc government decisions about base updating or the size of
the payment may generate expectations about the future and potentially
affect production. It is technically difcult to obtain empirical evidence
regarding the magnitude of these effects.
9 In this chapter, countercyclical support is any support that is triggered or increased by low
farm income, prices or yields, regardless of the underlying causes of these low values. In
general, this type of support reduces the variability of farm income.
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146 agricultural subsidies in the wto green box
These effects can occur simultaneously, and the magnitude of the pro-
duction effects depends both on policy design and on the size of the
support provided.
The economics behind the law
Rational objectives for agricultural policy include the redistribution of
income, based on equity considerations, and the correction for market
failure, based on efciency criteria. The optimal economic responses to
these objectives are, respectively, lump sum transfers, which cannot be
affected by the recipients behaviour, and correcting the underlying cause
of the market failure (Rude, 2000). In practice, however, government
programmes often have hybrid objectives and use second-best policy
instruments. The WTO Agreement on Agriculture tackled the challenge
of creating some rules that try to minimise the production effects and,
at the same time, allow implementing programmes that try to achieve
domestic objectives that are not always well dened.
The result is the set of boxes andthe specic rules appliedtothe different
sub-boxes inside the green box. These latter are written in Annex 2 of the
URAA and summarised in Appendix 1 of this chapter. Table 7.1 identies
three types of provision: (i) provisions that impose a monetary limit on
total expenditure; (ii) provisions that discipline the implementation rules
of the programmes; and (iii) provisions that dene the target, objective
or purpose of a given measure.
The amber box and the de minimis are the only WTOboxes with a limit
on expenditure dened, respectively, in each countrys schedules and as
a percentage of the value of production. Neither the amber box nor the
de minimis has any provision constraining the type of support measure
in terms of the implementation rules or the objective that is pursued.
Potentially they can have the largest impacts on production and trade,
which is why the total expenditure is disciplined.
Blue box measures do not have a limit on expenditure, but they include
some constraints on implementation rules. These are, in general, weaker
than the constraints specied for green box measures. Payments have
to be a part of production-limiting programmes, but there is no def-
inition of what these programmes have to be. The main constraint that
may have implications on reducing the potential impact on production
is that payments have to be based on a xed area, yield or number of
heads, or on a percentage of the base level of production. The idea is
that if only past parameters determine the amount of the payment, then
an analysis of eu, us and japanese green box spending 147
it will not create incentives to change production decisions. However,
blue box provisions do not dene whether the base area has to be deter-
mined at the individual or aggregate level. In practice, current parame-
ters have determined the amount of the payment received by individual
farmers. The main notied programmes the EU area compensatory
payments had an aggregate base area across countries or regions, and
individual farmers decisions on the allocation of land among commodi-
ties and uses had direct implications on the total payments received.
On the contrary, the yields were xed for individual farmers. These
EU payments were area payments, with a maximum total area receiv-
ing the payment. With this precedent, the blue box has excluded price
support and/or variable input payments, but has allowed area payments.
Payments can be commodity-specic. There are no provisions forbidding
payments being countercyclical with prices, and there is no limitation on
the objectives of the programme, except for being a production-limiting
programme.
Green box provisions attempt to impose better-dened constraints
on the implementation rules of the programmes and on the objectives
pursued, in order to reduce the impact on production and trade; this is
why during the Doha Round negotiations, the reduction of overall trade-
distorting support is being discussed, including under this heading amber,
de minimis and blue box expenditure, and excluding supposedly non-
trade-distorting green box expenditure. However, there are effects that
have been analysed in this section for which it is hard to imagine any set
of provisions that completely excludes the occurrence of their production
and trade impacts. In fact, none of the green sub-boxes includes any
provision ruling out future updates or programme changes that may
generate expectation effects. Neither is there any provision dealing with
wealth effects associated with the fact that farmers receiving support
would be wealthier than otherwise. The potential existence of these effects
does not exclude the possibility that they are minimal.
The objectives or purposes covered by the green box are, in general,
dened loosely, often in a single heading or a few words. There are 12
green sub-boxes: three on government services (expenditures or revenue
foregone) and nine on direct payments to producers. Two of the gov-
ernment services are domestic food aid and public stockholding for
food security, which dene the type of purpose that may make a measure
eligible for these sub-boxes. The general services sub-box includes a
long list of services (research, pest and disease control, training, exten-
sion, inspection, marketing and promotion, infrastructural services) that
148 agricultural subsidies in the wto green box
is not exhaustive; that is, other services could also be included without
any constraint on the purpose or target of the service. The eight types of
direct payment to producers have a loose description of the purpose of
the measures to be included in each sub-box. The loosest of these deni-
tions is probably decoupled income support, which also has one of the
most detailed set of constraints on implementation rules. There is also
a residual type of direct payments with no denition of purpose; they
have constraints only on the implementation rules, which are very close
to those for direct income support.
There is a general provision in Annex 2 of the URAA that applies to
all green box domestic support measures: the fundamental requirement
that they have no, or at most minimal, trade-distorting effect or effects
on production; they have to be part of a publicly funded government
programme; and they cannot have the effect of providing price support
to producers. Therefore, price support is excluded in this general green
box provision, but little is said about how to achieve no, or at most
minimal, trade-distorting effects (this could be interpreted as deviations
fromefcient trade that account for potential externalities induced by the
measures) or effects on production (this is independent of the exter-
nalities that may be derived from the corresponding green box measure).
Therefore, a fundamental criterion for green box measures is the mag-
nitude of their impact on production, which has to be at most minimal,
even when other specic provisions are respected. Additional provisions
may contribute to conform to this criterion, but there is no presumption
that they guarantee this conformity.
Among the general services listed in Annex 2, only two have addi-
tional constraints. Marketing and promotion excludes expenditure for
unspecied purposes that could be used by sellers to reduce their selling
price. Infrastructural services exclude the subsidized provisionof on-farm
facilities. Public stockholding should correspond to predetermined tar-
gets related solely to food security, and the process should be transparent.
Similarly, domestic food aid requires clearly dened criteria related to
nutrition objectives and transparency. Some of these services have the
potential to facilitate production; for instance, off-farm infrastructural
services that may reduce production costs at the farm level.
The decoupled income support sub-box has a detailed list of con-
straints on implementation rules. Eligibility has to be based on clear crite-
ria applied in a dened and xed base period. The amount of the payment
will not be based on information about the type or volume of production,
prices or factor use in any year after the base period. No production shall
an analysis of eu, us and japanese green box spending 149
be required to receive the payment. These three conditions will constrain
or reduce the potential impact on production of such payments. Farmers
cannot allocate land or other inputs in a way that increases the payment,
which mitigates relative price effects. Not requiring production implies
that farmers can leave land idle and receive payment, mitigating its impact
on keeping land or other resources in agricultural production. The xed
period provisions about production, prices and factors of production
rule out the possibility of most kinds of countercyclical payment and
the corresponding insurance effects on production. These conditions are
designed to make these payments most similar to lump sum payments.
However, some current conditions could still exist in a payment in this
sub-box, and these conditions on what to do or not to do with land may
affect relative costs of alternative uses and have an impact on production.
Empirical studies on US PFC payments, the main signicant payments
under this sub-box for which there is already a history, show a relatively
small impact on production compared with price support (Abler, 2004;
OECD, 2005a). However, the Cotton Case has ruled out the possibility of
excluding some commodities in payments under decoupled income sup-
port. Production of fruits and vegetables was forbidden in PFC payments
and, therefore, they did not comply with this requirement. Except for the
provision on eligibility based on clearly dened criteria in a xed base
period, the rest of the provisions apply to any other direct payment to
producers that is not spelled out in Annex 2. In general, the provisions for
the remaining direct payments that are spelled out are less constraining
on the potential impacts on production.
There are two sub-boxes related to insurance, one on income insurance
and income safety net programmes and another on crop insurance and
relief fromnatural disasters. Eligibility is based on a minimum30 per cent
loss of income or production; the amount of the payment will compensate,
respectively, a maximum of 70 per cent and 100 per cent of this loss, and
the sumof both types of payment cannot exceed the producers loss. Inthe
income insurance sub-box, the amount of the payment has to be related
solely to income, but the crop insurance sub-box permits the relation of
the payment to factors of production such as land and heads. Because of
the objective of this sub-box, the existence of potential insurance impacts
on production is unavoidable, since the money received by the farmer
will, by nature, be countercyclical with regard to income or production.
The main constraint on impact may come from the specicity of the
objective of these payments or programmes. Many developed countries
150 agricultural subsidies in the wto green box
have notied their crop insurance subsidies not in this sub-box, but
under the non-product-specic AMS (amber box or de minimis), due
to non-compliance with requirements, particularly the need for a formal
recognitionby government authorities that a natural disaster has occurred
and the minimum 30 per cent loss.
There are three green sub-boxes dealing with structural adjustment:
producer retirement programmes, resource retirement programmes and
investment aids. The rst two are conditional on the retirement of
resources from agriculture: permanent for the farmer, at least three years
for land and slaughtering for livestock. This retirement of resources may
have a negative direct impact on production. Both in the blue box and in
these sub-boxes, the URAAaccepts a negative impact on production com-
pared with positive impacts. However, potential positive impacts through
expectations or wealth cannot be ruled out in these resource-retirement
programmes. For the investment aids, eligibility has to be based on objec-
tively demonstrated structural disadvantage of the operation, and they
can only compensate for this disadvantage with no relation to future pro-
duction. These conditions constrain the target and the implementation
rules of investment aids in the green box, but they cannot rule out the
potential existence of investment effects on production, which are very
likely to be positive and direct.
The eligibility for payments under environmental programmes has
to be based on the fullment of specic conditions, including produc-
tion methods and inputs, while the amount of the payment is limited
to the extra costs of compliance. Payments could be based on area or
head, potentially increasing the use of these factors, but compliance with
environmental conditions may likely reduce rather than increase yields.
Payments under regional assistance programmes require being in a well-
dened structurally disadvantaged region and permit payments based on
current use of factors of production such as land as far as they are made
at a degressive rate.
Provisions in these green sub-boxes do not rule out all potential
impact on production; but this does not mean that impacts occur for
a given programme, or that if they do occur they cannot be considered
as minimal. Measuring the impacts on production of a given measure
would require an empirical investigation of each specic programme,
and deciding whether they are minimal would additionally require a
benchmark for comparison. None of these standards is dened in the
URAA.
an analysis of eu, us and japanese green box spending 151
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1986/88 1995

0
0
0

M
i
l
l
i
o
n
green box
blue box
total de minimis
AMS amber
AMS ceiling
Figure 7.1 Notied domestic support: EU15
Extent of green box spending: comparison with other boxes
The structure of the URAA permits changes of support levels from one
box to another. Furthermore, there are particular incentives for moving
support out of the amber box due to the reduction commitments that
discipline this box compared with others. Has support been shifted from
the amber box? Has support shifted from other boxes into the green box?
During these shifts, did the implementation rules of the programmes
change to constrain or reduce potential impact on production and trade?
Domestic support in the European Union
The EUis the rst provider of domestic support among all WTOmembers,
representing 39 per cent of all WTO-notied support across the period
1995 to 2003. Total notied support amounted to an annual 90 to 95
billion (bn
10
) in 1995 to 1996 and was reduced by about 15bn to 75
to 80bn in 2002 to 2003, the last two notications available (gure 7.1).
Overall trade-distorting support
11
(amber plus de minimis plus blue) was
71bn in 1995 and has progressively reduced since 1998 to 58bn in
2003. The EU has clearly reduced its total WTO-notied support since
10 The abbreviation bn denotes US billions, that is thousands of millions, or 10
9
units.
The abbreviation mn denotes millions, or 10
6
units.
11 Following the notation already used during Doha Round negotiations, we describe over-
all trade distorting support as the sum of the notications under amber, de minimis and
blue boxes.
152 agricultural subsidies in the wto green box
the beginning of the URAA process in 1995; this reduction affects mainly
the so-called trade-distorting boxes.
Most EU domestic support has historically been notied in the amber
box. However, there is a clear trend of reductioninamber box expenditure
in the EU. It accounted for 88 per cent of total support in the reference
period 1986 to 1988, while it was only 39 per cent of support in 2003
(table 7.2). This very signicant reduction in amber support has brought
its expenditure to around 30bn in 2003, compared with 74bn in 1986
to 1988 and 50bn in 1995 (see annex table 1). This is well below the
amber box ceiling for the EU15 of 67bn after URAA reductions. This
change involves both a reduction in total support plus a shift of support
towards other boxes. In fact, expenditure in all other boxes (de minimis,
blue and green) has not been reduced during the same period. The de
minimis expenditure has grown, but represents only 2bn in 2003. Blue
box expenditure has increased from 0.4bn in 1986 to 1988 to 25bn in
2003. Green box expenditure has uctuated more and in 1996 had the
same expenditure as in 2003 of 22bn.
What are the main shifts observed in the notications of the EU, and
what are the underlying policy changes that have occurred? Three main
shifts can be identied in the data. First, 1995 notications supposed a
clear shift from amber to blue, as compared with the reference period.
Second, from 2000 onwards, a new progressive shift from amber to blue
is observed. Third (not seen in the data, which end in 2003), there will
very likely be a change from blue to green in the years to come because of
2003 reform of the CAP.
Notications from 1995 include 21bn under the blue box, 75 per
cent of which is compensatory payments for arable crops notied as
payments based on xed area and yields, and 25 per cent of which is
compensatory payments per head notied as livestock payments made
on a xed number of head. These payments were created to compensate
farmers for the reduction in institutional prices decided under the 1992
MacSharry reform, whichincludeda 30per cent cut incereals intervention
prices. The new payments were based on area or head, with a maximum
guaranteedarea or number of animals andwithxedyields. They included
a compulsory set-aside obligation that created a production-limiting
programme. In practice, for the individual farmer with enough eligible
land, they were area and per-head payments whose impact on production
is potentially smaller than that derived from a similar amount of price
support. At the same time, 1995 notications included a reduction of
23bn in the amber box. This reduction is explained by lower levels of
T
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154 agricultural subsidies in the wto green box
market price support for the products affected by the reform, mainly
14bn reduction for cereals and 4.5bn for beef. In 1995, compared with
the reference period 1986 to 1988, there is a clear shift in support from
the amber box to the blue box, a shift that involves a change in the nature
of support that is now made suitable for the blue box.
The second signicant change in the composition of support in EU
notication occurs from 2000 onwards and is the same type of shift
observed after the 1992 reform: a reduction in amber box support accom-
panied by an increase in the blue box. This change is triggered by the
Agenda 2000 reform of the CAP that was a continuation of the 1992
reform: further cuts in institutional prices (15 per cent for cereals, 20
per cent for beef), partially compensated with an increase in the area
and per-head compensatory payments. In 2003, blue box payments were
5bn higher than in 1999 (3bn for payments based on area and 2bn
for livestock). Amber box support was reduced from 48bn to 31bn in
2003. This reduction is driven by a drop in the cereals prices and, partic-
ularly, a drop in the beef market price support, which fell 13bn down to
zero in 2003. This fall is explained by the replacement of the beef inter-
vention price that was 3,013/tonne in 2001 by a basic price for storage
of 2,224/tonne in 2002, which is lower than the xed reference price
used in WTO calculations for price support. Due to various economic
reasons, particularly the existence of border tariffs, reductions in institu-
tional prices of this nature may not always be transmittedfully toproducer
prices. Calculations of the OECDfor market price support followa differ-
ent, non-comparable methodology based on observed price gaps between
producer prices and border reference prices. According to these calcula-
tions, beef market price support did not fall between 1999 and 2003.
12
The third important change in domestic support composition in the
EU is likely to be observed in the years to come, when the EU will submit
notications that reect the impact of the new SFP scheme. The main
underlying policy changes are in the 2003 CAP reformpackage, which has
createdthis newtype of payment, the maincharacteristic of whichis that it
is paid to the farmer as a payment per eligible hectare, independent of the
type of production or no production that the farmer decides for that
hectare. There are three main current conditions attached to the payment:
land has to be maintained in good agricultural use, there is a set of cross-
compliance requirements related mainly to the environment and animal
12 See EU Commission (2006a), which questions this calculation of beef market price
support. The main argument is the heterogeneity of low- versus high-quality beef.
an analysis of eu, us and japanese green box spending 155
welfare, and it is forbiddento cultivate fruit, vegetables and table potatoes.
It is likely that the EU authorities envisage declaring these new payments
in the decoupled income support green sub-box. The implementation
rules of the payment scheme seem to t with the conditions imposed in
this sub-box, except for the prohibition of cultivating some commodities,
which, according to the panel report of the Cotton Case, may not be
compatible with this sub-box. The reform for the fruit and vegetables
sector that has been approved in 2007 includes the elimination of this
prohibition.
This newpayment directly substitutes former domestic support, mainly
blue box payments based on area and livestock heads. There are alterna-
tive choices for EU members on how to apply the reform, allowing the
maintenance of some percentage of compensatory payments linked to
specic products in the green box. It is estimated that, given the decision
taken to date, at least 80 per cent of the expenditure on compensatory
payments in the blue box would be moved to the new SFP scheme. If
nally notied in the green box, this would be the main shift in boxes
derived from the 2003 reform. However, there are other expected changes
of expenditure across boxes associated with 2003 and subsequent reforms
(Mediterraneanproducts, sugar, fruit, vegetables andwine). Current deci-
sions would imply that market price support will fall mainly for sugar,
milk, butter, olive oil and rice, which could add up to around 9bn, which
would reduce the EUs AMS. Further reductions of amber box support
will be likely implied by the reforms on fruits, vegetables and wine. These
cuts insupport are mostly compensatedby additional payments under the
SFP scheme. Finally, the 2003 reform establishes a reduction of all direct
payments of 5 per cent (called modulation), which will be used for rural
development expenditure, mostly notied in different green sub-boxes.
The decision by the European Council on budgetary perspectives 2007 to
2013 opened the door to a further 20 per cent modulationto be decided by
EUmembers, but this is still to be regulated. It is difcult to make an exact
estimate of the impacts of the CAP reform on WTO notications, but a
rough estimate of these shifts (without additional modulation) would be
of more than 25bn to be included in the green box, coming mostly from
reductions in blue box expenditure, but also from amber box.
Domestic support in the United States
The US is the second-largest provider of domestic support among all
WTO members, with 28 per cent of all WTO-notied support across
156 agricultural subsidies in the wto green box
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
1986/88 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
$

0
0
0

M
i
l
l
i
o
n
green box
blue box
total de minimis
AMS amber
AMS ceiling
Figure 7.2 Notied domestic support: United States
the period 1995 to 2003. Total notied support by the US added up to
$60bn in 1995 and increased by $31bn to $91bn in 2005. The US has
clearly increased its total WTO-notied support since the beginning of
the URAA process in 1995. This increase in support was due mainly to
increases in overall trade-distorting support in the period 1998 to 2001,
and to increases in green box support since 2002.
Most US domestic support has been notied as green box in all years
since 1995. In the reference period 1986 to 1988, green box expenditure
already represented 41 per cent of the total; it was 88 per cent in 1996 and
1997, 67 per cent in 2000 and 86 per cent in 2003. In monetary nominal
terms, greenbox expenditure inthe US increased in1995 to $46bnrelative
to the reference level of $24bn in 1986 to 1988; it has remained fairly
constant around $50 to $51bn between 1996 and 2001, and increased to
$72bn in 2005. Blue box expenditure disappeared after 1996, and amber
and de minimis expenditure was stable in the period 1995 to 1997. Since
1998, both amber and de minimis expenditure behaved cyclically with a
minimum in 2003 and two peaks in 1999 and 2005. Most support in the
US is declared as green, but the amount of (presumably most distorting)
amber box support has increased over the whole notication period and
in 2000 it represented 88 per cent of the amber box ceiling.
What are the main shifts observed in the notications of the US, and
what are the underlying policy changes that have occurred? Four main
shifts or changes can be seen in gure 7.2 and table 7.3. First, in 1995,
notications showa reduction in amber box and an increase in green box,
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158 agricultural subsidies in the wto green box
compared with the reference period 1986 to 1988. Second, by 1996 there
had been a shift from blue expenditure to green expenditure. Third, since
1998 there has been an increase in the total domestic support notied
due to increases in both amber and de minimis expenditure with a cyclical
pattern. Fourth, since 2002 thare has been a progressive increase in green
box expenditure.
The 1995 notication shows a reduction in amber box expenditure of
$18bn and an increase in green box expenditure of $22bn. There seems
to be little relationship between these two changes: most of the new
green expenditure is oriented towards domestic food aid (in the form of
nancial assistance for low-income families to purchase food), whereas
the reduction in the amber box is support received directly by farmers
(particularly cereals producers) in the form of market price support and
deciency payments. Expenditure shifts between boxes and the recipients
and the nature of the support provided have also changed.
The 1996 shift concerns the blue box. In1995, blue box support notied
under payments based on 85 per cent or less of base level of production
added up to $7bn. These were deciency payments declared to be made
only on 85 per cent of base area, with constant yields. This support is
eliminated in the 1996 notication. Part of this expenditure (more than
$5bn) was shifted to the decoupled income support green sub-box in
the form of the PFC payments introduced in the 1996 US Farm Bill (the
FAIRAct). These payments are based on xed area and yields, and there is
freedomon what to produce in the land beneting fromthem including
idling except for the production of fruit and vegetables. These payments
were renewed by the 2002 FarmBill as direct payments, while producers
were alsoprovidedthe optionof updating base areas tothe average acreage
planted between 1998 and 2001. The panel of the Cotton Case has found
that these payments do not conform to the criteria of the decoupled
income support sub-box, because they are based on the current type
of production due to the prohibition of producing some commodities.
However, the panel did not solve the issue of the conformity of the base-
updating option with the green box criteria. Since 1996, the amount and
structure of green box expenditure in the US has remained fairly stable.
The third important change in US domestic support pattern occurred
in 1998. In that year, a combination of low market prices pushed the US
Government to complement the PFC payments with additional ad hoc
market loss assistance, paid on the same basis as the PFCpayments, plus
crop disaster payments per hectare, adding up to a total of $3.4bn notied
as new support expenditure under non-product-specic de minimis. An
an analysis of eu, us and japanese green box spending 159
additional $1.3bnwas declared as crop disaster payments inthe greenbox,
but with little impact on total green box due to reduction of other spend-
ing. Additionally, the amber box expenditure onloandeciency payments
and marketing loss gains was also expanded automatically following their
countercyclical provisions that are triggered when prices are low, with
an increase in amber box expenditure of $4.2bn compared with 1997.
Expenditure on the same programmes was expanded further in 1999 in
the context of lower prices, with additional amber expenditure of $6.5bn
to a total of $17bn, and additional non-specic de minimis expenditure
of $2.7bn to a total of $7.4bn. Since then, expenditure was rst reduced
to a minimum in 2003, and then increased in 2004 to 2005. These move-
ments show high negative correlations with the level of world prices of
main agricultural commodities. This reects the countercyclical design
of main US programmes, particularly the new countercyclical payments
that were created by the 2002 Farm Bill as an institutionalisation of the
ad hoc Market Loss Assistance Payments. They have been notied under
de minimis.
The fourth change implies a signicant and progressive increase in
green box notications from $51bn in 2001 to $72bn in 2005. This adds
up to a total $21bn of additional green box expenditure.
According to the recently approved 2008 FarmBill, there will not be any
big changes in domestic support in the US in the years to come. Direct
payments will not prohibit the production of fruits and vegetables (to
make them compatible with the green box). Farmers will have the possi-
bility of opting between receiving the same countercyclical payments that
are contingent on prices and newAverage Crop Revenue Election (ACRE)
payments that are countercyclical with regard to the calculated state rev-
enue. One thing seems clear in the new Bill: US domestic support will
remain, to a large extent, countercyclical in nature and expenditure could
be signicantly reduced or increased, depending on the future evolution
of commodity prices and revenues.
Domestic support in Japan
Japan is the third-largest provider of agricultural domestic support
according to WTO notications, representing 18 per cent of all noti-
cations in the period 1995 to 2001. Total notied support has fallen from
7,220bn yen in 1986 to 1988 to 2,481bn yen in 2006. Japan has clearly
reduced the total level of notied domestic support since the reference
period1986 to1988 andsince the beginning of the implementationperiod
160 agricultural subsidies in the wto green box
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1986/88 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0
0
0

M
i
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l
i
o
n

Y
e
n

green box
blue box
total de minimis
AMS amber
AMS ceiling
Figure 7.3 Notied domestic support: Japan
in 1995; this reduction was due to reductions in overall trade-distorting
support, mainly amber box.
Japan notied 69 per cent of its support in the amber box in the
reference period 1986 to 1988, adding up to 5,000bn yen compared with
31 per cent, or 2,200bnyen, inthe greenbox. Notied amber box expendi-
ture has been reduced in two main steps: in 1995, amber box expenditure
dropped to 52 per cent of support and in 1998, it dropped to only 20 per
cent. Green box expenditure has uctuated in the notications, rst up
to 2,600 to 3,200bn yen in 1995 to 1998, and then down to 1,800bn yen
in 2006. There is a stable 1 to 2 per cent of support under de minimis and
a new 1 per cent under the blue box in 1998, which has increased to 2 to
3 per cent from 1999 onwards.
What are the main shifts observed in the Japanese notications, and
what are the underlying policy changes that have occurred? Three main
changes are observed in the Japanese history of WTO notications
(gure 7.3, table 7.4). First, from 1986 to 1988 to 1995, there is a reduc-
tion in amber support accompanied by an increase in the green box. Sec-
ond, in 1998, amber box expenditure dropped to a quarter of what was
notied in 1997; meanwhile, relatively low new blue box expenditure is
created. Third, there is a progressive reduction in green box expenditure
since 1998.
Comparing the 1986 to 1988 reference period with the rst notica-
tion in 1995, Japan shows a signicant reduction in amber box support
from nearly 5,000bn yen to 3,500bn yen. During this period, there are
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162 agricultural subsidies in the wto green box
reductions in market price support across most commodities, particu-
larly rice. These reductions are also captured to a great extent in the
market price support calculations in the OECDs PSEs, whose methodol-
ogy is not comparable with WTO notications. This reduction in amber
support was accompanied by a slightly smaller increase in green box sup-
port in the form of general services. Total support notied by Japan was
reduced by about 500bn yen.
Japan notied in 1998 zero market price support for rice, compared
with 2,315bn yen in 1997. In 1998, Japan introduced a new Rice Farm-
ing Income Stabilisation (RFIS) programme, which was thought of as
payments to compensate parts of the loss in case of market prices falling
below a historical average. The government announced that its future
rice purchases would be solely to maintain rice stocks for food secu-
rity and, therefore, the government purchase price for domestic rice was
no longer a tool for market price support. Despite the maintenance of
this administered price, since 1998 notications do not include market
price support for rice. The OECD calculations of Japanese rice market
price support use domestic prices tocalculate its ownmarket price support
and showmoderate reductions in support in the years 19982002 because
of subsequent reductions in the government purchase price. Given the
existence of border measures, in pure economic terms it is unlikely that
price support received by rice producers has fallen by as much as the
amount that is legally reected in WTO notications. The new RFIS pro-
gramme accounted for only 50bn yen and 93bn yen in 1998 and 1999,
respectively, only 4 per cent of the market price support given to rice in
the amber box 1997 notication. The new programme was notied in the
blue box (direct payments to rice producers under production-limiting
programmes, as payments based on 85 per cent or less of the base level
of production) and maintained with a similar level of expenditure in the
following years.
Finally, from 1998 there seems to be a trend progressively to reduce
green box support in Japan, from 3,000bn yen down to less than 1,800bn
yen in 2006. This mainly affects general services, particularly infrastruc-
tural services, and does not seem to be the result of any shift of support
between boxes.
Domestic support across all WTO countries
Analysis of expenditure for all WTOmember countries can be misleading
because it requires conversionintoa commoncurrency. Boththe exchange
an analysis of eu, us and japanese green box spending 163
0.0
50.0
100.0
150.0
200.0
250.0
300.0
1995 1996 1997 1998 1999 2000 2001 2002 2003
$

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M
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green box
blue box
total de minimis
AMS amber
Figure 7.4 Notied domestic support: All WTO notications
rate of national currencies (in which notications are made) and the
number of countries notifying can vary from one year to the next, which
can affect the result of adding up support, as in gure 7.4. This caveat
applies to the comparisons in this subsection.
Together, the EU, the US and Japan have notied 82 per cent of all WTO
domestic support in the period 1995 to 2003 (table 7.5). The only other
big country in terms of WTO agricultural domestic support is China,
which since 1999 has notied slightly above Japan, more than two-thirds
of it under the green box. Other countries have much smaller weight
in total support, including countries with high relative levels of support
according to the OECDs PSE, such as Norway and Switzerland. The Trio
represents 85 per cent of amber box notications, 97 per cent of blue box
notications and 79 per cent of green box notications. The participation
in the de minimis notication is slightly lower (63 per cent), indicating
that other countries use this exemption relatively more.
Total support has been reduced from$294bn in 1995 to $213bn in 2003
(table 7.6). Most of this reduction was observed in overall trade-distorting
support, but green box expenditure has also been reduced. The main
trends in total WTO notied domestic support between 1995 and 2003
are the following: amber box expenditure is halved from$122bn to $52bn;
blue box expenditure is reduced to $30bn; de minimis grows to around
$11bn; and green box expenditure is moderately reduced to around
$121bn. Nearly one-half of total support across all WTO notications
is green box expenditure, and its percentage has increased progressively:
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166 agricultural subsidies in the wto green box
it represented 45 per cent of expenditure in 1995 and 57 per cent in 2003.
The biggest reduction in relative terms occurs in the amber box, reducing
from 41 per cent of support in 1995 to 25 per cent of support in 2003.
The de minimis expenditure grows, but represents only 4 per cent of the
total in 2003, while the blue box uctuates around 9 to 14 per cent of the
total.
The share of eachcountry ineachboxdiffers signicantly, depending on
the pattern of domestic support expenditure of each one. For instance, in
the amber box, the EUrepresents the highest share of notiedexpenditure,
with an average 56 per cent for the period 1995 to 2003. Japan has 17 per
cent, the US has 12 per cent and all other countries amount to 15 per
cent of the amber box. The EUs share of amber box expenditure does
not change signicantly between 1995 and 2003. The EU is even more
important in the blue box, with 92 per cent of all notied support in the
same period. The US and Japan had 3 and 2 per cent, respectively, and
the remaining countries notied the remaining 3 per cent.
The US accounted for 55 per cent of the de minimis expenditure in
1995 to 2003, with only 10 and 2 per cent coming from the EU and Japan,
respectively. Other countries notied the signicant additional 37 per
cent. Finally, the highest share of green box expenditure also corresponds
to the US (42 per cent), followed by Japan (18 per cent) and the EU
(18 per cent); the remaining 21 per cent is distributed among all other
WTO members. Since 1999, this is dominated by China, with around
20 per cent of all green box notications.
The trends of total WTO support can be explained to a great extent by
the changes that have occurred in the Trio. In particular, the progressive
reduction in amber expenditure reects mainly the reductions in the EUs
and Japans notications. The slight increase in amber, de minimis and
total support in 1999 and 2000 and the subsequent reduction reects
mainly the countercyclical behaviour of domestic support in the US. The
increase is relatively small due to the signicant reduction in Japanese
amber expenditure since 1998, the same year in which US payments are
triggered for the rst time. The higher total notied levels in 1999 to 2001
reect the years for which there are notications from China.
Focus of green box spending: types of green box measure
The second section has already discussed the requirements imposed by
the URAA on each of the 12 green sub-boxes. The green box represents
an increasing share of all notied domestic support in the WTO, with
an analysis of eu, us and japanese green box spending 167
0.0
5.0
10.0
15.0
20.0
25.0
2003 2002 2001 2000 1999 1998 1997 1996 1986/88 1995

0
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n
Environmental/Regional/Other
Structural Adjustment
Insurance and Relief
Decoupled Income Support
Domestic Food Aid
General Services and Public
Stockholding
Figure 7.5 Green box expenditures in the European Union by category
57 per cent in 2003, and the Trio covers nearly 80 per cent of this spending:
the US is the main user of the green box, with 42 per cent of expenditure
for the period 1995 to 2003, followed by Japan and the EU (18 per cent
each). In this section, the pattern of green box expenditure of the Trio
countries is analysed, including the evolution of each of the 12 sub-boxes.
For the purpose of the graphs, these 12 sub-boxes are aggregated into
six sections: general services and public stockholding; domestic food aid;
decoupled income support; insurance and relief; structural adjustment;
and environmental, regional and other.
Green box spending in the European Union
Green box spending in the EU represents around 20bn, with a slight
increasing trend, particularly since 1997, and some uctuations from
year to year (gure 7.5). The four green sub-boxes with the highest levels
of spending are structural adjustment assistance provided through invest-
ment aids (highly variable, but above 30 per cent in several years), general
services (20 to 30 per cent), environmental programmes (15 to 30 per
cent) and regional assistance programmes (10 to 15 per cent); the latter
two show increasing trends. During the notication period 1995 to 2001,
there is no evidence of sharp increases in green box spending or shifts in
support among different green sub-boxes.
168 agricultural subsidies in the wto green box
Most EU green box expenditure is notied as environmental/regional
programmes, general services and structural adjustment, and except for
general services it is provided through the set of programmes under the
second pillar of the CAP that is devoted to rural development policies.
This idea of the second pillar, which complements the rst pillar of more
market-oriented support, was introduced under the Agenda 2000 reform
of the CAP (Council Regulation 1257/99). This second pillar grouped and
reoriented some already existing measures.
The EUs rural development policy is driven by a common EU frame-
work, which provides a menu that each EUMember State can adapt to the
reality of its regions and rural areas. All of these measures are co-nanced
between the EU budget and national/regional budgets at different rates.
The types of programme in the menu are relatively general, and only a
few implementation criteria are imposed on Member States. There are
numerous measures under common rural development headings, but
applied with different detailed rules in each country and monitored at the
EU level. More than three-quarters of EU green box spending is framed
under this rural development set of programmes, and most is notied
under the structural adjustment, environmental and regional sub-boxes.
The EU notications to the WTO on green box measures are not very
detailed when describing the exact measures covered by each sub-box.
General services spending represents around 5bn, or around one-
quarter, of green support along the notication period (see table 7.7 and
Annex table 2). The most important type of service in the EU is pest
and disease control, which normally represents 1 to 2bn and has a
tendency to increase. Expenditure on research on animal and plant selec-
tion and production techniques uctuates around 1bn. Expenditure on
inspection services for livestock and quality control is 0.2 to 0.4bn.
None of these three groups of measures is included in the rural devel-
opment policy framework, but most other spending in general services
is included. Training services, extension and advisory services and other
services have been reduced from a total of 3bn in 1995 to 0.5bn in
2003. Infrastructural services include drainage, collective irrigation, pro-
duction of electricity, roads and ood protection; spending uctuates by
year between 0.6bn and 2.4bn. Expenditure on marketing and promo-
tion has increased from 0.5bn in 1995 to 1.2bn in 2001 and includes
at least part of the spending on the operational funds for the producer
organizations of fruits and vegetables. Between 1995 and 2003, spending
on general services has shifted from training and other services to pest
and disease control and marketing and promotion.
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170 agricultural subsidies in the wto green box
The EU spends relatively very little money on public stockholding
for food security purposes (0.06bn in 2003) and on domestic food aid
(0.3bn in 2003 for distribution of agricultural products for deprived
people). In total, these two represent less than 2 per cent of EU green box
spending.
Decoupled income support includes only the agri-monetary aid that
was spent in EU member countries with strong currencies in the context
of main payments and price levels being dened at the EU level in ecus,
but these payments have been drastically reduced from a maximum1bn
in 1999 to almost zero, particularly with the introduction of the com-
mon currency, the euro. This sub-box could experience a very signicant
increase after the application of the 2003 and subsequent CAP reforms,
to the extent that the new SFP is notied as green. If this were the case,
then this shift mainly from the blue box may add more than 25bn
to this green sub-box and to total green box expenditure. This would
imply more than doubling the EUs green box expenditure. However, the
increase in spending may not be evident until the EU submits its 2008
domestic support notication to the WTO: gures in this should reect
the implementation of the reform of the fruit and vegetable sector, and
the lifting of the prohibition on producers cultivating certain products.
Meanwhile, it is possible that only the SFP paid with no prohibition of
producing fruits and vegetables and table potatoes, may be declared as
green. These payments under the SFP scheme are given under the so-
called regionalisation option, adopted by some member countries, and
the new members scheme.
The income insurance and safety net programmes sub-box is almost
empty in EUnotications. Payments for relief fromnatural disasters have
increased in the latest notications, but in 2003 they were still only 3 per
cent of green box spending, mainly from national budgets.
The structural adjustment assistance is the main type of green expen-
diture in the EU. This is provided mostly through the rural development
second pillar of the CAP. In 2003, spending included 0.8bn for producer
retirement programmes, 0.1bn for resource retirement and 6.8bn for
investment aids. Early retirement programmes intend to provide income
to farmers over the age of 55 if they decide to stop commercial farm-
ing, while encouraging replacement and reallocation of agricultural land.
Resource retirement programmes include voluntary set-aside, and expen-
diture has been reduced since 1995. Investment aids include restructuring
and conversion of wine production, plus several measures in the rural
development pillar. Among these are payments and interest concessions
an analysis of eu, us and japanese green box spending 171
for investment in agricultural holdings, setting up of young (under
40 years of age) farmers and promoting the adaptation and develop-
ment of rural areas (land improvements). The provisions in EC Regula-
tion 1257/99 on rural development do not specify some of the constraints
imposed by the URAAAnnex 2 for investment aids, such as the amount of
the payment being limited to compensation for structural disadvantage.
The EUs payments under environmental programmes have increased
from 2.8bn in 1995 to 5.2bn in 2003. Payments seem to include
mainly spending under the rural development second pillar, mainly agri-
environment measures and forestry, and also support for organic pro-
duction and conservation of genetic resources. The provisions in EC
Regulation 1257/99 on agri-environmental measures list general objec-
tives that would be promoted with such measures (for instance, ways of
using land that are compatible with the improvement of the environ-
ment) and specify that the amount of the support has to be calculated on
the basis of income forgone, additional costs resulting from compliance
and the need to provide an incentive. This provision seems less restrictive
than the URAA requirement of the amount of the payment being limited
to the extra costs or loss of income.
Finally, regional assistance programmes cover mainly the expenditure
onless favouredareas (LFA) andmountainareas under the secondpillar of
the CAP. They represent slightly less than3bnin2003 andhave remained
at around this level throughout the notication period. Expenditure has
not been notied under the residual category of other direct payments in
the EU.
There have been no big changes in the amount or composition of green
box support in the EU in the notication period 1995 to 2003, except for
some increases in environmental programmes. The 2003 CAP reform
established a compulsory 5 per cent modulation that cut rst-pillar direct
payments in order to shift this spending to the second pillar. Financial
discipline provisions have implied that total expenditure on this second
pillar will barely increase when the reform is applied, but the door may
be opened to further voluntary modulation of 20 per cent, which some
EU member countries may decide to apply and which may involve a
signicant increase of spending on structural adjustment, environmental
and regional green sub-boxes. However, this potential future shift may
not imply big additional increases in green box expenditure, since most of
the additional spending may come from the SFP, which may be notied
as green decoupled income support.
172 agricultural subsidies in the wto green box
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1986/88 1995
$

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Structural Adjustment
Insurance and Relief
Decoupled Income Support
Domestic Food Aid
General Services and Public
Stockholding
Figure 7.6 Green box expenditures in the United States by category
Green box spending in the United States
The US has notied about $50bn of support under the green box every
year between 1996 and 2001: this has since progressively increased to
$72bn in 2005 (gure 7.6, table 7.8). US green box support is highly
concentrated in domestic food aid (65 to 81 per cent of the total). Other
sub-boxes with high levels of spending are general services (13 to 18 per
cent) and decoupled income support (8 to 12 per cent since 1996). The
only shift of support observed in the green box since 1996 has been an
increase of $13bn of domestic food aid, accompanied by increases of $5bn
of general services and large variability of payments for relief fromnatural
disasters in the range $0 to $2bn in a countercyclical pattern. Most of these
programmes are part of the successive Farm Bills, the latest approved in
1996, in 2002 and most recently in 2008.
US green box notications single out each programme and responsible
agency with more detail than in the notications of the EU. The list of
programmes includes more than 70 different entries.
US spending ongeneral services has increasedsignicantly from$6.4bn
in 1995 to $11.3bn, or 16 per cent of green box expenditure in 2005. It is
the second-largest sub-box for the US, and it includes a list of 40 different
programmes that are not grouped following the list of service types in
Annex 2 of URAA. The main line in this list, with nearly 50 per cent
of spending of general services ($4.3bn in 2005), corresponds to state
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174 agricultural subsidies in the wto green box
programs for agriculture. This is sub-national expenditure net of fees
and taxes made by state governments in order to provide a number of
generally available services such as extension, marketing and research.
No further details are provided about this type of support.
Leaving aside the state government programmes, research can be sin-
gled out as the most important area of general services in the US, with
$1.9bn spent on the Agricultural Research Service and the Cooperative
State Research Service in 2005. Pest and disease control is executed by the
Animal and Plant Health Inspection Service (APHIS), with expenditure
of $1.2bn in 2005. Expenditure on the Extension Service, the Conser-
vation Programme technical assistance and conservation operations of
the Natural Resource Conservation Service corresponds to extension and
advisory services and amounts to $1.2bn in 2005. Finally, in 2005, $0.8bn
was spent on the Food Safety Inspection Service (FSIS). None of the other
programmes in the general services sub-box exceeds $0.2bn, and together
they represent less than 10 per cent of expenditure in general services.
The US has not notied any programme on public stockholding for
food security.
The sub-box with highest spending is domestic food aid. This had
$19bn in the reference period 1986 to 88, which increased to $37bn
in 1995, fell to $34bn in 2001 and progressively increased to $51bn in
2005. This represents 21 per cent of the US notied value of agricultural
production, which illustrates the relative dimension of this expenditure.
There are three main domestic food aid programmes notied by the US.
The FoodStampprogramme gives low-income people nancial assistance
to purchase nutritious food. Its total expenditure was $26bn in 1995,
$18bn in 2000 and $33bn in 2005. The Child Nutrition programme
increased expenditure from $7.5bn in 1995 to $12bn in 2005 and is
designed to assist childrento eat adequate diets. The Special Supplemental
Nutrition Programme for Women, Infants and Children, which is also
oriented towards elderly people, represented an additional $5bn in 2005.
Domestic food aid programmes in the US are an important part of the
social policies of this country.
Decoupled income support in the US began in 1996 with the FarmBill,
which came into force that year and introduced PFC payments. Spending
in this programme was $6.3bn in 1997 (10 per cent of total green box
spending) and was reduced progressively to $4.1bn in 2001 (8 per cent of
green box spending). Since 2002, the programme was called the Direct
Payments programme with a constant annual expenditure of $5.2bn.
These payments are paid on the basis of historical crop area, with high
an analysis of eu, us and japanese green box spending 175
exibility on what to do with the land, including idling. Under the Cotton
Case, the WTO Dispute Settlement Body has already declared this type
of payment (including the so-called Direct Payments Programme, which
substituted PFC payments in the 2002 Farm Bill) as not conforming
to green box provisions. Other expenditure included under decoupled
income support is the quota buyout programmes for peanuts (2003) and
tobacco (2005) of around $1bn each.
The US has not notied any programme under the income insurance
and safety net programmes sub-box.
Payments for relief fromnatural disasters are, by nature, countercyclical
and vary along the notication period, depending on declarations of
natural disasters indifferent years. They have never representedmore than
5 per cent of total green box spending and were a maximum of $2.1bn in
2000. They were above $1.4bn in 1986 to 88 and 1998 to 2004 and less
than $0.2bn in the remaining years. There are 12 different programmes
notied in this sub-box, all of them run by the Farm Service Agency
(FSA). The three main programmes ordered by average spending are the
following: crop disaster payments for crop producers suffering losses of
more than 30 per cent due to damaging weather or related conditions; an
emergency feed programme, which compensates livestock producers for
feed crop disaster; and a non-insured crop disaster assistance programme,
for crops that are not insurable under other programmes.
The US has not notied any programme under the structural adjust-
ment through producer retirement sub-box.
The only measure notied since 1995 in the structural adjustment
through resource retirement programmes is the Conservation Reserve
Programme (CRP) administered by the FSA and nanced by the Com-
modity Credit Corporation (CCC). In the reference period 1986 to 1988
there was also a dairy termination programme. Total spending in this
sub-box has been relatively stable, with $1.6bn or 3 per cent of total green
box expenditure in 2001. The CRP provides annual rental payments for
planting permanent vegetation on idle, highly erodible farmland. Since
2002, the CRP has been notied under the environmental programmes
sub-box.
There is a maximumof $0.1bn of spending under the structural adjust-
ment through investment aids sub-box. These aids are mainly farm credit
programmes providing loans at preferential interest rates.
Up until 2001, there was only $0.3bn of spending, or less than 1 per
cent of green box expenditure, under the environmental programmes
sub-box. However, there are 18 different environmental programmes
176 agricultural subsidies in the wto green box
in US notications, most of them with yearly spending below $0.1bn.
Each programme has different patterns of higher and lower expendi-
tures in different years. The two biggest programmes in terms of spend-
ing are the Wetland Reserve Programme (WRP) and the Environmen-
tal Quality Incentives Programme (EQIP), both run by the US Natural
Resources Conservation Service (NRCS). The WRP is a voluntary pro-
gramme offering landowners technical assistance and nancial support
to protect, restore and enhance wetlands on their property. The EQIP
offers nancial and technical help to assist eligible participants to install
or implement structural and management practices that promote agri-
cultural production and environmental quality as compatible goals. The
EQIPpromotes contracts that provide incentive payments andcost-shares
to implement conservation practices, and at least one-half of the funding
is usually for environmental concerns associated with livestock produc-
tion. Since 2002, the Conservation Reserve Programme is notied under
this sub-box, whose weight in US green box increases to 5 per cent in
2005.
There are no notications on regional assistance programmes or other
direct payments.
Greenbox expenditure inthe US jumps in1995, relative tothe reference
period 1986 to 88, and again in 1996. The reason for these two increases is
a shift in support from the amber box, in the case of the rst increase, and
a shift from the blue box, in the latter case. In the period 1996 to 2001,
total green box spending has been very stable. Policy changes resulting
fromthe 2002 FarmBill have mainly implied an increase in domestic food
aid and a shift of CRP to the environmental sub-box. Under the recently
approved 2008 Farm Bill, no big changes in the structure of the green box
are expected.
Green box spending in Japan
Japanese expenditure on green box measures has decreased from 3,169bn
yen ($34bn) in 1995 to 1,802bn yen ($15bn) in 2006 (gure 7.7). It
represented 73 per cent of total support notied by Japan in 2006. The
general services sub-box included 85 per cent of all green support in
1995 and 76 per cent in 2006, after a reduction that accounts for most
reduction of green support (table 7.9). Each of the other sub-boxes rep-
resent less than 10 per cent of total green box expenditure. The structure
of expenditure in the remaining sub-boxes has been stable, except for
environmental programmes, which have increased from 3 to 9 per cent of
an analysis of eu, us and japanese green box spending 177
0
500
1000
1500
2000
2500
3000
3500
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0
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Y
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Structural Adjustment
Insurance and Relief
Decoupled Income Support
Domestic Food Aid
General Services and Public
Stockholding
Figure 7.7 Green box expenditures in Japan by category
greenbox spending between1995 and2006, andfor structural adjustment
through producer retirement programmes, which has also increased to
9 per cent of green box spending in 2006. Structural adjustment through
investment aids has fallen from 4 per cent of green box spending to less
than 1 per cent in 2006, so the share of all structural adjustment has
remained fairly stable at around 7 to 10 per cent of green box spending.
Finally, payments for relief from natural disasters represent 2 to 3 per
cent every year, slightly more than public stockholding for food security
purposes.
General services is the biggest green sub-box for Japan, with nearly
2,700bn yen in 1995 and 1,374bn yen in 2006. The main rubric is
infrastructural services, with the programme on construction of irriga-
tion/drainage facilities and rural roads, land consolidation representing
two-thirds of green box spending in 1995 and less than one-half in 2006.
The reductionof spending onthis off-farmpublic investment programme
to 784bn yen explains the reduction in green box support. The second
main rubric in general services is extension and advisory services, with
more than 250bn yen in every notication year. There are six different
programmes notied as such, some of them also including some infras-
tructural services. In 2006, notied spending on research was 88bn yen,
and notied spending on pest and disease control was 20bn yen. Smaller
amounts were spent on marketing and promotion and on inspection
services.
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an analysis of eu, us and japanese green box spending 179
Spending on public stockholding for food security purposes has been
reduced from 60bn yen in 1995 to 21bn yen in 2006. Domestic food aid
has also been reduced, from 28bn yen in 1995 to 2.5bn yen in 2006.
Japan has not notied any programme under decoupled income sup-
port or under income insurance and safety net programmes.
Payments for relief from natural disasters were 50bn yen ($0.4bn) in
2006. This is a stable amount because, in contrast with the US and the
EU, most of this expenditure corresponds to government subsidies on
premiums for the agricultural insurance scheme. Japan notied under
the non-product-specic de minimis an additional 19bn yen for subsidies
on insurance for production loss not exceeding 30 per cent of the average
production. Eligibility for losses over 30 per cent of average production is
a requirement for government nancial participation on insurance subsi-
dies in the corresponding green sub-box. Both the US and the EUnotied
all of their insurance subsidies as non-product-specic de minimis.
Structural adjustment assistance through producer retirement pro-
grammes was increased in 2002 to around 160bn yen, or 8 per cent of
the green box. The only set of programmes notied as a single rubric in
this sub-box is farmers pension programmes (payments of pensions to
retired farmers on condition of transfer of the management). Neither the
EU nor the US has included in their notications farm-specic pension
schemes, and green box provisions do not make any specic reference to
pension schemes.
The payments under the structural adjustment assistance provided
through resource retirement programmes were 10bn yen in 1995, but
less than 1bn yen since 1996. They include land retirement programmes
for citrus production and programmes for reduction of number of
livestock (slaughtering payments to avoid overproduction of pork and
milk).
Structural adjustment through investment aids has been reduced from
117bn yen in 1995 to 7bn yen in 2006 (less than 1 per cent of the green
box). These are interest concessions for investments in farming.
Environmental programmes is the second green sub-box in terms of
expenditure. Spending has increased from 81bn yen in 1995 to 210bn yen
in 2002 and 170bn yen in 2006 (9 per cent of green box spending). The
main programme is the payments for conversion of rice production. This
consists of payments for maintaining paddy elds in good environmental
condition, but growing any plant other thanrice. There is a second, smaller
line since 1999 for dairy producers who comply with environmental
conditions.
180 agricultural subsidies in the wto green box
0
20
40
60
80
100
120
140
1995 1996 1997 1998 1999 2000 2001 2002 2003
$

0
0
0

m
i
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l
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n
Environmental/Regional/Other
Structural Adjustment
Insurance and Relief
Decoupled Income Support
Domestic Food Aid
General Services and Public
Stockholding
Figure 7.8 Green box expenditures in all WTO notications by category
Since 2000, there has been some spending on regional assistance pro-
grammes in the form of direct payments to farmers in hilly and moun-
tainous areas.
Green box spending in Japan has decreased in the notication period
1995 to 2006. Its main component is general services on infrastructure,
which have been reduced steadily. Environmental programmes is the sub-
box that has increased more signicantly. Japan is involved in an agricul-
tural reform process that is gradual in nature and it is not expected to
imply any radical changes in green box notications from 2006 onwards.
Green box spending across all WTO countries
Again, aggregating green support across countries can induce misinter-
pretations due to variability inexchange rates andthe number of notifying
countries. With this caveat, it seems that total green box support across
all WTO members has not increased since 1995 and is above $110bn
(gure 7.8, table 7.10). However, the share of the green box in total noti-
cations has increased from 45 per cent in 1995 to 57 per cent in 2003.
Therefore, today green box notications represent more than one-half
of total notied domestic support expenditure. According to the latest
available notications, the green box represents 28 per cent of domes-
tic support in the EU, 79 per cent in the US and 73 per cent in Japan
(tables 7.2, 7.3 and 7.4). These three countries share of total green box
notications is around 79 per cent, above its share of de minimis, but
below its share of amber and blue boxes. The US noties the largest green
T
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an analysis of eu, us and japanese green box spending 183
box expenditure, with 42 per cent of the total, followed by Japan and the
EU (19 per cent each).
The two biggest green sub-boxes among all WTOnotications are gen-
eral services (average 39 per cent between 1995 and 2003) and domestic
food aid (30 per cent). The three structural adjustment sub-boxes add
up to about 10 per cent, with investment aids leading this expenditure.
Decoupled income support and environmental programmes each have 5
to 6 per cent of green box expenditure. Regional assistance (3 per cent),
payments for relief from natural disasters (2 per cent) and public stock-
holding for food security purposes follow. Income insurance and safety
net programmes represent only 0.1 per cent of green box spending. In
several green sub-boxes, the share of a single country of the Trio is very
large, sometimes above 50 per cent.
General services accounts for the largest share of green box WTO
notications. The Trio countries represent 74 per cent of expenditure,
below the green box average (see Table 7.11 above). However, Japan
noties 44 per cent of all general services expenditure, well above its
green box average (21 per cent), compared with 16 per cent for the US
and 13 per cent for the EU. General services is generally the green sub-
box with the largest share of green box expenditure across the rest of the
WTO notifying countries, with more than 50 per cent of their notied
green box support. In the case of Japan, infrastructural services form
the greater part of general service expenditure. For the EU, the service
categories with largest spending are pest and disease control and research;
in the US, the categories are sub-national state programmes that are not
singled out and research. Share and expenditure on general services have
a slight decreasing trend in the period 1995 to 2003.
Public stockholding for food security purposes represents no more
than 2 per cent of green box expenditure, and the Trios share of this
sub-box is one of the lowest (average 17 per cent in 1995 to 2003). Japan
is the main user among the Trio.
Domestic food aid is the second-largest sub-box and is led completely
by the US, with 96 per cent of all WTO notications on domestic food
aid.
Decoupled income support represents 5 per cent of the green box, most
of it (69 per cent) corresponding to PFC payments in the US. The EU is
likely to increase substantially its notication under this sub-box because
of the 2003 and subsequent CAP reforms. If this were the case, then in
future the EUs SFP could become the main programme under this type
of support in the WTO.
184 agricultural subsidies in the wto green box
The income insurance and safety net programmes sub-box is barely
used, either by the Trio or by other WTO members.
Payments (made directly or by way of government nancial participa-
tion in crop insurance schemes) for relief from natural disasters represent
1 to 5 per cent of the green box. Of these payments, 76 per cent are noti-
ed by the Trio (40 per cent by the US, 21 per cent by Japan and 15 per
cent by the EU). Among the Trio, only Japan declares insurance subsidies
(for losses above 30 per cent of average) in this sub-box. The remaining
insurance subsidies, including all insurance subsidies in the US and the
EU, are normally notied as non-product-specic AMS and qualied for
the de minimis.
The three sub-boxes on structural adjustment measures have reduced
their share in green box expenditure, from 12 per cent in 1995 to 10 per
cent in2003. At the same time, environmental programmes have increased
their share, from 4 to 9 per cent, and regional assistance programmes
have a stable 3 per cent. The EU is the main WTO provider of structural
adjustment (58 per cent), environmental programmes (66 per cent) and
regional assistance (74 per cent), mainly through the so-called second
pillar of the CAP. Ongoing CAP reforms may lead to further shifts of
support from the rst to the second pillar, with likely increases in EU
future notications under these green sub-boxes.
Among the structural adjustment sub-boxes, investment aids repre-
sent the highest share, with 7 per cent of the total green box, followed by
resource retirement (2 per cent) and producer retirement (1 per cent).
Japanese producer retirement programmes represent 53 per cent of this
sub-box in the WTO, with its farmers pension scheme. The US noties
69 per cent of the total of the resource retirement sub-box. This expendi-
ture corresponds to the CRP up until 2002. The EU noties 64 per cent of
the investment aids sub-box, with several rural development programmes
such as setting up of young farmers.
Environmental programmes have the EU as the main and increasing
provider, followedby Japan(15per cent). Regional assistance programmes
are evenmore dominated by EUspending (74 per cent), followed by Japan
(2 per cent).
Among all of the green sub-boxes, the notications of the EU, the US
and Japan add up to a large share of all notied green support; these three
countries plus China are also the main origin of changes in composition
or levels of green sub-box spending. This is likely to be the case also in
the near future.
an analysis of eu, us and japanese green box spending 185
Concluding remarks
This is an analysis of agricultural support notication to the WTO, with
particular attention paid to green box measures in the EU, the US and
Japan. Further assessments about the levels, patterns and changes in
domestic support may deal with two aspects: rst, assessing the com-
pliance with URAA provisions on level of support (amber box and de
minimis) and on the implementation rules (blue and green boxes); and,
second, assessing the economic impact of these changes in terms of pro-
duction and trade impacts and/or distortions.
Since the URAA reference period 1986 to 88, and particularly since
1995, the rst year of agricultural support notications, there have been
several changes in agricultural policies, reected in WTO notications
by the EU, the US and Japan. Table 7.12 lists 10 signicant changes. Six
of these changes are shifts in support from one box to another, always
following the same direction pointed out in the URAA: from amber to
blue, from blue to green, or directly from amber to green. Also in this list
are three changes that imply a reduction or an increase of support in one
or more boxes with no apparent compensatory movement of opposite
direction in other boxes (US increase in amber and de minimis from 1998
and green box increase since 2002, and Japans reductions in amber in
1998 and green since 1998).
Each of the six shifts in boxes listed in table 7.12 has an underlying
policy change that implies signicant changes in the way in which the
programme is implemented. By signicant, we mean that they are rele-
vant from the point of viewof the type of implementation criteria used to
classify measures in the URAA, many of which are also relevant from an
economic impact assessment point of view. For instance, it is signicant
that market price support in the EU was substituted by direct compen-
satory payments based on land in 1992, because these are direct area
payments with set-aside requirements, quite a different programme from
price support. It is also signicant that the PFC payments in the US since
1996 give larger freedom to produce or not to produce, because they are
based on historical area and yields and no production was required.
Shifts among green sub-boxes have, in most cases, occurred in a pro-
gressive way, with more uctuations from year to year than in other
boxes. Despite the increase in green box share in total notied support,
there have not been many cases of increases in green box support. There
has been little increase in green box spending in the EU; there has been
186 agricultural subsidies in the wto green box
Table 7.12 Main changes in domestic support notications in the United
States, the European Union and Japan
Country/
Notication
year of shift
Box shift/Approximate
amount Underlying policy change
EU / 1995 From Amber to Blue/
20bn
1992 CAP reform: reduction in
price support and new
compensatory payments
EU / from 2000 From Amber to Blue/
5bn
Agenda 2000 CAP reform:
additional prices cuts (cereals,
beef) and additional
compensatory payments
EU / from 2005
(expected)
From Blue and Amber
to Green/up to
25bn
2003 and subsequent CAP reforms:
partial or total substitution of
compensatory payments for the
new Single Farm Payment (SFP)
US / 1995 From Amber to Green/
$20bn
Reduction of market price support
and deciency payments and
increase in Domestic Food Aid
US / 1996 From Blue to Green
$6bn
1996 Farm Bill: new Production
Flexibility Contract (PFC)
payments substitute for
remaining deciency payments.
US / from 1998 Increase in Amber and
de minimis $8bn
Ad hoc decision of additional
Market Loss Assistance (MLA)
and Disaster Payments
US / from 2002 Progresive Increase in
Green box and
cyclical amber/de
minimis $22bn
2002 Farm bill: new Direct
Payments and countercyclical
Payments, continuation of PFC
and MLA.
Japan / 1995 From Amber to
Green/1,000bn yen
Reduction in market price support
and increase in Infrastructural
General Services
Japan / 1998 Reduction in
Amber/2,300bn yen
Government announces that future
rice purchase would be solely for
food security
Japan / from
1998
Reduction in
Green/700bn yen
Progressive reduction in spending
on infrastructural services
(irrigation/drainage, rural
roads)
an analysis of eu, us and japanese green box spending 187
stability inthe US since 1996 andincreases since 2002; andthere have been
important reductions in Japan. Large increases in the green box occurred
before 1996: the US doubled domestic food aid between the 1986 to 1988
reference period and 1995, and introduced PFC payments as decoupled
income support in 1996; and Japan increased spending in general ser-
vices (mainly infrastructure) from the reference period to 1995. There is
a pending large shift to the green box that could occur in the next few
years when the EUs SFP is notied as green and, possibly, more budget
is transferred from the rst to the second pillar of the CAP.
It is beyond the purpose of this chapter to assess the legal question of
whether these changes make the newprogramme conformto the rules for
the new notifying box. Monitoring these aspects of notications should
be part of the review process under the URAA or, potentially, the dispute
settlement mechanism. It seems tobe the case that the three countries have
found ways of providing support to achieve their own dened domestic
objectives through the different categories in the green box. This is partic-
ularly the case for the US, with its domestic food aid programmes, and the
EU, with its rural development and environmental programmes. Dispute
settlement panel reports have dealt with the decoupled income support
programmes. The Cotton Case panel report declared that the US PFC and
direct payments did not conform to the corresponding sub-box criteria.
The same argument of excluded commodities is potentially applicable to
the EUs SFP. Both the EU and the US have already eliminated the prohi-
bition of some agricultural production in order to guarantee compliance.
Japan has made smaller moves to use other forms of support that may t
with its own domestic objectives and with green sub-boxes criteria; for
instance, through increased spending on environmental programmes.
The second aspect of the assessment would deal with the produc-
tion and trade impacts of observed changes. This is an economic assess-
ment that differs from the legal assessment. However, both are linked
through the general green box criterion of having no, or at most mini-
mal, trade-distorting effects or effects on production. The second section
has already developed the complexities associated with these economic
impacts, which may be caused by relative price effects, risk effects or
dynamic effects, or a combination of all three. Additionally, due to several
difculties, looking at total expenditure in boxes is not enough to assess
the economic impacts of support.
One difculty of assessment of the impact arises fromshifts that involve
the reduction of market price support included in the amber box. This
support is calculated on the basis of administered prices and xed external
188 agricultural subsidies in the wto green box
reference prices. This calculation has little economic meaning and can be
affected by government decisions on lower levels of administered prices,
which may not have the effect of fully reducing the economic level of
support sustained mainly through border measures. There are technical
alternatives for measuring the economic impacts of price support for
instance, using market price support estimated by the OECD and using
the value of tariffs directly.
However, this is not the major difculty of an economic assessment.
Response to each of the specic programmes may, unfortunately, be dif-
ferent for different countries, different years anddifferent details of imple-
mentation. The URAA review process itself, and the few examples of dis-
putes affecting the classicationof domestic support and compliance with
green box rules, prove that assessing the economic impact of each pro-
gramme requires analysis specic to each measure. There are economic
reasons to argue that measures that comply with blue box and green box
requirements would potentially have smaller impacts on production than
measures with no implementation requirement in the amber box. In the
greenbox, specic implementationrules differ signicantly fromone sub-
box to another, and it is difcult to make an assessment of all sub-boxes
simultaneously. The quantication of the impact and the assessment of
being minimally distorting requires further empirical analysis. Some
programmes have been analysed empirically, particularly in recent years,
but so far there is no robust, comprehensive body of empirical literature
that can solve the problem of quantication of impact across boxes and
sub-boxes. The references in this chapter give several examples of empir-
ical analysis of impact of different programmes. There are gains from
promoting this type of empirical work by research institutions, govern-
ments, international organisations and non-governmental organisations,
because there are still many open questions.
Are domestic objectives achieved with current green programmes? Are
domestic objectives well dened? Do impacts on production remain,
to a certain extent, in green box measures? If so, and in the context
of relatively high levels of green box expenditure, do these impacts on
production generate spill-over effects on other countries, particularly
developing countries? Do developing countries have room in the green
box to develop policies that meet their own sustainable development
objectives? Can the green box rules be improved in order to reduce the
impacts onproduction? Is it always possible toachieve domestic objectives
with at most, minimal trade-distorting effects or effects on production?
Appendix 1
Summary of World Trade Organization notied
support by the European Union,
the United States and Japan
189
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0
(
k
)
R
e
g
i
o
n
a
l
a
s
s
i
s
t
a
n
c
e
p
r
o
g
r
a
m
m
e
s
0
0
0
0
0
3
3
3
3
3
3
2
3
1
7
2
2
2
2
(
l
)
O
t
h
e
r
T
O
T
A
L
3
,
1
6
9
2
,
8
1
8
2
,
6
5
2
3
,
0
0
2
2
,
6
8
6
2
,
5
9
5
2
,
5
4
7
2
,
2
7
5
2
,
0
8
6
2
,
0
9
8
1
,
9
1
6
1
,
8
0
2
N
o
t
e
:

g
u
r
e
s
m
a
y
n
o
t
a
d
d
u
p
t
o
t
h
e
t
o
t
a
l
s
h
o
w
n
d
u
e
t
o
r
o
u
n
d
i
n
g
.
S
o
u
r
c
e
:
W
T
O
n
o
t
i

c
a
t
i
o
n
s
a
n
d
a
u
t
h
o
r

s
c
a
l
c
u
l
a
t
i
o
n
s
.
Appendix 2
Detailed green box notications by the European
Union, the United States and Japan
195
A
n
n
e
x
t
a
b
l
e
3
D
o
m
e
s
t
i
c
s
u
p
p
o
r
t
a
n
a
l
y
s
i
s
:
s
h
a
r
e
o
f
e
a
c
h
g
r
e
e
n
p
o
l
i
c
y
b
o
x
,
E
u
r
o
p
e
a
n
C
o
m
m
u
n
i
t
i
e
s
,
b
y
y
e
a
r
G
R
E
E
N
B
O
X
N
O
T
I
F
I
C
A
T
I
O
N
S
:
E
U
R
O
P
E
A
N
U
N
I
O
N
M
e
a
s
u
r
e
t
y
p
e
N
a
m
e
a
n
d
d
e
s
c
r
i
p
t
i
o
n
o
f
m
e
a
s
u
r
e
M
i
l
l
i
o
n

1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
M
e
a
n
%
(
a
)
G
e
n
e
r
a
l
s
e
r
v
i
c
e
s
5
,
0
0
7
6
,
4
7
2
5
,
5
2
3
5
,
0
1
8
6
,
7
2
8
4
,
7
3
6
5
,
6
3
6
5
,
2
2
9
5
,
0
1
6
5
,
4
8
5
2
7
%
R
e
s
e
a
r
c
h
9
2
4
1
7
6
7
2
1
,
2
0
7
1
,
3
5
6
1
,
3
8
5
7
0
4
7
1
4
8
2
2
8
1
9
4
%
I
m
p
r
o
v
e
m
e
n
t
o
f
p
r
o
d
u
c
t
i
o
n
p
o
t
e
n
t
i
a
l
t
h
r
o
u
g
h
a
n
i
m
a
l
a
n
d
p
l
a
n
t
s
e
l
e
c
t
i
o
n
a
n
d
o
f
p
r
o
d
u
c
t
i
o
n
t
e
c
h
n
i
q
u
e
s
t
h
r
o
u
g
h
,
e
.
g
.
t
e
s
t
i
n
g
o
f
m
a
c
h
i
n
e
r
y
;
d
e
v
e
l
o
p
m
e
n
t
o
f
e
x
p
e
r
i
m
e
n
t
a
l
c
e
n
t
r
e
s
;
p
i
l
o
t
p
r
o
j
e
c
t
s
a
n
d
d
e
m
o
n
s
t
r
a
t
i
o
n
p
r
o
j
e
c
t
s
;
s
a
l
a
r
i
e
s
o
f
p
e
r
s
o
n
n
e
l
.
P
e
s
t
a
n
d
d
i
s
e
a
s
e
c
o
n
t
r
o
l
4
9
8
1
,
7
6
1
1
,
8
6
6
1
,
1
2
8
1
,
1
3
8
7
2
6
1
,
7
2
4
1
,
9
8
3
1
,
3
7
2
1
,
3
5
5
7
%
P
l
a
n
t
a
n
d
a
n
i
m
a
l
h
e
a
l
t
h
c
o
n
t
r
o
l
a
n
d
p
r
o
t
e
c
t
i
o
n
;
s
u
p
p
l
y
o
f
v
a
c
c
i
n
e
s
;
s
a
l
a
r
i
e
s
o
f
p
e
r
s
o
n
n
e
l
;
l
a
u
n
c
h
i
n
g
a
i
d
f
o
r
l
i
v
e
s
t
o
c
k
h
e
a
l
t
h
p
r
o
t
e
c
t
i
o
n
g
r
o
u
p
s
.
T
r
a
i
n
i
n
g
s
e
r
v
i
c
e
s
1
,
3
4
4
1
,
2
7
1
6
6
9
9
6
1
6
3
1
3
6
1
4
8
1
8
3
1
8
9
4
6
7
2
%
E
s
t
a
b
l
i
s
h
m
e
n
t
o
f
a
g
r
i
c
u
l
t
u
r
a
l
t
r
a
i
n
i
n
g
c
e
n
t
r
e
s
;
g
r
a
n
t
s
f
o
r
c
o
u
r
s
e
a
t
t
e
n
d
a
n
c
e
;
s
a
l
a
r
i
e
s
o
f
a
d
v
i
s
o
r
s
.
E
x
t
e
n
s
i
o
n
a
n
d
a
d
v
i
s
o
r
y
s
e
r
v
i
c
e
s
0
3
2
9
2
7
9
2
9
0
3
0
4
2
4
6
2
3
1
1
9
5
2
4
6
2
3
6
1
%
E
s
t
a
b
l
i
s
h
m
e
n
t
o
f
i
n
t
e
r
-
r
e
g
i
o
n
a
l
a
d
v
i
s
o
r
y
c
e
n
t
r
e
s
;
t
r
a
i
n
i
n
g
a
n
d
e
m
p
l
o
y
m
e
n
t
o
f
a
d
v
i
s
o
r
s
.
I
n
s
p
e
c
t
i
o
n
s
e
r
v
i
c
e
s
1
3
3
1
8
7
1
8
9
1
9
9
3
2
6
2
3
4
2
2
6
3
8
3
3
5
8
2
4
8
1
%
L
i
v
e
s
t
o
c
k
i
n
s
p
e
c
t
i
o
n
s
e
r
v
i
c
e
s
;
q
u
a
l
i
t
y
c
o
n
t
r
o
l
;
r
e
m
u
n
e
r
a
t
i
n
g
a
n
d
t
r
a
i
n
i
n
g
o
f
i
n
s
p
e
c
t
o
r
s
.
M
a
r
k
e
t
i
n
g
a
n
d
p
r
o
m
o
t
i
o
n
s
e
r
v
i
c
e
s
4
6
2
6
0
4
7
6
2
1
,
0
9
4
1
,
0
7
2
1
,
0
2
3
1
,
2
9
9
1
,
1
6
2
1
,
1
7
5
9
6
1
5
%
A
i
d
t
o
e
n
c
o
u
r
a
g
e
e
s
t
a
b
l
i
s
h
m
e
n
t
o
f
p
r
o
d
u
c
e
r
g
r
o
u
p
s
a
n
d
e
a
s
e
a
d
m
i
n
i
s
t
r
a
t
i
v
e
o
v
e
r
h
e
a
d
s
;
s
c
h
e
m
e
s
t
o
i
m
p
r
o
v
e
m
a
r
k
e
t
i
n
g
n
e
t
w
o
r
k
,
q
u
a
l
i
t
y
a
n
d
p
r
e
s
e
n
t
a
t
i
o
n
o
f
p
r
o
d
u
c
e
;
c
e
r
t
i

c
a
t
i
o
n
;
p
r
o
t
e
c
t
i
o
n
o
f
g
e
o
g
r
a
p
h
i
c
a
l
i
n
d
i
c
a
t
i
o
n
s
.
I
n
f
r
a
s
t
r
u
c
t
u
r
a
l
s
e
r
v
i
c
e
s
7
7
0
1
,
3
2
4
5
9
3
5
9
5
2
,
3
5
3
9
4
9
1
,
1
4
1
5
5
3
7
3
3
1
,
0
0
1
5
%
A
r
t
e
r
i
a
l
d
r
a
i
n
a
g
e
;
c
o
l
l
e
c
t
i
v
e
i
r
r
i
g
a
t
i
o
n
s
c
h
e
m
e
s
;
p
r
o
v
i
s
i
o
n
o
f
e
l
e
c
t
r
i
c
i
t
y
a
n
d
w
a
t
e
r
s
u
p
p
l
y
;
f
a
r
m
r
o
a
d
s
;
c
o
n
s
t
r
u
c
t
i
o
n
o
f
r
e
s
e
r
v
o
i
r
s
;

o
o
d
p
r
o
t
e
c
t
i
o
n
.
O
t
h
e
r
f
a
r
m
s
e
r
v
i
c
e
s
1
,
7
0
9
5
7
9
4
9
4
4
0
9
1
7
3
6
1
6
4
5
7
1
2
3
3
9
9
2
%
L
a
u
n
c
h
i
n
g
s
e
r
v
i
c
e
s
f
o
r
m
u
t
u
a
l
a
i
d
,
f
a
r
m
r
e
l
i
e
f
,
f
a
r
m
m
a
n
a
g
e
m
e
n
t
,
i
n
t
r
o
d
u
c
t
i
o
n
o
f
a
c
c
o
u
n
t
i
n
g
o
n
t
h
e
f
a
r
m
.
(
b
)
P
u
b
l
i
c
s
t
o
c
k
h
o
l
d
i
n
g
f
o
r
f
o
o
d
s
e
c
u
r
i
t
y
p
u
r
p
o
s
e
s
0
0
0
1
9
2
0
1
9
1
8
2
4
5
5
1
7
0
%
(
c
o
n
t
.
)
A
n
n
e
x
t
a
b
l
e
3
(
c
o
n
t
.
)
G
R
E
E
N
B
O
X
N
O
T
I
F
I
C
A
T
I
O
N
S
:
E
U
R
O
P
E
A
N
U
N
I
O
N
M
e
a
s
u
r
e
t
y
p
e
N
a
m
e
a
n
d
d
e
s
c
r
i
p
t
i
o
n
o
f
m
e
a
s
u
r
e
M
i
l
l
i
o
n

1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
M
e
a
n
%
(
c
)
D
o
m
e
s
t
i
c
f
o
o
d
a
i
d
2
8
9
4
0
0
2
9
5
2
7
6
2
7
8
2
7
1
2
4
3
2
7
8
3
0
7
2
9
3
1
%
D
i
s
t
r
i
b
u
t
i
o
n
o
f
a
g
r
i
c
u
l
t
u
r
a
l
p
r
o
d
u
c
t
s
t
o
d
e
p
r
i
v
e
d
p
e
r
s
o
n
s
1
0
2
4
0
0
2
9
5
2
7
6
2
7
8
0
0
0
0
2
7
0
1
%
S
c
h
o
o
l
m
i
l
k
1
2
4
0
0
0
0
0
0
0
0
1
2
4
1
%
C
o
n
s
u
m
p
t
i
o
n
a
i
d
f
o
r
b
u
t
t
e
r
f
o
r
t
h
o
s
e
r
e
c
e
i
v
i
n
g
s
o
c
i
a
l
a
s
s
i
s
t
a
n
c
e
1
1
0
0
0
0
0
0
0
0
1
1
0
%
S
u
b
s
i
d
i
s
e
d
b
u
t
t
e
r
f
o
r
n
o
n
p
r
o

t
m
a
k
i
n
g
o
r
g
a
n
i
s
a
t
i
o
n
s
a
n
d
a
r
m
i
e
s
5
2
0
0
0
0
0
0
0
0
5
2
0
%
(
d
)
D
e
c
o
u
p
l
e
d
i
n
c
o
m
e
s
u
p
p
o
r
t
2
4
5
2
2
1
2
1
5
1
2
9
9
5
8
4
9
3
1
6
6
2
9
2
7
1
1
%
T
r
a
n
s
i
t
i
o
n
a
l
a
i
d
t
o
a
g
r
i
c
u
l
t
u
r
a
l
i
n
c
o
m
e
2
0
0
0
0
0
0
0
0
0
2
0
0
%
A
g
r
i
-
m
o
n
e
t
a
r
y
a
i
d
2
2
5
2
2
1
2
1
5
1
2
9
9
5
8
0
0
2
9
2
5
1
1
%
(
e
)
I
n
c
o
m
e
i
n
s
u
r
a
n
c
e
a
n
d
i
n
c
o
m
e
s
a
f
e
t
y
-
n
e
t
p
r
o
g
r
a
m
m
e
s
0
0
0
0
0
5
1
1
0
9
3
0
%
(
f
)
P
a
y
m
e
n
t
s
f
o
r
r
e
l
i
e
f
f
r
o
m
n
a
t
u
r
a
l
d
i
s
a
s
t
e
r
s
3
2
9
3
7
6
3
2
8
1
8
3
3
6
6
3
9
1
3
9
9
8
1
1
7
0
6
4
3
2
2
%
C
o
m
p
e
n
s
a
t
o
r
y
p
a
y
m
e
n
t
s
i
n
r
e
s
p
e
c
t
o
f
w
e
a
t
h
e
r
,
r
e
s
t
o
r
a
t
i
o
n
o
f
a
g
r
i
c
u
l
t
u
r
a
l
p
r
o
d
u
c
t
i
o
n
p
o
t
e
n
t
i
a
l
,
a
n
d
n
a
t
u
r
a
l
d
i
s
a
s
t
e
r
s
,
r
e
p
l
a
n
t
i
n
g
a
n
d
c
o
n
v
e
r
s
i
o
n
o
f
f
r
o
s
t
-
d
a
m
a
g
e
d
o
l
i
v
e
g
r
o
v
e
s
.
3
2
9
3
7
6
3
2
8
1
8
3
3
6
6
0
0
0
0
3
1
6
2
%
(
g
)
S
t
r
u
c
t
u
r
a
l
a
d
j
u
s
t
m
e
n
t
a
s
s
i
s
t
a
n
c
e
p
r
o
v
i
d
e
d
t
h
r
o
u
g
h
p
r
o
d
u
c
e
r
r
e
t
i
r
e
m
e
n
t
p
r
o
g
r
a
m
m
e
s
2
1
0
9
4
8
6
2
0
7
0
9
7
9
3
6
6
3
8
0
2
8
4
9
8
1
4
7
1
2
3
%
C
o
m
p
e
n
s
a
t
i
o
n
p
a
y
m
e
n
t
s
t
o
f
a
r
m
e
r
s
a
t
l
e
a
s
t
5
5
y
e
a
r
s
o
l
d
l
e
a
v
i
n
g
a
g
r
i
c
u
l
t
u
r
e
.
A
i
d
f
o
r
e
a
r
l
y
r
e
t
i
r
e
m
e
n
t
f
r
o
m
f
a
r
m
i
n
g
.
(
h
)
S
t
r
u
c
t
u
r
a
l
a
d
j
u
s
t
m
e
n
t
a
s
s
i
s
t
a
n
c
e
p
r
o
v
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d
e
d
t
h
r
o
u
g
h
r
e
s
o
u
r
c
e
r
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t
i
r
e
m
e
n
t
p
r
o
g
r
a
m
m
e
s
1
,
0
2
6
1
,
5
2
8
3
3
2
4
2
8
1
2
2
4
4
9
9
2
1
1
0
1
2
3
4
6
8
2
%
S
e
t
-
a
s
i
d
e
;
a
t
l
e
a
s
t
2
0
%
c
u
l
t
i
v
a
t
e
d
l
a
n
d
t
o
b
e
l
e
f
t
f
a
l
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o
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,
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o
d
e
d
o
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s
e
d
f
o
r
n
o
n
-
a
g
r
i
c
u
l
t
u
r
a
l
p
u
r
p
o
s
e
s
;
c
o
m
p
e
n
s
a
t
i
o
n
f
o
r
g
r
u
b
b
i
n
g
u
p
,
l
e
a
v
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n
g
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r
s
u
s
p
e
n
d
i
n
g
p
r
o
d
u
c
t
i
o
n
.
(
i
)
S
t
r
u
c
t
u
r
a
l
a
d
j
u
s
t
m
e
n
t
a
s
s
i
s
t
a
n
c
e
p
r
o
v
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d
e
d
t
h
r
o
u
g
h
i
n
v
e
s
t
m
e
n
t
a
i
d
s
6
,
6
0
3
4
,
9
7
2
4
,
8
9
7
5
,
4
0
1
2
,
3
0
9
5
,
8
6
0
5
,
3
5
5
5
,
2
6
5
6
,
8
2
2
5
,
2
7
6
2
6
%
C
o
n
s
t
r
u
c
t
i
o
n
o
f
p
r
o
c
e
s
s
i
n
g
,
p
a
c
k
a
g
i
n
g
a
n
d
s
t
o
r
a
g
e
c
e
n
t
r
e
s
a
n
d
e
q
u
i
p
m
e
n
t
;
l
a
n
d
i
m
p
r
o
v
e
m
e
n
t
(
l
e
v
e
l
l
i
n
g
,
f
e
n
c
i
n
g
,
e
t
c
.
)
;
a
i
d
f
o
r
f
a
r
m
m
o
d
e
r
n
i
s
a
t
i
o
n
g
r
a
n
t
e
d
t
h
r
o
u
g
h
s
u
b
s
i
d
i
e
s
o
r
e
q
u
i
v
a
l
e
n
t
i
n
t
e
r
e
s
t
c
o
n
c
e
s
s
i
o
n
s
;
p
u
r
c
h
a
s
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o
f
m
a
c
h
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n
e
r
y
a
n
d
e
q
u
i
p
m
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t
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a
n
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m
a
l
s
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b
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l
d
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n
g
s
a
n
d
p
l
a
n
t
a
t
i
o
n
s
,
e
t
c
;
a
i
d
f
o
r
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o
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n
g
f
a
r
m
e
r
s
.
(
c
o
n
t
.
)
A
n
n
e
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t
a
b
l
e
3
(
c
o
n
t
.
)
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R
E
E
N
B
O
X
N
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T
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F
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C
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T
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S
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U
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N
U
N
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M
e
a
s
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r
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p
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m
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m
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r
e
M
i
l
l
i
o
n

1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
M
e
a
n
%
(
j
)
E
n
v
i
r
o
n
m
e
n
t
a
l
p
r
o
g
r
a
m
m
e
s
2
,
7
8
3
4
,
2
2
4
3
,
6
8
7
4
,
9
6
5
5
,
4
5
9
5
,
7
2
5
5
,
5
1
9
5
,
0
1
0
5
,
2
3
4
4
,
7
3
4
2
3
%
P
r
o
t
e
c
t
i
o
n
o
f
e
n
v
i
r
o
n
m
e
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t
a
n
d
p
r
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s
e
r
v
a
t
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o
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o
f
t
h
e
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o
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n
t
r
y
s
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d
e
,
c
o
n
t
r
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l
o
f
s
o
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l
e
r
o
s
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o
n
,
e
x
t
e
n
s
i

c
a
t
i
o
n
,
a
i
d
f
o
r
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v
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r
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n
m
e
n
t
a
l
l
y
s
e
n
s
i
t
i
v
e
a
r
e
a
s
;
s
u
p
p
o
r
t
a
n
d
p
r
o
t
e
c
t
i
o
n
o
f
o
r
g
a
n
i
c
p
r
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d
u
c
t
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o
n
b
y
c
r
e
a
t
i
n
g
c
o
n
d
i
t
i
o
n
s
o
f
f
a
i
r
c
o
m
p
e
t
i
t
i
o
n
;
a
i
d
f
o
r
f
o
r
e
s
t
r
y
m
e
a
s
u
r
e
s
i
n
a
g
r
i
c
u
l
t
u
r
e
;
c
o
n
s
e
r
v
a
t
i
o
n
o
f
g
e
n
e
t
i
c
r
e
s
o
u
r
c
e
s
i
n
a
g
r
i
c
u
l
t
u
r
e
.
(
k
)
R
e
g
i
o
n
a
l
a
s
s
i
s
t
a
n
c
e
p
r
o
g
r
a
m
m
e
s
2
,
2
8
9
2
,
9
9
0
2
,
2
7
1
2
,
0
4
1
2
,
9
0
0
3
,
2
3
2
2
,
4
2
0
2
,
8
2
6
2
,
9
8
0
2
,
6
6
1
1
3
%
S
p
e
c
i

c
m
e
a
s
u
r
e
s
f
o
r
t
h
e
b
e
n
e

t
o
f
c
e
r
t
a
i
n
L
e
s
s
F
a
v
o
u
r
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d
A
r
e
a
s
(
F
r
e
n
c
h
o
v
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r
s
e
a
s
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p
a
r
t
m
e
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t
s
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z
o
r
e
s
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M
a
d
e
i
r
a
,
C
a
n
a
r
y
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s
l
a
n
d
s
,
A
e
g
e
a
n
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s
l
a
n
d
s
)
a
n
d
m
o
u
n
t
a
i
n
o
u
s
a
r
e
a
s
;
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o
m
p
e
n
s
a
t
o
r
y
a
l
l
o
w
a
n
c
e
s
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n
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e
s
s
F
a
v
o
u
r
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r
e
a
s
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p
a
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d
p
e
r
h
e
c
t
a
r
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o
r
p
e
r
l
i
v
e
s
t
o
c
k
u
n
i
t
.
(
l
)
O
t
h
e
r
0
0
0
0
0
0
0
0
0
0
0
%
T
O
T
A
L
1
8
,
7
7
9
2
2
,
1
3
0
1
8
,
1
6
7
1
9
,
1
6
8
1
9
,
9
3
1
2
1
,
8
4
5
2
0
,
6
6
1
2
0
,
4
0
4
2
2
,
0
7
4
2
0
,
3
5
1
1
0
0
%
N
o
t
e
:

g
u
r
e
s
m
a
y
n
o
t
a
d
d
u
p
t
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t
o
t
a
l
s
h
o
w
n
d
u
e
t
o
r
o
u
n
d
i
n
g
.
S
o
u
r
c
e
:
W
T
O
n
o
t
i

c
a
t
i
o
n
s
a
n
d
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u
t
h
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s
c
a
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c
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l
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t
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o
n
s
.
A
n
n
e
x
t
a
b
l
e
4
D
o
m
e
s
t
i
c
s
u
p
p
o
r
t
a
n
a
l
y
s
i
s
:
s
h
a
r
e
o
f
e
a
c
h
g
r
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e
n
p
o
l
i
c
y
f
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r
t
h
e
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,
b
y
y
e
a
r
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T
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F
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C
A
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S
:
U
N
I
T
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D
S
T
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S
(
1
)
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e
a
s
u
r
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t
y
p
e
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a
g
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n
c
y
a
n
d
p
r
o
g
r
a
m
m
e
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a
m
e
a
n
d
d
e
s
c
r
i
p
t
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n
o
f
m
e
a
s
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r
e
M
i
l
l
i
o
n
$
1
9
8
6

8
8
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
(
a
)
G
e
n
e
r
a
l
s
e
r
v
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c
e
s
4
,
7
3
7
6
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4
1
9
6
,
5
5
0
6
,
7
9
6
7
,
2
2
5
7
,
7
0
5
8
,
5
5
4
9
,
2
1
4
1
0
,
2
5
8
1
0
,
9
4
2
1
1
,
1
9
6
1
1
,
3
4
5
A
g
r
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c
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l
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r
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e
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v
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c
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(
A
R
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)
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g
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c
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s
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r
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r
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c
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n
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n
1
9
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.
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o
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c
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2
3
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5
6
6
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4
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236 agricultural subsidies in the wto green box
References and further reading
Abler, D. (2004), A Review of Empirical Studies of the Acreage and Production
Response to US Production Flexibility Contract Payments under the FAIR Act
and related Payments under Supplementary Legislation, Paris: Organization
for Economic Cooperation and Development.
Adams, G., Westhoff, P., Willott, B. et al. (2001), Direct Payments, Safety Nets and
Supply Response: Do Decoupled Payments Affect US Crop Area? Prelimi-
nary Evidence from 19972000, American Journal of Agricultural Economics
83: 11905.
Ant on, J. (2006), Modeling Production Response to More Decoupled Payments,
Journal of International Agricultural Trade and Development 2(1): 10926.
Ant on, J. and LeMouel, C. (2004), Do Counter-Cyclical Payments in the 2002 US
Farm Act Create Incentives to Produce?, Agricultural Economics 31: 27784.
Ant on, J. and Sckokai, P. (2006), The Challenge of Decoupling Agricultural Sup-
port, Eurochoices 5(3): 1319.
Arni, F. (ed.) (2005), Modelling Agricultural Policies: State of the Art and New
Challenges in Proceedings of the 89th European Seminar of the European Asso-
ciation of Agricultural Economists, edited by Filippo Arni, Monte Universit a
Parma.
Benjamin, C. and Hou ee, M. (2005), The Impact on Yields of Moving from Price
Support to Area Payments: a Study of the 1992 Cap Reform, Paris: Organization
for Economic Cooperation and Development.
Bursher, M., Robinson, S. and Thierfelder, K. (2000), North American Farm
Programs and WTO, American Journal of Agricultural Economics 82: 768
74.
Cahill, S. (1997), Calculating the Rate of Decoupling for Crops under
CAP/Oilseeds Reform, Journal of Agricultural Economics 48: 34978.
Coyle, B. (2005), Dynamic Econometric Models of Canadian Crop Investment
and Production under Risk Aversion and Uncertainty, OECD Papers 5(11):
426.
Dewbre, J., Ant on, J. and Thompson, W. (2001), The Transfer Efciency and Trade
Effects of Direct Payments, American Journal of Agricultural Economics 83:
120414.
Economic Research Service (ERS/USDA), WTO Agricultural Trade Policy Com-
mitments Database, http://www.ers.usda.gov/db/wto.
(ERS/USDA) (2004), Decoupled Payments in a Changing Policy Setting, Agri-
cultural Economic Report No. 838, United States Department of Agriculture.
EU Commission (2003), Rural Development in the European Union, fact sheet.
(2006a), Does the Trade Talk Match the Trade Walk? Exploding the Myths
Surrounding World Trade, MAP: Monitoring Agri-Trade Policy No. 3006,
December.
an analysis of eu, us and japanese green box spending 237
(2006b), The Rural Development Policy 20072013, fact sheet.
Gohin, A. (2005), Assessing the Impacts of the 2003 CAP Mid Term Review: How
Sensitive Are They to the Assumed Production Responsiveness to Agenda
2000 Direct Payments?, Contributed Paper to the Eighth Conference of
Global Economic Analysis, L ubeck, June.
Goodwin, B. K. and Mishra, A. (2005), Are Decoupled Payments Really Decou-
pled?, American Journal of Agricultural Economics 87(5): 1200210.
Goodwin, B. K., Mishra, A. and Ortalo-Magn e, F. (2003), Whats Wrong with
Our Models of Agricultural Land Values?, American Journal of Agricultural
Economics 85: 74452.
Hennessy, D. (1998), The Production Effects of Agricultural Income Support
Policies under Uncertainty, American Journal of Agricultural Economics 80:
4657.
Hennessy, T. and Thorne, F. S. (2005), How Decoupled Are Decoupled Payments?
The Evidence from Ireland, Eurochoices 4(3): 3035.
Key, N., Lubowsky, R. N. and Roberts, M. J. (2005), Farm-Level Production
Effects from Participation in Government Commodity Programs: Did the
1996 Federal Agricultural Improvement and ReformAct Make a Difference?,
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on Food, Agriculture and Rural Areas in Japan 2005 (and previous
editions), http://www.maff.go.jp/e/pdf/fy2005 rep.pdf, http://www.maff.
go.jp/e/annual report/past.html and http://www.maff.go.jp/e/index.html
Moro, D. and Sckokai, P. (1999), Modelling the CAP Arable Crop Regime in Italy:
Degree of Decoupling and Impact of Agenda 2000, Cahiers dEconomie et
Sociologie Rurales 53: 4973.
OECD (2001a), Decoupling: A Conceptual Overview, Paris: OECD.
(2001b), Market Effects of Crop Support Measures, Paris: OECD.
(2005a), OECD Papers Special Issue on Decoupling Agricultural Support,
Vol. 5, No. 11, http://puck.sourceoecd.org/vl=1433320/cl=29/nw=1/rpsv/
cw/vhosts/oecdjournals/16091914/v5n11/contp11.htm.
(2005b), The Challenge of Decoupling Agricultural Support, http//www.oecd.
org/agriculture/decoupling/, Paris: OECD.
(2006a), Decoupling: Policy Implications, Paris: OECD.
(2006b), Agricultural Policies inOECDcountries and previous editions, Paris:
OECD.
Producer and Consumer Support estimates (PSE), OECD Database
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36956855 1 1 1 1,00.html.
Roberts, M. J., Kirwan, B. and Hopkins, J. (2003), The Incidence of Government
Program Payments on Agricultural Land Rents: The Challenges of Identi-
cation, American Journal of Agricultural Economics 85: 7629.
238 agricultural subsidies in the wto green box
Rude, J. (2000), Green Box Criteria: A Theoretical Assessment, Agriculture and Agri-
food Canada.
Sckokai, P. and Ant on, J. (2005). The Degree of Decoupling of Area Payments
for Arable Crops in the European Union, American Journal of Agricultural
Economics 87: 122028.
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ability of EC and US Agricultural Subsidies to WTO Challenge, Journal of
International Economic Law 6(2): 369417.
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Assessment, September.
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G/AG/NG/S2, 19 April 2000.
(2002a), Members Usage of Domestic Support Categories, Export Subsidies
and Export Credits, TN/AG/S/1, 5 March 2002.
(2002b), Domestic Support: Background Paper by the Secretariat, TN/AG/S4,
20 March 2002.
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ber 2004.
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(2006b), Agricultural Negotiations. Agricultural Domestic Support Simula-
tions, JOB(06)151, 22 May 2006.
8
Green box subsidies and trade-distorting support:
is there a cumulative impact?
carlos galper n and ivana doporto miguez
1
Introduction
In the General Agreement of Tariffs and Trade (GATT), and now in the
World Trade Organization (WTO), members have been constructing a
set of rules and regulations to limit trade policies and other policies with
equivalent effects that is, policies that favour local production instead
of the purchase of imported products.
GATT rules rst put limits on subsidies for industrial products, and
then prohibited them. For agricultural products, limits appeared for the
rst time in the Uruguay Round. Because agricultural subsidies were lim-
ited but not prohibited, agriculture was incorporated into the multilateral
rules in a privileged way.
In the Agreement on Agriculture (AoA) approved during the Uruguay
Round, agricultural subsidies were classied into different boxes
according to their inuence on producers decisions.
Since 1994, the terms amber, blue and green have been used to
describe the different kinds of support. The original idea was to repeat
the colours of trafc lights red for prohibited subsidies, yellow for
limitedsubsidies andgreenfor permittedsubsidies but a softer treatment
prevailed.
The amber box includes measures related to production level or selling
price; these payments are limited rather than prohibited, and a com-
promise for reducing them was agreed. The AoA also created a special
category of amber box measures excluded from the reduction commit-
ments because of their low level: de minimis payments. The blue box
includes direct payments like those included in the amber box but
1 The opinions expressed here are those of the authors and not necessarily those of the
Centre for International Economy (CEI).
239
240 agricultural subsidies in the wto green box
under production-limiting programmes and was not subject to reduc-
tion commitments. The green box includes measures that have no, or
at most minimal, trade distorting effects or effects on production. As
there are no monetary limits imposed on green box subsidies, Annex 2
of the AoA details disciplines to avoid including amber or blue box type
payments in this category.
Apart from limiting some subsidies and disciplining the remaining
ones, it was decided not to apply limits to different types of subsidy,
either for the same product or for the same farmer. For example, a farmer
may receive payments related to output level (amber box), receive some
payments under production-limiting programmes (blue box) and also
receive direct payments decoupled from the current output level (green
box). Intuitively, one can expect that the accumulation of subsidies may
present a cumulative impact on the producers decision of what and how
much to produce.
The objective of this chapter is to present an analysis of this accumula-
tion of agricultural support to offer some insights from economic theory
to policy-makers and negotiators. Firstly, we present an economic analysis
of the different types of support and their inuence on production and
trade decisions. Secondly, we propose a simple taxonomy of accumulation
of supports and a corresponding analysis of cumulative impact. Thirdly,
we look briey at support levels in the United States (US). Fourthly, we
examine some cases of subsidy accumulation. Finally, we consider the
issue in the context of the Doha Round negotiations.
Accumulation of subsidies: an economic analysis
Domestic support is provided in order to encourage local production.
Support can reduce imports from more efcient producers if the subsidy
more than compensates for the cost difference between the local product
and the imported product, such that the local producer can compete with
foreign producers. The greater the support, the less efciency needed to
offer the local products and the greater the degree of insulation of local
producers from world markets.
Because of these effects on production and trade decisions, these subsi-
dies are saidtodistort productionandtrade. But howdoes this mechanism
inuence producer decisions?
Let us consider a producer with the objective of obtaining prots from
his or her activity. The producer has to answer two main questions: (i) is
it protable to produce? and (ii) what is the appropriate level of output?
green box subsidies and trade-distorting support 241
Microeconomic theory provides some basic concepts related to these
decisions.
A farmer may receive two types of income: variable incomes those
related to output levels and xed incomes those that do not come from
the act of selling the product, and are thus not related to output levels.
A farmer also has two types of cost: variable costs those that change
directly with output levels and xed costs those unrelated to output
levels.
In the short term, when the farmer cannot avoid paying the xed costs
and the level of xed income does not change, the decision is based on
the difference between variable income and variable costs that is, the
net margin of prot. In the long term, when every income and cost can
change, the decision is based on the difference between total income and
total cost that is, the gross margin of prot. If the net margin is positive,
then the proper decision in the short term is to produce although the
gross margin is negative; in the long term, the gross margin should be
positive to produce.
Subsidies related to output levels can be considered as variable income,
and those unrelated to the output levels as xed income. The former inu-
ence short-term decisions and the latter inuence long-term decisions:
they can be used to cover variable and xed costs. Both kinds of subsidy
can therefore modify production and trade decisions, which is why they
are said to distort the allocation of resources compared with a situation
without subsidies.
The degree of distortion differs between measures. It is said that the
degree of distortion is linked to the degree of decoupling of the sup-
port: the greater the decoupling, the less the distorting effect (Ant on,
2001).
According to Ant on (2001), there are three kinds of effects:
r
Static effects: the effects of the measure on relative prices of outputs
and/or inputs that induce a change in the allocation of resources and
may have an impact on production and trade decisions.
r
Risk effects: policy measures that may have effects on the risk faced by
farmers. An example is an insurance effect, because the support may
reduce farmer income variability; another is a wealth effect, because the
support may increase the expected income, inducing the farmer to act
in a riskier manner. In an uncertain world, risk reduction or a change
in the farmers attitude towards risk may lead to more production and
trade.
242 agricultural subsidies in the wto green box
r
Dynamic effects: some current measures affect the farmers present or
future decisions, with consequences on future production and trade.
For example, to induce investment and to modify expectations related
to future support payments that would be based on current levels of
production.
From a theoretical point of view, and taking into account only the static
effects (OECD, 2001), the market price support for a particular product
is the most coupled measure: it induces an increase in production in
domestic producer and consumer prices; a reduction in consumption;
a growth in exports or a decrease in imports (depending on whether
the country is a net exporter or net importer); and a reduction in the
world price (if the country is one whose decisions may change world
market variables). A payment based on the present output may increase
the producers income, but not consumer price, at least at the beginning;
due to the payment having a lesser inuence on consumer decisions, it is
said that it has lesser effects on trade and lesser total effects than market
price support. More decoupled measures are those less linked to prices
and current output, such as payments based on past output without the
obligation to produce anything.
The analysis could get more complex when: (i) a farmer produces
different goods, each good receiving a different measure of support with
different static effects; (ii) the amount of support matters that is, the
effects vary withthe total amount of different subsidies andwiththe initial
level of the subsidy; and (iii) the three types of effect occur at the same
time and differ in magnitude and in relative terms among the support
measures.
In these situations, empirical analysis is needed in order to determine
the magnitude of the impact and the relative impact of different measures
of support. In empirical and quantitative analysis presented in OECD
(2001) for some OECD countries, and using a simulation model, pay-
ments based on area planted and on historical entitlements show the
lowest impacts on production, trade and world prices, while payments
based on variable input use, market price support and current output
show higher impacts. Different empirical studies summarized in OECD
(2005) arrive at a similar conclusion.
OECD (2005) also shows that agricultural policies have insurance
effects; these tend to be larger than wealth effects and in some cases larger
than relative price effects. Empirical studies have also found the pres-
ence of dynamic effects: making returns more certain creates incentives
green box subsidies and trade-distorting support 243
Amber box De minimis
payment
Blue box Green box
Maximum
Minimum
Figure 8.1 Degree of distorting effects of Agreement on Agriculture type of
agricultural support
to invest, and the possibility of updating the base in the future to cal-
culate payment according to present production affects farmers present
decisions (OECD, 2005).
The classication of support under the AoA of the Uruguay Round is
a legal one; that is why it differs from a classication from an economic
viewpoint that would take into account impacts on production and trade
(Brink, 2007). Implicitly, however, these impacts were considered. Green
box measures are dened as those with no, or at most minimal, trade-
distorting effects or effects on production; so, the remaining measures
must have more than minimal distorting effects. De minimis payments
are very small amounts of amber-box-type measures that could have
small impacts.
2
Blue box measures are constrained only by payments
under production-limiting programmes. The amber box measures are
the remaining ones.
With this analysis in mind, it is possible to classify AoA measures
according to their expected degree of distorting effect, a classication that
may change with an empirical analysis of impact. In a continuous line
of effects, amber box support and de minimis payments are the more
distorting measures, followed by blue box subsidies; green box measures
have the least distorting effects (gure 8.1).
3
Accumulation of subsidies: a simple taxonomy
Agricultural policies employ a great variety of measures to protect farmers
and encourage local production. Some of the measures are classied in
the amber box; some as de minimis payments; some are classied in the
blue box and some in the green box.
Some subsidies are given directly for a product, but a farmer may
receive subsidies for a product indirectly. The latter can happen when a
farmer receives subsidies arising from non-agricultural policies.
2 An economic rationale for this is commented on in the next section.
3 An analysis of the economic basis of measures of different boxes, and especially of green
box measures, is given in the chapter by Jes us Ant on in this book (chapter 7).
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green box subsidies and trade-distorting support 245
Three main situations can be identied:
r
Type i: a product may receive support from different measures in the
same box and/or different boxes.
r
Type ii: a product may receive subsidies directly from a measure for
that product and indirectly through subsidies to inputs used for this
product.
r
Type iii: a product may receive subsidies as a nal product and also as
an input for another product.
Inthe rst type, the accumulationof subsidies may imply anamplication
of the same degree of distorting effect or a cumulative impact of subsidies
with different degrees of distorting effects. For example, a product such
as corn may receive support from different amber box measures, where
each one adds similar distorting impacts to the farmers decisions. The
difference lies in the amount of support, regarding whether the level of
subsidy may or may not change the farmers decisions according to the
modication of both the net and gross prot margin.
However, if a product derives benets from amber box, blue box and
green box measures, then various degrees of distorting impacts are added.
The result is an articial modication of both net and gross margins of
prot, and the farmers short-term and long-term decisions may change.
This depends on the degree to which the different subsidies supplement
income to cover and exceed variable and xed costs.
Also important is the total amount and the initial level of each type
of support (Ant on et al., 2005). One dollar spent through an amber box
measure has greater impact than the same dollar spent through a more
decoupled (for example, green box) measure. As the marginal impacts are
clearly different, box shifting of one dollar, for example, from the amber
to the green box will have a smaller impact on production and trade.
However, the total amount of the more decoupled support also matters:
the impact of a reduction of one dollar in a less decoupled subsidy may be
more than compensated for by the impact of a larger increase in a more
decoupled subsidy. In the current Doha Round, negotiators are discussing
the size of cuts to the consolidated level of amber box subsidies, but no
such discussion is taking place on limiting green box expenditure.
4
The marginal impact may vary with the initial level of support. For
example, adding a dollar to a small amount of subsidy would have a
4 We return to this issue in the fth section.
246 agricultural subsidies in the wto green box
larger relative impact on the quantity produced than if the initial level
of subsidy were larger; that is, we are in the presence of a diminishing
marginal impact of support.
5
The answer tothis questionis of anempirical
status. If this is the case, then the decreasing impact of shifting a dollar
fromthe amber to the green box may be compensated if the initial level of
the green box subsidy is low enough to induce bigger marginal impacts.
In the second type we could include the case of livestock: the farmer
may receive payments for the livestock the direct subsidy and buy
feed from the producers, which have been beneciaries of subsidies for
its production (therefore, the price of the feed may be lower than in a
situation without this support) the indirect subsidy.
An example of the third type also may be the case of livestock and feed,
but from the feed producers perspective: the feed producer benets from
the support to the feed production the direct subsidy and also from
the increased demand for the producers product due to the subsidies
given to users of this commodity as feed the indirect subsidy.
This analysis may grow in complexity if a farmer produces different
goods, where the type of subsidy for each product may differ in the cate-
gory of box and the degree of the distorting effect. Here, the transference
of subsidies is among products of the same farm; that is, part of payments
for a product may be transferred for covering costs of another product.
Another possible situation of transference is the case of a producer of two
commodities one with subsidies and another without that share some
inputs, such as land and machinery: payments for the rst commodity can
be used for paying the costs of the joint inputs, thus reducing production
costs of the commodity without subsidies.
How large are these transfers? Qualitatively, in the second and third
types it is possible to use a benet incidence approach to determine if the
transfer is large or small; that is, how the benets given to a participant
in a productive chain are distributed among all the participants in the
chain. In the second type, the more elastic the supply of feed, the lower its
price and the larger the benet transferred fromfeed producer to livestock
producer. In the third type, the analysis is the opposite: the less elastic
the supply of the commodity, the larger the price increase due to greater
demand from livestock producers and the larger the benet transferred
from livestock producers to feed producers.
5 This marginal impact depends on the relationship between price and quantity supplied
the supply function or, alternatively, on the functional form of the production-support
curve (Ant on et al., 2005; OECD, 2001).
green box subsidies and trade-distorting support 247
It is more difcult to measure the amount of indirect subsidies. It is
important to measure this if a product has a cap on the total amount of
support it can receive, or if some subsidies are not included in the measure
of payments notiedto the WTOwhen, according to the noticationrules
agreed in the Uruguay Round, they should be.
Support levels in the United States
Data used to analyze accumulation come mainly from US domestic sup-
port notications to the WTO for the years 2002 to 2005 (table 8.1).
Green box measures account for the larger part of the support, followed
by amber box (AMS). No measures were notied under the blue box.
Green box expenditure grew by 23 per cent in this period, AMS by 34 per
cent and total support by 21 per cent.
The choice of timing for notications, often after a long delay, has
provoked controversy. However, still more controversial has been the
content of notications and the choice of subsidy box in which different
payments have been classied.
For this study, it is relevant to mention that the US notied counter-
cyclical payments as non-product-specic de minimis payments so that
they were exempt from counting towards the amber box limit. How-
ever, the amount of countercyclical payments is set at different levels for
different commodities. Other critics say that these payments are product-
specic because they are not provided to farmers in general farmers
who plant fruits and vegetables are not eligible for the payments (Inside
US Trade, 2007). Using these arguments, in the 13 November 2007 meet-
ing of the WTOCommittee on Agriculture, this aspect of US notications
was questioned by Australia, the European Communities, Japan and New
Zealand.
Similarly, the level of amber box support notied by the US has been
disputed recently by Brazil and Canada. Both charge that the US stayed
within its amber box limits only by improperly excluding payments from
its calculations under several different types of farm programme.
6
6 In January 2007, Canada requested consultations with the US and the Dispute Settlement
Body for the subsidies and other domestic support for corn and other agricultural products
(WTO, 2007b). In June, Canada requested a special group to examine the levels of global
support of the US and the programme GSM 102, which grants export credit guarantees
(WTO, 2007c). In addition, Brazil requested consultations in July 2007 and asked for
informationabout domestic support andexport credit guarantees for agricultural products
(WTO, 2007d).
248 agricultural subsidies in the wto green box
Table 8.2 Commodities and corn in the United States: basic data
Payments
Commodity Payments Harvested acres per
Yearly Average Crop year harvested Total cost of
(Fiscal Years 200306) (average 200205) acre production
Billions of Millions of
dollars % of total acres % of total Dollars $/unit
Corn 4.7 43.7 72.7 32 65.73 2.4
All commodities 10.8 100 228.8 100 47.53
(i)
Note:
(i)
if the yearly support spending ($10.8 bn) had been distributed equally
over all acreage, the payments would have been $48 per acre.
Source: own elaboration based on Womach and Schnepf (2007).
Even though US direct payments were ruled ineligible for the green box
in the dispute over US cotton subsidies, on the basis that producers would
not have applied for the programme if they planted fruit or vegetables, the
US has nonetheless continued to classify these payments as green (Bridges
Weekly Trade News Digest, 2007a).
Cases
This section presents some examples of subsidy accumulation in the US.
The rst example examines corn support measures. The second, also
about US corn, concerns biofuels. In some cases, it is possible to quantify
accumulation directly, but some assumptions are needed.
Corn in the US is a clear example of type (i) accumulation. In order to
quantify payments to corn, the last US WTO notications (2002 to 2005)
are used. Net outlays by commodity from the US budget are also taken
into account in order to identify individual programme expenditures for
corn.
Corn has been chosen because of its importance to the US economy
and the support that it receives. For scal years 2003 to 2006, total pro-
gramme payments by commodity averaged US$10.8 billion per year, of
which the largest share went to corn (43.7 per cent) (table 8.2). The corn
harvest averaged 72.2 million acres between 2002 and 2005 (Womach and
Schnepf, 2007).
green box subsidies and trade-distorting support 249
Table 8.3 shows support to corn, in the format of WTO notications.
7
For green box measures and non-product-specic de minimis payments,
US budget data on net outlays by commodity have been used to identify
specic payments for corn.
It can be seen that total support for corn resulting from the sum of
payments grew by 224.3 per cent between 2002 and 2005. Specically,
AMS support has increased by 46.7 per cent in this period. For 2002
to 2003, product-specic payments granted are classied as product-
specic de minimis because they do not exceed 5 per cent of the value of
production. The non-product-specic de minimis category has increased
by 217.7 per cent. Green box support has increased by 15 per cent. Total
support for corn has increased by 224.3 per cent between 2002 and 2005.
In the amber box, support has been distributed between several
programmes. Loan deciency payments are the most signicant, and
accounted for the highest increase of support in this category. As can be
seen in the 2005 notication to the WTO, loan deciency payments rep-
resent 93 per cent of total AMS and 51 per cent of total support for corn.
They are includedinthe marketing assistance loanprogramme. According
to the 2002 Farm Bill, the marketing assistance loan programme provides
non-recourse loans to producers, with the farm programme crop used
as collateral. The programme is a nancing source in the short term and
gives exibility to producers to respond to market signals.
This programme provides minimum price guarantees on the crop
actually produced. These loan prices were set by the 2002 Farm Bill,
and the US Department of Agriculture (USDA) adjusts them to local
loan rates, taking into account the regional differences in the agricultural
markets.
Marketing loan provisions take effect when the posted county price
falls below the local loan rate by four mechanisms:
r
Loan deciency payments: the direct payment of loan benets equal
to the difference between the posted county price and the local loan
rate multiplied by the quantity eligible for loan instead of taking out
a loan and repaying it.
r
Marketing loan gain: repaying a loan at a lower price than the original
loan.
7 Despite the caveats presented in the third section, and without lessening the importance
of the boxes where the support has been classied, this is the available information that
has been used to analyze the accumulation phenomenon.
250 agricultural subsidies in the wto green box
Table 8.3 Corn subsidies in the United States ($ million)
Notications to WTO
Type of domestic support 2002 2003 2004 2005
Amber-box-type support
Product-specic aggregate
measurements of support:
non-exempt direct payments
Loan deciency payments 0.2 40.0 2,660.8 4,207.1
Marketing loan gains 16.0 37.4 252.6 143.2
Commodity loan forfeit 0.2 0.1 6.5 0.9
Certicate exchange gains 0.1 0.2 21.4 115.5
Subtotal all direct payments (1) 16.5 77.7 2,941.3 4,466.8
Other product-specic support and
total product-specic support
Bionergy programme payments 126.7 124.4 63.6 13.7
Commodity loan interest subsidy 57.1 43.5 68.1 19.6
Subtotal other support (2) 183.8 167.9 131.7 33.3
Fees/levies (3) 13.2 12.9 13.6 10.0
AMS (4 = 1 +2 +3) 3,059.4 4,490.0
de minimis product-specic
(5 = 1 +2 +3)
187.1 232.6
Value of production 20,882.4 24,476.8 24,381.3 22,198.5
5% of value of production 1,044.1 1,223.8 1,219.1 1,109.9
de minimis non-product-specic
Crop and revenue insurance 510.6 620.6 795.9 716.3
Countercyclical payments 338.7 905.8
Total de minimis
non-product-specic (6)
510.6 620.6 1,134.6 1,622.1
Total amber-box-type support
(7 = 4 +5 +6)
697.7 853.2 4,194.1 6,112.1
Green box
Production exibility contract
payments
1,834.6
Direct payments 1,407.7 2,115.4 2,100.5
Total green box (8) 1,834.6 1,407.7 2,115.4 2,100.5
Total domestic support (7 +8) 2,532.2 2,260.9 6,309.5 8,212.6
Source: based on WTO (2007a) and Farm Service Agency USDA (2007).
green box subsidies and trade-distorting support 251
r
Certicate gain: permits repaying a loan with commodity certicates
instead of cash at a lower loan repayment rate.
r
Forfeiting the collateral: implies delivering commodity.
As marketing loan payments depend on market prices, they can vary
considerably from year to year (Monke, 2006).
Through the bio-energy programme, bio-energy producers may
increase their purchases of eligible commodities and convert them into
increased commercial fuel-grade ethanol and bio-diesel production as
compared with previous scal year ethanol and bio-diesel production.
Direct payments will be based on bio-energy production increases from
eligible commodities compared with the same time period a year earlier
(CFDA, 2007).
The commodity loan interest subsidy favours the availability of loan
funds at below-market interest rates or, insome cases, without any interest
at all. The rate is typically less than the rate farmers would have to pay
for commercially available short-term loans (Economic Research Service,
2007a).
Countercyclical payments and crop revenue insurance are among the
most important programmes notied as non-product-specic de min-
imis. To identify individual payments for corn, budget information was
used.
Countercyclical payments compensate for the difference betweena crop
target price and a lower effective market price. The target price is dened
in the Farm Bill, and the effective price is the direct payment rate plus the
national average farmprice or the national average loan rate (whichever is
larger). The basic characteristics of this type of payment are that they are
tied to a historical farm acres base and countercyclical payment yield.
This programme depends on market prices, but it does not require the
farmer to produce any of the commodities. It was rst implemented in
1973, but was discontinued in the 1996 Farm Bill and reinstated in the
2002 Farm Bill (Economic Research Service, 2007a, 2007b).
Corn producers can purchase subsidized crop and revenue insurance
products to manage the risks caused by weather problems, pests and
low market prices. The USDA Risk Management Agency pays a part of
contract premiums for producers insurance policies and also pays some
of the delivery and administrative costs of private insurance companies
that provide this type of service (Economic Research Service, 2007b).
Direct payments account for 25.6 per cent of total support to corn
and are equal to 46.7 per cent of AMS for 2005. They were created by
252 agricultural subsidies in the wto green box
the 1996 Farm Bill with the name production exibility payments; the
2002 Farm Bill renamed them direct payments. They are decoupled
from production and farmers may plant any crop (with the exception
of fruit and vegetables) or no crop. The direct payment is calculated by
multiplying the commodity payment rate by the farm payment yield and
85 per cent of the farm base acres (Economic Research Service, 2007a).
It is worth noting that other programmes have been notied in the
green box, some of which can affect corn production. It was not possible
to obtain these programmes net outlays per commodity, but, given the
total payments of the programmes, it could be inferred that the allocation
to corn would have been minimal.
In sum, corn receives amber-box-type payments 55 per cent
corresponding to AMS, and 20 per cent to de minimis and green box
payments 25 per cent in the form of decoupled direct payments, which
are supposedly less distorting. The combination of green box payments
with amber box payments intensies the harmful effects of the amber box
subsidies.
As mentioned in the second section above, the nal level of green box
subsidies mixed with more coupled measures matters, because high levels
of decoupled support still have a large impact on production.
Regarding the decoupled nature of direct payments, Berthelot (2008)
concludes that these payments have distorting effects on trade and pro-
duction, based on the WTO Appellate Body Report of the Cotton Panel.
This mentions that the US admitted that farmers decide what to plant
based on expected market prices and subsidies. Besides, the Panel, when
looking for distorting aspects of direct payments which have been noti-
ed to the WTO by the US in the green box states that although direct
payments are tied to base acreage, they enhance producer wealth and
investment potential, including lowering risk aversion. There is there-
fore a strong positive relationship between upland cotton production and
producers who receive these annual payments.
If green box payments are considered to be not as neutral as they
should be, it is not difcult to imagine the effects that this support has
when it is combined with subsidies that are intrinsically distorting. What
is the cumulative impact of this accumulation of support? The answer is
of an empirical nature, and so an empirical evaluation is necessary.
Anexample of type (iii) accumulation that is, whena product receives
subsidies both as a nal product and as an input for another product is
the case of biofuels. US energy policy grants benets to blenders of ethanol
andmineral fuel, inthe formof a Volumetric Ethanol Excise Tax Credit. As
green box subsidies and trade-distorting support 253
Taheripour and Tyner (2007) indicate: (i) this subsidy creates an articial
demand for ethanol and fuel; (ii) the less elastic the ethanol supply,
the larger the proportion of the subsidy beneting ethanol producers;
(iii) ethanol producers increase their demand for corn, the basic input
for ethanol; and (iv) the less elastic the corn supply, the larger the benet
transferred to farmers.
Although the subsidy is initially intended to benet the blender, it may
also favour ethanol producers and ultimately cornproducers as well. Corn
is granteddifferent types of payments inthe US as anagricultural product,
and so corn receives some subsidies directly from the agricultural policy
and some indirectly through transfer from the ethanol producer and the
fuel blender.
This point relates both to the observance of WTO rules and to the
Doha Round negotiations. Concerning the rst point, although the AoA
requires subsidies for ethanol and corn to be notied to the WTO, the
benet received by ethanol and corn producers from biofuel blenders is
not included in recent notications.
This is why Canada and Argentina pointed out, during a 24 May 2007
meeting of the Special Session of the WTO Committee of Agriculture,
that this subsidy must be included in the Aggregated Measure of Sup-
port. In addition, Brazil asked the US about subsidies applied to biofuel
production during a consultation session of the Dispute Settlement Body
about corn subsidies.
8
Regarding the second point, reduction of agricultural support is one of
the main issues in the Doha Round negotiations. This biofuel subsidy may
compensate for the reduction in support measures for corn. However, if
this subsidy must eventually be included as an agricultural subsidy, then
it too must be reduced and will affect the cumulative impact on corn of
direct and indirect subsidies.
Negotiating a solution
In view of the increasing total support and the possibility of box shifting
due to the absence of green box reduction commitments, one possible
solution that would reduce cumulative effects would be a cap on the boxes
and on payments for specic products in order to reduce accumulation
andthe concentrationof payments for certainproducts. Fixing caps inthis
8 For an analysis of the relation between biofuel subsidies and WTO rules and negotiations,
see P erez Llana et al. (2007).
254 agricultural subsidies in the wto green box
way does not, however, represent a complete solution to the accumulation
issue.
A solution to box shifting is to put a cap on green box measures. For
some authors, such as Blandford and Josling (2007), capping the green
box is not a feasible solution. They state that:
it would run contrary to the concept of a green box as a desirable way
of allowing governments to respond to political realities and to develop
rural policies that are minimally trade distorting. Any capping of green
box payments is likely to be seen as setting trade rules in contradiction
to broadly desirable trends in domestic agricultural policies over the past
two decades.
Another approach could be to restrict support. For example, if a prod-
uct receives amber box subsidies, then it should not receive blue box pay-
ments; products beneting from de minimis payments should not receive
blue box subsidies; and products that benet from product-specic de
minimis port should not receive non-product-specic de minimis sup-
port. An alternative to this approach is to x limits to the degree to which
subsidies can be combined.
Speaking specically about accumulation, the G-20 has suggested that
decoupled income support payments shall not be made in conjunction
with AMS support and support under Article 6.5, if the sum of such
support, as appropriate, exceeds X% of the annual value of production of
a given product (G-20, 2005).
In addition, the G-20 declares that:
in relation to the issue of cumulation of green, blue and amber payments,
the G-20 suggestion reects the undeniable fact that, in the presence of dis-
torting payments, green policies do not properly performtheir function.
Onthe contrary, their neutral nature is beingabusedandthey merely follow
the general orientation of the distorting policy. As a consequence, green
money is merely added to blue and amber monies and becomes undif-
ferentiated in relation to them. Nevertheless, we acknowledge the fact that
should we deliver on the mandate of substantial reduction of trade dis-
torting domestic support, that with a combination of cuts, disciplines
and monitoring, some of the G-20 preoccupations would be partially met
(WTO, 2006a).
A complementary issue important to avoid more than minimal dis-
torting effects of green box measures is the base period used to calculate
direct payments and decoupled income support. This topic is also being
considered in the current Doha Round negotiations. The G-20 proposes
green box subsidies and trade-distorting support 255
that payments be based on income or production during a xed and
unchanging base period. The group argues that:
the key political issue behind the suggestion that base areas, yields and
animal numbers be made xed and unchanging has its origins in the
fact that current language is perceived as pushing farmers to bet in favour
of frequent update of the basis for the direct payments. In other words,
there is anever-present risk that, although intended to be decoupled, direct
payments may indeed be re-coupled through updating of the base areas
and yields. This situation requires xing and the notion of xed and
unchanging addresses this concern (WTO, 2006a).
The Draft Modalities for Agriculture prepared in August 2007 (WTO,
2007e) by the chair of the Committee onAgriculture Ambassador Craw-
ford Falconer take the notion of a xed and unchanging base period and
permit an exceptional update. The text imposes some conditions on this
update: it should not affect producer expectations or production deci-
sions. The revised Draft Modalities of July 2008 (WTO, 2008) then added
that it should not be possible for producers to anticipate the updated base,
and that updates should not be made simultaneously with an increase of
the rate per crop.
The US and the European Union expressed opposition to the chairs
proposal for decoupled income support payments, regional development
assistance and investment aid inrelationto the neutrality of the updated
base with regard to producers support and/or reductions of that support
(Bridges Weekly Trade News Digest, 2007b).
However, at the last Ministerial meeting in Geneva (July 2008), the
green box was not discussed, and is not a question that developed coun-
tries wouldlike toconsider inthe negotiations. They wouldlike topreserve
a margin which gives them the possibility of increasing their support to
producers.
The analysis and evidence presented in this chapter show the existence
and relevance of subsidy accumulation. A solution to this issue is impor-
tant in moving towards a less distorting mix of subsidies and measures.
If such a solution cannot be reached in the Doha Round, then the issue
must be on the agenda for subsequent multilateral trade negotiations.
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9
The distributional structure of green box subsidies
in the European Union and France
vincent chatellier
Introduction
For the past 50 years, European agriculture has beneted froma Common
Agricultural Policy (CAP) which aims to ensure food security (in terms of
both quality and quantity) for consumers, to modernise the farming and
agro-alimentary sector, to support farm revenue and, more recently, to
take greater account of social concerns relating to the environment, land
use, biodiversity and animal welfare. In pursuing these objectives, the
CAP has three major principles: (i) market unity, which involves putting
in place common administrative, health and veterinary regulations in all
Member States, adopting identical prices between institutions and set-
ting up a uniform customs tariff at the European Unions (EU) external
frontiers; (ii) community preference, which encourages Member States
lacking in certain products to give priority to obtaining supplies from a
partner country (through taxing imports originating in third (non-EU)
countries); (iii) nancial solidarity, based on the premise that CAP agri-
cultural expenses are shared, regardless of the agricultural specialisation
of Member States.
The CAP has made it possible for agriculture within the community
to develop and to move progressively from the decit situation existing
at the end of World War 2 (for the majority of temperate zone agri-
cultural products) to a situation of surplus (Bureau, 2007). The EU,
which is responsible for a quarter of all world agro-alimentary imports
and exports, has become the largest actor in this sector, ahead of the
United States (US). From 1986 onwards, and under US pressure, the
agricultural sector was included in the GATT (General Agreement on
Trade and Tariffs) multilateral trade negotiations. Following eight years of
difcult discussions, the Member States of the World Trade Organization
258
structure of green box subsidies in the eu and france 259
(WTO) signed the Uruguay Round Agreement on Agriculture (URAA)
in Marrakech in 1994. They then undertook to convert all frontier pro-
tection measures into their tariff equivalents (with a view to reducing
them progressively over time), to reduce subsidised exports (in both vol-
ume and value) and to reduce internal subsidies that were judged to
have a distorting effect on production and trade. As well as meeting
certain challenges internal to the EU, the CAP reforms that have been
carried out over the last 15 years (1992, 1999 and 2003) were essen-
tially aimed at making community subsidy instruments more compat-
ible with URAA rules. In 2001, a new round of multilateral negotia-
tions was initiated (the Doha Round); this is still ongoing at the time of
writing.
Within this context, the present chapter aims to analyse domestic sub-
sidies for European and French agriculture, specically green box subsi-
dies. According to the URAA, WTOMember States may synchronise their
agricultural subsidies since these are not considered to introduce distor-
tions in production and trade (green box). When the CAP was reformed
in 2003, the Community authorities decided to establish the principle of
decoupling subsidies fromagricultural revenues (OECD, 2006, Swinbank,
2007) so as to put an end to the system of basing subsidies on factors of
production. With the expiry of the peace clause after 2003, these blue
box domestic subsidies may in fact be challenged by WTO members.
This chapter is divided into ve parts as follows. The rst part con-
sists of a review of the denitions of the three boxes (amber, blue and
green) and EU notications to the WTO regarding these three boxes for
the period 199596 to 200304 (no notications have been made since
then). Using budgetary data from the European Agricultural Guidance
and Guarantee Fund (EAGGF) and data on national agricultural subsi-
dies, the second part attempts to put a gure on the total amount of green
box subsidies made within the different EUMember States (this was done
where EU notication reports to the WTO did not provide a breakdown
by country). Using budgetary data and categories used by the Ministry
of Agriculture and Fisheries, the third part contains an analysis of the
changes in green box budgetary subsidies in France. Using data from the
Farm Accountancy Data Network (FADN), the fourth part attempts to
demonstrate the role of direct green box aid for European agricultural
holdings. The fth part, using the same FADN data, concentrates specif-
ically on French farm holdings (using a simulation of CAP reform and
decoupling).
260 agricultural subsidies in the wto green box
Green box support and EU notications
This rst part begins with a review of the rules retained in the URAA
relating to the classication of domestic subsidy into different boxes and
the denition of the green box. It then describes the EU notications on
domestic subsidy presented to the WTO for the period 199596 to 2003
04, and discusses the weighting of the boxes in relation to the ceiling of
permitted subsidy.
The measurement of domestic subsidy and
the denition of the green box
The WTOMember States (withthe exceptionof the developing countries)
undertook, at the time of the URAA, to reduce part of their agricultural
subsidies by 20 per cent over the period from 1995 to 2001 (Mathews,
2006). This reduction concerns only subsidies included in the Aggregate
Measurement of Support (AMS). The calculation of the AMS distin-
guishes between subsidies classied as amber box (which have an effect
on trade) from those in the green box (which have little or no distorting
effect).
Subsidies classed as amber box cover all forms of aid which have a
direct effect onthe level of productionor trade. This includes market price
subsidy, compensatory payments and subsidies aimed at reducing input
costs. Subsidy is calculated per product, and is based on either the gap
betweenthe administeredprice anda xedexternal reference price (taking
the years 1986 to 1988 as the basis in the case of direct intervention), or
on budgetary outlays in the case of compensation allowances. All of those
measures which fall outside the green box are taken into account when
the AMS is calculated and thus should in theory be reduced under the
terms of the URAA. However, several exemptions fromthis rule have been
granted:
r
The blue box. Direct aid measures relating to programmes of reducing
or limiting production based on xed areas or yields or xed numbers
of heads of livestock, and which do not exceed 85 per cent of the base
level of production, are not taken into account in calculating the AMS.
These are blue box measures. This exemption, which applied over the
period from 1995 to 2003, played an important role in the EU, since it
related to compensation payments for factors of production following
the CAP reforms of 1992 and 1999.
structure of green box subsidies in the eu and france 261
r
The de minimis rule. Specic subsidy amounting to not more than
5 per cent of the total value of the production of a specic commodity
is also excluded. The same applies to non-specic subsidy amounting
to not more than 5 per cent of the value of total national production.
Subsidies in the green box conform to the following two basic criteria
(URAA, Paragraph 1 of Annex 2): (i) the subsidy is provided as part of a
government-funded programme which does not involve nancial input
from consumers; (ii) the subsidy does not result in price guarantees for
producers.
Within the green box, there are two types of subsidy. The rst relates to
public service programmes. This consists mainly of general services such
as research, training, dissemination, inspection (health, safety, quality
control and normalisation), sales, promotionand infrastructural services.
Domestic food aid or the stockpiling of foodstuffs for purposes of food
security also falls into this category. The second concerns direct payments
to producers. Paragraph 6, Annex 2 of the URAA (box 9.1) sets out the
conditions that govern the allocation of decoupled income support to the
green box. It species that these subsidies should not be linked to either
production or factors of production (land and livestock), nor even to an
objective price. This applies mainly to: income guarantee and security
measures (natural disasters, state contribution to crop insurance, etc.);
to structural adjustment measures (farmers retirement schemes, with-
drawal of land from production, investment grants); and environmental
protection programmes.
box 9.1. conditions for decoupled income support
(a) The right to payments under this heading is laid down according to clearly
dened criteria, such as income, whether producer or landowner, the use of
factors of production and the level of production over a dened and xed base
period.
(b) For a given year, the total amount paid out may not be linked to the type
or volume of production (including heads of livestock) carried out by the
producer during the year following the base period.
(c) For a given year, the total amount paid out may not be linked to or calculated
on the basis of either the domestic or foreign price applicable to the production
carried out during the year following the base period.
(d) For a given year, the total amount paid out may not be linked to or calculated on
the basis of factors of production used during the year following the base period.
(e) It is not necessary to produce anything in order to benet from these payments.
262 agricultural subsidies in the wto green box
Table 9.1 EU domestic subsidy notications to the WTO
( billion)
1995 1996 1997 1998 1999 2000 2001 2002 2003
1996 1997 1998 1999 2000 2001 2002 2003 2004
Permitted AMS (1) 78.8 76.4 74.1 71.8 69.5 67.2 67.2 67.2 67.2
AMS running total (2) 50.0 51.0 50.2 46.7 47.9 43.7 39.3 28.5 30.9
Blue box (3) 20.8 21.5 20.4 20.5 19.8 22.2 23.7 24.7 24.8
of which direct COP
aid
15.6 17.2 16.2 16.0 15.1 16.8 18.1 16.3 17.1
of which livestock
grants
5.2 4.3 4.3 4.5 4.7 5.4 5.6 8.5 7.7
Green box (4) 18.8 22.1 18.2 19.2 19.9 21.8 20.6 20.4 22.1
(5) = (2) +(3) +(4) 89.6 94.6 88.8 86.4 87.6 87.7 83.6 73.6 77.8
(2) / (5) 56% 54% 57% 54% 54% 50% 47% 38% 40%
(3) / (5) 23% 23% 23% 24% 23% 25% 28% 34% 32%
(4) / (5) 21% 23% 20% 22% 23% 25% 25% 28% 28%
Source: EU notication reports on domestic subsidy to the WTO; EAGGF reports.
Using these denitions of the three boxes, WTOMember States are obliged
to notify the organisation of the total amount of their agricultural sub-
sidies (Butault et al., 2004). The EU makes an overall notication which
makes no distinction between Member States. The notication reports
made by the EU to date cover only the years 199596 to 200304.
EU domestic subsidy notications and the green box
According to EU notication reports to the WTO (WTO-199504), the
total amount of support (made up of current AMS, blue box and green
box support) to European agriculture amounted to 77.8 billion in 2003
to 2004 (table 9.1). This amount has fallen by 13 per cent compared
to 1995 to 1996, due primarily to the impact of the Agenda 2000 CAP
reform. The reduction of institutional prices for cereals and beef has made
it possible to reduce the gap between domestic and world prices.
Due to the fall in institutional prices, the AMS running total fell steeply
over this period, from50 billion in 1995 to 1996 to 30.9 billion in 2003
to 2004. Conversely, the total amount of blue box subsidies increased
(from 20.8 billion in 1995 to 1996 to 24.8 billion in 2003 to 2004), as
farmers beneted from a concomitant increase in their direct grants. In
structure of green box subsidies in the eu and france 263
2003 to 2004, blue box subsidies accounted for 69 per cent of direct aid
to the agricultural sector and for 31 per cent of livestock grants. The total
amount of green box subsidies increased slightly, from 18.8 billion in
1995 to 1996 to 22.1 billion in 2003 to 2004 (forming 28 per cent of all
subsidies notied by the EU).
During the period when the URAAwas in operation, the AMS running
total remained markedly lower than the AMS ceiling (Anton, 2007), with
the effect that this ceiling didnot exercise a constraining inuence (Butault
and Bureau, 2006). In 2003 to 2004, the accumulated running total of the
AMS and the blue box was only 17 per cent lower than the AMS ceiling.
In other words, this meant that the authorities within the Community
did not have sufcient room for manuvre to enable them to negotiate
a steeper lowering of the AMS ceiling within the framework of the Doha
Round. This is the main reason why Community authorities decided to
adopt the decoupling of direct aid at the time of the CAP reform in June
2003.
The effects of CAP reform and the setting up of the Single Payment
Scheme (SPS) have not yet been noticeable in EU notications to the
WTO, since the last available notication is that for 2003 to 2004. As from
2004 for the new EU Member States (introduction of the single payment
per area) and from 2005 or 2006 for other EU members (introduction
of the SPS in several countries), the green box total should show a sharp
increase.
1
According to recent estimates (Guyomard et al., 2007), the EU
shouldtherefore be ina positiontoaccept, without prejudice, a 70 per cent
reductioninthe AMS ceiling during the current Doha Roundnegotiations
(the level proposedinApril 2007 by the chair of the agriculture negotiating
committee). This estimate takes into account the enlargement of the EU
to include new Member States, the changes that have occurred in several
sectors (milk in 2003; hops, raw tobacco, olive oil and cotton in 2004;
sugar in 2005) and the Common Market Organisation (CMO) reforms
currently under way for fruit, vegetables and wine.
1 The decoupled single payment is considered here as part of the green box (Swinbank,
Tranter, 2006; OECD, 2001; Goodwin, Mishra, 2002). However, the author does not wish
to prejudge any future denition of boxes which might result from current negotiations
and debates. Hence, certain Non Governmental Organisations (NGOs) consider that it will
be necessary to revise the content of the green box (Oxfam, 2005); similarly, other authors
have put forward the idea that the single payment does not meet all of the demands set
out in the URAA, Annex 2, Article 6 (Berthelot, 2005). Thus, for example, these authors
emphasise that European farmers are unable to produce what they want because a number
of agricultural products are forbidden (fruit and vegetables, milk and sugar beet if farmers
do not have a quota).
264 agricultural subsidies in the wto green box
Table 9.2 EU green box notications to the WTO ( billion)
1995 1996 1997 1998 1999 2000 2001 2002 2003
1996 1997 1998 1999 2000 2001 2002 2003 2004
1 General Services 5.01 6.47 5.52 5.02 6.73 4.74 5.64 5.23 5.02
2 Structural
adjustment:
investment
6.60 4.97 4.90 5.40 2.31 5.86 5.36 5.27 6.82
3 Structural
adjustment:
cessation of
activity
0.21 95 62 71 79 66 80 85 81
4 Structural
adjustment:
resource
retirement
1.03 1.53 33 43 12 45 09 11 12
5 Environmental
protection
programmes
2.78 4.22 3.69 4.97 5.46 5.73 5.52 5.01 5.23
6 Regional
assistance
programmes
2.29 2.99 2.27 2.04 2.90 3.23 2.42 2.83 2.98
7 Natural disaster
payments
33 38 33 18 37 39 40 81 71
8 Domestic food
aid
29 40 30 28 28 27 24 28 31
9 Other green box
subsidies
25 22 22 15 98 52 20 03 07
Green box total 18.78 22.13 18.17 19.17 19.93 21.85 20.66 20.40 22.07
Source: EU notication reports on domestic subsidy to the WTO; EAGGF reports.
Green box support relates to budget expenditures that are very diverse
in terms of their nature (investment aid versus agro-environmental aid,
etc.), their aims and their mode of nancing (variable proportion of
co-nancing by Member States). The ultimate beneciary of this mea-
sure is not necessarily the farmer, as in the case with blue box subsi-
dies. Green box support can be divided up under the following headings
(table 9.2):
structure of green box subsidies in the eu and france 265
1 General Services. These are funds made available for research, pro-
grammes to counter pests and diseases, training services, dissemination
and advisory services, inspection services, marketing and promotion
services, infrastructural services and other agricultural services (such
as the introduction of accounting in farms).
2 Structural adjustment aid provided in the form of investment aid. This
covers mainly aid for farm modernisation (in the form of subsidies
or interest rebates); support for young farmers; the restructuring and
reconversion of wine production; soil improvement; and the construc-
tion of centres of processing, packaging and warehousing.
3 Structural adjustment aid provided through programmes encouraging
producers to cease activity. This consists of compensation payments for
farmers aged 55 and over who give up farming, as well as grants for
early retirement from farming activity.
4 Structural adjustment aid provided by means of set -aside programmes.
This refers to agreed subsidies for cessation or suspension of produc-
tion, clearing or set-aside of land (except in the case of compulsory
fallow periods).
5 Environmental protection programmes. These subsidies are allocated for
the purposes of environmental protection, safeguarding of rural land-
scapes, controlling soil erosion, extensication and protection of eco-
logically sensitive areas. They are also concerned with the conservation
of genetic resources, development of sylviculture within agriculture
and the development of organic production.
6 Regional assistance programmes. These are specic measures to help
mountainous and other less favoured areas (French overseas depart-
ments, the Azores, Madeira, the Canary Isles and the Aegean Islands).
7 Grant aid for natural disasters. This refers to severe weather compensa-
tion payments and aid for the re-establishment of agricultural produc-
tion after natural disasters.
8 Domestic food aid. This relates to the distribution of agricultural prod-
ucts to those in need or programmes designed to meet nutritional
needs.
9 Other green box subsidies. These include public stockholding for pur-
poses of food security, agri-monetary aid, income support measures
and decoupled income support.
For the year 2003 to 2004, over 90 per cent of EU green box support
came under only four headings, in descending order: investment aid
(31 per cent), environmental protection programmes (24 per cent),
266 agricultural subsidies in the wto green box
subsidies for the provision of general services (23 per cent) and relief
for natural disasters (13 per cent). Over the period 199596 to 200304,
the greatest increase was seen in environmental protection programmes,
for which the total increased by 2.5 billion.
EU notication reports to the WTO do not specify how the total green
box amount is divided between different Member States of the EU. Also,
they do not provide details of the methodology used which would make
it possible to see how different types of subsidy made by each state (or
regional authority) are integrated into the nal result. In order to gain
a better understanding of the proportion of green box budget subsidy
contributed by each country to the overall amount of subsidy, this chapter
uses an approximation; this is based on both budgetary data from the
European Agricultural Guidance and Guarantee Fund (EAGGF) and on
the amount of agricultural subsidy granted by each country.
2
Budgetary support for agriculture within the EU and
green box estimates
On the basis of EAGGF budgetary information broken down by country
and the subsidies made by each state to its agriculture, the second part
of this chapter attempts to ascertain what proportion of total budgetary
support for agriculture is made up of green box subsidies.
EAGGF, the two pillars of the CAP and the green box
In 2005, the budget of the EU at 25 EAGGF (Guarantee and Guidance
sections) amounted to 52.6 billion, equivalent to 43 per cent of the EUs
general budget. This proportion has been falling for many years: from
two-thirds at the beginning of the 1980s, it will constitute only one-third
by 2013. If agriculture accounts for so great a part of the EU budget,
this is essentially because of the choice that was made when the CAP
was instituted of transferring expenditure initially made from national
budgets to the community as a whole. The division of this budget between
EUMember States is carriedout onthe basis of nancial solidarity. Hence,
those countries where agriculture plays an important role receive a greater
2 The overall total of these subsidies was taken from the website of the Euro-
pean Commission Competition Directorate: http://ec.europa.eu/competition/state aid/
studies reports/studies reports.html. The results of this estimate should be treated with
caution since certain categories of domestic subsidy (by states or regional authorities) are
not necessarily included in the Commissions gures.
structure of green box subsidies in the eu and france 267
share of the community credits awarded under the CAP. This situation
is reversed for countries with low levels of agricultural production or
which concentrate on forms of agricultural production which attract
only limited subsidies (horticulture, market gardening, vineyards, pig
and poultry farming). With 20 per cent of the agricultural production of
the EU 25, France receives 20 per cent of EAGGF spending. It thus heads
the list, ahead of Spain (14 per cent), Germany (14 per cent), Italy (12 per
cent) and the United Kingdom (8 per cent). The 10 New Member States
(NMS) receive 8 per cent of the EAGGF, but this proportion will increase
by 2013, in line with the commitments made at the date of enlargement
on May 2004.
The expenditure of the EAGGF increased steadily until the implemen-
tation of the MacSharry reforms of the CAP in 1992. Since then it has
been relatively stable in real terms, if we discount the impact of succes-
sive enlargements and the bovine spongiform encephalitis crisis. Several
measures adopted in previous CAP reforms have had a positive effect on
the control of expenditure: the reduction of supply (specically through
compulsory fallow periods in the case of cereals and quotas in the case
of milk production); the ceiling on the right to allowances or premiums
(at individual and collective level); and the modication of the condi-
tions on market intervention by state authorities (stockpiling of surplus
or granting of refunds).
Under the headings used by the EuropeanCommission, EAGGF spend-
ing is frequently split into two aggregated gures, with no direct relation-
ship between the boxes as dened by the WTO. Thus, the rst pillar
includes measures falling into three boxes, but the second pillar contains
only measures relating to the green box:
r
Measures in the rst CAP pillar (heading 1-A of the EAGGF Guar-
antee) represent 80 per cent of total spending by the EAGGF (42.1
billion in 2005). The majority of this (33.7 billion) consists of direct
aid linked to products or factors of production (placed in the blue
box). These include compensation payments allocated on the basis of
arable crop areas (17.1 billion), cattle premiums (7.7 billion), sheep
and goat premiums (1.8 billion) and direct dairy aid (1.3 billion). It
also includes single area payments (1.4 billion) allocated to the NMS
(green box) and other direct aid falling into the amber box, namely
that for olive oil (2.2 billion) and tobacco production (905 million).
The rst pillar also includes export refunds (3.1 billion in 2005), stor-
age costs (0.8 billion), intervention expenditure by common market
268 agricultural subsidies in the wto green box
organisations (4.3 billion) and other green box subsidies (food pro-
grammes, animal and plant health measures, control and prevention
activities, etc.).
r
The gures in the second CAP pillar (heading 1-B of the EAGGF Guar-
antee) represent 20 per cent of total EAGGF spending (10.5 billion in
2005). These fall into the green box, and include 4.9 billion for rural
development (mainly agri-environmental measures, less favoured area
subsidies, investment aid and grants for early retirement), 3.6 billion
for rural development measures nanced by the EAGGF Guidance in
Objective 1 areas (plus the LEADER programme) and 1.9 billion for
specic rural development in the NMS.
An estimate of the green box total for each EU Member State
The total amount of agricultural support notied by the EU to the WTO
(77.8 billion in 2003 to 2004) is noticeably higher than the total amount
of EAGGF expenditure (45.9 billion in 2004). The disparity between
these two sources is due primarily to the fact that the EAGGF does not
aggregate the expenditure of Member States on their own agriculture
through both co-nanced measures and those nanced exclusively from
their own resources. It is also explained by the fact that subsidies related
to the current AMS do not correspond to real budgetary expenditure
and are therefore not included in the EAGGF. This is, in effect, an esti-
mate of the loss of income to consumers, as the domestic price they pay
for agricultural and food products is often higher than the world price.
Although the EAGGF covers only a small fraction of amber box subsidies,
it includes the totality of blue box subsidies (direct aid linked to factors
of production being nanced exclusively by Community funds). In terms
of the green box, the EAGGF only covers part of these subsidies, because
these measures are co-nanced by states or regional authorities.
On the basis of information published annually by the European Com-
mission, it is possible to estimate the total amount of EAGGF green box
expenditure for the EU overall and for each country. This estimate takes
into account all EAGGF Guidance expenditure and EAGGF Guarantee
expenditure under heading 1-B (rural development) as well as EAGGF
Guarantee expenditure that falls into the green box. It should be borne in
mind that some expenditure in the rst pillar is compatible with the de-
nition of green box: the single payment; food aid; eradication of plant and
animal diseases; organisation and modernisation of sectors; and product
promotion activities.
structure of green box subsidies in the eu and france 269
According to these estimates, the total amount of EAGGF budgetary
subsidies falling into the green box is of the order of an average of
8.8 billion per year for the period 2003 to 2004. In fact, this total amount
is much lower than that notied to the WTOby the EUunder the heading
of green box (22.1 billion in 2003 to 2004). This discrepancy is explained
by the fact that this notication includes not only EAGGF expenditure,
but also agricultural subsidies provided by Member States. It is difcult
to arrive at a completely accurate gure for two main reasons: (i) the
notication reports do not specify how the green box is divided between
Member States; (ii) there is no information provided on the method used
by Member States and/or organisations of the Commission in declaring
how certain national payments come to be included in the green box. As
will be seen in the case of France, looking at public spending on agri-
culture, which theoretically falls into the green box, shows that the total
estimated amount of budgetary expenditure is higher than that presum-
ably found in the EU notication to the WTO. Some authors maintain
(Berthelot, 2005) that it is possible that not all Member States declare
domestic expenditure and that of regional authorities (regional councils
and general councils in the case of France) to the EU as green box. They
also consider that the lack of transparency and lack of checks on green
box support is not a problem for the WTO since such support is not
considered to be trade-distorting and hence is not limited.
According to the European Commissions Competition Directorate,
overall budgetary subsidies to agriculture made by EUMember States rose
to an average of 15.4 billion a year during the 2003 to 2004 period. These
are consideredto fall into the greenbox inthat they do not comprise either
direct payments for factors of production, export refunds, storage costs or
other market support measures. By adding these national subsidies to the
estimated green box total provided by EAGGF (8.8 billion), the overall
total amount is 24.2 billion. This total amount is thus not far removed
from EU green box notications to date (22.1 billion). While the results
of this method of calculation should be treated with some caution, adding
these two together gives an approximation of the green box total. This
allows us to show, rstly, the growth in green box subsidies (estimated)
for the EU (table 9.1) and, secondly, the value of this box in each of the
Member States.
The total amount of budgetary expenditure on European (EU 25)
agriculture has risen to a total of 69 billion in 2005 (52.6 billion of the
EAGGF and 16.4 billion in national support for agriculture). The green
box total (29.5 billion) is made up of 13.1 billion of EAGGF green box
270 agricultural subsidies in the wto green box
(of which 1.4 billion was allocated to the NMS under the heading of
single area payments) and 16.4 billion of national subsidies. The green
box thus represents 42 per cent of total budgetary expenditure. The effects
of the introduction of decoupled payments in the EU 15 have not yet
registered in the gures (in other words, these relate to a period before
the SPS came into effect). The green box amount should show a marked
increase when the next exercise takes place. Blue box subsidies notied by
the EU, or at any rate a large part of them, will then be placed in the green
box (except for those which remain coupled in some Member States).
The distribution of national subsidies between countries is based on
a different system from that described in relation to EAGGF green box.
According to data supplied by the European Commission Directorate
General for Competition, three countries alone between them account
for 60 per cent of the national expenditure notied for the EU, i.e.
Germany (30 per cent), France (17 per cent) and Finland (12 per cent).
The four Mediterranean countries (Spain, Greece, Italy and Portugal)
provide little agricultural support from their own funds. Between them,
they account for 6 per cent of the Community budget, ve times less than
Germany. Such national subsidies are equally small in Belgium, Denmark,
Luxembourg, Portugal and Sweden.
The green box total (EAGGF green box +national funding to agricul-
ture) amounted to 28.8 billion for the EU 25 in 2005. Germany, with 22
per cent of the total budget, is the main beneciary, ahead of the NMS
(20 per cent), France (14 per cent) and Finland (8 per cent). The 14
other countries together attract one-third of the green box support total
(table 9.3). The total amount of green box expenditure as a proportion of
all budgetary expenditure is particularly high in the NMS (91 per cent),
Finland (81 per cent) and Austria (65 per cent). This proportion is nearly
50 per cent in Germany and 30 per cent in France; it is below 25 per cent
in Denmark, Spain, Greece and the United Kingdom.
By dividing the total amount of green box subsidies by usable agri-
cultural area (UAA), the community average is calculated at 176 per
hectare. This total is less than 80 in three countries (Denmark, Spain
and the United Kingdom) and over 350 in ve others (Germany, Austria,
Finland, Luxembourg and the Netherlands). Caution should be exercised
when interpreting these national averages, since green box subsidies are
not evenly spreadbetweenfarms or betweenterritories (as will be shownin
the case of French farms according to FADN data). This amount depends
partly onthe number of less favouredareas withineachcountrys territory.
The green box total accounts for 9 per cent of the value of agricultural
production on average (table 9.4). This is particularly high in Finland
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structure of green box subsidies in the eu and france 273
Table 9.4 Total amount of green box subsidies in EU Member States in
2005
Green box Green box Green box
EAGGF green total (3) / Total total (3) / total (3) /
box (2) / EAGGF subsidies Hectares Agricultural
Total (1) (1) +(3) of UAL production
Germany 20% 53% 381 17%
Austria 41% 63% 386 23%
Belgium 7% 27% 252 5%
Denmark 5% 15% 77 3%
Spain 21% 25% 75 5%
Finland 39% 81% 1068 57%
France 12% 31% 136 6%
Greece 18% 20% 167 5%
Ireland 22% 41% 228 17%
Italy 22% 29% 129 4%
Luxembourg 50% 65% 419 22%
Netherlands 7% 37% 368 3%
Portugal 41% 42% 127 7%
UK 7% 23% 70 6%
Sweden 21% 40% 167 12%
EU15 18% 37% 177 8%
NMS-10 87% 91% 169 18%
EU25 24% 42% 176 9%
Source: European Commission (DGAGRI and DGfor Competition) / INRASAE2
Nantes authors calculations.
(57 per cent), Austria (23 per cent) and Germany (17 per cent). It is, how-
ever, low in both the Netherlands and Denmark, which have developed
intensive forms of agricultural production(pig farming, horticulture) that
attract few subsidies. In France, according to these estimates, green box
subsidies represent 6 per cent of the total value of agricultural production.
Budgetary support for agriculture in France and
green box estimates
The third sectionanalyses the growthinbudgetary support for agriculture
in France, with special emphasis on the relative importance of the green
274 agricultural subsidies in the wto green box
box. For this it uses the information published each year by the Ministry
of Agriculture and Fisheries.
Total public assistance to French agriculture amounted, in 2005,
3
to
16.5 billion. This expenditure does not take intoaccount payments made
under the heading of social protection in the agricultural sector (this
scheme runs largely at a decit because of the lack of balance between the
number of persons retiring from agriculture and the number of working
farmers). In excluding funding for general services in agriculture, higher
education, research and the forestry sector, public funding devoted to
agriculture and rural areas amounted to 12.7 billion in 2005. Of this
funding, 10.4 billion came fromcommunity funds and 2.3 billion from
national funds (that is, amounts that are similar to those shown in table
9.3). Using the budget headings adopted by the Ministry of Agriculture
and Fisheries (2007), these funds can be placed under the following ve
headings (of which the last three correspond to the green box).
Subsidies linked to market regulation (amber box)
The rst heading (amber box) accounted for 1.36 billion in 2005
(table 9.5). The reduction in institutional prices, the changing of the
rules governing intervention and the capping of export refunds have led
to these funds being cut to a quarter of what they were in 1992. Export
refunds, (548 million in 2005), which were capped in the URAA, should
nally disappear by the period 2013 to 2015. This heading also covers
subsidies for the sale of agricultural products on the domestic market
(342 million), other market regulation subsidies (286 million) and
intervention costs (187 million).
Direct aid linked to products and the control of supply (blue box)
The second heading (blue box) came to a total of 8.22 billion in 2005.
It includes compensation payments for cereals, oilseeds, pulses and fal-
low areas based on area (4.94 billion); animal premiums (2.87 bil-
lion), including suckler cow herd maintenance bonuses (1.25 billion),
direct dairy aid (545 million), special male bovine bonus (463 mil-
lion), slaughter payments (438 million) and ewe and goat premiums
3 Only data relating to 2005 are discussed here. Readers are referred to table 9.5 for the
2006 gures (these are presented in order to discuss the impact of the decoupled single
payment). Readers may also refer to table 9.2 to see the growth in budgetary subsidies in
the three boxes over the period 1992 to 2004.
structure of green box subsidies in the eu and france 275
Table 9.5 Budgetary expenditure (paid out) on French agriculture
( million)
2005 2006
Millions % Millions %
Amber box
1 Subsidies linked to market
regulation
1,364 10.8% 1,043 7.7%
1.1 Export refunds 548 4.3% 331 2.4%
1.2 Aid for domestic marketing 342 2.7% 253 1.9%
1.3 Other taxes and duties 286 2.3% 263 1.9%
1.4 Intervention spending 187 1.5% 195 1.4%
Blue Box
2 Direct aid linked to products
and control of supply
8,224 64.9% 3,311 24.4%
2.1 Compensation payments
for elds and leaving fallow
4,943 39.0% 1,138 8.4%
2.2 Animal premiums 2,870 22.6% 1,802 13.3%
2.3 Other direct payments for
products
411 3.2% 371 2.7%
Green box
3 Single decoupled payment
(from 2006 only)
0 0.0% 5,644 41.7%
4 Rural development grants 2,229 17.6% 2,340 17.3%
4.1 Agro-environmental
measures
552 4.4% 576 4.3%
4.2 Disadvantaged area
compensation payments
527 4.2% 516 3.8%
4.3 Installation, modernisation
and pollution control
459 3.6% 464 3.4%
4.4 Landscaping and
protection of rural green
space
365 2.9% 408 3.0%
4.5 Aid for equestrian activities 186 1.5% 150 1.1%
4.6 Agricultural set-aside 89 0.7% 80 0.6%
4.7 Processing and marketing
of products
49 0.4% 144 1.1%
5 Other aid for agriculture and
rural areas
852 6.7% 1,208 8.9%
5.1 Plant and animal health 374 3.0% 402 3.0%
5.2 Organisation and
modernisation of sectors
136 1.1% 185 1.4%
(cont.)
276 agricultural subsidies in the wto green box
Table 9.5 (cont.)
2005 2006
Millions % Millions %
5.3 Management of hazards
and reductions in charges
99 0.8% 363 2.7%
5.4 Food aid 90 0.7% 87 0.6%
5.5 Product promotion and
quality control
80 0.6% 77 0.6%
5.6 Cessation of dairy
activity and grubbing up of
vines
73 0.6% 94 0.7%
Public funding for agriculture
and rural areas
12,672 100.0% 13,549 100.0%
Source: Ministry of Agriculture and Fisheries, 2007 / classication by the author.
(170 million); and other direct product-linked payments (411 mil-
lion), including those for tobacco and rice production.
The decoupled single payment (green box, see Paragraph 6,
Annex 2 of the URAA)
The introduction of decoupling results in the gure of 5.6 billion that
is found under the third heading in 2006. In parallel, the total amount of
direct aid linked to products (blue box) fell by 4.9 billion between 2005
and 2006.
In France, the total amount of decoupled single payments was arrived
at on the basis of individual historic references from 2000 to 2002. The
French Government did not wish to avail itself of the opportunities
opened up by Regulation 1782 under Articles 58 and 59 (regionalisa-
tion of the single payment) or Article 69 (drawing down of 10 per cent of
the national single payment ceiling in order to convert this into types of
agriculture of environmental importance). It has, however, taken advan-
tage of partial decoupling. Hence, coupling remains at 100 per cent for
the suckler cow herd bonus, the veal slaughter bonus and the seed bonus;
60 per cent for direct payments for potato starch and tobacco; 50 per cent
for the ewe and goat premium; 40 per cent for the adult cattle slaugh-
ter bonus; and 25 per cent for direct payments based on area of COP,
voluntary set-aside, ax and hops.
structure of green box subsidies in the eu and france 277
Rural development (green box) subsidies
This fourth heading represents a total of 2.22 billion in 2005 (of which
50 per cent was community funding). These subsidies, allocated within
the framework of the National Rural Development Plan (PDRNin French
initials), include:
r
Agro-environmental measures (green box, see URAA, Annex 2, Para-
graph 12). These account for a total of 552 million (of which 52 per
cent is community funding) and include the following measures: the
agro-environmental grassland premium PHAE in French initials
(196 million), which aims to encourage large numbers of farmers to
undertake measures to preserve grasslands and maintain areas under
forms of more extensive management; agro-environmental measures
including Territorial Contracts of Farming CTE in French initials
(281 million) and Sustainable Agriculture Contracts CADin French
initials (36 million); rotation measures designed to encourage diver-
sication of crops in rotation cropping (26 million); and other agro-
environmental measures (11 million).
r
Compensation for areas of natural disadvantage (green box, see URAA,
Annex 2, Paragraphs 11 and 12). These payments amount to 527 mil-
lion (of which 50 per cent comes from the EU), of which 503 million
is accounted for by Compensatory Allowances in Disadvantaged Areas
(ICHN in French initials). The other payments are for mechanisation
and modernisation of animal housing in farms in mountain areas.
r
Support for installation, modernisation and pollution control (green
box, URAA, Annex 2, Paragraph 11). These subsidies represent a total
amount of 459 million (of which 33 per cent is provided by the EU)
and include interest rebates on loans; young farmer installation grants;
land and water management; farm pollution management programme
(PMPOA in French initials); CTE/CAD economic and social measures;
and other aid for farm modernisation (including the animal housing
modernisation instrument).
r
Aid for rural area management and protection (green box, URAA,
Annex 2, Paragraphs 1 and 2). Of this expenditure, a total amount
of 365 million, 85 per cent is concerned with EU structural policy
measures whose objective is to foster both development and structural
adjustment in regions in which development is lagging behind and also
economic and social conversion in regions having structural difcul-
ties. In a more tangential way, this also relates to spending on SAFER
278 agricultural subsidies in the wto green box
(Societ e dAm enagement Foncier et dEtablissement Rural) and farm-
ers unions.
r
Support for equestrian activities (greenbox, URAA, Annex 2, Paragraphs
1 and 2). These subsidies, which total 185 million are granted for the
organisation and development of horse-rearing (by means of national
studs) and of equestrian activities.
r
Farmers retirement schemes (green box, URAA, Annex 2, Paragraph 9).
These amount to a total of 89 million (of which 15 per cent comes
from the EU).
r
Aid for processing and marketing agricultural products (green box,
URAA, Annex 2, Paragraphs 1 and 2). This aid, amounting to 49 mil-
lion, aims to encourage investment in farm-related enterprises (mainly
those that play an important role in providing economic stimulus in
rural areas and in adding value to agricultural products). These feature
in the National Rural Development Plan (PDRNin French initials) and
are complemented by nancing directed to regional authorities.
Other aid for agriculture and rural areas (green box)
r
Aid for plant and animal health (green box, URAA, Annex 2, Paragraphs
1 and 2).
4
This amounts to a total of 374 million (of which 8 per cent
comes from Community funds), and it provides for 62 per cent of
public abattoirs and 38 per cent of disease control (plant and animal).
r
Support for sector organisation and modernisation (green box, URAA,
Annex 2, Paragraphs 1 and 2). These subsidies (136 million, 80 per
cent of which is EU-funded) concern, essentially, measures for the
restructuring of vineyards and improvement of vine varieties.
r
Management of production disasters and tax-reduction measures (green
box, URAA, Annex 2, Paragraph 8). These funds (99 million, from
exclusively national sources) concern ministry spending on farm disas-
ter guarantees; rebates for disaster loans taken out by affected farmers;
debt management in cases of disaster; special producer grants; covering
of social security payments, etc.
r
Food aid (green box, URAA, Annex 2, Paragraph 8). These subsidies
(89 million, of which 80 per cent is EU-funded) include support for
4 The classication of subsidies into each of these three boxes was carried out following
expert advice and using the rules and exemptions listed in Annex 2 of the URAA. Although
it is not possible to check whether this is the case, it may well be that my proposed
classication does not correspond in all respects to the classication used by the EU in its
WTO notications.
structure of green box subsidies in the eu and france 279
the most disadvantaged sectors of the national population and aid for
populations of developing countries in the event of food crises.
r
Product marketing and quality control (green box, URAA, Annex 2,
Paragraphs 1 and 2). These expenditure items (80 million, of which
20 per cent is EU-funded) are, rstly, measures promoting systems of
product labelling and quality control, through ofcial institutions such
as the Institut National dAppellations dOrigine (National Institute of
Certicates of Origin) and, secondly, promotional activities for agri-
cultural products carried out by inter-trade ofces in conjunction with
organisations like Ubifrance and Sopexa.
r
Measures relating to the cessation of milk production (62 million)
and the grubbing-up of vines (11 million). These are classed as green
box subsidies (URAA, Annex 2, Paragraph 9).
While the total amount of state aid to agriculture and rural areas has
been brought under control in France over the last 10 years, the structure
of this support has changed as a result of CAP reforms (table 9.2). Green
box support, which had remained at around 3 billion for some time,
rose considerably in 2006 with the introduction of decoupling (Dervieux,
2007). Assuming that the single payment is placed in the green box, the
latter accounts for 9.2 billion in 2006 (i.e. 68 per cent of total funding).
The blue box total has also risen on a regular basis since 1995 to reach
8.2 billion in 2005. In 2006, following decoupling, it comes to no more
than 3.3 billion (of which 1.2 billion is for aid linked to arable surface
area and 1.1 billion for the suckler cow herd bonus). This major shift
between green and blue boxes is found in all of the EU Member States,
and even more so in those countries which have opted for a complete
or almost complete decoupling (Germany, Greece, Ireland, Italy and the
United Kingdom). The amber box subsidies (as fractions of the budget)
were reduced by 2.5 between 1995 and 2006.
The green box and the European farming economy
Inthe fourthsectionI shall attempt todescribe the role playedby subsidies,
in particular green box subsidies, in the farming economy of the EU at
25 Member States. To do this I shall draw on data provided by the Farm
Accounting Data Network (FADN). This statistical tool, which is available
in harmonised form in all EU Member States,
5
is constructed so as to be
5 Luxembourg and Malta are not included in the following tables because of the small
number of farms within these two countries.
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structure of green box subsidies in the eu and france 281
representative of commercial farms
6
(Chantry, 2003). It provides detailed
information on farm structure, economic output and nancial situation.
Its main focus is on linking the total amount and the nature of direct aid
provided for each farm in the sample to its size, means of production and
economic output.
In relation to FADN term, when using the generic term support (or
direct payments), it is important to make a clear distinction between farm
subsidies and investment aid.
r
Farm subsidies. These are subsidies for current activities related to pro-
duction and nanced from European and/or national funds. In order
to obtain coherent results for a given nancial year, as a general rule
these are taken on the basis of entitlement and not receipt. These sub-
sidies are included within the income of the enterprise and are taken
into account when revenue calculations are made. According to FADN,
based on all commercial farms within the EU 25, this item amounted
to 40.6 billion in 2005 (in the case of Italy, the United Kingdom,
Sweden and Slovenia, the 2005 statistics were not available, so the 2004
gures were used). Initially, taking this aggregated gure, it was possible
to work out the amount of green box subsidies (minus that of single
payments) on the basis of the headings used. These are, essentially,
agri-environmental measures, compensation for natural handicap pay-
ments, severe weather payments, support for dairy farmer retirement
schemes and some support for regional authorities. These amounted
to an overall total of 7.5 billion for the EU 25 in 2005. Secondly, the
single payment (single area payment for the NMS and decoupled single
payment for several EU Member States) was taken out. This came to
a total amount of 9.5 billion for the EU 25 in 2005. The single pay-
ment for only seven countries is itemised as the data for 2005 were not
available for some countries (see above), while other countries had not
yet implemented decoupling (Spain, Finland, France, Greece and the
Netherlands).
r
Support for investment (or direct investment aid). This refers to subsidies
granted by the state, public bodies or possibly by third parties, towards
6 Farms are considered to be commercial if they employ more than 0.75 Agricultural Work
Units (AWU) or if their standard gross margin(SGM) is above a minimal threshold xed by
each Member State. This threshold is one European Size Unit (ESU) in Portugal, two ESUs
in Spain and in Ireland, Four ESUs in Northern Ireland and eight ESUs in France and the
United Kingdom. Commercial farms account for almost 95 per cent of total agricultural
production within the EU as a whole. They attract an approximately equivalent share of
farm subsidies.
282 agricultural subsidies in the wto green box
the acquisition or creation of xed assets. These are animal housing,
drainage improvements, young farmer grants, etc. This subsidy (i.e.
green box) may be given in the form of a xed lump sum or may be
spread over several years. According to FADN data for 2005, this item
comes to an overall total of 1.4 billion for commercial farms within
the EU 25.
Over the last 10 years (1995 to 2005), the average total farm subsidy
(for the EU 15) has risen. There are two main reasons for this: the CAP
reforms (in 1999 and 2003) involved a revalorisation of plant and animal
premiums; as farms became larger, the subsidy they received increased.
The slight fall perceived since 2004 (gure 9.3) is due to the fact that the
average total farm subsidy is less in the NMS (5,240 in 2005) than in the
EU at 15 (12,780).
In 2005, the 4.1 million commercial farms of the EU 25 received, on
average, 9,930 in farm subsidy. This amounts to 6,050 by full-time
farm job, 292 by hectare of usable agricultural land, 15 per cent of the
value of agricultural production (minus direct aid) and 55 per cent of
pre-tax earnings. The average amount of subsidy (totals) per farm varies
greatly between Member States of the EU. This is essentially due to the
three criteria listed below (Blogowski and Chatellier, 2004):
r
Agricultural specialisation. Only certain kinds of agricultural produc-
tion benet or have beneted (since the introduction of decoupling)
from compensatory payments. Pig and poultry rearing, wine, horti-
cultural, arboricultural and vegetable production do not benet from
direct subsidies. As the single payment was calculated on the basis of
the situation as at 2000 to 2002, the apportioning of public expendi-
ture between different kinds of agricultural production has not been
fundamentally altered since the introduction of decoupling in 2005.
However, changes are expected to occur over the coming years as indi-
vidual countries have a certainfreedomof actionto re-orient decoupled
subsidies (the principle of regionalisation).
r
Size of farm. Compensation payments allocated for factors of produc-
tion (surface area and head of livestock) were historically set so as to
cushion the economic consequences of the fall in guaranteed prices. In
the absence of a capping mechanism, the total amount of direct aid per
farm is thus tightly linked to its size (in hectares or per head of stock).
r
Geographic location of farm. In the cereal sector, for example, the total
amount of direct aid per hectare is obtained by multiplying the amount
7 , 8 0 0
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284 agricultural subsidies in the wto green box
of subsidy per ton (xed in exactly the same way for all European
producers) by the previous cereal yield calculated for each country or
each agricultural region. In the same way, certain subsidies are only
awarded in targeted areas, as in the case of compensation payments for
natural handicaps (whose total amount per hectare differs for high-
altitude areas, mountain areas, foothills and areas which are simply less
favoured).
Over the period 1995 to 2005, the total amount of green box subsidy
per farm (excluding single payment) has increased only slightly over the
Community as a whole. On average, for the EU25, it amounted to 1,850
per farm, that is, 19 per cent of total subsidy, 10 per cent of pre-tax earn-
ings and 4 per cent of business turnover (or agricultural production) in
2005. However, these gures disguise major disparities between coun-
tries (table 9.6). Thus, green box subsidy plays an important economic
role in Austria, a country where farms are often small-scale and located
in marginal areas. There, green box subsidies total, on average, 11,100
per farm (in 2005), the equivalent of 53 per cent of all subsidies and
42 per cent of pre-tax income. They also make an important contribution
to farmers income in the case of Finnish and Irish farmers. In France
and Germany, green box subsidies make up, on average, 15 per cent of
revenue. As will be shown in the fth section, these averages conceal
major disparities within states, either between types of production (green
box subsidies go mainly to farms where grazing animals are reared) or
between regions (they are more concentrated in less-favoured regions).
Green box support represents less than 5 per cent of revenue in Belgium,
Greece, Italy and Spain.
Investment subsidies often play an important role for the farms which
receive them, but these are only a small proportion of the total number of
farms. Thus, the total amount of such subsidy is 330 per farm across the
EU 25. Calculations based on the individual data supplied by the French
FADN will make it possible to provide certain additional information on
this point below.
In 2005, as pointed out above, it is still too soon to draw up a nal
balance sheet of the effects of decoupling on the growth in overall green
box support (green box subsidy and single payment) for EU Member
States in total. At this stage, this can be done only for the NMS (except
Slovenia) and six countries of the EU 15 (table 9.7). From 2006, or 2007
at the latest, it will be possible to make a more complete assessment of
the impacts. In the case of Denmark, where decoupling is complete, with
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structure of green box subsidies in the eu and france 287
Table 9.7 Single payments total in commercial farms in EU Member
States (2005 and %)
Total Agricultural
Farm AWU Ha of UAA subsidies output
Belgium 8,150 4,290 198 48% 5%
Denmark 23,510 16,100 331 87% 11%
Germany 21,250 10,020 284 77% 13%
Ireland 11,060 9,960 276 67% 34%
Austria 6,610 4,080 195 32% 11%
Portugal 1,530 970 69 30% 8%
EU15 2,570 1,520 48 12% 3%
Cyprus 550 550 99 17% 3%
Czech Republic 17,130 2,000 69 36% 7%
Estonia 3,680 1,230 31 27% 6%
Hungary 3,670 1,930 73 35% 7%
Lithuania 1,620 830 40 30% 8%
Latvia 1,400 530 23 17% 4%
Poland 970 540 56 29% 4%
Slovakia 29,690 1,610 54 33% 8%
NMS 1,540 680 55 28% 5%
EU25 2,340 1,310 50 16% 4%
Source: FADN EU, European Commission DG-AGRI-G3 / Analysis by INRA
SAE2 Nantes.
the exception of the special bonus for adult beef cattle (which was 100 per
cent coupled) and the ewe and goat bonus (which remains 50 per cent
coupled), the single payment total as from 2005 comes to 23,510 per
farm. If we add green box support to the single payment, the cumulative
green box total forms 92 per cent of overall subsidy. This proportion is
close to 100 per cent in Ireland and Germany, countries which operate
total decoupling (Boinonet al., 2006; Kleinhanss, 2005). It is 85 per cent in
Austria (where the suckler cow herd bonus and the adult cattle slaughter
bonus remain coupled) and 59 per cent in Belgium (retention of the
coupled suckler cow herd bonus and arable crop bonus) and in Portugal.
The single payment total per hectare varies greatly fromone country to
another, as a functionof the degree of decoupling adopted, the agricultural
specialisation and the degree of intensication. With the exception of
the specic situation of the NMS, the total amount per hectare varies
288 agricultural subsidies in the wto green box
greatly within each country, according to type of farm and region. These
differences make it difcult to introduce a uniform total single payment
for farmers, as envisaged in Germany and recommended by the European
Commissioninits recent report onthe current state of the CAP(European
Commission, 2007). The total amount of the single payment, which is
around 50 per hectare in the NMS, will increase between now and 2013
in line with decisions taken at the time of their accession.
The green box and the French farm economy
This fth and nal section deals specically with French farms. It aims,
rstly, to describe the role played by green box support and investment aid
for different categories of farm and, secondly, to provide some estimate
of the effect of the introduction of (partial) decoupling on the growth
in green box total. This work was made possible thanks to an analysis of
individual data carried out by the French FADN.
Green box support: the case of livestock rearing in mountain areas
The 342,500 French commercial farms beneted from an overall
9.4 billion in farm subsidy in 2005. This represents an average total
of 27,400 per farm, or 13,700 per agricultural work unit (AWU), 363
per hectare of usable agricultural area (UAA) or 98 per cent of revenue.
Green box support (minus single payment) alone represents an overall
total of 1.5 billion (or 16 per cent of total subsidy), of which 34 per cent
comes inthe formof natural handicappayments (ICHNinFrenchinitials)
and 13 per cent in the form of agri-environmental grassland payments
(PHAE in French initials) (for the management of low-intensity pasture
systems). This represents a total amount of 4,300 per farm, 2,200 per
AWU, 58 per hectare and 16 per cent of the Family Farm Income (FFI).
These national averages conceal large divergences according to type of
production and classication of economic volume (see Appendix A
7
).
Green box subsidies are closely targeted: 86 per cent of funding goes to
farms specialising in herbivores (dairy cattle, beef cattle and sheep/goats);
43 per cent goes to small farms of less than 40 ESU (table 9.8); and
55 per cent goes to mountainous areas (although these represent only
20 per cent of all farms).
7 In Appendix A, farms are divided into seven production types (according to their main
agricultural activity) and ve size categories. The size indicator used is the standard gross
margin. This is expressed in the form of European Size Units (ESU = 1,200 of potential
added value).
structure of green box subsidies in the eu and france 289
Table 9.8 Distribution of green box support among French farms:
by type of production and size of farm
Farm size (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 9.8% 5.8% 4.5% 5.1% 5.7% 30.9%
Beef cattle 22.9% 6.9% 5.7% 3.0% 4.0% 42.4%
Sheep/goats 7.6% 2.8% 1.0% 1.2% 0.8% 13.2%
Granivores 0.0% 0.0% 0.0% 0.0% 0.3% 0.4%
Field crops 0.8% 0.5% 1.2% 0.8% 3.4% 6.6%
Vineyards 0.8% 0.3% 0.4% 0.4% 1.4% 3.2%
Other 1.0% 0.2% 0.3% 0.2% 1.4% 3.1%
Overall 42.9% 16.4% 13.0% 10.6% 17.0% 100.0%
Source: FADN France 2005 / Analysis by INRA SAE2 Nantes.
An analysis of the distribution (table 9.9) shows that only 60 per cent of
French farms receive green box support. This proportion rises to 90 per
cent for sheep/goat farms, 83 per cent for beef cattle farms and 66 per cent
for dairy cattle farms. In the case of the 14,800 farms which benet the
most from green box support that is, which receive more than 20,000
per year this plays a crucial economic role in that it represents 82 per
cent of their revenue.
As a national average, green box support comprised 74 per cent of the
revenue of sheep/goat farms, 33 per cent of that of beef cattle farms and
14 per cent of that of dairy cattle farms. This proportion is more marginal
in other types of production, especially vineyards and granivore. For
herbivore farms, the role of green box subsidy is greater for smaller-sized
farms (Appendix A) and those in mountain areas.
Farms in mountain areas receive, on average, 11,500 of green box
support, i.e. 7,000 per AWU, 162 per hectare and 56 per cent of rev-
enue. These subsidies are mainly from ICHN (55 per cent) and PHAE
(17 per cent).
r
ICHN. This aid is targeted at farms in less favoured areas which con-
centrate on rearing herbivore species. The total amount of ICHN is
xed by hectare and varies according to farm location (high altitude,
mountain, foothill, etc.) and the type of zone (arid or not). It is capped
at 50 hectares per farm, with a 20 per cent bonus payable for the rst
290 agricultural subsidies in the wto green box
Table 9.9 Distribution of total green box support per farm (in France):
number of farms and green box support as proportion of revenue
Amount of green box support per farm
0 05K 510K 1015K 1520K >20K Overall
Number of farms
Dairy cattle 33,500 33,600 14,100 9,800 4,200 4,100 99,200
Beef cattle 15,200 24,500 20,400 13,100 4,900 6,700 84,900
Sheep/goats 1,900 3,600 4,000 3,100 1,900 3,100 17,600
Granivores 3,800 2,100 0 0 0 0 6,100
Cereals 40,500 21,900 5,200 1,500 500 300 69,900
Vineyards 30,600 10,200 2,500 800 200 100 44,400
Other 11,900 6,300 1,000 400 300 500 20,400
Overall 137,400 102,200 47,400 28,700 12,000 14,800 342,500
Green box support / Revenue (or Family Farm Income FFI)
Dairy cattle 0% 5% 24% 42% 51% 62% 14%
Beef cattle 0% 11% 33% 49% 52% 76% 33%
Sheep/goats 0% 15% 43% 106% 161% 149% 74%
Granivores 0% 3% ns ns ns ns 3%
Cereals 0% 5% 23% 29% ns ns 6%
Vineyards 0% 4% 16% 97% 59% 38% 3%
Other 0% 12% 20% ns ns ns 11%
Overall 0% 7% 27% 48% 60% 82% 16%
ns =not signicant (sample too small).
Source: FADN France 2005 / Analysis by INRA SAE2 Nantes.
25 hectares. Grant of the aid is conditional on the farmers adher-
ence to good agricultural practices that respect demands for environ-
mental protection. The applicant for this aid is held to respect good
practice for example, stocking density must fall between a permitted
minimum and maximum density.
r
PHAE. This is an instrument designed to encourage large numbers
of farmers to undertake agro-environmental activities designed to pre-
serve grasslands andtoopenupareas toextensive management. The cri-
teria for eligibility are set by each d epartment, taking into account local
environmental priorities. PHAE is allocated per hectare to a maximum
of 100 hectares per farm. In some d epartments the applicant must
satisfy a minimum degree of specialisation (this corresponds to the
relationship between the grassland area and the usable agricultural
structure of green box subsidies in the eu and france 291
Table 9.10 Green box support for mountain farms in France
( and %)
Types of production
Dairy cattle Beef cattle Sheep/goats Overall
Number of farms 23,300 28,900 9,300 70,600
Income per family AWU
(euros)
14,500 15,400 9,900 14,500
Total subsidies per farm 24,500 35,500 28,600 27,500
Amount of green box
support per farm
12,500 12,500 15,300 11,500
of which ICHN 7,500 6,300 8,900 6,300
of which PHAE 2,100 2,600 2,000 2,000
Green box support / AWU 7,200 9,200 10,100 7,000
Green box support / Ha of
UAA
177 152 189 162
Green box support / Total
subsidies (%)
51% 35% 53% 42%
Green box support / Farm
Income
53% 63% 110% 56%
Source: FADN France 2005 / Analysis by INRA SAE2 Nantes.
area). A maximum stock density per hectare for each activity may be
specied.
Goat and sheep rearing mountain farms, because of their low incomes,
are particularly dependent on these subsidies (110 per cent of revenue).
These subsidies also represent more than half of the revenue of beef cattle
and dairy cattle farms (table 9.10). In allowing mountain farms to keep
going, in spite of sometimes severe structural constraints (low labour
productivity, limited agronomic potential, etc.), green box subsidies
have a social and territorial impact (Chatellier, Delattre, 2006). In other
words, it is highly likely that without these subsidies, agricultural produc-
tion would be abandoned in the medium term in certain less-favoured
areas.
Investment aid: aid for modernisation of animal housing
According to FADN data, French commercial farms beneted overall
from 470 million of investment aid in 2005 (or the equivalent of only
292 agricultural subsidies in the wto green box
Table 9.11 Distribution of investment aid among French farms:
by production type and farm size
Size of farm (Standard gross margin)
4060 6080 80100 >100
<40 ESU ESU ESU ESU ESU Overall
Dairy cattle 2.8% 5.9% 7.6% 6.0% 15.5% 37.7%
Beef cattle 9.7% 3.7% 4.2% 3.8% 3.8% 25.2%
Sheep/goats 2.9% 1.7% 0.4% 0.5% 0.1% 5.5%
Granivores 0.4% 0.4% 0.0% 0.1% 0.3% 1.2%
Cereals 0.5% 0.4% 0.7% 0.8% 4.6% 7.0%
Vineyards 2.1% 1.4% 1.7% 2.0% 6.8% 14.0%
Other 2.0% 0.3% 0.2% 0.4% 6.4% 9.3%
Overall 20.4% 13.8% 14.8% 13.6% 37.4% 100.0%
Source: FADN France 2005 / Analysis by INRA SAE2 Nantes.
5 per cent of farm subsidy). These subsidies accounted for 53 per cent
of building subsidies, 17 per cent of subsidies for material, 16 per cent
of permanent crops subsidies and 10 per cent of installation grants for
young farmers.
Investment aid represented an average total amount of 1,380 per
farm. Thirty-seven per cent of these went to large farms (over 100 ESU),
although these represent only 22 per cent of the total number. This can
be explained by the fact that the larger farms undertake more sustained
investment.
Cattle farms (dairy and beef cattle) alone receive 63 per cent of these
subsidies (table 9.11). Two factors account for this concentration: these
two sectors are still beneciaries of many installation grants for young
farmers; and cattle farms are entitled to subsidies for the adaptation of
animal housing in order to conform to environmental norms. Although
they comprise 20 per cent of all farms, large arable farms receive only
7 per cent of investment aid; the percentage is also low in the granivore
sector, despite the fact that the infrastructural expenditure involved in the
latter is often very high.
In 2005, only 15 per cent of French farms received investment aid
(51,600 farms). For the farms receiving it, the average amount of aid was
9,150. The total amount, however, increases with size of farm: farms
of under 40 ESU received 6,700, as against 13,200 for those of over
structure of green box subsidies in the eu and france 293
100 ESU. The average total amount of young farmers grant, involving
nearly 5,800 farms, was 12,700 per beneciary.
The introduction of decoupling and the future single
payment (green box) total
As was shown in the third part of this chapter in relation to the budget,
the introduction of the single payment in France modies the content of
the green box. Using FADNdata fromthe 2005 tax year (when decoupling
had not yet come into effect), I propose carrying out a simulation exercise
in order to measure the probable effects of the 2003 CAP reform on
2008 levels of the single payment, for different categories of farm. This
simulation, applied to FADN individual data, assumes that structure
and productivity remain constant. It does not, therefore, include any
possible increases inlabour productivity whichmight be brought about in
future years by a reduction in the number of farms. This simulation does,
however, take into account the accentuation of the rate of modulation,
the reform of the milk and sugar producing sectors, and the growth in
the rate of set-aside.
8
The simulation considers two hypotheses related to decoupling: H1
application of partial decoupling (in the sense of the French option, dis-
cussed in the third section above); and H2 application of total decou-
pling (decoupling of all direct subsidies which could theoretically be
decoupled).
In the case of partial decoupling, the total amount of single payment
is estimated as a national average (across all types of farm) of 16,500
per farm; it represents 57 per cent of the total amount of farm subsidy
and 234 per hectare. We can see some differences between types of
production(table 9.12). Hence, for specialisedbeef cattle units, andtaking
into account the retention of the suckling cow herd bonus, the single
payment total amounts to only 132 per hectare. This total is far lower
than for intensive dairy farms (349) and farms specialising in maize
grain production (308).
Following the total decoupling hypothesis, the single payment total
would increase to a national average of 23,100 per farm, i.e. 80 per
cent of total subsidies and 327 per hectare. If the divergences between
systems of production were to be similarly reduced in a situation of partial
decoupling, the total amount of single payment per hectare would still
8 For more information on the simulation methodology, see Chatellier, 2006.
294 agricultural subsidies in the wto green box
Table 9.12 Total single payment to French farms by type of production
(2008 estimate)
Single Single
Single payment payment payment/
per farm () per hectare Direct aid (%)
H1 H2 H1 H2 H1 H2
Dairy cattle 23,000 27,800 270 327 69% 83%
Specialised Maize
limited
23,800 28,300 349 415 79% 93%
Specialised Maize
unlimited
18,700 22,400 248 297 69% 83%
Specialised Grassland 10,900 13,600 141 177 39% 49%
Diversied 32,500 39,500 301 365 74% 91%
Beef cattle 14,900 28,600 167 321 40% 76%
Specialised 11,500 26,900 132 309 30% 70%
Diversied 17,900 30,100 197 331 49% 83%
Sheep/goats 9,900 15,300 125 194 35% 53%
Granivores 4,700 6,100 229 295 60% 77%
Cereals 26,200 33,300 290 368 73% 93%
Wheat (orientation) 29,500 37,300 290 367 74% 94%
Maize grain 19,800 25,500 308 398 71% 91%
Oilseeds and pulses 29,500 38,100 262 338 72% 93%
Other 20,600 24,700 315 378 72% 87%
Vineyards 1,300 1,700 235 301 33% 42%
Other (market gardening,
etc.)
1,200 1,500 194 251 15% 19%
Overall 16,500 23,100 234 327 57% 80%
H1: partial decoupling; H2: total decoupling
Source: FADN France 2005 / analysis by INRA SAE2 Nantes.
remain much higher in intensive dairy systems based on maize fodder
than in grass-based systems.
In the current state of the French option (partial decoupling), the
introduction of a uniform single payment by hectare (European Com-
mission, 2007) would have major economic repercussions (Guyomard
et al., 2007). It would bring about a large transfer of subsidies from
intensive dairy units to specialised beef cattle units. While the movement
structure of green box subsidies in the eu and france 295
towards total decoupling might make this possibility more economically
feasible, it might arouse internal debates over its implications for the
geographical localisation of agricultural production (Daniel, Kilkenny,
2002).
This simulation shows that the green box will play a central role in
farm nancing in the future. In a situation of partial decoupling, the
accumulated total of single payment and the historically decoupled direct
subsidies (ICHN, PHAE, etc.) will in fact account for three-quarters of all
farm subsidies. This rate will of course accelerate if the French authorities
decide to abandon the coupling of certain premiums.
Conclusion
European agriculture is protected by the levying of import duties on
certain imported agro-alimentary products and by the granting of bud-
getary subsidies to farmers. While EU agricultural expenditure has been
well controlled over the last 10 years, it is still the subject of contentionand
controversy, both by some developing countries (which lack the nancial
resources to support their own agriculture) and by historically less inter-
ventionist industrialised countries (OECD, 2007), such as New Zealand
and Australia. Within international bodies, the debate over domestic sub-
sidy to agriculture has focused more on the nature of such aid than on its
amount. Since the URAA of 1994, states have been permitted to subsidise
their agriculture, but on condition that the public transfers carried out
should not inuence the direction of production and trade. It is for this
reason that the EU decided, in the 2003 reforms, to institute the decou-
pled single payment (to replace compensation payments for factors of
production). Because of the principle of subsidiarity, this reorientation
of the CAP does not operate in the same way in all EU Member States
(total decoupling versus partial decoupling; the historic model versus the
hybrid model, etc.).
In this context, marked by a thorough revision of the modalities of
support for European agriculture, this chapter set out to produce an anal-
ysis focusing primarily on the green box subsidies made to European and
French farmers. After reviewing the mainissues raised for the EU(the def-
initionof key concepts andthe summarising of the EUnoticationreports
of domestic subsidy), it presented a predominantly qualitative analysis of
these subsidies. In order to carry out the analysis, several sources were
296 agricultural subsidies in the wto green box
used. EAGGF budgetary data, together with information from the Euro-
pean Commission Directorate General for Competition on Member
States subsidies to their agriculture, enabled me to measure the rela-
tive importance of green box measures within overall agricultural expen-
diture for each Member State. Subsequently, budgetary data published
by the French Ministry of Agriculture proved to be of great value in
enabling a better understanding, at the level of a single country, of the
content of different measures classied as green box and in establishing a
hierarchy of their relative importance within the budget. Data from the
European FADN then made it possible to measure the contribution of
direct green box subsidies to the farming economies of different Member
States. Finally, French FADN data were used, rstly, to discuss the dis-
tribution of green box support and of investment aid between different
categories of farms and, secondly, to carry out a simulation of the impact
of CAP reform in the growth of the single payment.
As a result of the work presented here, I should like to emphasise three
ideas which would repay further study.
r
Greenbox support (minus single payment) over the period1995to2005
accounted for what was often a modest proportion of total European
budgetary subsidies to agriculture (with the exception of a few other
countries, particularly Austria). Nevertheless, they had (and still have)
a major economic impact on farms in less favoured areas, especially
those specialising in stock rearing. These green box subsidies, which
have a ceiling per farm and are precisely targeted, are leading to the
improvement of the relationship between agriculture, the land and the
environment.
r
The EU has attempted to make these domestic subsidies conform more
closely to Annex 2 of the URAA. However, it is possible that some WTO
Member States may in the future query whether even the green box is
soundly based. In fact, as the work of other economists has shown
(Andersson, 2004; Anton, Le Mou el, 2003; Hennessy, 1998), decoupled
direct support can have an impact on agricultural production in a
variety of ways.
r
The spectacular rise in the cost of raw materials (mainly milk and
cereals) is likely to provide a stimulus to the questioning of at least
part of the direct support provided to European agriculture. It brings
sharply into relief the question of how these public funds are to be
allocated between different categories of farmer.
structure of green box subsidies in the eu and france 297
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Appendix A
Green box support to French farms according to
type of production and farm size (France, 2005)
Table 9.A-1 Number of commercial farms in France (2005)
Economic value of farm (Standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 23,900 19,900 17,500 15,900 22,100 99,300
Beef cattle 46,600 14,000 9,200 7,000 8,200 85,000
Sheep/goats 10,400 3,500 1,300 1,300 1,000 17,500
Granivores 2,100 600 700 600 2,000 6,000
Field crops 18,900 9,000 11,500 9,700 20,800 69,900
Vineyards 11,600 5,000 6,100 5,300 16,400 44,400
Other 7,800 2,700 2,300 2,000 5,600 20,400
Overall 121,300 54,700 48,600 41,800 76,100 342,500
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
299
300 agricultural subsidies in the wto green box
Table 9.A-2 Total farm subsidy by farm ()
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 15,000 19,400 27,000 34,500 55,400 30,100
Beef cattle 26,700 36,900 49,000 50,400 69,800 36,900
Sheep/goats 21,200 27,000 31,500 49,100 65,300 27,800
Granivores 600 4,100 5,200 9,300 16,900 7,800
Field crops 11,600 21,900 31,100 37,500 60,800 34,300
Vineyards 2,300 3,100 3,600 3,500 5,200 3,800
Other 3,600 4,000 5,400 6,500 16,600 7,700
Overall 17,300 22,400 28,000 32,700 43,900 27,400
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
Table 9.A-3 Family Farm Income (FFI) by family agricultural work
unit ()
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 13,000 16,400 17,600 20,100 24,000 19,000
Beef cattle 13,900 17,000 18,300 21,500 25,100 17,300
Sheep/goats 9,300 10,600 10,700 12,800 21,100 11,100
Granivores 12,600 16,200 20,200 31,000 37,000 25,200
Field crops 6,500 12,400 16,300 19,900 27,500 17,800
Vineyards 6,500 15,300 18,700 24,000 53,700 31,600
Other 16,300 15,200 14,800 12,500 13,400 14,700
Overall 11,600 15,400 17,200 20,300 29,900 19,400
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
the distributional structure of green box support 301
Table 9.A-4 Green box subsidy by farm ()
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 6,100 4,300 3,900 4,800 3,900 4,600
Beef cattle 7,300 7,300 9,200 6,300 7,300 7,400
Sheep/goats 10,800 11,800 10,700 13,400 11,000 11,200
Granivores 300 700 400 400 2,300 1,000
Field crops 600 800 1,500 1,200 2,400 1,400
Vineyards 1,000 900 1,000 1,000 1,300 1,100
Other 1,900 1,300 1,700 1,700 3,800 2,300
Overall 5,300 4,500 4,000 3,800 3,300 4,300
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
Table 9.A-5 Green box support as a percentage of all farm subsidies (%)
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 41% 22% 14% 14% 7% 15%
Beef cattle 27% 20% 19% 13% 10% 20%
Sheep/goats 51% 44% 34% 27% 17% 40%
Granivores 46% 18% 7% 4% 14% 13%
Field crops 5% 4% 5% 3% 4% 4%
Vineyards 43% 28% 27% 30% 24% 29%
Other 51% 31% 33% 27% 23% 30%
Overall 30% 20% 14% 12% 8% 16%
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
302 agricultural subsidies in the wto green box
Table 9.A-6 Green box subsidy per Agricultural work unit ()
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 4,800 2,900 2,200 2,300 1,400 2,500
Beef cattle 6,300 4,900 5,100 3,700 2,700 5,000
Sheep/goats 8,300 7,600 5,200 6,700 4,400 7,300
Granivores 200 500 200 200 1,000 600
Field crops 400 600 1,000 800 1,000 800
Vineyards 800 500 500 400 300 400
Other 900 500 500 300 500 500
Overall 4,000 2,900 2,200 1,800 1,000 2,200
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
Table 9.A-7 Green box subsidy by hectare of usable agricultural area ()
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 136 72 50 50 25 54
Beef cattle 115 80 80 49 40 82
Sheep/goats 176 147 133 96 57 140
Granivores 82 50 26 15 55 49
Field crops 18 13 18 11 14 15
Vineyards 81 52 50 44 41 49
Other 275 126 158 103 112 142
Overall 115 72 53 42 27 58
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
the distributional structure of green box support 303
Table 9.A-8 Green box subsidy as proportion of FFI (%)
Economic value of farm (standard gross margin)
<40 4060 6080 80100 >100
ESU ESU ESU ESU ESU Overall
Dairy cattle 37% 18% 13% 12% 7% 14%
Beef cattle 47% 32% 32% 19% 15% 33%
Sheep/goats 95% 77% 57% 64% 25% 74%
Granivores 2% 4% 1% 1% 4% 3%
Field crops 8% 6% 8% 5% 6% 6%
Vineyards 14% 5% 4% 3% 2% 3%
Other 9% 6% 8% 9% 17% 11%
Overall 38% 22% 16% 12% 6% 16%
Source: FADN France 2005 / calculations by INRA SAE2 Nantes.
10
The distributional structure of US
green box subsidies
harry de gorter
Introduction
The objective of this chapter is to provide information on the distribu-
tional structure of US green box subsidies. The extent to which payments
are made to farms of different sizes is provided as well as the impor-
tance of subsidy payments as a share of both farm and off-farm income.
We will analyze the distributional structure of payments under differ-
ent types of green box programs. The implications of this structure for
the achievement of economic, social and environmental public policy
goals are derived. Because payments tend to go to the largest farms,
sustainable development objectives such as preserving the family farm
and providing environmental services may be undermined. The chap-
ter examines the extent to which the structure of green box subsidies
distorts production and international trade. Finally, the chapter offers
some suggestions for options to reformgreen box criteria that might sup-
port sustainable development goals in developed as well as developing
countries.
Distributional structure of US green box payments
The evolution of overall US green box subsidies and its relation to the
other boxes is given in Ant on (this volume, chapter 7) and Matthews
(2006). Our analysis focuses only on payments that can potentially
be captured directly by producers. Hence, we exclude domestic food
aid to consumers, the largest share of US green box expenditures.
Table 10.1 summarizes the remaining categories of expenditures for the
base period and for each year of the implementation period through 2005
(the last year for which the US notied the WTOof its domestic support).
Total support has tripled since the base period, increasing from $7bn in
304
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306 agricultural subsidies in the wto green box
198688 to $21.2bn in 2005. The category general services constitutes
the largest share of green box expenditures, averaging $8.7bn or 49 per
cent of total expenditures. Most of these expenditures are research and
advisory services, although marketing and inspection services may be a
signicant share of these expenditures. These can have a direct impact
on the market, but the data are neither available on a commodity-by-
commodity basis or by farm size. Hence, we are unable to determine
the distributional benets of general service expenditures across farm
types.
The second category in table 10.1 is decoupled income support,
which averaged about $5.5bn per year or 31 per cent of total expendi-
tures. Although all green box expenditures are to be non-product specic,
decoupled income payments (known as AMTA or PFC payments in
the 1996 Farm Bill, but now described as Direct Payments in the 2002
FarmBill) are disbursedona commodity-by-commodity basis, depending
on historical base acreage. However, these base acres have been updated
in the 2002 Farm Bill even though this was explicitly forbidden in the
Uruguay Round Agreement on Agriculture: The amount of such pay-
ments in any given year shall not be related to, or based on, the type or
volume of production . . . undertaken by the producer in any year after
the base period. The trade-distorting effect of updating base acres is
discussed in a later section of this chapter.
The third category of expenditures in table 10.1 is environmental pay-
ments, averaging $2.2bn per year. This category has shown the largest
increase since the base period, having increased ve-fold. Most of these
environmental payments are for the Conservation Reserve program
(CRP), going directly to major eld crop farmers. However, the Envi-
ronmental Quality Incentives Program (EQIP) constitutes slightly over
10 per cent of total environmental expenditures. Half of EQIP is targeted
for livestock production practices. Hence, some environmental payments
go to livestock farmers, but the bulk is for crop farms. As the penulti-
mate row in table 10.1 shows, payments for natural disasters represent
7 per cent of total green box expenditures (mostly for crop farms),
while investment aids represent only 1 per cent of total expenditures.
To summarize, almost 50 per cent of green box expenditures are for
general services, all of which are non-product specic and for which data
by sector or farm size are unavailable. Decoupled income support is the
next big category, going to the major eld crop sectors, while most of the
remaining expenditures are for the environment and natural disasters,
the bulk of which go to crop farms.
the distributional structure of us green box subsidies 307
The different types of green box expenditures by crop sector for the
years 1998 and 2005 are summarized in table 10.2. Total government
payments were $5.7bn in 1998 and $8.7bn in 2005. The rst sub-category
gives the direct payments (decoupledincome support payments as dened
above in the WTO notications). Conservation payments are separated
out for 2005 only. Meanwhile, loan deciency payments, marketing loan
gains and certicate exchange gains are all lumped into the category
of LDPts. In 1998, decoupled payments were well over one-half of
total government payments but were only about one-third in 2005. In
some years, LDPts and countercyclical payments are zero, so decoupled
payments are the major source of government payments for crop farmers.
Conservation payments are now about $600 million per year. Other
payments represent about 10 per cent of total payments in 2005.
Net cash farm income minus government payments was 25 per cent
of total government payments in 1998, but was almost equal to total
government payments in 2005. Hence, government payments in 1998
were three times the level of farmincome derived fromthe market. Notice
that farm income was negative in 1998 for wheat and cotton/rice farms.
Data for off-farm income is also provided in table 10.2. Off-farm
income is rather stable at $17.6bn and $15.8bn in 1998 and 2005, respec-
tively. Off-farm income was 12 times farm income in 1998, but only twice
farm income in 2005. Nevertheless, off-farm income is generally a larger
source of income than that from farming.
The value of farm assets is provided in table 10.2 for 2005 only. Corn
and soybeans represent over one-half of total assets. General cash grain
farms own 28 per cent of total crop farm assets. Government payments
average about 3 per cent of farmassets in 2005, but were twice that for rice
and cotton farms. The two largest groups of farms in 2005 represented
20.5 per cent of the total number of farms, but 43 per cent of total assets.
The concentration of direct payments is very stable across commodity
sectors over time and is relatively so for total payments as well, except that
payments to wheat producers declined substantially from 1998 to 2005
while increasing sharply for corn producers.
Data on the distributional structure of government payments, total
farm income and farm numbers for all farms are given in table 10.3 for
the years 1998 and 2005. The distribution of decoupled payments relative
to total government payments for all crops is presented under the heading
Payment share in table 10.3. The rst column shows that farms with
sales of less than $50,000 in 1998 received 10 per cent of total government
payments, while farms with sales of over $500,000 received 21 per cent.
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the distributional structure of us green box subsidies 309
Table 10.3 Distribution of payments by farm size (all farms)
Payment share
1998 2005
Farm no. share Income share
(i)
decoupled decoupled
Total payments Total payments 1998 2005 1998 2005
% % % % % % % %
Farm size
<$50,000 10 9 4 2 39 39 39 33
$50,00099,999 12 12 9 8 18 17 17 11
$100,000249,999 30 29 26 27 26 23 21 17
$250,000499,999 27 27 27 28 12 13 11 16
>$500,000 21 22 34 35 5 7 12 23
(i)
Income from farm and off-farm sources excluding government payments.
Source: 1998 and 2005 USDA Agricultural Resource Management Survey.
This uneven distribution was magnied in 2005 where farms with sales
less than$50,000 receivedonly 4 per cent of the payments while farms with
sales of over $500,000 received 34 per cent of the total.
1
The distribution
of decoupled payments mirrored that of total payments, with only slight
changes in the distribution across farm sizes.
The next set of data in table 10.3 shows the farm numbers associated
with each farms sales class. Farms of less than $50,000 represented 39 per
cent of total farms yet these farms received only 10 and 4 per cent of total
government payments in 1998 and 2005, respectively. Farms in the sales
class of over $500,000 represented only 5 and 7 per cent of total farms
in 1998 and 2005, respectively, but received 21 and 34 per cent of total
government payments. As data in the nal columns show, these same
farms received 12 and 23 per cent of farm income (excluding government
payments) in 1998 and 2005, respectively. Clearly, the distribution of
farm payments is skewed towards the large farm that needs the govern-
ment payments less.
2
Large farms derive a disproportionate share of their farm income
from government payments in total. The two largest groups representing
1 This conrms the ndings of MacDonald, Hoppe and Banker (2006).
2 For a broader picture of the distribution of government payments, see gure 15 and the
discussion thereof in USDA (2007).
310 agricultural subsidies in the wto green box
17.5 (20.5) per cent of the total number of farms in 1998 (2005) received
48 (61) per cent of total government payments, but generated only 23
(39) per cent of their total income from other sources. By contrast, the
two smallest farm size groups in 1998 (2005) received only 22 (13) per
cent of the payments while earning 56 (44) per cent of total farm income
fromother activities. Considered fromanother perspective, the largest 5.1
(7.4) per cent of the farms derived over 48 (54) per cent of their income
from government payments, while the smallest 39 per cent (in both 1998
and 2005) derived only 8.9 (4.3) per cent of their income fromthis source.
The situation is somewhat different for 2005, where farm income net of
government payments is much higher than in 1998.
Large farms make signicant income from farming and so should not
need taxpayer support as much as small farmers, yet the former receive
by far the largest share of payments. As the data in table 10.2 show, total
off-farm income is three times government payments, while total income
fromfarming inthe market is only $1.4bnin1998 government payments
are over three times the total farm income from farming.
This is more easily shown in gure 10.1, where the distribution of
payments, farm income and off-farm income per farm is given for each
farm size and crop sector for 1998. Data in gure 10.1 indicate that large
farms receive much higher average per farm payment. Comparable data
for 2005 are shown in gure 10.2.
More detailed data on payment, income and farm number shares for
several individual farm sectors are given for 1998 and 2005 in table 10.4.
The situation for wheat is such that the government payment shares
are relatively even across farm sizes, but total income shares and farm
number shares are far higher for the smaller farms. This reects the
importance of off-farm income for most farms and that incomes from
farming net of government payments are not very high. The picture
for corn, rice and cotton farms is somewhat similar. Small farms make
little from farming (some sectors even lose money in some years) and
government payments are likewise small. It almost seems that small farms
use government payments to offset losses in farming, while obtaining the
most signicant share of income from off-farm sources. Large farms do
not need government payments as they make signicant prots from
farming as well as from off-farm sources.
Large farms receive more subsidies because decoupled payments are
based on historical acreages, while coupled subsidies are based on current
acreage. The concentration of subsidy payments on a per farm basis does
not strictly follow the concentration of revenues. Figure 10.3 shows how

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the distributional structure of us green box subsidies 313
Table 10.4 Distribution of total payments by farm size (%)
Payment share Income share
(i)
Farm no. share
1998 2005 1998 2005 1998 2005
Wheat
<$50,000 0.11 0.09 0.52 0.40 0.48 0.43
$50,00099,999 0.24 0.15 0.23 0.11 0.25 0.19
$100,000249,999 0.35 0.28 0.17 0.22 0.18 0.23
$250,000499,999 0.19 0.27 0.07 0.12 0.06 0.10
>$500,000 0.11 0.20 0.02 0.15 0.02 0.05
Corn
<$50,000 0.09 0.06 0.41 0.31 0.44 0.37
$50,00099,999 0.11 0.08 0.18 0.12 0.18 0.16
$100,000249,999 0.28 0.24 0.21 0.15 0.22 0.24
$250,000499,999 0.30 0.28 0.12 0.21 0.11 0.14
>$500,000 0.21 0.35 0.09 0.21 0.04 0.08
Rice
(ii)
<$50,000 0.02 0.17 0.17
$50,00099,999 0.06 0.03 0.15
$100,000249,999 0.28 0.27 0.13 0.51 0.32 0.45
$250,000499,999 0.24 0.32 0.24 0.53 0.19 0.32
>$500,000 0.40 0.41 0.43 0.05 0.17 0.24
Cotton
<$50,000
$50,00099,999
$100,000249,999 0.15 0.15 0.33
$250,000499,999 0.26 0.22 0.34
>$500,000 0.59 0.63 0.33
(i)
Income from farm and off-farm sources, excluding government payments.
(ii)
Rice and cotton combined for the year 1998.
Source: 1998 and 2005 USDA Agricultural Resource Management Survey.
government payments for the smallest group of farms are only 6 per cent
of farm revenues, increasing to 18 per cent for the middle-size group of
farms and then falling for the two largest farm sizes. Therefore, there are
elements of both progressivity and regressivity in government payments
on a revenue per farm basis.
314 agricultural subsidies in the wto green box
0.02
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0.06
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0.18
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< $50,000 $50,000$99,999 $100,000$249,999 $250,000$499,999 > $500,000
Payments/revenues
Farm size
Figure 10.3 Government payments as a share of farm revenues by farm size (2005)
Distribution of farm assets
The rst set of data in table 10.5 shows the distribution of farm assets
by sales class. As expected, the larger the farm, the higher the average
value of assets. However, farm subsidies are strictly regressive if evaluated
from the perspective of government payments as a share of the value of
farm assets. The second set of data in table 10.5 shows how government
payments as a share of farm assets increase signicantly with farm size.
For example, government payments are 0.6 per cent of farm assets for
farms with sales less than $50,000. However, for farms over $500,000
of annual sales in 2005, government payments as a share of farm assets
are 4.29 per cent, which is seven times higher than that for small farms.
Figure 10.4 summarizes the ratio of government payments to asset values
by farm size. The larger the farm, the greater the share of government
payments are to asset value. Because larger farms have a higher average
value of assets, subsidies as a proportion of assets are higher for larger
farms. Government payments are not used to offset wealth differentials,
but rather toaddtothe wealthdifferentials. This means the subsidy system
is regressive. Interestingly, the empirical results here do not corroborate
the ndings by Kirwan (2007).
Distribution of conservation payments
Because conservation payments and environmental payments in gen-
eral have increased substantially in recent years, we present data on the
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316 agricultural subsidies in the wto green box
Table 10.6 Conservation payments and farm income by farm sales
class in 2005
General
Wheat Corn Soybeans Rice Cotton Cash grains
Conservation Payments (per farm)
<$50,000 336 553 925 NA NA 328
$50,00099,999 2,867 891 789 NA NA 367
$100,000249,999 6,415 770 1,120 2,139 685 1,324
$250,000499,999 6,002 1,252 1,234 3,852 2,296 1,854
$500,000 15,693 2,151 2,286 4,519 1,873 3,861
NA =not applicable.
Source: 2005 USDA Agricultural Resource Management Survey.
0.000
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0.045
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< $50,000 $50,000$99,999 $100,000$249,999 $250,000$499,999 > $500,000
Payments/assets
Farm size
Figure 10.4 Government payments as a share of asset value by farm size (2005)
distribution of conservation payments in table 10.6. In contrast to other
subsidies, there is no clear pattern of regressivity with regard to environ-
mental payments. Overall, the pattern of payments is far less distorted
than that for the other subsidies. The multiple of per farm conservation
payments for the smallest to largest farm size category is much lower
compared to that for either total payments or decoupled payments. This
can be more easily seen by comparing the more uniform conservation
the distributional structure of us green box subsidies 317
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Wheat Rice General cash grain Cotton Soybean Corn
$250,000$499,999
(13.1% of farms)
$100,000$249,999
(23.4% of farms)
$50,000$99,999
(17.2% of farms)
<$50,000
(38.9% of farms)
>$500,000
(7.4% of farms)
Figure 10.5 Conservation payments per farm by commodity and sales class (2005)
payments in gure 10.5 to the more unequal distribution of payments in
gures 10.1 and 10.2.
Trade distortions from green box subsidies
Because payments are decoupled or linked to environmental regulations,
many economists argue that the effects of decoupled programs in the US
on production and hence on trade have been negligible (see Bursher and
Hopkins, 2003, and the background studies for that report; and Babcock
2007). Many other studies nd varying degrees of distortion, presenting
several arguments as to how payments seemingly not tied to current pro-
duction can still provide production incentives (see Ant on, this volume,
chapter 7). These mechanisms include wealth effects that impact atti-
tudes towards risk; decisions on leisure and savings; overcoming credit
constraints or other input market imperfections; and dynamic effects
including farmers expectations about future government decisions on
agricultural policy (Abler and Blandford, 2005; OECD, 2005; Goodwin
and Mishra, 2006; McDonald et al., 2006; and Sckokai and Moro, 2006).
Sumner (2005) also includes the effect of limitations on what can be
grown on program acreage on output distortions (the ruling in Brazils
WTO case on cotton that deemed US green box subsidies to be trade
distorting and therefore violating the green box criteria
3
).
However, these studies do not go far enough, because they ignore the
fact that US direct payments inthe greenbox are a classic infra-marginal
3 United States Subsidies on Upland Cotton, dispute DS267, http://www.wto.org/english/
tratop e/dispu e/cases e/ds267 e.htm.
318 agricultural subsidies in the wto green box
subsidy whereby farmers in theory are only to receive a subsidy for part of
their historical production (based on base acres and program yields).
In a recent paper by de Gorter, Just and Kropp (2008), it is shown how
infra-marginal subsidies can be as trade distorting as a fully coupled
subsidy.
4
This has major implications for green box subsidies like the US
decoupled and CRP payments. To this we now turn.
How infra-marginal subsidies can distort production
The key factor is cross-subsidization where subsidies on a production
base indirectly nance losses on all-over base production produced at
world market prices that are below the average cost of production. Until
de Gorter, Just and Kropp (2008), there had been no economic analysis
of cross-subsidization in the literature. In addition to the trade distortion
of extra-marginal output because of declining average costs, some farms
would not produce the limited amount of output entitled to the support
without it in the rst place. This deters exit, which generates an additional
source of production distortion due to infra-marginal support. Further-
more, there are other farms that wouldbe unprotable producing only the
limited amount, but would nd it protable to produce a higher amount
at the margin at world prices, but only because of the infra-marginal
support.
The issues of cross-subsidies and exit deterrence centre around infra-
marginal support where farms receive higher revenue on only a limited
amount of output. This is exactly the case for US direct payments notied
in the green box. The de Gorter, Just and Kropp (2008) paper deter-
mines the conditions under which output distortions occur due to exit
deterrence or extra-marginal output, or both simultaneously. The WTO
cases were silent about the effects on decisions to exit and determined the
distortion to be only the extra-marginal output, that is, output beyond
the quota. Cases of both positive and negative prots at the limited out-
put are analyzed, as well as when price is below either average total or
variable costs of production. It is also possible that infra-marginal sup-
port is more output distorting than an equivalent fully coupled subsidy.
4 The de Gorter, Just and Kropp (2008) paper develops a theory to conrm the outcome
of two recent high prole trade disputes brought before the WTO where higher prices
for domestic sales (which were limited by a production quota) were found to cross-
subsidize exports in the Canadian dairy and EU sugar sectors (WTO, 2002, 2004). The
paper generalizes the results and shows that cross-subsidization can occur for any type of
infra-marginal subsidy.
the distributional structure of us green box subsidies 319
The de Gorter, Just and Kropp (2008) paper presents empirical evidence
of the various sources of output distortion with cross-subsidization by
evaluating infra-marginal subsidies for US dairy farmers. Results show
that output distortions due to infra-marginal subsidies are signicant and
close to that of a fully coupled subsidy in the short run. They show that
production distortions due to exit deterrence are much higher than the
extra-marginal output distortion analyzed by the WTO.
5
How US decoupled payments distort production
Because farmers in the US are not formally required to obtain decoupled
payments, the arguments of cross-subsidization and exit deterrence does
not apply in a straightforward manner. However, there are features of
the US green box subsidies that generate cross-subsidization and exit
deterrence effects. The purpose of this section is to identify four different
mechanisms whereby US decoupled payments distort production that
have not been identied in the literature to date and are all related to the
concepts of cross-subsidization and exit deterrence.
6
First, land has to be kept in good agricultural use in order for farmers
to receive decoupled payments. A farmer necessarily incurs xed costs to
comply and so it is optimal to incur variable costs as well. It may now pay
5 The results of this paper have broad implications for several agricultural policies and for
potential trade disputes in the future and the controversy over which type of policy goes
into what box in the WTO trade negotiations. The WTO panel rulings only addressed
one aspect of cross-subsidization, or more specically, the extra-marginal output, and
failed to analyze the output distortions due to exit deterrence. In addition to all of this, the
WTOPanel only evaluated cases where prices were belowaverage total costs of production,
as variable costs were considered explicitly to be covered. Cross-subsidization can also
occur if world prices are below the average variable costs of production. Although the
two WTO cases being considered involved consumer-nanced transfers to exporters via a
production quota, cross-subsidization can occur for importers as well, and can also result
from taxpayer-nanced infra-marginal subsidies. This means that cross-subsidization and
ensuing trade distortions can arise from a wide array of policies; any policy in which
producers receive a higher per unit revenue on a limited amount of production can
potentially lead to cross-subsidization. Close examination of OECDdata shows an increase
in infra-marginal support such as countercyclical payments, payment limits per farm,
payments based on a limited amount of output or inputs (e.g. land or animal numbers),
production quotas and historical entitlements. Governments are not only moving away
from border to domestic support, the composition of domestic support itself has shifted
from fully coupled towards that only partially tied to production. Therefore, the dispute
settlement panel rulings on domestic production quotas with infra-marginal support
open the door for an array of domestic support programs to be subject to the same WTO
disciplines.
6 These arguments also apply to payments under the CRP and EQIP.
320 agricultural subsidies in the wto green box
D
NA
D
A
D
A
D
'
NA
L* L
a
b
P
A
P
NA
c
distortion
L
A
A = allowed
NA = not allowed (fruit and vegetables plus all
other non-agricultural uses of land)
'
'
Figure 10.6 Effect of land restrictions with decoupled payments as demand for not
allowed land expands
for the farmer to produce when he or she otherwise would not (de Gorter
and Chau 2005). If these costs were not incurred, the most protable
option may have been to keep the land idle.
Second, there is the restriction that no land receiving payments is to be
used in the production of fruit and vegetables. Some land that otherwise
would be in fruit and vegetable production now remains in crop produc-
tion. Because farmers are not allowed to produce fruit and vegetables, this
means they have to produce other crops. This acts as an infra-marginal
subsidy. The effects of the combined restrictions of keeping land in good
agricultural use and not in fruit and vegetable production automatically
means farmers have to produce to receive decoupled payments and so are
infra-marginal subsidies, but only in the allowed versus not allowed
acreage decision. In other words, decoupled payments cross-subsidize
crop production that otherwise would have been in not allowed acreage
like fruits and vegetables, forest, recreational and other uses.
Third, the decoupled payment becomes a coupled distortion if decou-
pled subsidies were converted from coupled subsidies or over time the
demand for not allowed land expands. This can be shown in gure 10.6.
the distributional structure of us green box subsidies 321
Initially, before any subsidy, the equilibrium amount of land between
allowed and not allowed uses is given by L

(point a). A decoupled

subsidy for land shifts the demand for land down to D
A
, but because of
land-use restrictions, land use does not change (the price of allowed
land goes down by the subsidy). However, if over time the demand for
not allowed land increases (as it has in the US), then the observed
amount of land in allowed uses may not change, but the new demand
for not allowedland may intersect at point c. Consequently, eventhough
observed land use has not changed, the unobserved distortion is given by
the distance L to L

.
Fourth, and perhaps most importantly, there are two features of US
decoupled payments that effectively require farmers to produce in order
to receive the payments:
1. base acres and program yields are updated; and
2. farm operators by law receive payments (not the landowner who owns
the rights to decoupled payments).
The implication of updating is that there is some positive probability that
extra acres will help in the future. Hence, farmers are acting as if they have
to produce to obtain the payments. The implication of the requirement
that farm operators receive the payments is that if they do not produce,
they do not receive any payments. Because recent research has shown
that only 20 to 25 per cent of decoupled payments are capitalized into
land rental values (Kirwan, 2005), it follows that farm operators have
every incentive to produce in order to receive the payments. Therefore,
both features of updating and farm operators receiving the payments
automatically make the entire decoupled payment a bona de infra-
marginal subsidy for the within land allowed production decisions.
The US decoupled program therefore causes production distortions
due to cross-subsidization and exit deterrence effects as discussed in
the previous subsection. In theory, these distortions can be greater than
an equivalent amount of money spent on a fully coupled subsidy. The
outcome is anempirical question, depending onthe farmsize distribution
and corresponding cost structures.
Concluding remarks
Green box subsidies for agricultural production in the US have tripled
since the base period (table 10.1). In addition to describing the different
322 agricultural subsidies in the wto green box
components of green box spending that goes directly to producers, this
chapter analyzes the distribution of payments by program. The major
ndings of this study are as follows:
r
The concentrationof commodity subsidies has changedlittle for decou-
pled payments between the two years analyzed (1998 and 2005), but all
other payments have increased substantially for corn and declined for
wheat.
r
Although we expect large farms to receive more revenues because pay-
ments are based on current or historical production, we nd that the
concentration of subsidy payments does not closely reect the concen-
tration of revenues and assets:
payments as a share of revenues is highest for the middle-size farm
group and is lower as farm sizes decline and increases relative to
medium-sized farms;
payments as a share of the value of farm assets increase sharply as
farm size increases.
r
Because subsidies as a proportion of assets are lower for lowasset farms,
the subsidy system is regressive.
r
20 per cent of farms received 62 per cent of total government payments
and hold 43 per cent of total farm assets in 2005.
The key question is to what extent do green box payments to producers
in the US distort production, thereby impacting adversely on developing
countries? Although many economists argue that green box payments
are minimally distorting (for example, Bursher and Hopkins, 2003;
Babcock, 2007), several studies have shown them to be quite trade dis-
torting by way of risk reduction and wealth effects, expectations for
more support because of a change in rules and the relaxation of input
constraints (for example, see Ant on, this volume, chapter 7).
The analysis in this chapter extends the analysis of green box payment
effects on production by summarizing the paper by de Gorter, Just and
Kropp (2008) onhowinfra-marginal subsidies (like decoupled payments)
can increase output by either increasing farm numbers and/or output per
farm by cross-subsidization or exit deterrence (or both). This leads to
four major factors on how green box payments can distort output that
hitherto has been ignored in the literature:
1. Land is required to be kept in good agricultural use (farms incur
xed costs, so it is optimal to incur variable costs).
the distributional structure of us green box subsidies 323
2. There are fruit and vegetable planting restrictions (and more land in
crop production as a result). In addition, both aspects above imply
green box payments to be an infra-marginal subsidy for the allowed
versus not allowed (fruit and vegetables and all non-agricultural)
land decisions. This means that production is distorted.
3. Base acres and program yields are updated and farm operators are
required to receive the payments. This means that farmers have to pro-
duce to get the payments and so infra-marginal production distortions
occur for the within allowed land acreage decisions.
4. Demand for not-allowed land expands over time. This generates a
production distortion (most of which may be unobserved).
The implication is that economists have to look beyond the marginal
decision lens to understand the potential distortions arising from green
box payments.
However, the switch from a coupled to a decoupled program is under-
taking a signicant step in the right direction of trade liberalization.
Ideally, governments would give a one-time unconditional payment, a
subsidy buy-out, to all those engaged in farming or deemed in need
of compensation as an annuity (bond) that is non-transferable to the
farmers successors and non-renewable. However, the decoupling expe-
rience shows that there can be problems because of both the design of
programs and their implementation.
7
This indicates that with anything
short of an ideal decoupling scheme, some distortions will continue.
Features that will increase the effectiveness of a slightly less than ideal
decoupling scheme include:
r
making the payment program transitory and for adjustment purposes
only;
r
imposing strict payment limitations per farm;
r
as proposed by the G-20, decoupled payments should be based on
income rather than current or historical production;
r
requiring no constraints on input use;
r
implementing credible and time-consistent policies with no changes in
the eligibility rules, payments or eligible sectors or farmers;
r
discontinuing all other coupled programs; and
r
binding payments and the time frame in the WTO to prevent back-
sliding.
7 e.g. the GAO (2004) shows how per-farm payment limitations have been ineffective in the
US.
324 agricultural subsidies in the wto green box
The disciplines in the WTO on domestic support and WTO Panel rul-
ings have not been effective in both including all distorting mecha-
nisms andinducing compliance. Effective andbalanceddomestic-support
reductions will require major changes in the current methods of mea-
surement and classication, as well as strong commitments to reduce
trade-distorting support. Therefore, the WTO should consider other
options. For example, because of the WTO Cotton Panel ruling, pre-
viously product-specic direct-income payments to farmers in the green
box should be distinguished fromexpenditures for public goods. The for-
mer should be reported as part of the amber box. The green box should
be maintained for expenditures that provide public goods or prevent
negative externalities.
References
Abler, David and Blandford, David (2005), A Review of Empirical Studies of the
Acreage and Production Response to US Production Flexibility Contract
Payments under the FAIR Act and Related Payments under Supplementary
Legislation, AGR/CA/APM(2004)21/FINAL, 30 March, OECD, Paris.
Alston, J. M. (2007), Benets and Beneciaries fromUS FarmSubsidies, AEI Agri-
cultural Policy Series: The 2007 Farm Bill and Beyond, American Enterprise
Institute.
Babcock, Bruce A. (2007), Money for Nothing: Acreage and Price Impacts of US
Commodity Policy for Corn, Soybeans, Wheat, Cotton, and Rice, AEI Agri-
cultural Policy Series: The 2007 Farm Bill and Beyond, American Enterprise
Institute.
Bursher, Mary E. and Hopkins, Jeffrey (eds.) (2003), Decoupled Payments:
Household Income Transfers in Contemporary US Agriculture, AER-822,
US Department of Agriculture, Economic Research Service, February.
de Gorter, H. and Chau, N. (2005), Disentangling the Consequences of Direct Pay-
ments in Agriculture on Fixed Costs, Exit Decisions and Output, American
Journal of Agricultural Economics 87 (No. 5, December): 11741181.
de Gorter, H. and Cook, D. (2006), Domestic Support in Agriculture: The Struggle
for Meaningful Disciplines, chapter 7 in Newfarmer, R. (ed.), Trade, Doha
and Development: A Window into the Issues, Washington, DC, World Bank.
de Gorter, H., Just, D. R. and Kropp, J. D. (2008), Cross-subsidization Due to Infra
Marginal Support inAgriculture: AGeneral Theory and Empirical Evidence,
American Journal of Agricultural Economics 89 (No. 1, January).
GAO (US General Accounting Ofce) (2004), Farm Program Payments: USDA
Needs to Strengthen Regulations and Oversight to Better Ensure Recipients
Do Not Circumvent Payment Limitations, Publication No. GAO-04407,
Washington, DC, April.
the distributional structure of us green box subsidies 325
Goodwin, Barry K. and Mishra, Ashok K. (2006), Are Decoupled Farm Program
Payments Really Decoupled? An Empirical Evaluation, American Journal of
Agricultural Economics 88 (No. 1, February): 7389.
Kirwan, Barrett E. (2005), The Incidence of US Agricultural Subsidies on Farm-
land Rental Rates, Working Paper 0504, Department of Agricultural and
Resource Economics, University of Maryland.
(2007), The Distribution of US Agricultural Subsidies, AEI Agricultural Policy
Series: The 2007 Farm Bill and Beyond, American Enterprise Institute.
Matthews, Alan (2006), Decoupling and the Green Box: International Dimen-
sions of the Reinstrumentation of Agricultural Support, Paper presented to
the 93rd EAAE seminar Impacts of Decoupling and Cross Compliance on
Agriculture in the Enlarged EU, 2223 September.
MacDonald, James, Hoppe, Robert and Banker, David (2006), Growing Farm
Size and the Distribution of Farm Payments, Economic Brief No. 6, US
Department of Agriculture, Economic Research Service, Washington, DC.
McDonald, D., Nair, R., Podbury T. et al. (2006), US Agriculture without Farm
Support, ABARE Research Report 06.10, September, Canberra.
OECD (2005), Decoupling: Illustrating Some Open Questions on the Production
Impact of Different Policy Instruments, AGR/CA/APM(2005)11/FINAL,
3 May, Paris.
Sckokai, Paolo and Moro, Daniele (2006), Modeling the Reforms of the Common
Agricultural Policy for Arable Crops under Uncertainty, American Journal
of Agricultural Economics 88 (No. 1, February): 4356.
Sumner, D. (2005), Boxed In: Conicts between US Farm Policies and WTO
Obligations, Cato Institute Trade Policy Analysis 32, December.
USDA (2007), Agricultural Income and Finance Outlook, Economic Research Ser-
vice, Research Report AIS-85, December.
WTO(2002), Canada Measures Affecting the Importation of Milk and the Expor-
tation of Dairy Products. Second Recourse to Article 21.5 of the DSUby New
Zealand and the United States WT/DS103/AB/RW2, WT/DS113/AB/RW2,
December.
(2004), European Communities Export Subsidies on Sugar, Report of the
Panel WT/DS265/R, WT/DS266/R, WT/DS283/R, October.
PART III
Green box subsidies and developing countries
11
Agricultural subsidies in the WTO green box:
opportunities and challenges for
developing countries
andr e nassar, maria elba rodriguez-alcal a,
cinthia costa and saulo nogueira
11 years of green box usage
Perhaps because green box subsidies are not subject to commitments in
the AoA, relatively few studies have analysed expenditure in this area.
It is therefore not easy to nd studies compiling notied expenditure
and comparing situations among green box users. Although the WTO
(2000) Secretariat background paper is one exception, this study has not
subsequently been updated.
Moreover, the green box comprises different programme types and is
dividedintoseveral categories, making it evenharder tooffer comparisons
between them. Some existing analyses of green box categories focus on
decoupledincome support anddirect payments toproducers. The work of
the Organization for Economic Cooperation and Development (OECD)
is particularly worthy of mention in this respect.
This section is based on a compilation of green box notications for
a selected number of developed and developing countries. The rst part
briey introduces subsidy disciplines in the AoA and looks at traditional
greenbox policies. The subsequent sections are supportedby notications
from 1995 onwards.
Typical green box policies: legal arguments and interpretations
The AoA, established in the Uruguay Round, brought disciplines for the
use of agricultural subsidies (domestic support and export subsidies) into
the multilateral trading system for the rst time, establishing limitations
and reduction commitments. The agricultural subsidies were classied
into three categories:
329
330 agricultural subsidies in the wto green box
r
Amber box: domestic support measures that can cause distortion and
for this reason are subject to reduction commitments based on the
total aggregate measurement of support (AMS). The concept of de
minimis must also be mentioned here: this represents a minimum
subsidy allowance, which is 5 per cent of the value of production for
developed countries and 10 per cent for developing countries.
r
Blue box: disciplines related to direct payments under production-
limiting programmes that would be exempt from reduction commit-
ments.
r
Green box: programmes of domestic support measures with no reduc-
tion commitments, assuming they have no or at most minimal trade-
distorting effects. These payments include expenditures on infra-
structure, research, environment and direct payments not related to
production. The disciplines are set out in Annex II of the AoA.
Although the policies that fall within the amber box are tied to reduction
commitments, the blue box denes cases where expenditure would be
acceptable and the green box comprises permitted subsidies, since they
should have no or minimally trade-distorting effects.
The green box policies can be provided by both developed and devel-
oping countries and must be linked to publicly funded government pro-
grammes (including government revenue forgone) not involving transfers
from consumers and must not have the effect of providing price support
to producers.
In addition to the three boxes described above, there is also a separate
category that applies exclusively to developing and least developed coun-
tries (LDCs), known as special and differential treatment (SDT). This
category is not classied specically as a box, but it is often treated as such
in the discussions. The SDT includes non-reciprocal trade concessions
and exemptions to some WTO-specic disciplines and obligations.
Nevertheless, the use and misuse of policies labelled as green box by
WTO members such as the US and the EU have raised questions about
the non-trade-distorting effects of some types of subsidy notied as green
box.
In the Cotton Case,
1
for example, Brazil argued that payments made
under the production exibility contract payments (PFC) (FAIR Act
FarmBill 1996) anddirect payments (FarmSecurity andRural Investment
Act (FSRI) Farm Bill 2002) had trade-distorting effects; for this reason,
1 United States Subsidies on Upland Cotton, dispute DS267, http://www.wto.org/english/
tratop e/dispu e/cases e/ds267 e.htm.
opportunities and challenges for developing countries 331
they should have been notied as amber box and not green box. The
panel concluded that PFC and direct payments do not conform fully to
paragraph 6(b) in Annex II and thus should be notied as amber box.
Moreover, payments made as decoupled income support, which are
not linked to current production, can have trade-distorting effects, as we
discuss later. Nevertheless, through the process of box-shifting,
2
some-
times countries shift programmes from the blue box or the amber box
to the green box, without fully complying with the concept of no or
minimally trade-distorting effects.
Paragraph 16 of the WTO 2004 July Framework established a mandate
to reformulate the green box criteria in order to avoid the disguised use of
programmes that have distorting effects. Furthermore, the G-20presented
a proposal setting out the initial steps for the review and clarication of
the green box.
For the purposes of this chapter, it is important to recover the funda-
mental aspects entailed in the concept of the green box. Only subsidies
linked to social, environmental and rural development objectives must
be kept in this category.
Evolution of green box expenditure: 1995 onwards
This section analyses the notications of WTO member countries, which
are required annually, in order to understand how the green box is being
used. Unfortunately, reporting of notications is a voluntary process
for member countries, which therefore compromises transparency. In
addition, there is no formal monitoring mechanism developed by the
WTO on domestic support. Countries included in table 11.1 will be
covered in this section. As can be seen, very few of these countries have
notications for recent years.
Table 11.1 shows that delaying notications is not an exclusive habit of
developed countries.
In order to analyse green box support programmes within the perspec-
tive of total support provided, more recent data from WTO notications
were gathered to build gure 11.1. It must be noted that the years for the
most recent notications submitted by each country vary. Therefore, the
three last years notied in each case were used.
2 For the purposes of this chapter, the termbox-shifting refers tothe movement of subsidies
between boxes without fundamental reform of its trade-distorting nature.
332 agricultural subsidies in the wto green box
Table 11.1 WTO domestic support notications: periods
provided by selected countries
Member Notication period
Argentina 19952001
Brazil 19952003
Chile 19952002
China 19992001
Colombia 19952004
EU 19952001
India 19951997
Indonesia 19952000
Japan 19952003
Malaysia 19951998
Mexico 19952004
Norway 19952001
Pakistan 19951999
Philippines 19952001
South Africa 19952004
South Korea 19952004
Switzerland 19952004
Thailand 19952004
USA 19952005
Venezuela 19951998
Source: Memberss ofcial subsidy notications to the WTO.
Figure 11.1 is based on proportions from the total amount of domestic
support spent by each country, and so proportions represented in the
gure do not reect a comparison among countries of the amount spent.
For instance, the US proportion on AMS was smaller than that of some
countries, but when the total spent on AMS by the US was considered, it
was higher than all developing countries analysed.
Figure 11.1 shows that, among developing countries, with the excep-
tions of Brazil, India, Thailand and Colombia, green box expenditure
represented over 50 per cent of total domestic support during the most
recent period available, representing 11 developing countries. In the case
of the ve developed countries analysed, the US spent over 80 per cent,
Japan over 70 per cent and Switzerland over 50 per cent, while the EU
and Norway spent less than 25 per cent on green box subsidies.
opportunities and challenges for developing countries 333
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Developing countries Developed countries
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Figure 11.1 Composition of domestic support as percentage of total
Source: Members ofcial subsidy notications to the WTO; authors elaboration.
Note: for each country, an average value of its last three WTO notications was
calculated. Argentina, 19992001; Brazil, 200103; Chile, 200002; China, 19992001;
India, 199597; South Korea, 200204; Malaysia, 199698; Mexico, 200204; Pakistan,
199799; the Philippines, 19992001; Thailand, 200204; South Africa, 200204;
Colombia, 200204; Venezuela, 199698; Indonesia, 19982000; US, 200305; Japan,
200103; EU, 19992001; Norway, 19992001; Switzerland, 200204.
Note that Brazil had a strong concentration of subsidies in de minimis
support. Total AMS represented more than 20 per cent of total support for
Argentina, South Korea, Thailand, Colombia and Indonesia, and Thai-
lands share was over 60 per cent. Furthermore, in general there was no
use of the blue box in developing countries, but they have used the SDT
considerably. Of the 15 developing countries selected, about half applied
around 10 per cent of their spending in the SDT, including Brazil, India,
Malaysia, Mexico, the Philippines, Colombia and Venezuela. Among the
developed countries in gure 11.1, variations existed more in the use of
the blue box. The EU and Norway, for example, applied over 20 per cent
of domestic support in the blue box, while the US and Switzerland made
no use of the blue box.
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opportunities and challenges for developing countries 335
The general conclusion inferred from gure 11.1 is that proportions
applied by countries for different boxes varied widely. However, in the
case of the green box, usage was signicant as a whole.
In order to standardise the information, green box expenditure has
been calculated annually in proportion to the respective agricultural
gross domestic product (GDP) for each country. Figure 11.2 presents the
average for the period in which country notications are available (see
table 11.1 for notied years). It is difcult to afrm that there are sim-
ilar patterns within developed and developing countries. However, as a
general observation, developed countries have a higher level of green
box subsidies compared with developing countries. The maximum level
observed in developing countries is 22 per cent for South Korea compared
withalmost 50per cent for Switzerland. Comparing larger economies such
as the US and China, the former has spent more than the latter.
There are a noticeable number of developing countries with expen-
diture below 10 per cent in relation to their agricultural GDP. Many of
the larger agricultural producers, such as Thailand, Mexico, Brazil, India,
Malaysia, Argentina and Indonesia, are among this group.
The evolution of expenditure during the notied period is represented
by the arrows, with upward arrows showing a rising trend and downward
arrows showing a falling trend. In developed countries, the general trend
is at and stable. The higher spenders of developing countries show
stabilization, while the lower spenders have both upward and downward
trends.
Table 11.2 shows the historical expenditure, in local currency, on green
box programmes by developing countries and three developed countries
that spent the most on these measures. When converted to US dollars,
we notice that most developing countries green box expenditure is well
below that of developed countries, while for most developing countries
annual expenditure is below US$1 billion, with the exception of Brazil,
China, Korea and Thailand. Country expenditure of the US, Japan and
the EU is over US$20 billion each. Analysing this expenditure in local
currencies, we notice that most expenditure is relatively constant over
the period 1995 to 2004. Nonetheless, a few countries, such as Mexico,
the Philippines, South Africa, Thailand and Venezuela, increased their
expenditure, while Brazil, Colombia and Indonesia reduced their green
box expenditure over the same period.
Figure 11.3 shows the green box expenditure as a percentage of the
agricultural GDP of each country. The countries were separated into
four groups according to the agricultural GDP value (high and low) and
T
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opportunities and challenges for developing countries 337
High
(>US$10
billion)
High
(>10%)
Low
(<US$10
billion)
Low
(<10%)
India ($128; 2%)
Brazil ($56; 4%)
Indonesia ($36; 0.5%)
Pakistan ($20, 1.7%)
Mexico ($24; 8%)
Australia ($20; 6%)
Thailand ($16; 9%)
Argentina ($15; 1.7%)
Philippines ($13; 2%)
Colombia ($12; 1.5%)
Malaysia ($11; 2%)
China ($250; 14%)
EU15 ($205; 12%)
US ($125; 38%)
Japan ($76; 30%)
South Korea ($22; 22%)
South Africa ($6.4; 11%)
Switzerland ($4.4; 49%)
Venezuela ($4.4; 15%)
Norway ($3.6; 16%)
Israel ($1.9; 17%)
Zambia ($1.2; 16%)
Jordan ($0.3; 12%)
Trinidad and Tobago ($0.1; 16%)
Green box as % of
agriculture GDP
A
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Morocco ($7.8; 5%)
New Zealand ($7.3; 3%)
Chile ($5; 4%)
Peru ($4.7; 3%)
Kenya ($4.1; 2%)
Tunisia ($3.3; 2%)
Dominican Republic ($2.0; 2%)
Uruguay ($1.5; 3%)
Costa Rica ($1.5; 2%)
Paraguay ($1.4; 1.5%)
Honduras ($0.9; 1.1%)
Nicaragua ($0.8; 1.2%)
Jamaica ($0.5; 1.3%)
Figure 11.3 Green box expenditure and its relevance based on agricultural GDP
Source: USDA (2007); authors elaboration.
according to the percentage of green box expenditure over agricultural
GDP(highandlow). The top-right quadrant comprises the countries with
large agricultural sectors andwhere greenbox expenditure represents over
10 per cent of agricultural GDP. The top-left quadrant comprises large
agricultural producers where green box expenditure represents less than
10 per cent of agricultural GDP. The two lower quadrants have the same
division, but comprise countries where agricultural GDP is less than
US$10 billion.
1. Values in brackets are agriculture GDP in billion dollars; green box
expenditure as percentage of agriculture GDP.
2. Countries are ranked according to agriculture GDP.
3. Values are average for the period 1995 to 2005.
The rst thing to notice in gure 11.3 is that all countries, except
for China, in the top-right quadrant are developed countries, indicat-
ing clearly that they spend large amounts on green box support and
have large agricultural sectors. In the quadrant below there are also
338 agricultural subsidies in the wto green box
countries that spend signicant amounts on green box support and yet
have smaller agricultural sectors. Here we have a mix of developed and
developing countries. We notice, however, that developedcountries green
box expenditure represents a larger amount of their agricultural GDP,
such as Switzerland, where green box expenditure represents half of the
sectors GDP. Green box spending in small economies, such as Jordan and
Trinidad and Tobago, also represents over 10 per cent of the sectors GDP;
however, the actual value is almost insignicant because the GDP is very
small.
The top-left and lower-left quadrants contain countries that have much
room to increase their green box support and could gain the most from
doing so. In economic terms, the gain would be higher for the countries in
the top-left quadrant, as their agricultural sectors are bigger. These include
some of the top agricultural players, such as Argentina, Brazil, India,
Thailand, Australia and Indonesia. The two countries that are under-
utilizing green box measures the most are India and Indonesia, where
green box expenditure represents 2 and 0.5 per cent of agricultural GDP,
respectively. There is no common pattern in green box spending among
the main agricultural exporters or importers. Some relevant exporters,
suchas Chile and NewZealand, spend little onthe greenbox, while others,
such as Thailand, spend more. Similarly, net food importers have various
green box spending levels.
Dividing green box expenditure by programme
The previous section has shown that only a few developing countries
have meaningful green box expenditure in relation to the total agricul-
tural product. Apart from Australia and New Zealand, traditionally non-
subsidising countries, the situation is the opposite in developed countries.
As discussed in the next sections, the green box is comprised of different
types of programme. From the perspective of distorting effects of green
box policies on trade, special attention must be given to programmes
oriented to reducing risk effects (effects on production and effects on
farmers income) and to inuencing farmers expectations. Green box
programmes related to trade-distorting effects are direct payments to
producers, decoupled income support, government nancial participa-
tion in income insurance and income safety net. The increasing rele-
vance of payments under agri-environmental programmes makes these
policies a strong candidate for the group of trade-distorting programmes.
opportunities and challenges for developing countries 339
These are the programmes that must be analysed carefully in the green
box.
Table 11.3 shows the weight of expenditure of each green box pro-
gramme per country. In contrast to developing countries, developed
countries expenditure is spread over more different programmes within
the green box. It is clear that the largest share of developing countries
expenditure goes to general services, most representing over 60 per cent.
The programmes that seemto receive the most resources are public stock-
holding for food security, domestic food aid, payments for relief from
natural disasters and structural adjustment through investment aids. The
latter is a programme that receives many resources, representing around
30per cent of greenbox payments for countries suchas Argentina, Colom-
bia and South Korea. The public stockholding and domestic food aid
programmes have similar objectives of helping lower-income consumers
to access food. The former is imperative in India, where public stockhold-
ing of food grains (mostly rice and wheat) is crucial to managing food
supplies across the country, and to a lesser extent also in China. We notice
that in Brazil, Indonesia, the Philippines and Venezuela, these two pro-
grammes represent a noteworthy portion of green box support. In Brazil,
the Fome Zero programme and other food aid programmes to disad-
vantaged regions of the country account for 22 per cent. Nonetheless,
the actual amount provided through these programmes is small in India
and Venezuela because the monetary value paid to green box support is
relatively small.
Decoupled income support and income insurance programmes have
similar objectives to provide income support to farmers. With the excep-
tion of Mexico, where decoupled income support represents half of green
box expenditure, only Argentina and South Korea use these programmes.
Payments for relief fromnatural disasters represent small portions of total
expenditure, although they do exist in most of these countries. Besides
these, regional assistance programmes were also present in some coun-
tries, such as China, Mexico and South Africa.
There are no clear grouping similarities for developing countries
according to their spending on different green box programmes. Spend-
ing on general services is relatively low for the US and the EU, while for
Japan this represents most of the green box spending. The US spends
more on domestic food aid programmes, while the EU spends more
on agri-environmental programmes, regional assistance and structural
adjustment through investment aid programmes.
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opportunities and challenges for developing countries 341
The three developed country areas chosen are those that spend most
on the green box: the US, the EU and Japan. The WTO notications
from each of these regions do not show signicant changes in green box
expenditure, witha fewexceptions. Overall, though, notiedexpenditures
did not change signicantly: the US paid around US$50 billion on average
from 1995 to 2001; the EU increased green box spending slightly from
19 billionto20 billionfor the same period; andJapanreducedspending
from 3 billion yen to 2 billion yen from 1995 to 2004.
Looking at the specic programmes (table 11.3), we notice that the US
spends 9.1 per cent in decoupled income support, which represents a sig-
nicant volume. Even though decoupled income support payments rep-
resent only 1.7 per cent of the EUs green box expenditure, this gure will
increase signicantly whensingle farmpayments fromthe CommonAgri-
cultural Policy (CAP) reformare takenintoaccount. The EUspends 23per
cent on agri-environmental programmes. Agri-environmental spending
shouldbe studiedcarefully, because althoughthese programmes may look
harmless, they may provide indirect support to sustaining or increasing
agricultural production through time. Finally, Japan spends 5.5 per cent
on agri-environmental programmes, which also represents a signicant
amount.
Main inferences from the rst section
From the analysis presented so far, the following summary can be drawn:
r
Considering total domestic support expenditure, developing countries
spend a large portion of their total domestic support on green box
subsidies. Nonetheless, the total amount spent for all programmes,
as well as specically for green box payments by developing countries
is still very small when compared to developed countries.
r
The amount spent by developing countries ongreenboxmeasures is still
small in relation to their agricultural GDP. Therefore, these countries
have much room to increase their green box support, from which their
agricultural sectors stand to gain the most if used properly.
r
The main agricultural producers among developed countries spend
large amounts ongreenboxsubsidies, but they alsospendlarge amounts
on other types of support included in the amber box and the blue box.
Moreover, the percentage from total domestic support allocated in the
green box varies among developed countries.
342 agricultural subsidies in the wto green box
r
Within the green box programmes, developing countries tend to spend
the most on general services, while developed countries are more
diversied.
Decoupled programmes: theoretical aspects
Various analyses have been made by OECD, Oxfam, the US Department
of Agriculture (USDA) Economic Research Service (ERS) and the Inter-
national Agricultural Trade Research Consortium (IATRC), among oth-
ers, describing possible distorting effects of programmes classied in the
green box. This section offers a brief review of these studies, concluding
the general ndings so far.
Programmes in the green box not subject to trade distortion include:
(i) provision of general services, such as research, training, extension,
marketing and promotion, and infrastructure such as water supply and
drainage; (ii) public stockholding for food security purposes; (iii) income
insurance andsafety net programmes andnatural disaster relief; (iv) struc-
tural adjustment through producer and resource retirement programmes
and investment aids; and (v) payments under regional assistance pro-
grammes. These types of subsidy are very important, particularly for
developing countries, because they help agriculture to develop in order
to become more competitive, hence helping poorer farmers to compete
in a more open market. In developing countries, these types of subsidy
can help farmers compete until they reach better conditions present in
developed countries.
However, green box programmes permit developed countries to offer
decoupled income support (described in paragraphs 5 and 6 of Annex 2 of
the AoA). In the past, decoupling has been questioned as trade-distorting,
similar to programmes in the amber and blue boxes. The following dis-
cussion aims to explain these concerns regarding trade distortion. Stud-
ies analysed later in the chapter that have focused on this issue lead to
the conclusion that decoupled income support programmes should be
eliminated or at least have stronger restrictions and better scrutiny by the
WTO. According to the literature, other programme types included in the
green box should also be monitored better, such as agri-environmental
programmes and the provision of domestic food aid. It is important
to note that some agri-environmental programmes could fall under the
category of decoupled income support payments. However, the discus-
sions of decoupling and agri-environmental payments are separated in
opportunities and challenges for developing countries 343
the literature, since the latter represents a complex debate within its own
subject.
In order to understand programmes notied in the green box, it is
important to work through the domestic agricultural policies of different
countries and to try to understand the logic behind them and the impacts
that have been studied so far. Decoupling has become one of the key issues
in agricultural policy, due mainly to the international pressure originating
from the WTO rules, to which member countries have committed and
therefore are expected to comply.
In general, concerns focus on the idea that green box subsidies may
not respect the total terms described in Annex 2 of the AoA. The Cotton
Panel proved that direct payments for cottonfarmers, a decoupled income
support programme in the US, do not qualify for the green box. The
decisionwas justiedlegally considering the fact that under US legislation,
farmers planting other products such as fruit, vegetables and wild rice
were not eligible for such payments for which cotton producers qualied.
Programmes in the green box cannot discriminate against producers; that
is, programmes cannot be selective for specic agricultural products, such
as the case of cotton. However, the US is not the only country to apply this
type of discriminating policy. For instance, the 2003 CAP reform in the
EU regarding single farm payments, a green box programme, contains
restrictions on growing fruits and vegetables (European Commission,
2007).
Currently, the most important types of subsidy are those included in
the amber and blue boxes, where subsidies are coupled to price and/or
production. Because they are coupled, the bound
3
levels to these types
of programme have been negotiated emphatically in the Doha Round.
However, programmes in the green box, including decoupled income
support, have not received the same strong treatment in the negotiations
anddonot have boundlevels. This relaxedcontrol offeredby the greenbox
could be working as an incentive for developed countries to shift existing
subsidies from other boxes into the green box, hence creating similar
trade-distortion effects as programmes in other boxes. The section below
shows the evolution in the use of decoupled subsidy in the EUand the US.
The second section discusses the distortion effects of decoupled subsidies,
and the third section then describes what other studies have found on the
subject.
3 Bound represents the maximum limit that WTO member countries are allowed to apply
in subsidies and tariffs. This level for each country was established during the Uruguay
Round negotiations.
344 agricultural subsidies in the wto green box
0
10
20
30
40
50
60
70
80
90
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
U
S
$

b
i
l
l
i
o
n
Other green box programmes Decoupled income support
Blue box De minimis support
AMS
Figure 11.4 Evolution of the value spent on programmes in the green box, de
minimis, blue box and amber box in the US, 19952005
Source: Members ofcial subsidy notications to the WTO.
Evolution of the composition in decoupled income support in the
EU and the US
The US and the EU are the developed country areas causing the most
distortion in agricultural markets because of their signicant domestic
support. The more distorting subsidies are classied as amber and blue
box, which have been much contested. However, feeling the pressure
against their extensive use of the amber box and the blue box, these coun-
tries have been trying to mask distortion effects created by the subsidies
they offer. The main tool to reach this goal has been the use of decoupled
income support programmes that belong to the green box. Hence, this
strategy decreases support placed in the amber and blue boxes as notied
by countries voluntarily, but not necessarily their total spent on domestic
support or, more specically, on trade-distorting programmes. As will be
argued later, decoupled income support programmes that are part of the
green box can be distorting.
In the US, the 1996 Farm Bill introduced decoupled income support
programmes. Since that year, decoupled subsidies correspond to about
10 per cent of the total green box expenditure and 8 per cent of total
domestic support. This percentage amounts to around US$5.5 billion
(average from 1996 to 2005). Figure 11.4 shows the evolution of the
participation in decoupled income support in the US.
In the EU, decoupled programmes were not signicant until the last
notications in 2002. The average spent on decoupled subsidies in the
opportunities and challenges for developing countries 345
0
10
20
30
40
50
60
70
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
B
i
l
l
i
o
n

E
C
U
Green box (WTO) Green box (OECD) Blue box (WTO)
Blue box (OECD) Amber box (WTO) Amber box (OECD)
Figure 11.5 Evolution of the value spent on green box, blue box and amber box
programmes in the EU from WTO notications and OECD equivalent programmes
(19952005)
Sources: Members ofcial subsidy notications to the WTO and OECD (2007).
EU was 0.36 billion between 1995 and 2003. This value represents about
1.8 per cent of total green box expenditure and 0.4 per cent of total
domestic support in the EU. However, in 2003, the EUincorporated other
programmes with decoupled characteristics in its CAP reform, known as
the Single Farm Payment and the Single Area Payment programmes.
Consequently, changes in the EU domestic support programmes can be
seen only from 2005.
The OECD provides databases on total support estimate (TSE), which
include all subsidy types for selected countries. In these databases, EU
domestic support data until 2005 can be found, which is not available in
more recent WTOnotications. These data correspond with WTOnoti-
cations provided by such countries. Therefore, in order to provide a more
current analysis for the EU and to show recent changes in 2005, this study
adapts data from the OECD. Figure 11.5 illustrates the correspondence
between domestic support described in WTO notications and an effort
to harmonise the OECD database with the boxes described in the WTO.
On average, for period 1995 to 2003, about 93 per cent of the WTO data
can be matched to OECD harmonised data for green box payments. For
the blue box, the average was 86 per cent, and for the amber box (AMS),
it was 73 per cent. The reason for a larger difference in the AMS is that
the OECD harmonised data include import tariff with domestic support
under one category, whereas the WTO separates these.
346 agricultural subsidies in the wto green box
0%
20%
40%
60%
80%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Other green box programmes Decoupled income support
Blue box De minimis support
AMS
Figure 11.6 Evolution of the participation of green box, de minimis, blue box and
amber box programmes in the EU (19952005)
Sources: Members ofcial subsidy notications to the WTO and OECD (2007).
Nevertheless, during the period 2002 to 2003, the difference in the
amber box programmes between the WTO and OECD data increased.
WTOdata for 2002 to2003 correspondtoaround50 per cent of the OECD
data. Therefore, amber box data presented in gure 11.6 for the years 2004
to 2005 were calculated using OECD data as a base. Unfortunately, the
value spent with de minimis cannot be estimated for the years 2004 and
2005 using the OECD database.
Figure 11.5 shows in numbers, and Figure 11.6 illustrates by participa-
tion of total domestic support, that in 2005 the amber box and blue box
spending decreased signicantly. On the other hand, green box spending
increased. The transfer of more distorting subsidies from the amber box
and blue box to less distorting categories clearly represents a signal that
a box-shifting strategy is taking place. Furthermore, gure 11.6 presents
the participation of decoupled programmes in total support, which corre-
spondedtoalmost 40 per cent of greenbox payments in2005. As discussed
later, we question whether decoupled income support subsidies are non-
trade-distorting. Hence, a box-shifting strategy may be an intended tactic
to hide distorting subsidies in the green box.
As a result, the data adapted from OECD databases show that there is
a clear tendency in policy changes in the EU in which amber and blue
box programmes are being converted into decoupled income support
programmes belonging in the green box. The US seems to be following
the same trend towards increasing decoupling support in the future.
opportunities and challenges for developing countries 347
Wheat
Net revenue = $1 from
the market + $0.2 in
the form of subsidy,
per ha planted
Maize
Net revenue = $0.2
from the market + $1
in the form of subsidy,
per ha to produce
Total market net revenue = $13
Total subsidy revenue = $17
Before decoupling After decoupling
Wheat
Net revenue = $1
from the market
Maize
Net revenue = $0.2
from the market per
ha to produce
Total market net revenue = $21
Total subsidy revenue = $17
10 ha
15 ha
20 ha
5 ha
If subsidy is updated = $9
$30 $38
Figure 11.7 Hypothetical example of decoupled subsidies and trade-distorting effects
Furthermore, Murphy (2005) mentions that the US hopes to shift even
more of its agricultural expenditures into the green box as part of the
2007 Farm Bill: Presumably, this reects their intention to continue and
even expand decoupled income support, which is the most controversial
element of Green Box spending allowed by WTO rules (Murphy, 2005,
p. 6). She does not, however, specify why she believes the US is following
this trend.
Could decoupled subsidies be causing distortion effects?
To explain how decoupled subsidies could have similar effects as the
amber or blue boxes that is, have an impact on production and, conse-
quently, world markets we examine an example considering a hypothet-
ical farmer who produces wheat and maize. Figure 11.7 helps to illustrate
the example developed below.
Assume this farmer produces 10 hectares of wheat and 15 hectares of
maize. The farmers net revenue from market prices equals 1 monetary
unit for each hectare of wheat and 0.2 monetary units for each hectare
of maize. Hence, we know from the monetary units that wheat is more
competitive for this particular farmer.
Without any subsidies, the farmer receives a total of 13 monetary units
when revenues depend only on the market. Once subsidies are considered
(before decoupling), revenue in this farm includes that obtained from
348 agricultural subsidies in the wto green box
Policy will
not be
updated
Policy will be
updated
Policy was not
updated
Policy was updated
What actually happened What
producer
believes
SR and LR same
production
SR market-oriented
(oversubsidized)
LR less subsidy but
the producer could go
back to same production
(expectations)
SR same
production
LR market-oriented
(oversubsidized)
SR and LR market-
oriented
(oversubsidized)
1 2
3 4
Figure 11.8 Producers expectations according to policy updating
Note: LR-long run; SR-short run.
the market 13 monetary units plus that obtained from the
subsidies 17 monetary units giving a total net revenue of 30 monetary
units.
In order to qualify for a decoupled income support payment, the sub-
sidy must not be linked to current production or price. Hence, the subsidy
is calculatedusing anhistorical base periodfor plantedarea andprice cho-
sen by the government. In our example, the xed subsidy amount equals
$17. The base period then denes the xed value that a farmer receives
as a subsidy each year. In practice, farmers who were under coupled pro-
grammes, which base payments on current production and/or market
price, migrate to decoupled income support payments in order to be
qualied as green box programmes.
Going back to our example, after the move from a coupled to a decou-
pled policy, if the farmer produces more wheat than maize, for example
20 hectares of wheat and only 5 hectares of maize, then the farmers total
revenue rises. Considering that the market price does not change, the
total new revenue received by the farmer with the decoupled income
support payment is 38 monetary units.
Four possible general impacts can result from the migration of cou-
pled to decoupled programmes. We divide these into four scenarios
(gure 11.8).
opportunities and challenges for developing countries 349
Scenario 1: If the farmer considers that the base (i.e. the year chosen by
the government for planted area and price) to estimate the subsidy
will change, then the farmer may not produce more wheat, because,
from experience, the farmer knows that producing maize under the
recalculated subsidy gives the same income (21 + 9 = 30). Therefore,
the rst possible effect is that the decoupled subsidy has the same effect
as the coupled subsidy on the farmers decision. In this case, the farmer
may not decide based on market forces; rather, the farmers production
decisions may be based on the assumption that future subsidy revenues
could be updated.
In this scenario, if the producer believes that the programme will be
updated, and it actually is, in the short or long term, then the same
results appear as when the programme was coupled. In other words,
the production scenario is the same as when coupled subsidies take
place, and so the same trade-distorting effects take place.
Scenario 2: If the farmer believes that the subsidy will be updated and
the update does not occur that is, the programme is not updated
then only in the short term do coupled and decoupled situations have
the same effects. In the long term, over-subsidisation could occur in
market-oriented commodities.
Scenario 3: If the farmer believes that the subsidy will not be updated and
he or she is right, then wheat is over-subsidised. In this case, although
the farmer may produce wheat (the more competitive commodity inthe
farmers region), the commodity is subsidised in addition to receiving
a better market price. This situation makes us question whether the
decoupled subsidy may be causing similar distorting effects as the
previous subsidy programme was in the case of maize.
Scenario 4: If the farmer believes that the subsidy will not be updated and
he or she is wrong, then the farmer produces more wheat in the short
termand there is over-subsidisation. Whenthe base year is updated, the
subsidy will be reduced. This effect is a weaker argument because the
farmer can go back to producing maize in the long term, as explained
in Scenario 1.
As a result, there are two possibilities in the long term for this scenario
for production: (i) the farmer goes back to initial production considering
expectations in an increase for his or her future subsidy; or (ii) the farmer
does not change production. Only in this latter case, as described above,
do we have a reduction in subsidy; this will be market-oriented, therefore
reducing its distorting effect.
350 agricultural subsidies in the wto green box
Nowgoing back to gure 11.7, after decoupling production decisions
by the farmer in the example do not change from before decoupling
if the higher unit subsidy was already being given to a more competitive
commodity, in this case wheat.
Additionally, if there are coupled and decoupled income support pro-
grammes being applied concurrently to this same farmer, then the impact
is higher. This occurs because if the farmer receives a decoupled subsidy,
then the commodity with the coupled subsidy could be interpreted as
the more competitive commodity described above. Then there is over-
subsidisation on the commodity being subsidised in the coupled pro-
gramme and thus more distorted subsidies in place.
The example described here shows that if the green box decoupled
subsidy is given to the same farmer receiving a coupled subsidy, and the
decoupled income support payment is based on historical planted area,
then this subsidy will cause the same distorting effects as the coupled
subsidy. It is important to note that this type of policy was adopted by the
EU on a large scale under the CAP.
What do other studies say about green box programmes?
The literature review shows that concerns regarding improper use of
the green box can generally be divided into three categories: (i) decou-
pling agricultural support; (ii) agri-environmental programmes; and (iii)
indirect agricultural subsidies provided through domestic food aid. The
debate on decoupling was extensively discussed previously. This section
summarises the main points identied in the literature related to agri-
environmental programmes and indirect agricultural subsidies provided
through domestic food aid.
Agri-environmental programmes
Agricultural policies with environmental conservation objectives are gen-
erally referred to as agri-environmental programmes. Such programmes
are exempt from trade-distorting commitments and hence can be placed
in the green box. As part of such programmes, payments
4
are common in
developed countries. Additionally, such programmes are also voluntary.
Indeveloping countries, onthe other hand, agri-environmental payments
4 Agri-environmental payments are also referred to as green payments. Nonetheless, the
termgreen here is not necessarily related to the green box, but rather to the environment.
Since this chapter focuses on the green box, we will avoid using the term green when
referring to the environment in order to avoid confusion of the termbeing used in different
contexts.
opportunities and challenges for developing countries 351
are very rare, and most programmes tend to be of a mandatory type, with
very few, if any, monetary compensations offered by the government.
Hence, the discussion focuses on developed countries.
In this section, two broad concerns are discussed. First, there is the
proper placement of agri-environmental programmes in the green box;
that is, how green are these payments? The second concern, practically
non-existent in the literature, but identied in Cardoso et al. (2006),
is related to imbalances being created among farmers in the developed
world versus those in developing countries.
The rst concern relates to the idea that some agri-environmental poli-
cies being created may not have environmental objectives as the primary
goal; rather, income support is the priority. Environmental goals may
be compromised when co-existing with income support as the primary
end. This co-existence may take place within one particular programme
with concurrent objectives or among different programmes being applied
simultaneously.
There are several unresolved issues that make agri-environmental pay-
ments by far the most complex type of programme to be evaluated as
trade-distorting (ERS, 2007). The primary difculty is concerned with
measuring the trade-offs between environmental protection gains and
trade distortion. As global climate concerns increase worldwide, this
issue may become a central theme in the next WTO Round.
5
Negative
environmental externalities caused by agricultural production today are
demonstrating the need for better-planned farm practices. Nonetheless,
empirical evidence analysing the trade-offs between co-existing income
support impacts and environmental gains are still insufcient. More long-
term studies will be needed in the future, since agri-environmental pay-
ments are relatively new compared with other subsidies (Diakosavvas,
2003).
An issue that is practically non-existent in the literature, and hence
deserves further analysis, is one concerning competitive imbalances
potentially being created among farmers in developed countries as
opposed to those in developing countries. For the purposes of this dis-
cussion, we focus on the US and the EU.
The rst issue arises from the fact that a large portion of agri-
environmental programmes offered in the US and the EU are volun-
tary, while farmers in developing countries are increasingly confronting
5 It must be recalled here that issues related to environmental subsidies are not a priority
in the Doha Round, particularly when considering that other subsidies that have been in
place for longer periods and that are classied as distorting are still not resolved in this
round.
352 agricultural subsidies in the wto green box
mandatory punitive legislation. In other words, farmers in developed
countries inmany instances may choose toapply environmentally friendly
practices. On the other hand, farmers in developing countries must follow
imposed environmental measures and are punished for not doing so. An
interesting point here is that governments in developing countries often
impose new environmental restrictions on farmers in their countries fol-
lowing pressure originating in developed countries, particularly the EU.
6
It must be noted that we are not criticising or favouring any particu-
lar environmental legislation in this chapter, but we are examining how
these are treated differently and consequently unfairly among farmers in
different countries.
The second issue related to competitive imbalances, and perhaps even
more concerning, is that farmers in developed countries receive govern-
ment payments to help preserve the environment. There is nothing wrong
with spending money on protecting the environment, but this implies,
once more, that farmers in the developed world are not confronting
the true costs of polluting or preserving, which today are a real market
demand. On the other hand, farmers in developing countries not only do
not receive any payments, but also must fully bear the costs for mandatory
policies.
From a global perspective, negotiators should be questioning if this
differential treatment on incentives applied to farmers in the developing
and developed world could further impair the ability of poorer coun-
tries to compete globally in a sustainable way. In the medium or long
term, these opposing situations may increase the competitive imbalances
already seen among farmers in the developed world versus those in the
developing world. Nonetheless, it is not our purpose to provide for solu-
tions on these possible imbalances identied, but simply to highlight that
future challenges originating fromagri-environmental programmes being
created may have signicant impacts among poorer farmers in particular.
Hence, we strongly recommend further analyses on this subject.
6 This is particularly the case in agricultural competitive countries such as Brazil, Argentina
and Paraguay. Farmers in Brazil, for example, are legally obliged to preserve certain areas
(percentages vary between20 per cent of the total property to up to 80 per cent) withintheir
private property at their personal cost, with no government aid. The main environmental
pressures onfarmers inthese countries originate inthe EU, causing local politics to respond
with further punitive measures (Cardoso et al. 2006). Coincidentally, as demonstrated
previously, the EU is the top spender in agri-environmental payments included in the
green box. It is also the case for other countries, such as Colombia, Peru, Chile and some
Central American countries, that have signed or are seeking to sign a free trade agreement
with the US. Such agreements are becoming tougher on environmental restrictions.
opportunities and challenges for developing countries 353
Domestic food aid
Notications categorise foreignfoodaidanddomestic foodaidseparately.
Foreign food aid notications t under Article 10.4 of the AoA and
hence they are not relevant to our discussion of the green box. On the
other hand, countries notify domestic food aid as part of the green box,
which is of concern for this discussion. Once again, the US deserves
attention when it comes to the amount spent on domestic food aid. As
depicted earlier, on average, about 70 per cent of green box expenditure
for the US corresponds to domestic food aid (average for 1995 to 2004),
representing the largest expenditure of non-distorting programmes for
the US. Critics in the US have addressed domestic agricultural policies
as a whole, including domestic food aid programmes under the category
of food and nutrition service programmes, which represent the largest
domestic food aid expenditure in the US.
Critics in the US, particularly academics, point to the fact that the food
programmes of the US are biased towards providing income support to
some types of farmer (grain producers) and large food companies (such
as large cereal companies), by subsidising low-income consumers, hence
representing an indirect subsidy for those farmers and companies. One of
the issues raised to prove this concern is the increase in obesity in the US.
Although obesity cannot be blamed solely on food programmes, there
are suggestions that such programmes have contributed to the increase
in obesity in the US. The rationale behind this issue is that if these
programmes focused truly on nutrition, then obesity should have been
a more relevant factor behind the programmes, particularly considering
that obesity has been rising among the most low-income families that
is, those who qualify for and use such programmes.
In general, we would like to point out that better scrutiny is necessary.
Nonetheless, the WTO does not possess a monitoring mechanism that
could control these issues more rigidly, and hence the need for reforms
under food aid is evident.
Revision of the Doha Round proposals for the green box
The proposals presented by members, the documents prepared by the
WTOs General Council andmore recent documents preparedby Falconer
regarding the green box will be analysed in this section. Ambassador
Crawford Falconer, the Chair of the WTOs Committee on Agriculture
during the Doha Round negotiations, has been in charge of evaluating
354 agricultural subsidies in the wto green box
the proposals ofcially presented at the table by various WTO members.
After such evaluations take place, the Chair submits documents in the
name of the Committee on Agriculture. Such documents aim to merge
different members interests into a single document.
It is important to note that the fact that certain topics have not been
covered properly or completely by Falconer in recent documents, accord-
ing to our perspectives analysed here, does not imply that he will not
address them in the near future, as is expected. Once future documents
are made public by the Chair, they must be considered concurrently with
our analysis in order to offer a broader view of impacts from the Doha
negotiations.
There is no specic provision in the 2004 August Framework
Agreement
7
on the issue of what to do with the green box. The para-
graph regarding the green box states the following:
16. GreenBox criteria will be reviewed and claried witha viewto ensuring
that Green Box measures have no, or at most minimal, trade-distorting
effects or effects on production. Such a review and clarication will need
to ensure that the basic concepts, principles and effectiveness of the Green
Box remain and take due account of non-trade concerns. The improved
obligations for monitoring andsurveillance of all newdisciplines foreshad-
owed in paragraph 48 below will be particularly important with respect to
the Green Box (WTO, 2004).
Inparagraph48 of this text, the General Council of the Trade Negotiations
Committee (TNC) writes about monitoring and surveillance:
48. Article 18 of the Agreement on Agriculture will be amended with a
view to enhancing monitoring so as to effectively ensure full transparency,
including through timely and complete notications with respect to the
commitments inmarket access, domestic support andexport competition.
The particular concerns of developing countries in this regard will be
addressed (WTO, 2004).
The Hong Kong Ministerial Declaration of 2005 did not advance on
issues regarding the green box. It only reafrms the 2004 Frameworks
declaration. As a result, discussions in the Doha negotiations focus on
modications in Annex 2 to ensure the purpose described above. There
are, however, some declarations and proposals on the table in the Doha
Round negotiations regarding the green box. These documents can be
divided into two groups. The rst group is established by developing
7 The 2004 August Framework Agreement is a detailed complete document submitted by
the WTO General Council and represents a good starting point for our analysis.
opportunities and challenges for developing countries 355
countries where proposals have the intention to discipline bad use of
subsidies notied in the green box by developed countries. Proposals pre-
sented by developing countries came from two groups: the G-20 (WTO,
2005a) and the African Group (WTO, 2006b).
The second group comprises developed countries that defend the
greater use of subsidies in the green box. Proposals and declarations from
developed countries include the US (WTO, 2006a), the G-10 (WTO,
2006c) and the EU (WTO, 2005c). Canada presented a proposal as well
(WTO, 2005b), but such a document does not add much to the original
2004 Framework, since it neither approves what developing countries are
presenting nor contests developed countries ideas.
In addition, the last paper submitted by Falconer was written after the
interruption in the Doha negotiations, between July 2006 and February
2007. In this text, divulged on 17 July 2007, the Chair synthesises the main
proposals and discussions present so far (WTO, 2007a). This is the most
recent evolution in discussions concerning reforms in the green box in
Doha.
The G-20s proposal wants more discussion on green box subsidies.
This proposal begins by explaining the need to reform the green box.
The main reasons presented are related to misuse of the green box by
developed countries and the need to adapt the box better to developing
countries policies.
The G-20s concerns are very similar to the considerations described in
the literature review discussed in the section regarding decoupled income
support programmes. For instance, as this category of subsidy is not
subject to reduction commitments, the G-20 points out that this is a
aw that generates incentives for members to notify distorting support
programmes as green, consequently encouraging box-shifting of already
existing programmes. When such behaviour takes place, the distorting
nature of the support remains the same, no matter what box it is placed
in.
Furthermore, the G-20 justies that decoupled income support pro-
grammes included among direct payments distort due to the follow-
ing identied reasons: (i) these payments are not transitory measures,
hence creating long-termeffects on production; (ii) the practice of updat-
ing reinforces farmers expectations on protectionist government policy,
thereby inuencing their future productiondecisions; and(iii) the incom-
plete decoupling, inthe formof exclusionof certaincrops for determining
eligibility to receive decoupled income support payments, or in the form
of coupled support programmes implemented concurrently with green
356 agricultural subsidies in the wto green box
box direct payments for the same product, continue to inuence farmers
production decisions. The G-20s proposal, however, does not provide
suggestions for reform; rather, it simply points to the need for reform.
It discusses negative impacts in relation to neither food aid nor agri-
environmental programmes, and hence the focus is more on decoupling.
Some vague G-20 proposals on reforms in direct payment include that
payments shall not be linked to production levels or any other criteria. For
decoupled income support, the G-20 states that the base period shall be
unchanging as well as xed. Another important item states that payments
shall not be made in conjunction with AMS support and the blue box
if the sum of such support exceeds a certain percentage of the annual
value of production of a given product. This percentage shall be limited
and shall not be high. The objective, then, is to discipline this type of
decoupled income support among developed countries.
Regarding the reform in Annex 2 to adapt the green box to the policies
of developing countries, the G-20 proposal includes agrarian, land and
institutional reform in general services. The G-20 suggests emendations
in payments to income insurance and for relief from natural disasters.
These requests imply that in the case of a developing country, green box
payments shall be dened as part of national policy. The objective here is
to help developing countries to include existing programmes in this box.
The African Group believes that the review and clarication of the
green box, as described in the Framework, should achieve the same
objectives described by the G-20. The rst goal described is to ensure
that this measure has no, or at most minimal, trade-distorting effects
or effects on production. The second objective, related to the rst, is to
ensure that domestic support will not undermine (through box-shifting)
trade-distorting support by programmes notiedwithinthe greenbox. As
described above, there is fear and proof that the 2003 CAP reformis mov-
ing towards a box-shifting behaviour. Thus, the African Group appears
to be very worried about these changes in EU policies that could then
be carried among other developed countries. The African Group clearly
states its concerns for the need to reform the green box. However, the
African Group did not include suggestions as the G-20 included. Finally,
the third objective described by the African Group is to introduce the
elements necessary to reect the particular circumstances of developing
country members. In this case, they proposed very similar suggestions to
those of the G-20.
Onthe other hand, developedcountries, suchas the US andmembers of
the G-10 and EU, have been very resistant to alterations that could change
opportunities and challenges for developing countries 357
the character of, or cap, the green box and recall the limited mandate for
this exercise as demanded by developing countries, as described above.
The EU justies implementing the CAP reform in order to offer a
reduction on this scale through the WTO. As described above, this reform
has already moved 90 per cent of EU payments into the green box. But
is this really a valid justication from the EU? This afrmation could be
interpreted as a public confession of going in the wrong direction. After
all, the support value will not be reduced as stated, and if we combine this
with the analysis offered in the second section we could conclude that EU
policies being implemented will affect production and hence trade, even
if the new programmes are notied in the green box.
The US (WTO, 2006a) proposed no change in paragraph 6 of
Annex 2. Murphy (2005) also states that the US did not agree with the
word unchanged in this type of policy because its programmes vary
signicantly in different years. According to the author, this happens due
to the nature of some of the programmes, which are designed to move
with world prices.
Canadas technical discussions (WTO, 2005b) proposed some changes
in Annex 2. In general, these changes were aimed at clarifying and provid-
ing transparency to the original text. Furthermore, the Canadian proposal
addedthat denitions regarding the periodinassistance shouldbe applied
andpayments shouldhave a limitedlife inorder toavoidongoing support.
Considering the scenario described here, the Chair of the Committee
on Agriculture wrote his reference paper in 2006, where he concluded the
following main issues:
r
There is a convergence among the proposals in general services that
benets developing countries and he agreed with such suggestions.
r
The G-20 proposals to amend footnote 5 met resistance because they
could introduce trade-distorting measures in developing countries;
hence he did not agree with the G-20s suggestions.
r
He did not agree with the G-20s changes in footnotes 5 and 6, which
assist developing countries, because it is difcult to foresee the justi-
cation behind objectives on ghting hunger and rural poverty.
r
In accordance with developed countries claims, he did not accept any
changes to direct payments, as proposed by developing countries.
r
Changes proposed by developing countries for decoupled income sup-
port to discipline subsidies given by developed countries were not
recognised; he justied that there has been rm resistance to altering
the criteria in that direction.
358 agricultural subsidies in the wto green box
This study does not judge the justications presented by the Chair at that
point. Some explanations regarding proposals not accepted and described
above seem reasonable, but, as we can see, he did not accept terms that
he believed could introduce trade distortions in developing countries.
On the other hand, he did not accept terms that could clearly discipline
already existing trade-distorting subsidies used by developed countries. It
is, at least, intriguing why this discrimination was made openly between
developed and developing countries.
In July 2007, the latest paper by Falconer was made public (WTO,
2007a). In this later version, he tries to advance agricultural negotiations
that have been stuck for a long time. Nonetheless, in the green box text,
Falconer did not advance in the issues above questioned from the 2006
Chairs reference paper. Interestingly, the Chair used the word unchang-
ing in the latest text, but added: An exceptional update is not precluded,
but any such update would only be permissible where (i) the updated
base period is itself a signicant number of years in the past and (ii) the
result of the updated base period is either neutral with respect to support
to producers or reduces that support (WTO, 2007a). Thus, if developed
countries have this option, why will they not use it? The context pre-
sented by the Chair contradicts what the word unchanging intended
before.
Additionally, it is important to recall that the inclusion of the term
unchanging, as required for decoupled income support payments by
the G-20, could ensure that this type of subsidy will indeed be decoupled
fromproduction, although, as described above, it does not guarantee that
the more competitive commodity will be subsidised.
Besides this context, there is clearly a convergence among proposals
for monitoring and surveillance of the green box similar to what appears
in the literature review. Additional disciplining criteria are favoured by
many countries. The more important items described by the G-20 relate
to direct payments anddecoupledincome support policies to be subject to
notication.
The two more recent major proposals are the G-20 (WTO, 2007b) and
the Cairns Group (WTO, 2007c). Both proposals converge by establishing
that particular products that receive product-specic support from the
AMS, blue box and green box must be notied. The G-20 added that
non-product-specic support must also be reported.
Regarding this context, the Chair wrote in the last document that these
proposals have not been discussed, and he did not put this claim in his
text.
opportunities and challenges for developing countries 359
Possibilities for reforming the green box
The green box will not be reformed effectively in the Doha Round
The main argument of this section is that there is a hiatus between the
green box negotiations under the Doha Round and the effective reforms
that must be implemented in order to make the declared green box pay-
ments less trade-distorting. One assumption behind this argument is that
any reform in the green box should be focused on the misuse of the box
rather than transforming it with a view to making the green box more
adapted to the policies of developing countries.
Despite the fact that the green box needs to be reformed in order to
more precisely take into account the policies of developing countries, data
regarding developing countries usage presented in the rst section are
clear: the reform of the green box is not a prerequisite to lead developing
countries to use it more intensively; rather, these countries simply do not
have the resources and proper domestic policies to increase their use of
the green box.
Therefore, the proposals presentedby developing countries inthe Doha
Round with the objective of adjusting the green box to t their policies do
not seemto be well founded and are intended more to reduce future risks.
Thus, developing countries are using this strategy as a protective measure
trying to avoid being litigated inthe WTOinthe future. It must be pointed
out that developing countries widely accepted the current categories of
the green box in the Doha Round. However, their criticisms are more
regarding details of the legal text corresponding to those categories. This
movement among developing countries reinforces the idea that proposals
are not focused on in-depth reform of the green box.
Effective reforms are also not the objective of the proposals focused on
developed countries payments. Even G-20 proposals, which go through
the details of the legal text, were developed based on past perspectives
rather than a forward-looking view. All of the discussions regarding the
insertion of the commitment of unchanged decoupling programmes,
as discussed in the last section, are concerned with the experience learned
from the 2002 Farm Bill. However, few discussions can be found on
the topic of additional disciplines for payments that are shifted to the
green box, such as the single farm payment created by the 2003 CAP
reform, or disciplines for decoupled income support payments that are
even more restricted than only the imposition of unchanging base peri-
ods. Beyond that, no additional disciplines have been discussed for cat-
egories that seem to be the destination for future subsidies, such as
360 agricultural subsidies in the wto green box
agri-environmental programmes. Therefore, we strongly support the idea
that the focus of developing countries must be shifted towards better
disciplines, better monitoring mechanisms and better rewarding or puni-
tive methods applicable to those who follow or do not follow the rules,
respectively.
One alternative approach to effective reforms of the green box would
be based on gathering arguments in the WTO jurisprudence. However,
the jurisprudence is not much help, given that the only green box pay-
ment challenged in the WTO dispute settlement body was the US direct
payments (previous PFC) under the Cotton Case. Although the ruling
has accepted that direct payment/PFC is not a green box payment, the
reason does not support any motive for reform that is, legal restrictions
for fruit and vegetables, rather than trade-distorting impacts of those
programmes, have guided the WTOs Dispute Settlement Bodys (DSB)
decision. The Cotton Panel ruling has not affected the decisions of the US
Government so far: recently released US notications for 2002 to 2005
keepdirect payments inthe greenbox. Moreover, despite all of the detailed
work developed by the OECD on decoupled income support payments,
results from its well-founded studies have not been incorporated in the
Doha Round negotiations.
If the green box provisions of the AoA are not able to guarantee even
the boxs own corollary that they have no, or at most minimal, trade-
distorting effects or effects on production then any proposal for reform
based on the current structure of the green box, as it has been negotiated
under the Doha Round, will not have any meaningful impact.
An underlying assumption of the Doha Round negotiations is that
domestic support must be addressedina sense of priority: trade-distorting
subsidies, such as amber box, blue box and de minimis clauses, must be
disciplined in relation to the non-trade-distorting programmes in the
green box. Although this approach makes sense for the negotiations, the
opportunity for effective reforms of the green box on the Doha Round
seems to be a lost battle. The losses associated within the Doha Round
negotiations can be divided into four, as follows:
r
No meaningful reform can be expected in the green box that will
reduce trade-distorting effects of direct payments to producers, decou-
pled income support and government nancial participation in income
insurance and income safety net. Those are the programmes ori-
ented to reduce risk effects (effects on production and effects on
opportunities and challenges for developing countries 361
farmers income) and to inuence farmers expectations. The so-called
box-shifting can be observed in those programmes in both the US and
the EU (after the 2003 CAP reform).
r
No proposals have been tabled for better disciplines on agri-
environmental programmes. Although it is controversial to defend
explicitly that those programmes are trade-distorting, disciplines are
necessary in order to avoid any future trade-distorting effect that may
occur as expenditures rise. Disciplines are also necessary to mitigate the
imbalance effect with developing countries farmers, as discussed in the
second section above.
r
Trade-distorting subsidies will not be eliminated, and thus the accumu-
lation effect mentioned in the discussion on decoupling will continue
to occur.
r
No mechanism of control and surveillance will be put in place in this
round. Effective punitive andrewarding methods for members tofollow
WTO rules are strongly needed.
Directions for reform
The fact that the green box will not go through real reform in the Doha
Round is undoubted proof that any signicant reform implies a new
approach on domestic support as a whole, rather than three independent
categories (amber, blue, green), two of them being subject to commit-
ments and one being exempt. Subsidies should be split into prohibited
and questionable, amber and blue box payments being the former and
green box payments the latter. Such an approach would create the link
between the AoA and the Agreement on Subsidies and Countervailing
Measures (ASCM) that would lead to elimination of the subsidies chap-
ter of the AoA. Agricultural subsidies, therefore, would be disciplined
as any other type of subsidy. Based on this approach, the evolution of
the disciplines for the policies declared as questionable would be given
by the development of the WTO jurisprudence rather than by long and
complicated rounds of negotiation.
Using the current framework being considered in the Doha Round
for example, green box programmes with no or minimal trade-distorting
effects two options for reform would be ideal.
First, to create disciplines similar to those in use or those in the Doha
Round negotiations for the amber box and blue box, there should be an
overall ceiling to set a commitment in terms of total expenditure, with a
362 agricultural subsidies in the wto green box
focus on the most trade-distorting programmes. Those disciplines should
be applicable todirect payments for producers, decoupledincome support
and government nancial participation in income insurance and income
safety net. The Cairns Group made some proposals in that direction
before the 2004 July Framework.
Alternatively, rather than creating new disciplines in the green box,
recognised and identied trade-distorting green box programmes must
be shifted to other categories that is, the amber box or the blue box.
The Cotton Panel decision offers initial parameters to establish this sep-
aration between distorting and non-distorting subsidies in the green
box.
As a nal comment on the idea of improving mechanisms for mon-
itoring and surveillance, it is clear that this is a necessary step to create
conditions for future reform of the green box. Without lowering the evi-
dent importance of such mechanisms strongly defended by the G-20 and,
more recently, by Canada and other developed countries, the proposals
assume that green box payments are not trade-distorting and thus do not
promote additional reforms. A key variable that would promote future
reforms, and that would take advantage of the evolution of the monitor-
ing and surveillance mechanisms, is to prove, under the WTO DSB, that
some green box programmes are trade-distorting.
The green box and developing countries
If the green box will be reformed only cosmetically in the Doha Round,
then one could argue that developing countries should negotiate reforms
in order to make the provisions of the green box friendlier to policies of
developing countries. That is exactly the current situation in the Doha
Round negotiations. However, as argued earlier, the analysis of green box
expenditure by developing countries has shown that they are not mean-
ingful users for other reasons (lack of funds and inability to implement
more appropriate domestic policies to t their needs), andthere is a strong
concentration in general services programmes. Very few countries, with
the exception of Mexico, have been using other types of subsidies rather
than general services and consumer subsidies (public stockholding for
food security and domestic food aid).
It is clear that developing countries do not apply income guarantee
and agri-environmental programmes. Therefore, any new wording on
the legal text of these programmes will not stimulate those countries
to develop new programmes. This tendency of developing countries to
opportunities and challenges for developing countries 363
focus on the wording rather than on the reasons behind the low use of
the green box is common practice in local politics. It is common for
politicians to focus on changing legislation rather than spend energy on
how the current laws are being properly applied. Hence, we warn that
such strategy is going in the wrong direction and shall not be extended
to the multilateral negotiations because it contaminates discussions and
consequently diverts the negotiators energy away from where reforms
really need to be focused. In reality, the proposals for the green box from
the perspective of developing countries are oriented to create a grey area
between green box payments and Article 6.2 provisions.
We acknowledge that developing countries proposals adopt a defensive
approach. This defensive approach is reinforced by the positions of coun-
tries that are in the process of establishing a new institutional framework
for agricultural policies. For this reason, they are not yet sure of all new
policies that will be used in the near future and, as a consequence, are
seeking to protect themselves just in case. This is the case of countries
such as China. China is developing new agricultural policies and, due to
the fact that the country has no amber box entitlements, Chinese policies
must be adapted to green box programmes. For China, any meaningful
reform in the green box would create problems in the future. China is
trying to guarantee the preservation of those policies, and the green box is
fundamental to guarantee that future Chinese agricultural policies are in
line with WTO rules. Similar situations apply to other larger developing
countries, such as Brazil and India.
The analysis of green box expenditure by developing countries has
shown that many of these countries still have not reformed their domes-
tic agricultural policies, a key issue that impacts trade and negotiations
that is, the two are not independent of each other. The stronger example
is India. India, like China, has no amber box entitlements, and its poli-
cies are concentrated in the non-product-specic de minimis. This means
that Indias policies are trade-distorting. India has not gone through the
box-shifting process, reforming its policies in order to make them more
green. India is another example of a country imposing constraints on
future reforms of the green box in the Doha Round. So far, the countrys
behaviour does not clearly portray Indias intention; rather, it provides
room for more uncertainty as to what purposes are behind Indias criti-
cisms of the green box. Brazil also has its own restrictions regarding green
box reform; however, they are more associated on this thin line between
the green box and the SDT box. Both countries seem to be deliberately
acting in a less transparent behaviour with regard to their objectives in
364 agricultural subsidies in the wto green box
the reforms so far proposed. The two countries are not addressing the
issue properly, perhaps as a strategy to avoid any commitments that may
later conict with the current domestic changes that they are currently
undergoing.
Conclusions
Although decoupled income support payments can be potentially trade-
distorting, as discussed in the second section above, and the increasing
relevance of agri-environmental programmes will also change the role
of these subsidies in farmers decision-making, it cannot be denied that
green box policies are less trade-distorting than amber box and blue box
payments. From the perspective of developing countries, therefore, most
agricultural policies should be understood as green box policies. Even
without any signicant reform in the Doha Round, the green box is very
important for developing countries because the majority of their policies
fall among this boxs categories.
This chapter has shown that green box provisions are not a barrier
to more intensive use by developing countries, despite the fact that the
green box was strongly determined by developed countries policies and
objectives whenit was rst developedduring the Uruguay Round. Instead,
developing countries have not used the green box as much as they might
have done due to a lack of resources, and a lack of an ongoing domestic
reform process, rather than due to a policy-tting problem regarding
the green box criteria. The main opportunity for developing countries,
therefore, is a matter of domestic policy rather thanreforming multilateral
rules.
Challenges, however, remain huge and uncertain. Without effective
reform of the green box in the Doha Round, and with expected reduc-
tions in amber box and blue box commitments, the box-shifting process
will be stimulated and developed countries will strongly undertake this
process this chapter has proved that this is already starting to happen.
Hence, the need for clear disciplines also applies to the green box, not
only the amber and blue boxes. The two main depositaries of developed
countries box-shifting processes are income-related payments (decou-
pled income support) and agri-environmental payments. The opportu-
nity for reforming both programmes in the Doha Round seems to be
lost already, since this task requires commitments that will not be agreed
easily among countries. In addition, green box reforms are not a priority
opportunities and challenges for developing countries 365
under current negotiations taking place, particularly when we consider
that other issues for which the battle started long before the green box
concerns have still not been concluded.
Regarding decoupled income support payments, the main concern is
that such programmes are capable of inuencing a farmers decisions in
terms of products andplantedarea. Decoupledincome support payments,
therefore, are not free of effects on world trade. As a result, the inclusion
of decoupled income support programmes in the green box shall be re-
evaluated. The 2003 CAP reform will serve as an experience to better
prove empirically how distorting decoupled income support payments in
fact are. Given that improvements in the disciplines for the green box will
not take place in the Doha Round, it is expected that the disciplines will be
reinforced mainly through panels and litigation in the coming round. In
this sense, the most important proposal is the improvement of monitoring
and surveillance mechanisms. More than any wording modication of the
legal text of the green box, monitoring and surveillance shall be the main
achievement for developing countries to deal with the challenges of the
green box in the context of a new round.
Moreover, agri-environmental payments have received increased atten-
tion in recent analyses. The growing relevance given to environmental
impacts from agricultural production seems to be reaching domestic
political discussions, but with other objectives attached as well. Since
this issue has been less targeted by critics, and it is a topic too com-
plex to address in a context of trade distortion, there seems to be
room within new policy programmes being considered by developed
countries to convert traditional income support programmes into agri-
environmental payments. As a result, this conversion leads to box-shifting
strategies from the amber or blue box to the green box as a means
to minimise amounts allocated in the other two boxes, which today
have more disciplines and are being monitored more carefully by critics.
Trade distortion is perhaps the most complicated topic to argue against,
since it is extremely difcult to measure or justify trade-offs between
environmental gains and trade-distortion losses caused by these newer
programmes.
Nonetheless, the argument that any programme aimed at protect-
ing the environment shall be justied as a green box measure must be
analysed with more scrutiny, but exclusively under the idea of measur-
ing environmental benets versus trade distortion caused. Using past
experiences from trade negotiations that have clearly identied strong
366 agricultural subsidies in the wto green box
agricultural protectionism persisting in developed countries, negotiators
shall now be better prepared to move ahead in the discussion concerning
agri-environmental payments. After all, these payments are preventing
farmers in the developed world, once again, from confronting what the
market requires. This time, the market is asking farmers to take better
care of resources that are becoming scarcer as the global population has
grown, but the size of the planet remains the same. This dilemma regard-
ing better use of resources is a fact today, and protecting farmers from
confronting the dilemma may be extremely risky in the future, since this
dilemma will only worsen with time.
Furthermore, impacts from agri-environmental payment programmes
in regions such as the US and the EU could be negative for farmers in
developing countries with cumulative effects in the long term, creating a
competitive imbalance among the two worlds once more. As farmers in
developed countries receive payments to adhere to environmental restric-
tions andmany enter these programmes voluntarily their governments
are assuming environmental damages (that is, negative externalities) for
farmers, while for other sectors this is usually not the case in those coun-
tries. It is also not the case for farmers in developing countries. So why
are farmers in rich countries once more being protected by their gov-
ernments? As the green box provides room for this to happen freely,
environmental payments may become the next agricultural battle for the
coming decade as tariffs and quotas have been in past negotiations. Once
more, we note that we are not criticising or favouring any particular
environmental legislation applied to farmers in this chapter, but rather
simply identifying how such laws are treated differently and consequently
unfairly among farmers in different countries.
We summarise our conclusions by stating that reforms in the green box
are needed, although they should be focused more on monitoring and
surveillance rather than on signicant reforms of the legal text. Within the
legal text, decoupling income support programmes represent perhaps the
most urgent issue to be reconsidered. Our discussionalso signals that even
well-intentioned programmes, such as the agri-environmental payments,
are instrong needof more rigidandclearer disciplines, otherwise they may
end up being misused. Developing countries are right to ght for green
box reforms, but requests for reforms shall not be induced from their
lack of resources, from their inability to implement the proper domestic
agricultural policies or by seeking guarantees for current reforms that
they are undergoing. These are issues that correspond to their domestic
opportunities and challenges for developing countries 367
responsibilities and their ability to comply with WTO rules as well as
their responsibility to be transparent. Finally, we believe that the green
box battle for reforms will be an issue, perhaps a central one, for the next
round, but not for Doha.
References and further reading
Cardoso, F. C., Kaechele, K., Klug, I. et al. (2006), Agropecuaria Sustent avel na
Amaz onia Legal: o caso da soja, ICONE internal paper, S ao Paulo, Brazil.
Diakosavvas, D. (2003), The Greening of the WTO Green Box: A Quantitative
Appraisal of Agri-Environmental Policies in OECD Countries, contributed
paper presented at Agricultural Policy Reform and the WTO: Where Are We
Heading? Capri, Italy, 236 June.
European Commission (2007), Single Payment Scheme: The Concept,
http://ec.europa.eu/agriculture/capreform/infosheets/pay en.pdf.
ERS brieng room (2007), AoA Issues Series: Green Box Policies and the Environ-
ment, http://www.ers.usda.gov/brieng/wto/environm.htm.
Murphy, S. (2005), The United States WTO Agriculture Proposal of October 10,
2005, Institute for Agriculture and Trade Policy (IATP), Minneapolis, MN,
USA.
OECD (2007), Statistics. Agriculture and Fisheries. Producer and Consumer Sup-
port Estimates, OECD Database 19862005, http://www.oecd.org.
UNCTAD (2007), Development Indicators: Gross Domestic Product by Type
of Expenditure and by Kind of Economic Activity, http://stats.unctad.org/
Handbook/TableViewer/tableView.aspx?ReportId=1930.
USDA (2007), WTO Agricultural Trade Policy Commitments Database, WTO
Domestic Support Notications, http://www.ers.usda.gov/db/Wto/AMS
database.
WTO (2000), Green Box Measures, background paper by the Secretariat,
G/AG/NG/S/2, 19 April, WTO, Geneva, Switzerland.
(2004), Doha Work Programme, WT/L/579, 2 August, WTO, Geneva,
Switzerland.
(2005a), Review and Clarication of Green Box Criteria, G20/DS/Greenbox,
WTO, Geneva, Switzerland.
(2005b), Green Box: Clarication and Review of Criteria. Detailed Technical
Discussions, WTO, Geneva, Switzerland.
(2005c), Making Hong Kong a Success: Europes Contribution, WTO, Geneva,
Switzerland.
(2006a), United States Communication on Domestic Support, JOB(06)/80,
WTO, Geneva, Switzerland.
(2006b), Review and Clarication of the Green Box, TN/AG/GEN/15, African
Group, WTO, Geneva, Switzerland.
368 agricultural subsidies in the wto green box
(2006c), G-10 Positions on Domestic Support, WTO, Geneva, Switzerland.
(2007a), Draft Modalities for Agriculture, JOB(07)/128, 17 July, WTO, Geneva,
Switzerland.
(2007b), Improving Monitoring and Surveillance Mechanisms, JOB(07)97,
20 June, WTO, Geneva, Switzerland.
(2007c), Cairns Group Proposal Improving Monitoring and Surveillance,
JOB(07)88, 11 June, WTO, Geneva, Switzerland.
12
Use of green box measures by developing
countries: an assessment
biswajit dhar
Disciplining farmsubsidies has beenone of the mainobjectives of the mul-
tilateral trading system ever since agriculture was included in the negoti-
ating mandate for the Uruguay Round negotiations in 1986. The decision
to extend multilateral trade rules to the agricultural sector reected the
desire of the GATT contracting parties to rein in the market-distorting
subsidies. The negotiating mandate for the Uruguay Round was thus
adopted to improve the competitive environment by increasing disci-
pline on the use of all direct and indirect subsidies (emphasis added).
However, while agreeing to the Agreement on Agriculture (AoA), the
eventual outcome of the Uruguay Round negotiations on agriculture,
the GATT contracting parties adopted a more nuanced approach to the
disciplining of farm subsidies.
While introducing the discipline on farm subsidies, the AoA adopted a
three-tiered structure in respect of the production-related subsidies, the
so-called domestic support. The discipline was ostensibly based on the
perceived distortions caused by each of the three sets of subsidies. Thus,
subsidies that directly inuenced prices and production, including price
support measures and input subsidies, were reined in. These subsidies
had to be reduced if they exceeded the threshold, identied as the de
minimis level, and could not exceed the de minimis level if the actual
spending was below this threshold. However, subsidies that have no, or
at most minimal, trade-distorting effects or effects on production were
not subjected to any discipline. Annex 2 of the AoAidenties the subsidies
that do not introduce distortions in the market or are minimally market
distorting. In other words, WTO members are not constrained in their
ability to provide Annex 2 subsidies, or green box measures. The green
box therefore provides crucial exibilities in the farm subsidy discipline
introduced by the AoA.
369
370 agricultural subsidies in the wto green box
This chapter looks at how developing countries have utilised the ex-
ibilities that the green box has provided to WTO members. The chapter
is divided into three main sections. At the outset, it elaborates on green
box measures and discusses the limitations, if any, that these measures
impose on WTO members, and in particular on developing countries.
The discussion highlights the nature of the disadvantages that members
could face while using these measures. The second part of the chapter
discusses the implementation of green box measures by developing coun-
tries. This discussion analyses the observed trends in green box spending
by developing country members of the WTO. Finally, in the third part, the
chapter brings to the fore some of the proposals that have been presented
to address the hurdles faced by developing county members while using
green box measures.
Green box measures: A critical assessment
As stated above, WTO members are not currently required to reduce
their outlays on domestic support measures under Annex 2 of the AoA.
Two sets of criteria have been laid down for identifying the measures that
could belong to this category of domestic support. First, these measures
must have no or [have] at most minimal, trade distorting effects or
effect on production. Furthermore, green box measures should: (i) be
provided through a publicly funded government programme (including
government revenue foregone) not involving transfers from consumers;
and (ii) not have the effect of providing price support to producers. The
twin criteria are then extended by means of a fairly detailed list of several
specic farm support measures: these are described below.
Annex 2 includes government service programmes, made up of three
sets of green box measures. These are: (i) general (government) services;
(ii) domestic food aid programmes; and (iii) direct payments to produc-
ers. Several specic forms of farmsupport programme are included under
each of the three sets of green box measures as enumerated below.
General (government) services are dened as government expenditure
(or revenue foregone) on programmes which provide services or benets
to agriculture or the rural community, but which are not in the nature
of direct payments to producers or processors. The non-exhaustive list is
provided in Annex 2, which includes the following categories of support:
(i) research, including those undertaken in connection with environment
programmes or for the development of particular products; (ii) pest
and disease control, including quarantine and eradication; (iii) training
use of green box measures by developing countries 371
services; (iv) extension and advisory services; (v) inspection services;
(vi) marketing and promotion services; and (vii) infrastructural services.
Marketing andpromotionservices exclude expenditure for unspecied
purposes that couldbe usedby sellers toreduce their selling price or confer
a direct economic benet to purchasers. Expenditure on infrastructure
services would be considered as green box measures only when they are
for construction of capital works. Furthermore, subsidies to inputs or
operating costs, or preferential user charges, are also excluded.
The second set of support measures that can be used in an unhindered
manner by WTO members are those necessary to support domestic food
aid programmes. The measures that can be included in the green box are
public stockholding for food security purposes (paragraph 3 of Annex 2)
and domestic food aid (paragraph 4). Public stockholding for food secu-
rity purposes covers expenditures (or revenue foregone) in relation to
the accumulation and holding stocks of products which form an integral
part of a food security programme identied in the national legislation.
This can include government assistance to private storage of products as
a part of a food security programme. However, all such operations have
to be conducted subject to three conditions: (i) the volume and accumu-
lation of such stocks will have to correspond to predetermined targets in
relation solely to food security; (ii) the processes of stock accumulation
and disposal have to be nancially transparent; and (iii) food purchases
by the government will have to be made at current market prices and
sales from food security stocks will have to be made at no less than the
prevailing domestic market price for the product and quality in question.
An additional condition that accompanies the administration of public
stockholding for food security purposes is that if the stocks of foodstuffs
for food security purposes are acquired and released at administered
prices, the difference between the acquisition price and the external ref-
erence price will have to be accounted for in the Aggregate Measurement
of Support (AMS). External reference price for the purposes of AoA is
the average f.o.b. unit value for basic agricultural products in the case of a
net food-exporting country and the average c.i.f. unit value for the basic
agricultural product concerned in a net food-importing country. This, in
other words, implies that part of the food subsidy component could nd
itself in the AMS, which is subject to the rigours of subsidy discipline, if
the administrative prices move higher than the external reference price in
case of foodstuffs that are covered by food security measures. This con-
dition imposed on the operation of public stockholding for food security
purposes thus appears to be a serious deterrence for developing country
372 agricultural subsidies in the wto green box
WTO members who would have utilised this green box measure to put
into effect their domestic food aid programmes. It is important to empha-
sise that the conditionimposed was fundamentally awed, because it tried
to impose subsidy disciplines on activities that address critical non-trade
concerns like food security, when these disciplines were intended primar-
ily to address market distortions by setting limits on the use of egregious
farm subsidies through the AMS.
Domestic food aid is also included under the green box. Eligibility to
receive food aid is subject to clearly dened criteria related to nutritional
objectives. Domestic food aid provisions thus provide for domestic food
aid to be targeted on the basis of nutritional norms. Food aid can be
provided either directly to the eligible section of the population, or in
the form of means to allow those eligible to purchase food at market
or subsidised prices. It should, however, be mentioned that developing
countries would nd this instrument handy only insofar as they are able
to use domestic policy instruments to adapt the eligibility criteria for
receiving food aid.
1
The third broad category of green box measures, direct payments,
includes eight forms of payment. These are: (i) decoupled income sup-
port; (ii) government nancial participation in income insurance and
income safety-net programmes; (iii) payments (made either directly or
by way of government nancial participation in crop insurance schemes)
for relief fromnatural disasters; (iv) structural adjustment assistance pro-
vided through producer retirement programmes; (v) structural adjust-
ment assistance provided through resource retirement programmes;
(vi) structural adjustment assistance provided through investment aids;
(vii) payments under environmental programmes; and (viii) payments
under regional assistance programmes.
Paragraph 6 of Annex 2 provides for the grant of decoupled income
support. The relevant paragraphs specify that eligibility for payments
shall be determined by clearly-dened criteria, such as income, status as
a producer or landowner, factor use or production level in a dened and
xed base period. The use of a dened and xed base period, as well as
1 Inits statement to the General Council inNovember 1998, India stated that restrictions on
public holdings for food security purposes and domestic aid do not appear to be entirely
realistic since at times it would be impractical to insist on hard and fast criterion for
eligibility for distributing subsidized food grains, particularly in view of the geographical
spread of the vulnerable sections of society. See WTO (2000), Committee on Agriculture,
Operation of the Green Box: Issues Raised by Members in AIE chapters and Pre-Seattle
Submissions, October (G/AG/NG/S/18).
use of green box measures by developing countries 373
additional requirements that payments cannot be related to production,
domestic or international prices, or factors of production in any year
following the base period and that payments cannot be contingent on
production, are considered as playing an important role in weakening
the linkages between income support and production. The logic behind
including decoupled income support inthe exempt categories of subsidies
has been that since direct payments are based on a xed historical base
period, producers cannot affect the size of the payment through current
behaviour, and their current production will only be based on market
considerations.
Decoupled income support has been among the most contentious
green box measures, as it has been used by some of the larger subsidy-
granting members of the WTO, and in particular the US, to grant large
amounts of subsidy to producers. The US started increasing its reliance
on decoupled payments in the early 1990s, a process which has acquired
new momentum lately, as evidenced by the most recent Farm Bill. This
proposes that subsidies for some key crops be shifted from the trade-
distorting amber box tothe greenbox. This phenomenonof box shifting
has allowed the US to make the most of exibilities provided by the
domestic support disciplines introduced by the AoA. In the ongoing
Doha Round negotiations, developing country members, in particular
the G-20 and G-33, have argued that the existing criteria for decoupled
payments need to be strengthened so as to prevent the large subsidisers
from box shifting. Specic proposals have been tabled, which will be
elaborated in a later section.
Three sets of measures included in the green box, namely insurance
schemes, structural adjustment assistance and regional assistance pro-
grammes, can have a benecial impact on developing country agriculture
only if the provisions take into consideration the capacities of these coun-
tries to use these measures effectively. The insurance schemes included
in the green box include income insurance and income safety net pro-
grammes, as well as crop insurance schemes for relief from natural dis-
asters. However, the existing provisions have serious limitations from the
viewpoint of developing country members.
The provisions relating to income insurance and crop insurance mea-
sures are of limited use for developing country members, as a number of
stringent conditions must be met before they can be invoked. In order
to make these measures operational, agricultural producers must suf-
fer income or production losses exceeding 30 per cent of the average
gross income and production in the preceding three-year period, or a
374 agricultural subsidies in the wto green box
three-year average based on the preceding ve-year period. In case of
income insurance, the compensation claimed by the producers cannot
exceed 70 per cent of their income for the year in which the claimis made.
Compensation for production losses, on the other hand, can be made
only in respect of losses of income, livestock, land or other production
factors and cannot exceed the level required to prevent or alleviate further
loss.
The thresholds included in the above-mentioned provisions are, how-
ever, inadequate for the low income and resource-poor producers that
represent a signicant part of the agricultural landscape in most develop-
ing country WTO members. For instance, the requirement that income
insurance schemes only become operational after producers suffer a 30 per
cent income loss is far too high for poor producers. This problem in the
use of the income andcropinsurance programmes that wouldbe regarded
as WTO-compliant is reected in the data on implementation of green
box measures by developing countries. These programmes accounted for
less than 5 per cent of total green box spending by developing country
members during the 1995 to 2007 period.
2
The use of structural adjustment assistance provided through invest-
ment aids couldhave a salutary impact ondeveloping country agriculture,
particularly when economically disadvantaged producers are the major
beneciaries. However, eligibility for such assistance would be contin-
gent upon the fullment of the following condition: there must be clearly
dened criteria in government programmes designed to assist the nan-
cial or physical restructuring of a producers operations in response to
objectively demonstrated structural disadvantages. Developing country
members use of structural adjustment assistance throughinvestment aids
could be affected, as they would have to develop appropriate policies to
meet the condition accompanying the use of this form of green box sup-
port. That this was indeed the case is amply demonstrated by the evidence
on the implementation of green box measures by developing countries,
discussed in the following section.
Regional assistance programmes have been used by a number of devel-
oping countries for the development of backward regions. These subsidies
are nonetheless subject to several conditions, including: (i) the disadvan-
taged regions beneting from the use of regional assistance programmes
must be a contiguous geographical area with a denable economic and
administrative identity; (ii) the area must be considered as disadvantaged
2 See the following section for details.
use of green box measures by developing countries 375
on the basis of neutral and objective criteria clearly spelt out in law or
regulation; and (iii) the regions difculties arise out of more than tem-
porary circumstances. These conditions, in particular the requirement
that the disadvantaged regions need to be a contiguous geographical area,
impose limitations on the ability of developing countries to use regional
assistance programmes. Most of these countries are dotted with pock-
ets of underdevelopment, and these areas need to be addressed through
regional assistance programmes.
The above discussion pointed to several constraints that developing
country WTOmembers face in trying to take advantage of the exibilities
introduced by the AoA in the subsidies regime through the green box.
Notably, several green box measures include provisions that limit the
ability of developing countries to use these measures for the development
of their agricultural sector. Developing countries green box spending
thus remains focused on a few categories of measures, an issue which is
discussed further in the following section.
Trends in the use of domestic support measures by
developing countries
The following discussion will rst focus on the broad tendencies that
can be identied as characterising farm subsidy spending by developing
country WTO members. This sets the context for the analysis of green
box subsidies in the subsequent section.
The analyses of developing country WTO members
3
use of domestic
support measures are based on the data that they have provided in their
notications to the Committee on Agriculture until the end of September
2007. The available data shows that the use of domestic support was lim-
ited to 48 developing countries.
4
Fifty-six developing country members
did not report grant of this form of farm subsidy since the inception of
the WTO. Importantly, 29 of 32 least developed country WTO members
appear in this group.
3 Developing countries exclude OECDMember States and the Eastern European countries
that are usually identied as economies in transition.
4 Forty-seven of these countries had indicated the monetary value of domestic support in
their notications. However, Burundi, while indicating that it was providing subsidies to
resource-poor farmers under the provisions of Article 6.2, did not mention the value of
the subsidies. The discussion is therefore limited to 47 countries.
376 agricultural subsidies in the wto green box
Countries that did do not show any spending on domestic support
measures can be divided into two sets: 17 countries submitted noti-
cations declaring that they had not provided domestic support to their
agricultural sector, while the remaining countries did not submit any
domestic support notication.
Considerable deciencies in the reporting of farm subsidies were in
evidence even among the 47 developing countries which have notied
to the WTO the magnitude of subsidies they have granted. The decien-
cies stemmed from the fact that most of these countries reported their
farm subsidies to the Committee on Agriculture for only a few years.
Twenty-six of the 47 countries had submitted their notications for ve
years or less, and perhaps more signicantly, the 35 founder members of
the WTO, which are in their 13th year as members of the organisation,
had submitted their notications for six years or less. Thus, the average
number of years for which the founder members of the WTO (i.e. those
countries that assumed membership of the organisation on January 1,
1995) have notied their farm subsidies is only six-and-a-half years. In
other words, on average, the founder members in the developing world
reported to the WTO about their farm subsidies in only half of the years
since 1995. Agricultural exporters in the Cairns Group have performed
better, submitting notications for more than seven years on average.
Only two members, namely Tunisia and Trinidad and Tobago, have sub-
mitted domestic support notications for each of the 12 years between
1995 and 2006, while 10 members have submitted their notications up
to 2004.
5
Among the other major countries that have submitted their noti-
cations for relatively few years are India and Egypt, the former having
notied for only the initial three years, i.e. 1995 to 1997. Besides these
countries, Chinas record in terms of domestic support notications has
an interesting dimension: in the only domestic support notication that
the country has submitted thus far, the magnitude of farm subsidies
for the three years prior to its accession to the WTO in 2001 has been
recorded. This, in other words, implies that China is in the league of those
developing countries that have not notied their use of domestic support
since they have assumed membership of the WTO. Tables 12.1 to 12.2
below summarise these tendencies.
A key aspect of the use of domestic support measures by developing
countries is that only three of the 32 least developed country members
5 Brazil, Colombia, Cuba, Dominican Republic, Guyana, Israel, South Africa and Thailand.
use of green box measures by developing countries 377
Table 12.1 Number of developing countries making
domestic support notications (19952007)
Developing countries making
Years domestic support notications (nos.)
1995 35
1996 34
1997 35
1998 31
1999 27
2000 24
2001 23
2002 20
2003 15
2004 13
2005 4
2006 3
2007 1
Source: Compiled from the domestic support notications of
individual members.
Table 12.2 Prominent developing country
members and the years for which domestic
support notications were made (19952007)
Members Years (nos.)
China 3
India 3
Malaysia 4
Argentina 7
Indonesia 6
Philippines 7
Brazil 10
South Africa 10
Thailand 10
Source: Compiled from the domestic support noti-
cations of individual members.
378 agricultural subsidies in the wto green box
Table 12.3 Least developed country members using
domestic support (US$ million)
Members 1995 1996 1997 1998 1999
Bangladesh 77.6 155.9 70.2 92.4 98.8
The Gambia 1.5
Zambia 112.3 60.5
Source: Compiled from domestic support notications of indi-
vidual members.
of the WTO have taken recourse to this form of farm support. Two of
these three, Gambia and Zambia, have used domestic support measures
during just one year. And, perhaps more importantly, these countries had
submitted all of their domestic support notications before the year 2000.
Table 12.3 gives further details.
The 47 countries whose domestic support notications were analysed
had all used green box measures to support their agricultural sector. The
main trends in their use of the green box are elaborated in the following
section.
Relative signicance of green box spending for developing countries
As discussed above, WTO members have carte blanche for providing gov-
ernment support for a wide range of activities, many of which are critical
for the development of their rural sector in the medium to long term.
The exibility provided by the AoA is therefore particularly benecial to
developing countries in two ways. First, it allows themto continue spend-
ing on domestic food aid programmes, thereby meeting the imperative
of providing food security to disadvantaged sections of their populations.
Second, it allows them to undertake programmes for improving rural
infrastructure, which could, in turn, address some of the structural bot-
tlenecks faced by their farm producers. The discussion below highlights
the importance accorded by developing countries to green box measures.
Green box payments represented the largest component of domes-
tic support payments of all developing countries taken together
(table 12.4). The gures in the table were obtained by excluding the
negative product-specic support that appears prominently in the noti-
cations of four countries; China, India, Pakistan and Tunisia. It should
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380 agricultural subsidies in the wto green box
Table 12.5 Share of green box measures in total spending on domestic
support (19952007)
Members Share of green box (%)
UAE, India, Peru, Tunisia, Bangladesh, Jordan <50
Colombia, Sri Lanka, Honduras, Philippines, Thailand,
Bahrain, Panama, Uruguay, Morocco, Chinese
Taipei, Costa Rica, Argentina, South Africa, Egypt
5080
Namibia, Brazil, Gambia, Venezuela, Malaysia,
Barbados, Indonesia, Chile, Oman, Paraguay, Fiji,
Cuba
>80, but <100
Botswana, Dominican Republic, Guatemala, Guyana,
Hong Kong, Israel, Jamaica, Kenya, Mongolia,
Nicaragua, Trinidad and Tobago, Zambia, Zimbabwe
100
Note: China has been excluded fromthe table since its total domestic support is less
than its green box spending, because of the presence of negative product-specic
support.
Source: Compiled from the domestic support notications of individual members.
be noted that the share of green box spending increased during the initial
years of implementation of the AoA, which was also the period which saw
the largest numbers of developing countries submitting their domestic
support notications. Green box spending by developing countries went
up from just below 60 per cent in 1995 to nearly 80 per cent in 1998.
The trend in green box spending after 1998 does not, however, reect
the reality of domestic support spending by developing countries due to
twofactors. Between1999and2001, greenbox spending was inuencedby
the presence of China. The share of China in the total green box spending
of developing countries taken together went up from over 77 per cent
in 1999 to 82 per cent in 2001. In the period since 2001, the number
of developing countries notifying their domestic support spending had
declined sharply, and by 2004, only 13 countries had submitted their
notications.
Greenbox spending was alsothe most important component of domes-
tic support spending in an overwhelming majority of countries included
in the analysis. Only in six countries did green box measures have a rela-
tively minor role to play (table 12.5). This set includes India, the country
that has the largest economically active populationdependent onthe rural
sector. At the other extreme are 13 developing countries that have only
use of green box measures by developing countries 381
taken recourse to green box measures while providing scal support to
the agricultural sector. These trends are summarised in table 12.5 above.
It should be pointed out that the relative importance of green box
spending increased over time for several prominent developing countries.
This was evident inthe case of several Cairns Groupagricultural exporters,
including South Africa and Thailand. At the same time, however, several
other countries such as Argentina, Brazil and Malaysia reduced their share
of spending on green box measures. The relative decline in green box
spending was particularly noticeable in the case of Brazil, which reduced
its spending by nearly 40 per cent between 1995 and 2004. As for China,
the countrys green box spending remained almost stagnant in the three
years for which it led domestic support notications (1999 to 2001). The
detailed trends in the share of green box spending are described in Annex
table 12.2.
However, the real signicance of green box spending can be gauged by
the magnitude of spending undertaken by individual developing coun-
tries, discussed in the section below.
Trends in developing country green box spending
The magnitude of green box support used by the 47 developing country
members between 1995 and 2007 is described in Annex table 12.1. This
demonstrates that, for most members, the use of green box measures does
not quite reect the importance of agriculture intheir national economies.
This point is further emphasised in table 12.6 below, which compares
Table 12.6 Comparison of green box spending by US, EU members and
the major spenders among developing countries (US$ billions)
Members 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
EU 14.5 18.7 20.5 21.3 21.2 20.1 18.5 19.2 24.9 n.a.
US 46.0 51.8 51.3 49.8 49.7 50.1 50.7 58.3 64.1 67.4
Brazil 4.9 2.6 3.5 2.4 1.6 1.5 1.5 0.6 0.8 0.9
China n.a. n.a. n.a. n.a. 22.3 25.1 29.3
India 2.2 2.5 2.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Thailand 1.4 1.6 1.5 1.0 1.0 1.0 1.1 1.0 1.1 1.1
Cuba 0.9 1.0 1.2 1.6 1.2 1.4 1.5 1.8 2.3 2.1
Source: Compiled fromthe domestic support notications of individual members.
382 agricultural subsidies in the wto green box
green box spending by the US and the EU with the major developing
country spenders on green box measures, namely Brazil, China, India,
Thailand and Cuba.
6
China was the only major spender on green box support from among
the developing countries, spending US$22.3 billion in 1999, US$25.1
billion in 2000 and US$29.3 billion in 2001. Interestingly, the green box
spending reported by China was only for the years immediately prior to
its accession to the WTO. Chinas reported level of green box spending
was next only to that of the US and was, in fact, larger than that of the EU
during the years for whichit has submitteddomestic support notications
(table 12.6).
However, while Chinas green box spending was comparable to that
of other major farm subsidy spenders such as the US and the EU,
Indias green box support lagged far behind. In contrast with China,
India reported green box spending that peaked at US$2.9 billion in 1997,
the latest year for which its domestic support gures are available.
The only other developing country that reported signicant green box
spending was Brazil, which provided US$4.7 billion of green box support
in 1995, the highest level of spending by a developing country during
that year. However, Brazil subsequently reduced its green box spending
considerably. In 2004, the latest year for which it submitted notications,
its green box spending had decreased to US$0.9 billion.
At least four broad observations can be made from the trends in devel-
oping country green box spending indicated in Annex table 12.1. First,
green box spending by developing countries was highly concentrated
amongst the top ve spenders.
7
In the beginning of the AoA implemen-
tation period, the top ve spenders represented about 70 per cent of total
spending by all developing country members taken together. However,
with the advent of China, the share of the top ve increased to more
than 90 per cent, with China alone representing around 80 per cent of
all developing country members green box expenditure. An important
corollary of this is that spending on this form of domestic support was
relatively insignicant for most developing country members.
Second, for a majority of countries, no clear trends in green box spend-
ing can be reported, since they notied their green box spending for
only a few years. As stated earlier, a majority of countries notifying their
6 Each of these countries had spent over US$1 billion on green box measures, and had
submitted their domestic support notications for at least three years.
7 China, Brazil, Cuba, India and Thailand.
use of green box measures by developing countries 383
domestic support did so for ve years or less, a period that is insufcient
for making any observations about possible trends.
Third, most members, other than those belonging to the Cairns Group,
providedrelatively small levels of greenbox support. For most of these, the
domestic support levels that they provided were consequently quite small,
since green box measures constituted a major share of their domestic
support spending.
The nal observation, and possibly the most signicant, is that most
developing country members decreased their green box spending over
the period for which they submitted notications. This tendency was
particularly marked in the case of certain Cairns Group members. Chile,
for instance decreased its green box spending from US$458 million in
1995 to US$216 million in 2002, while Colombia decreased its green box
spending from US$318 million in 1995 to US$74 million in 2004. Cuba
was the only WTO member to have increased its green box spending,
from US$0.9 billion in 1995 to US$2.1 billion in 2004.
The following section analyses the importance of the different cate-
gories of green box support for developing countries.
Relative importance of the green box components
The relative importance of the various green box components can be
measured by taking into consideration the share of spending in the major
greenboxcategories by developingcountry WTOmembers whichnotied
domestic support from 1995 to 2007. Table 12.7 provides the percentage
share of spending on the major components of green box support for all
47 developing country members included in this analysis.
From an analytical point of view, the gures provided in Table 12.7
are signicant only until 2004, when 13 developing country members
submitted their domestic support notications. As indicated above, the
number of countries submitting domestic support notications in the
three most recent years was down to single digits.
General services was the most important component of developing
country members green box expenditures, representing up to two-thirds
of all such payments in 2004. Spending in this category, together with
domestic food aid and public stockholding for food security purposes,
made up for more than 80 per cent of developing country WTO mem-
bers green box payments. Decoupled payments did not nd favour with
any developing country members with the exception of Malaysia and
Argentina. The former gave particular importance to this form of green
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use of green box measures by developing countries 385
Table 12.8 Focus of developing country members spending on general
services (US$ million)
Sub-components of
General
Services 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Infrastructure 37.0 38.0 36.6 34.9 59.1 61.2 61.0 40.3 27.0 29.4 8.2 5.4 6.4
Research 16.5 15.1 14.8 11.9 5.2 5.0 4.1 20.3 16.6 11.5 8.4 6.5 9.8
Total 53.6 53.1 51.5 46.8 64.3 66.2 65.1 60.6 43.6 40.9 16.6 11.9 16.2
Source: Compiled from domestic support notications of individual members.
box support, with its share increasing to nearly 77 per cent in 1999, the
most recent year for which data are available.
Quite clearly, therefore, the focus of green box payments by developing
country members remained unaltered in the period during which these
payments were notied to the WTO.
However, the pattern of green box spending indicated above is
not followed by all of the major developing country spenders. Annex
tables 12.3 to 12.7 give spending, by component, for Brazil, China, Cuba,
India and Thailand: these show that for Brazil, China and Thailand,
general services was the largest component of green box spending. Fur-
thermore, Thailand had spent only on general services in all but one year
for which it has submitted domestic support notications. In the case of
Cuba and India, the components supporting food security programmes
have been more important: in India, this component exceeded two-thirds
of total green box spending in each of the three years for which domestic
support was notied (199596 to 199798), while in Cuba, the impor-
tance of domestic food aid increased from close to one-quarter in 1995
to over one-half in 2001.
It is also important to analyse the distribution of spending between the
seven sub-components of the general services category. The notications
submitted by the 47 developing country members analysed show that
general services spending has beenfocusedonresearchandinfrastructural
services (see table 12.8). These components are arguably critical for the
development of developing country agriculture, as they determine the
medium- to long-term growth prospects of the sector. While spending
on research can help developing countries break the low-yield syndrome
that plagues many of them, spending on rural infrastructure provides the
producers with the wherewithal to maximise returns.
386 agricultural subsidies in the wto green box
However, the ve developing countries that have spent most in the
green box have varied considerably the focus of their general services
spending. Annex tables 12.8 to 12.12 provide further details.
In contrast to the broad trends in the allocation of funds under general
services, which saw infrastructure emerging as the most signicant sub-
component, only two among the ve major developing country spenders,
China and Thailand, gave importance to this sub-component. Of the
others, India allocated over 70 per cent of spending to research activi-
ties during 19971998, the latest year for which domestic support data
are available, while the focus of Cubas spending was on education and
vocational training in rural areas. More than 90 per cent of Cubas total
general services spending was on training-related activities. In Brazil, the
government allocated over one-quarter of the general services spending
to agrarian organisation.
Several broad observations can be made on the use of domestic sup-
port by developing country WTO members. First, relatively few develop-
ing countries reported domestic support spending since the Agreement
on Agriculture became effective in 1995. Available notications indicate
that, while 48 developing country members indicated the use of domestic
support measures, 56 countries indicated otherwise. Seventeen develop-
ing countries inthe latter category reported that they did not use domestic
support measures, but the remaining countries had not submitted any
notication to the Committee on Agriculture.
For a majority of developing country members, the delays insubmitting
domestic support notications have been considerable. Only 21 members
notied their domestic support measures for more than six years between
1995 and 2006. This demonstrates the major limitations in the domestic
support data that developing countries have made available through their
notications.
Greenboxmeasures were usedby all of the 47developing country mem-
bers: for all members, green box support was also the most prominent
form of support. However, barring ve developing country members, the
levels of spending for the other members were quite insignicant. Only
China had a level of green box spending that was comparable to developed
countries.
The above discussion indicates that two factors contributed to inade-
quate use of green box measures by developing countries. First, and most
obviously, developing countries suffered structural inrmities which have
prevented them from using those subsidies that would have contributed
to the development of their agricultural sectors. The resource constraints
use of green box measures by developing countries 387
that most countries in this group have faced is perhaps epitomised by the
fact that only three least developed country members of the WTO were
able to notify the use of domestic support.
Developing country members were also constrained in their use of
green box measures because of limitations imposed by a number of these
measures, as indicatedabove. Inthe ongoing negotiations for the reviewof
the AoA, several developing country members have proposed amending
Annex 2 provisions so as to provide greater opportunities for developing
countries to use AoA exibilities. This issue is explored in more depth
below.
Making green box measures more development friendly
WTO members have been confabulating on the provisions governing the
green box ever since the Committee on Agriculture began the informal
process of consultations in preparation for the review of the AoA that
was formally launched in 1999. An informal process of consultations
was initiated in 1997 through the Analysis and Information Exchange
(AIE), which provided the basis for a re-look at the green box. This
process, together with discussions in the run-up to the Seattle Min-
isterial Conference, saw developing country members highlight what
they saw as the inadequacies of green box provisions from their own
viewpoint. While some countries argued that these provisions are better
suited to developed countries,
8
others argued that green box provisions
must be amended to make them respond to the needs of developing
countries.
9
The mandate for agriculture negotiations during the current round of
negotiations agreed at the conclusion of the Doha Ministerial Conference
emphasised that the outcome of the negotiations must enable developing
8 WTO (1999), Agreement on Agriculture: Special and Differential, Non paper 2 by El
Salvador, Cuba, Honduras, Dominican Republic, Pakistan, Sri Lanka and Zimbabwe,
AIE/70.
9 This view was best articulated by Indonesia, Malaysia, Philippines and Thailand in their
joint submission to the General Council in September 1999: The criteria for the green
box category of support measures, or Annex 2 of the Agreement must be reviewed to
ensure that . . . they adequately address the trade, nancial and development needs of
developing countries. See WTO (1999), General Council, Special and Differential Treat-
ment for Developing Countries in World Agricultural Trade and the Mandated Negotia-
tions: Communication from Indonesia, Malaysia, Philippines, and Thailand, September
(WT/GC/W/331).
388 agricultural subsidies in the wto green box
countries effectively to take account of their development needs, includ-
ing food security and rural development. Given this guidance, developing
country members tabled several proposals for modifying green box mea-
sures, which address the needs of small-scale farmers. It was proposed
that, to assure these farmers survival, green box criteria should be exam-
ined and modied.
10
The discussions on the green box in the early phase of the Doha Round
negotiations found some reection in the rst draft of modalities for
further commitments prepared by the then Chairman of the Committee
on Agriculture, Stuart Harbinson.
The Harbinsonmodalities proposednewelements of special anddiffer-
ential (S&D) treatment in Annex 2 of the AoA, covering three areas. The
rst was a proposal to amend the provisions relating to public stockhold-
ing for food security purposes (paragraph 3 of Annex 2) by exempting
developing countries fromthe requirement that the volume and accumu-
lation of stocks should correspond to predetermined targets related solely
to food security. The amendment proposed by Harbinson in paragraph
3 did not address the limitation imposed on the use of this mechanism,
which was that the difference between the prices at which food stocks are
acquired and the external reference prices would have to be accounted
for in the AMS. As indicated earlier, this limitation effectively extended
a domestic support discipline, ostensibly introduced to address market
distortions, to an area addressing a non-trade concern, food security.
A feature of the Harbinson modalities was that new elements of S&D
treatment were proposed in paragraph 6 relating to decoupled payments.
This step was an exercise in futility on two counts. First, very few devel-
oping country members have used decoupled payments to support their
farm sector. Second, developing countries were more intent on intro-
ducing additional disciplines on this form of support given that their
developed country partners had gained unfair advantage in the market
for agricultural commodities by using decoupled payments.
11
Fromthe point of viewof developing country members, the Harbinson
modalities addressed only one relevant green box issue. By introducing
exibilities for developing countries, his draft tried to address the inher-
ent limitation in existing green box income and crop insurance measures,
10 WTO (2002), Committee on Agriculture, Concerns of Small-scale Farming Members:
Modication of the Criteria of Green Box: Specic Drafting Input: the Separate Customs
Territory of Taiwan, Penghu, Kinmen and Matsu, September (JOB(02)126).
11 This issue has been given prominence by the G-20. See G-20 Ministerial Declaration,
March 19, 2005.
use of green box measures by developing countries 389
namely that the thresholds beyond which these measures become oper-
ational are too high for resource-poor farmers in the developing world.
Harbinson proposed that developing countries could dene these thresh-
olds clearly in national legislation, thus devising appropriate domestic
laws that would operationalise the income and production insurance
schemes.
The discussions on the green box reviewgathered momentumafter the
July 2004 framework agreement
12
formally included a decision on these
measures. Further clarication on the contours of the review process was
provided in the Hong Kong Ministerial Declaration, which stated that
Green Box criteria will be reviewed . . . to ensure that programmes of
developing country members that cause not more than minimal trade-
distortion are effectively covered.
13
Specic proposals were submitted by developing country groups, in
particular the G-20 and the African Group. The former argued that
developing countries should be encouraged to resort more frequently
to the Green Box as preferred instrument for their agricultural policies.
The group put forth the view that the green box should be reviewed
and claried to include specic provisions designed to accommodate
developing countries agriculture and rural development programmes
aimed at alleviating poverty, promoting agrarian reform and settle-
ment policies, and ensuring food security and addressing livelihood
needs.
14
The G-20 proposed several amendments to Annex 2 that would help to
realise the development objectives stated above. The group argued for the
inclusion of an additional category of general services that would cover
programmes related to food and livelihood security and rural devel-
opment, in developing country Members, including services related to
such reform and other programmes. The group indicated that other
programmes could include settlement programmes, issuance of prop-
erty titles, employment assurance, provision of infrastructure, nutritional
security, poverty alleviation, soil conservation and resource management,
and drought management and ood control, among others.
A major component of the green box measures, public stockholding
for food security purposes, is subject to the condition that the difference
12 WTO (2004), Doha Work Programme: Decision Adopted by the General Council on 1
August 2004, August (WT/L/579), para. 16.
13 WTO (2005), Doha Work Programme: Ministerial Declaration, December
(WT/MIN(05)/DEC), para. 5.
14 G-20 Ministerial Declaration, March 19, 2005.
390 agricultural subsidies in the wto green box
between the acquisition price (for food stocks) and the external reference
price has to be included in the AMS. Developing countries have argued
that the condition imposes limits on the use of a mechanism that is
critically important to them. The G-20 tried to address this issue by
proposing that the acquisition of stocks of foodstuffs by developing
countries with the objective of supporting low-income or resource-poor
producers shall not be required to be accounted for in the AMS, in order
to give some exibility to countries operating food security programmes.
The G-20 also proposed that developing countries income and pro-
duction insurance programmes should be granted additional exibility,
with these payments being based on criteria that would be dened in
national legislation.
The G-20 has also proposed exempting developing countries from
the existing condition in paragraph 13 that requires regional assistance
programmes to benet geographically contiguous areas.
Conclusions
This chapter attempts to address two sets of issues relating to the use
of green box measures by developing country WTO members. First, it
indicates the possible constraints that may arise as developing countries
try to use the so-called exibilities provided in Annex 2 of the AoA.
Second, it analyses the use of the green box by developing countries
during 1995 to 2007.
The pattern of use of the green box by developing country members
suggests that the limiting provisions accompanying green box measures
have imposed restrictions on these members. For instance, only a few
members have usedprogrammes for public stockholding for foodsecurity
purposes and regional assistance, both of which are of critical importance
to most developing countries.
The G-20 and African Group have proposed signicant changes to
Annex 2 that would allow developing country members to make better
use of existing exibilities. The amendments proposed by these groups
need to be better focused in the ongoing discussions for them to be
accepted as a part of the nal deal.
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use of green box measures by developing countries 395

Annex table 12.3 China Composition of green box spending (%)
Components 1999 2000 2001
General services 59.2 58.3 59.9
Public stockholding for food security purposes 25.8 25.9 24.6
Environmental programmes 3.9 6.1 7.2
Regional assistance programmes 7.0 6.0 5.6
Payments for relief from natural disasters 2.7 2.6 2.5
Domestic food aid 1.4 1.1 0.3
Annex table 12.4 Brazil Composition of green box spending (%)
Components 1995 1995/96 1997 1998 1999 2000 2001 2002 2003 2004
General services 50.1 75.1 78.2 82.0 77.4 57.6 65.7 92.3 54.4 52.7
Domestic food
aid
32.6 5.8 9.4 18.0 11.9 39.6 29.4 32.9 43.3 38.8
Public
stockholding
9.2 19.0 9.8 0.0 9.0 2.7 4.9 7.5 0.7 7.3
Insurance 0.5 0.0 2.6 n.a. 1.8 0.0 0.0 0.1 1.5 1.2
Regional
development
7.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Annex table 12.5 India Composition of green box spending (%)
Components 1995/96 1996/97 1997/98
Public stockholding for food security purposes 71.5 68.3 70.3
Relief from natural disasters 5.7 17.8 15.4
General services 18.1 9.6 9.2
Structural adjustment assistance provided
through investment aids
2.7 1.5 2.6
Payment under environmental programmes 1.5 2.9 2.4
Income insurance 0.5 0.0 0.0
396 agricultural subsidies in the wto green box
Annex table 12.6 Thailand Composition of green box spending (%)
Components 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
General
services
94.7 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Domestic
food aid
5.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Annex table 12.7 Cuba Composition of green box spending (%)
Components 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Domestic food aid 26.7 33.4 28.6 18.8 37.4 48.8 50.3 49.4 41.0 39.0
General services 29.2 21.0 23.7 18.7 30.7 29.1 30.2 23.5 25.2 32.2
Regional development
aid programmes
16.9 16.6 8.0 5.1 7.7 6.0 6.5 10.5 16.5 13.6
Structural adjustment
assistance provided
through investment
aid
23.8 25.5 39.1 24.3 23.2 15.2 11.0 16.0 16.6 13.2
Natural disaster relief 3.4 3.5 0.5 33.0 1.1 0.8 2.0 0.6 0.7 2.0
Annex table 12.8 China Components of spending
on general services (%)
Components 1999 2000 2001
Infrastructure services 67.4 67.5 67.4
Other general services 13.1 13.1 13.6
Extension and advisory services 13.5 13.6 13.2
Research 2.3 2.3 2.2
Inspection services 1.5 1.3 1.7
Pest and disease control 1.9 1.9 1.7
Training 0.3 0.3 0.3
use of green box measures by developing countries 397
Annex table 12.9 Brazil Components of spending on general
services (%)
Components 1995 1995/96 1997 1998 1999 2000 2001 2002 2003 2004
Agrarian
organisation;
agrarian reform
settlement
47.6 53.6 47.3 30.7 38.4 31.0 27.2 34.6 44.5 28.2
Infrastructure 24.4 22.3 26.5 31.1 26.6 26.0 25.1 21.4 13.5 24.2
Education, rural
training
6.6 0.3 8.1 11.3 7.8 12.8 7.8 14.0 17.9 14.9
Extension 1.0 9.0 7.0 14.2 15.4 13.0 27.2 15.1 7.4 13.4
Research 17.4 7.8 5.3 4.5 6.4 9.0 6.9 7.8 9.0 11.1
Pest control 3.1 5.7 2.5 2.6 2.5 5.6 3.7 3.8 3.7 4.8
Inspection services 0.0 0.0 2.5 3.8 1.6 1.7 1.8 2.6 3.2 2.7
Marketing 0.0 1.3 0.8 1.7 1.3 0.8 0.3 0.7 0.8 0.7
Annex table 12.10 India Components of spending on general
services (%)
Components 1995/96 1996/97 1997/98
Research 41.0 66.9 70.2
Command area development programme 3.0 16.5 13.3
Extension and advisory services 0.0 3.4 5.6
Pest and disease control 2.1 2.7 3.8
Marketing and promotion services 26.4 2.2 2.8
Training services 1.2 4.9 2.5
Infrastructural services 0.0 1.0 1.3
Provision for livestock health facilities 26.4 2.4 0.5
398 agricultural subsidies in the wto green box
Annex table 12.11 Thailand Components of spending on general
services (%)
Components 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Infrastructural services 71.7 73.5 74.4 71.4 69.6 69.8 67.8 59.4 65.0 74.6
Extension and
advisory services
11.6 10.8 10.1 9.9 10.7 11.1 16.9 13.3 10.6 10.7
Agricultural research 7.1 6.9 6.4 7.1 7.7 7.7 6.9 21.1 19.2 5.9
Inspection services 0.3 0.3 0.3 0.7 0.6 0.6 0.3 0.0 1.2 3.8
Pest and disease
control
4.2 4.1 4.2 4.1 3.7 3.4 3.4 0.6 1.2 2.8
Marketing programme 0.1 0.1 0.1 0.2 0.7 0.3 0.2 3.4 0.9 1.3
Training services 1.6 1.3 1.1 2.6 2.6 2.4 0.0 2.2 1.9 0.9
Environmental
promotion
3.4 3.0 3.4 4.1 4.5 4.7 4.5 0.0 0.0 0.0
Annex table 12.12 Cuba Components of spending on general
services (%)
Components 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Education and
vocational training
in rural areas
(primary,
secondary and
higher education)
90.3 87.4 90.4 89.0 89.4 90.5 92.0 92.3 93.4 92.5
Science and
technology, basic
and applied
research
9.2 12.2 7.3 8.8 6.1 6.8 5.5 4.7 5.1 4.2
Animal and plant
health services
0.2 0.2 2.3 2.1 4.5 2.8 2.5 3.0 1.5 3.4
Rural promotion and
extension services
0.3 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
13
A Chinese perspective on the green box
jianmin xie
China is a large agricultural developing country, andits agricultural policy
aims at ensuring foodsecurity, increasing farmers income andpromoting
the harmonious and sustainable development of agriculture, economy
and society in rural areas. For a long period of time, instead of being
subsidized and supported, the agricultural sector has been exploited by
agriculture taxes and the difference between the prices of industrial and
agricultural products. It has nonetheless made considerable contributions
to industrialization and urbanization in the country.
Ever since the founding of the Peoples Republic of China, signicant
achievements have been made in the agricultural sector, attracting atten-
tion fromaround the world. These achievements can mainly be attributed
to policy and institutional factors, such as land ownership reform and the
household contract responsibility system.
1
Scientic and technical inno-
vationandthe improvement of farmers skills andabilities have alsoplayed
an important role. After the reform and opening-up, the government has
been gradually increasing support for the agricultural sector with the
growth of nancial capacity and the aging of agricultural infrastructure.
Support for agricultural production, however, is still very limited, due to
the double constraint of weak nancial capacity and the commitments
made during the countrys accession to the WTO. The main support
measures are still conned to a few green box measures and support pro-
grammes under the coverage of de minimis. Furthermore, Chinas support
is far lower than that of developed countries, and even lower than some
developing countries, when seen from the perspective of support per unit
or the proportion of agricultural support as a share of the total value of
agricultural production.
1 The system contains two features. Firstly, farmland is still owned by the public. Secondly,
production and management are entrusted to individual farming households through
long-term contracts. During the contract period, the farmers pay taxes to the state and
collective reserves to local governments, and keep all of the other produce for themselves.
399
400 agricultural subsidies in the wto green box
Currently, the Chinese Government is endeavouring to build a
sustainable and harmonious society, developing modern agriculture
and steadily pushing forward the Programme of Building a New Social-
ist Countryside. In general, this will strengthen support for farmers,
agriculture and rural areas, following the principle of more supports,
less burdens, and greater exibilities as well as industrial sectors feed-
ing back the agricultural sector and urban areas supporting rural areas.
Meanwhile, in addition to the factor of budgetary constraints, consider-
ation will also be given to the conformity of such measures with WTO
rules, as well as the efciency of support measures, which are expected to
be signicantly enhanced. Starting with a description and comment on
current practice in applying green box measures, this chapter will explore
the opportunities and challenges facing developing countries, including
China, provide comments and suggestions for green box reform under
the WTOlegislative framework, and help to position sustainable develop-
ment objectives in the context of an efcient green box that would address
developing countries needs.
Current usage of green box subsidies in China
Value
The Chinese Government attaches great importance to agriculture. Sup-
port given to agriculture has historically included input subsidies to state-
owned or collectively owned economic organizations, indirect subsidies
to buyers and sellers of major agricultural products such as grains and
cotton, and direct subsidies to farmers. Green box measures nonethe-
less constitute the main form of support. Although the overall value of
subsidies has always been insufcient, it has nonetheless been increas-
ing gradually. From 1999 to 2001, annual green box support averaged
211.5 billion RMB Yuan, and represented an annual increase of 39.7 per
cent compared to the period from1996 to 1998. Payments under environ-
mental programmes increased by 130 per cent, general services expendi-
ture increased by 59.3 per cent and spending on public stockholding for
food security purposes increased by 39.9 per cent.
Structure
Chinas greenbox subsidies are concentrated and limited inscope. Among
the 12programmes providedinAnnex II of the Agreement onAgriculture,
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402 agricultural subsidies in the wto green box
300,000
250,000
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0
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y
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1996 1997 1998 1999 2000 2001
Total
Figure 13.1 Green box support in China
China usedonly six programmes: general services, public stockholding for
food security purposes, domestic food aid, disaster relief, environmen-
tal programmes and regional assistance programmes. General services
subsidies accounted for the largest component, accounting on average for
59.1 per cent of total annual green box expenditure from 1999 to 2001,
spending on public stockholding for food security purposes accounting
for 25.4 per cent (close to the average level for 1996 to 1998) and spending
under environmental programmes increasing from a proportion of 3.9
(from 1996 to 1998) to 5.9 per cent (from 1999 to 2001).
Chinas general services expenditure was concentrated in infrastruc-
ture. The average subsidy for infrastructural services during the 1999 to
2001 period amounted to 84.3 billion RMB Yuan, accounting for 67.4 per
cent of general services expenditure. The second largest outlay was for
marketing and promotion services, which from 1999 to 2001 averaged
16.7 billion RMB Yuan, or 13.4 per cent.
The efciency of Chinas green box subsidies
Fromthe perspective of general economic theory andsustainable develop-
ment, Chinas green box subsidies are inefcient, for the reasons outlined
below.
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404 agricultural subsidies in the wto green box
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1997 1998 1999 2000 2001
Figure 13.2 Green box support structure in China
Firstly, although the total value in absolute terms appears to be sub-
stantial, in relative terms it was far fromsufcient. In 1998, total green box
subsidies amounted to US$18.35 billion very close to the ECs expen-
diture of US$18.5 billion in 2001. However, support at the individual
farmer level averaged only US$280. This amount is not only far below
the per capita support of developed countries, such as the US (US$32,110
per farmer), Canada (US$23,908 per farmer), Australia (US$21,275 per
farmer), Japan (US$16,789 per farmer) and the EU (US$13,987 per
farmer), but also lower than that of some developing countries, including
Korea (US$7,101 per farmer), Argentina (US$5,057 per farmer), Brazil
(US$2,014 per farmer), Mexico ( US$1,205 per farmer) and South Africa
(US$931 per farmer). Green box subsidies as a share of total agricultural
GDP was only 7.2 per cent, which was below the average level of these
countries (14.5 per cent), and far lower than Switzerland (71.2 per cent),
Japan (28.4 per cent), the US (25.5 per cent) and Korea (15.3 per cent).
Secondly, green box subsidies are unevenly distributed, meaning that
policy objectives cannot be achieved comprehensively. As in other devel-
oping countries, Chinas green box subsidies are mainly concentrated
on one or two programmes, and conned to a limited scope. In addi-
tion, there are no rigid binding institutional or legal mechanisms that
can ensure steady growth. For example, in the 1999 to 2001 period,
approximately 60 per cent of green box subsidies were focused on gen-
eral services and 25 per cent on public stockholding for food security
purposes. Furthermore, general services expenditure was mainly focused
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406 agricultural subsidies in the wto green box
on infrastructural services, while subsidies under public stockholding for
food security purposes were primarily used to construct the stockhold-
ing system for operational costs. While this structure was appropriate
for improving comprehensive production capacity and ensuring food
security, it was relatively inefcient, and consequently delivered compar-
atively limited benets to farmers. For example, in 1999 to 2001, direct
payments to farmers were zero, including payments under decoupled
income support, government nancial participation in income insur-
ance andincome safety-net programmes, andstructural adjustment assis-
tance provided through producer and resource retirement programmes
and investment aids. Support under environmental programmes only
accounted for 5.9 per cent. Compared with the average international
level, China provided insufcient green box support to achieve the policy
objectives of bridging income differences and promoting social fairness
and equality; furthermore, it did not prioritize the factors such as scien-
tic and technical innovation and environmental protection, upon which
the sustainable development of agriculture is heavily reliant.
Opportunities and challenges facing Chinas green box subsidies
Policy objectives of Chinas green box subsidies
The basic objective of Chinas agriculture policy has long been to guaran-
tee supply and safeguard food security. Green box subsidies have appro-
priately made their contribution to the achievement of this objective.
However, it is precisely this policy objective and the decidedly insufcient
subsidies in relative terms that have led to the reality of growing inequality
between rural and urban incomes and to environmental deterioration.
Ever since the reform and opening-up, the Chinese Government has
attached great importance to the harmonious and sustainable devel-
opment of the economy and social affairs, and established the overall
strategic objective of constructing a well-off and harmonious society. The
policy objectives associated with agricultural subsidies also changed sig-
nicantly. Fundamental policy change took place in 2004, which was an
important turning point in the history of Chinas policy on agricultural
subsidies. The No. 1 Document jointly issuedby the Central Committee of
the Communist Party of China (CPC) and the State Council put forward
the principles of more support, less burdens and greater exibilities.
The document prescribed the repeal of agricultural tax and the specialty
tax on products other than tobacco in ve years, as well as direct support
a chinese perspective on the green box 407
to farmers, a subsidy to promote the application of high quality seeds
and subsidies for purchasing farming machinery. These policies funda-
mentally changed the traditional relationship of give and take between
government and farmers.
Agriculture can be seen as contributing to economic development by
safeguarding the supply of agricultural products and increasing farm-
ers income while ensuring the sustainable development of agriculture.
The objective of Chinas agriculture subsidies in the years ahead should
therefore be as follows:
r
supporting and promoting the structural adjustment of agriculture and
changes in the pattern of development, and enhancing the efcient use
of agricultural resources and overall agricultural production capacity
throughthe establishment and improvement of the agricultural subsidy
system;
r
supporting cost reduction and efciency improvements, and reduc-
ing the extent to which developed countries benet from an unfair
competitive advantage, by increasing the competitiveness of Chinese
agricultural products; and
r
enhancing the ability to defend farmers from natural disasters and
market risks, safeguarding food security, increasing farmers incomes,
narrowing the gaps between urban and rural areas, between different
regions, and between workers and farmers, so as to ensure the compre-
hensive harmonious and sustainable development of the agricultural
economy and social affairs.
It should be noted that, to a large extent, Chinas green box subsidies
can satisfy such policy objectives.
Opportunities and challenges facing China in the use of
green box subsidies
Undoubtedly, green box subsidies will be the main instruments used to
achieve Chinas agriculture policy. However, China faces both opportu-
nities and challenges concerning the better use of green box subsidies.
The strengthened development mandates in the Doha Round negotia-
tions represent an opportunity for developing countries to seek more pro-
visions that better reect their needs. Governments have agreed that green
box disciplines will be reviewed and claried. This review and clari-
cation process could strengthen disciplines on the green box subsidies
408 agricultural subsidies in the wto green box
provided by developed countries, reducing the possibility that the existing
rules are abused to provide subsidies that do in fact distort production
and trade, with their consequent negative effects on developing coun-
tries. In addition, the Hong Kong Ministerial Declaration clearly stated
that the review must ensure that programmes of developing country
Members that cause not more than minimal trade-distortion are effec-
tively covered. These mandates could provide favourable opportunities
for developing countries, including China, to make better use of green
box subsidies.
However, China also faces a number of challenges in the use of green
box subsidies. Firstly, agriculture is inherently in a disadvantaged position
in attracting investments from government and other channels. It is an
industry that combines production in nature with further processing by
mankind. Investment in agriculture, especially investment in agricultural
science and technology which are of critical importance to steady, sus-
tainable, long-term agricultural development has signicant positive
externalities. Agriculture is therefore an industry characterized by high
investment risks, but with levels of reward that are not necessarily high.
Although green box subsidies are provided by the government, they are
nonetheless constrained by the natural and economic context in which
agricultural production takes place. Due to agricultures inherent char-
acteristics, the sector lacks internal driving forces and mechanisms that
provide incentives. Secondly, signicant aws in existing green box provi-
sions make it difcult for developing countries to provide these subsidies
effectively. It has often been argued that Annex II of the Agreement on
Agriculture was tailored to t the specic conditions of developed coun-
tries, and that many provisions are therefore unsuitable for developing
country members to use. Out of the 12 programmes provided under
the green box, China has used only six. Furthermore, like India, Brazil,
Indonesia and many other developing countries, spending is concen-
trated on one or two programmes. For example, Brazil used almost all of
its green box subsidy on programmes under general services; spending
under this category inArgentina is as highas 83per cent. Indias subsidy on
public stockholding for food security purposes represents 70 per cent of
its total green box subsidies. Low levels of economic development makes
it difcult for developing countries to provide decoupled income sup-
port, a problem compounded by the fact that many developing countries
have not established income registration systems. Therefore, developing
countries cannot afford or do not have the conditions to use most green
box support measures, and cannot increase green box subsidies in large
a chinese perspective on the green box 409
amounts in the way that developed countries can. Furthermore, green
box disciplines tend to reect primarily the needs and policy objectives
of developed countries, while shedding little light on the problems asso-
ciated with agricultural development in developing countries. Ironically,
some developing countries do not even know how to categorize their
subsidies programmes when notifying those measures to the WTO.
Prospects for reforming green box rules
The Doha Declaration, the July 2004 FrameworkAgreement andthe Hong
Kong Declaration established three basic objectives for green box reform:
rstly, to strengthen disciplines through review and clarication, with a
view to ensure that green box subsidies have no, or at most minimal,
production or trade-distorting effects; secondly, to incorporate the pro-
grammes that developing countries need into the new agreement, even
though these might have minimal trade-distorting effects; and, thirdly, to
improve the monitoring and surveillance mechanism.
Bearing these basic objectives in mind, the G-20, Canada, the G-10, the
European Commission, the United States, the African Group and other
members have put forward proposals in this regard. Notably, the G-20
and Canada have provided specic suggestions on the revision of relevant
provisions in Annex II of the Agreement on Agriculture. The European
Commission and some of the G-10 members do not support the revision
of Annex II in principle, stressing that the basic concept, principles and
effect of green box subsidies should be maintained.
China supports the G-20 proposal that green box disciplines for devel-
oped countries should be strengthened through the review and clarica-
tion of the existing rules, with a view to reducing production and trade
distortions; at the same time, programmes should be added that corre-
spond to the level of development and future needs of developing country
members, especially those programmes that can guarantee food security,
farmers livelihoods and rural development. This will thoroughly change
the current green box rules, and provide the necessary policy space for
agricultural and rural development in developing countries. At the same
time, the transparency of the green box should be enhanced, through
a new monitoring and surveillance mechanism. China is furthermore
especially concerned with the following two specic aspects:
One is public stockholding for food security purposes. There are 740
million farmers in China who are scattered throughout the vast remote
area in the central and west of China. Two hundred million farmers earn
410 agricultural subsidies in the wto green box
less than one US dollar a day, and most of them are in remote or border
areas. Arable land and water resources are decient in the central and
west region, especially in poverty-stricken remote areas. Effective pub-
lic stockholding of food has to be established to maintain food security,
subsistence and the livelihoods of these farmers, ensuring their employ-
ment and some income by providing an outlet for what they produce,
as well as preventing them from destroying the fragile natural environ-
ment through excessive exploitation. China therefore believes that public
stockholding for food security purposes in developing countries is totally
different fromthe role it plays indevelopedcountries, andespecially inthe
large net food importers, since these subsidies have no or minimal trade-
distorting effects and fully conform to the mandate of the Hong Kong
Ministerial Declaration. If these payments are required to be included as
de minimis, they will eventually be subject to ceilings for the volume of
these acquisitions, thus affecting the basic objective of these policies and
deviating from a fundamental tenet of this development round. Besides,
as China has had to accept the obligation to include in the de minimis
category those payments it makes under Article 6.2 of the Agreement
on Agriculture, thus limiting them to only 8.5 per cent of the value of
production for any given product, Chinas concern cannot otherwise be
effectively addressed. China should therefore insist on the adoption of the
G-20s proposal in this regard, i.e. that developing countries acquisition
of stocks and foodstuffs with the objective of supporting low-income,
resource-poor producers shall not be required to be accounted for in the
AMS.
The other specic concern that China has relates to the subsidies that
need the establishment of a base period, including decoupled income sup-
port, structural adjustment assistance provided through investment aids
and payments under regional assistance programmes. Developing coun-
tries can hardly make use of subsidies such as decoupled income support
payments, because these provisions seem to be designed specically for
developed country members, and developing countries have only limited
scal capacity to afford such programmes. China is not against the stricter
disciplines that have been proposed, such as requiring base periods to be
xed and unchanging; however, it emphasizes that members should be
entitled to equal opportunities. Developing country members in particu-
lar should not be deprived from using green box subsidies simply because
they have not previously used these measures. China therefore supports
the proposal by the Chair that would allow developing country members
which have not previously made use of this type of payment to establish
a chinese perspective on the green box 411
an appropriate base period. At the same time, China supports the notion
that the base period of a time-limited experimental or pilot programmes
may not be taken as the xed and unchanging base period, to take into
account the fact that developing country members lack experience in
providing such subsidies.
Conclusion
China has been feeding its 22 per cent of the worlds population with only
9 per cent of the worlds arable land. Undoubtedly, beside the policy and
institutional factors in China, and scientic and technical innovation,
the limited green box support provided by the government has played
a very important role in building agricultural infrastructure. Green box
support will be one of the major instruments that China uses to achieve
its agriculture sustainable development objectives in the future.
Although the mandate for a review and clarication of green box
subsidies is limited, it is an important step in the right direction. It
represents both opportunities and challenges for China, and potentially
also other developing countries, to make better use of the green box as an
instrument for achieving sustainable development objectives. However,
the challenges remain greater than the opportunities. China and other
developing countries will need to be more active and constructive in
the ongoing WTO agriculture negotiations so as to achieve a balanced
outcome that addresses the sustainable development needs of agriculture
indeveloping countries whilst at the same time preventing the abuse of the
greenbox indeveloped countries. Developing countries, including China,
also need to enhance their internal management of green box subsidies,
and improve the structure of these payments, in order to make themmore
efcient and prepare for further green box reform in the future.
14
African countries and the green box
abena oduro
African perspectives on the green box measures
A major concern of African countries with regard to the implementation
of the Agreement on Agriculture and green box measures is the need to
ensure that the measures made recourse to indeed have no or minimal
trade- or production-distorting effects. The need to instil discipline in
the use of the green box measures has been a recurring theme in all of
the proposals and statements made by African countries on the issue.
African countries have made individual submissions on the green box
measures or have joined developing countries fromother regions to make
submissions. One of the early views expressed by the African Group in
the WTO on the green box measures is found in the Joint Proposal
on the Negotiations on Agriculture presented by the Group in March
2001.
1
It was proposed that the criteria for the green box should be
tightened to ensure that measures that were employed had no or minimal
trade- or production-distorting effects. The members of the West African
Economic and Monetary Union (WAEMU) in 2002 noted the increase
in the use of domestic support measures by developed countries because
of box shifting. The appropriateness of decoupled support as a green box
measure was raised in that submission.
2
Egypt, Uganda and Zimbabwe
presented a paper jointly with Cuba, the Dominican Republic, Sri Lanka
and Honduras in which they identied direct decoupled payments and
export credits and guarantees as measures which must be removed from
the green box.
3
Zimbabwe and six other developing countries presented
1 WTO (2001), African Group Joint Proposal on the Negotiations on Agriculture, Committee
on Agriculture, Special Session, G/AG/NG/W/142, Geneva.
2 WTO(2000), Common Position of the Member States of the West African Economic and Mon-
etary Union (WAEMU) in the Multilateral Trade Negotiations on Agriculture, Committee
on Agriculture, Special Session, G/AG/NG/W/188, September, Geneva.
3 WTO (2000), Operations of the Green Box. Issues Raised by Members in AIE Papers and Pre-
Seattle Submission. A Compilation by the Secretariat, G/AG/NG/S/18, October, Geneva.
412
african countries and the green box 413
a paper that argued that green box measures were better suited to address
the problems and situations of developed countries. In particular, policies
under the category of direct payments to producers were considered to
be expensive and difcult for developing countries to implement. They
proposed that developing countries should have access to other measures
such as greater exibility in import controls.
4
Namibia in its submission
mentioned in reference to green box measures that some provisions
have obviously beneted developing countries. The submission went on
further to state that in some countries green box measures were the only
recourse available to developing countries to assist in their agriculture
sectors.
5
Namibia complained about the misuse and lack of transparency
and precision in the use of the green box measures.
African trade ministers in the Kigali Consensus of 2003 called for the
enhancement of green box measures for developing countries.
6
Included
in the statement was the need for tighter disciplines through notica-
tion, surveillance and monitoring and the establishment of permanent
modalities to prevent box shifting.
In the Cairo declaration of 2005, African countries called for policy
space to enable them to have adequate and timely resources to full
their essential development objectives. Annex 2 of the Agreement on
Agriculture, i.e. the greenbox measures, was identiedas a means whereby
this policy space could be provided.
7
The establishment of disciplines to
prevent box shifting was raised again.
In their 2006 communication on a review and clarication of the green
box, the African Group in the WTO stated that the process should have
three objectives. The rst objective of the review and clarication process
should be to ensure that measures notied under the green box com-
ply with the criterion of no or minimal trade- or production-distorting
effects.
8
The second objective should be to ensure that trade-distorting
support is not shifted to the green box. Finally, the reviewand clarication
4 Ibid.
5 WTO (2001), WTO Negotiations on Agriculture. Proposal by Namibia in the Areas of (i)
Market Access (ii) Domestic Support (iii) Export Competition and (iv) Non-Trade Concerns,
G/AG/NG/W/143, March, Geneva.
6 African Union (2003), Kigali Consensus on the Post-Cancun Work Programme,
AU/TD/MIN/Decl.1 (II) Annex, Addis Ababa.
7 African Union (2005), The Cairo Declaration and Road Map on the Doha Work Programme,
TI/TMIN/EXP/6-b III Rev.4, Addis Ababa.
8 WTO (2006), Review and Clarication of the Green Box. Clarication by the African Group,
Committee on Agriculture, Special Session, TN/AG/GEN/15, April, Geneva.
414 agricultural subsidies in the wto green box
process should result in the introduction of elements to reect the par-
ticular circumstances of developing country members.
The use of green box subsidies by African countries
Using information from 17 African countries, it has been found that
spending on agriculture in real terms rose fromUS$7.3 billion to US$12.6
billion. Despite this increase, the share of spending in agriculture out
of state spending declined from 6.4 per cent in 1980 to 4.5 per cent
in 2002. As a ratio of agriculture gross domestic product, agriculture
spending declined to 6.7 per cent in 2002 from 7.4 per cent in 1980.
9
African countries are spending relatively less on agriculture despite the
possibilities offered by the green box measures for increased spending.
This declining trend in spending in agriculture is occurring within the
context of rising total public sector spending in many African countries.
The declining share of spending on agriculture has been attributed to the
emphasis placed by the poverty reduction strategy papers on social sector
spending.
10
Countries are expected to provide notications on the use of all cate-
gories of domestic support measures. It is, however, difcult to obtain a
clear picture of trends in the use of green box measures among African
countries. This is because most African countries do not honour their
notication obligations. Botswana, Egypt, Gambia, Kenya, Morocco,
Namibia, Tunisia, South Africa, Zambia and Zimbabwe are the only
African countries that have notied the WTO on the use of green box
measures during the period 1995 to 2006. Another difculty in assessing
the use of green box measures by African countries is that the few coun-
tries that have notied the WTO have not always done so consistently.
Tunisia is the only African country that has regularly provided the WTO
with information on spending on green box measures (table 14.1).
Among the few countries for which some information is available, no
clear pattern emerges on the trends of spending on green box measures
over time. In Tunisia, for example, spending peaked in 1999 and declined
for most of the period to 2006, although the levels in 2006 are higher
than in 1995. In South Africa, on the other hand, support to green box
measures declined until 2001, after which it began to rise (table 14.1).
9 Akroyd, S. and Smith, L. (2007), Review of Public Spending to Agriculture. A Joint
DFID/World Bank Study, Final Draft, Oxford Policy Management.
10 Akroyd and Smith (2007).
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african countries and the green box 417
Table 14.3 Share of general services in green box support (%)
Morocco Namibia South Africa Tunisia Zambia Zimbabwe
1998 14.9 80.8 72.1 100.0 100.0
1999 14.4 90.2 65.3 100.0
2000 17.4 100.0 85.3 80.7
2001 14.9 95.3 85.3
2002 15.9 93.0 82.7
2003 80.4 83.1
2004 85.4 82.5
2005 83.3
2006 83.6
Source: WTO Notications.
For the few African countries that have notied the WTO of their
green box measures, these measures forma substantial proportion of total
domestic support. In Kenya, Zimbabwe and Zambia, all of the domestic
support provided to agriculture fell under the category of green box mea-
sures. In South Africa the share of green box measures in total domestic
support increased from about 56 per cent in 1995 to 100 per cent in 2001
(table 14.2).
Spending under the heading of General Services appears to dominate
green box support in many African countries (table 14.3). Spending on
extension service, research and training are the most frequently reported
components of spending under the heading of general services in most
reporting member countries. In Zambia, Zimbabwe and Namibia, all
of the notied green box support measures were under the heading of
General Services. It is only in Morocco that less than one-half of green
box spending consists of spending on general services. This is due to
the dominance of spending on domestic food aid in spending on green
box measures in that country. In addition to spending on general ser-
vices, South Africa reported spending on environmental, disaster relief
and regional assistance programmes, while Tunisia reported spending on
structural adjustment assistance.
None of the African countries that notied the WTO on their green
box measures reported spending on public stockholding for food secu-
rity purposes, income insurance and income safety-net programmes,
structural adjustment assistance provided through producer retirement
programmes or spending on resource retirement programmes. The lack
418 agricultural subsidies in the wto green box
Table 14.4 Selected features of African agriculture
Africa South Asia
Irrigated area % of cropland
198991 3.6 33
200103 3.6 39
Fertiliser consumption 100 gm per hectare
of arable land
198991 142 749
200002 123 1,066
Cereal yield (kg per hectare)
199395 1,034 2,128
200305 1,087 2,505
Source: World Bank (2007), Assistance to Agriculture in Sub-Saharan
Africa. An IEG Review, The World Bank, Washington D.C.
of spending on income insurance programmes and stockholding for food
security purposes is not indicative of the irrelevance of such spending
in African countries, but reects more the dearth of adequate nancial
resources, human resources and the institutional framework to imple-
ment such schemes.
Relevance of green box subsidies to African agriculture
African agriculture is dominated by small-scale producers with a high
incidence of subsistence farming. The use of modern inputs such as fer-
tilisers and improved seeds is relatively low compared to other regions.
Soil fertility is on the decline in many parts of the continent. In a
UN report cited by Cartridge and Leraand (2007), it is found that
65 per cent of the cropland and 30 per cent of the pasture land is affected
by degradation.
11
Agriculture is largely rain-fed with limited use of irrigation. Africa has
the potential to irrigate 20 per cent of its farmland, but irrigates about
4 per cent (table 14.4). It has been estimated that there has been a
25 per cent decline in the rainfall in the last 25 years.
11 Cartridge, A. and Leraand, D. (eds) (2007), Catalyst for Action. Towards an African Green
Revolution, Yara International ASA.
african countries and the green box 419
Agriculture is challengedby market access andcredit constraints. Farm-
ers have difculty accessing input and output markets. Productivity tends
to be low and there is a high incidence of post-harvest losses.
Agriculture in Africa is characterised by uncertainty. Dependence on
rain-fed agriculture exposes farmers to the vagaries of the weather. Inef-
cient input delivery systems imply that inputs such as fertiliser may not be
delivered on time. The high incidence of post-harvest losses adds another
layer of uncertainty.
Although the contribution of agriculture to GDP has declined over the
years in several African countries and averages between 35 and 40 per
cent, the sector remains the main sector of employment for between 50
and 60 per cent of the adult working population.
An improvement in productivity and increased opportunities to trans-
late output into income are critical for growth and poverty reduction on
the continent. A review of recommendations to improve agriculture in
Africa and increase productivity suggests that this can happen if there
is an improvement in soil health, improvement and expansion in small-
scale water management, improved access to better seeds and planting
material and an effective extension service.
12
Soil health can be improved
by the appropriate combination of mineral and organic fertiliser and
using better methods of soil erosion control and water conservation, for
example.
13
Access to input and output markets will be enhanced by an
improvement in transport infrastructure. Improved access to credit of the
appropriate quality and quantity will encourage the demand for inputs.
Investment in research and extension must be improved. The linkage
between research and extension and the producers and consumers must
be strengthened and made more effective. Investment in dams and other
water conservation methods should reduce exposure to the vagaries of
the weather.
Do the green box measures provide African countries with policy space
to implement these recommendations? Measures included under para-
graph 2 of Annex 2 of the Agreement on Agriculture provide the pol-
icy space required to address the capacity constraints faced by African
agriculture. Included in the category of General Services of the green
box measures are spending on research including research programmes
12 The Hunger Task Force (2005), Halving Hunger. It Can be Done.
13 These are some of the recommendations of the Hunger Task Force cited in Cartridge and
Leraand (2007).
420 agricultural subsidies in the wto green box
relating toparticular products, pest anddisease control, training services
including both general and specialist training facilities, extension and
advisory services including the means to facilitate the transfer of infor-
mationandthe results of researchto producers andconsumers, marketing
and promotion services and spending on infrastructural services
including roads and other means of transport, market and port facili-
ties. These are activities that are critical to reducing the constraints faced
by African agriculture and to achieve an increase in productivity and
income. There are limited, if any, conditions on how spending under
general services is to be conducted. Additional categories under the green
box measures include public spending on income insurance and income
safety net programmes, structural adjustment assistance as well as regional
assistance programmes.
Proposed changes to the green box by African countries
InApril 2006, the AfricanGroupprepareda communicationonthe review
and clarication of the green box.
14
The recommendations made by the
African Group were concerned primarily with introducing measures in
the green box to address imbalances faced by developing countries in
the Agreement in Agriculture. Two recommendations were directed at
expanding somewhat the scope of the green box measures.
Special and differential treatment for developing countries
A number of recommendations were made to either exempt developing
countries fromparticular requirements or ensure that the prior lack of use
of a policy option by a developing country did not exclude its future use.
With regard to payments for relief from natural disasters, the African
Group recommended that in the case of developing countries relief may
be provided to producers when the estimated production loss is less than
30 per cent of the average production over an agreed time period. This
contrasts with the original provision that relief could only be provided
when the production loss exceeds 30 per cent of the average produc-
tion in the agreed-upon time period. In essence, the recommendation
aims at providing developing countries with discretion to decide what
level of production loss justies the payment of relief for disasters. The
14 WTO (2006), Review and Clarication of the Green Box. Communication by the African
Group, Committee on Agriculture, Special Session, TN/AG/GEN/15, April, Geneva.
african countries and the green box 421
initial requirement that the production loss should exceed 30 per cent is
particularly stringent for small-scale farmers, for whom a much smaller
production loss could have a signicant impact on their incomes and
welfare.
Another recommendation of the African Group was that the condi-
tions to be met for payments under environmental programmes should
not apply to developing countries. It is not clear what advantage African
countries will derive by not having such payments guided by environ-
mental and conservation programmes. Where such programmes do not
currently exist, a more appropriate response would be to seek techni-
cal assistance to design such programmes to inform the use of spending
under this heading.
The African Group proposed the inclusion of text exempting develop-
ing countries from the condition that payments under regional assistance
programmes can only be made when a disadvantaged region is a clearly
designated contiguous geographical area with a dened economic and
administrative identity. Disadvantaged locations may not necessarily be
contiguous or have a dened economic and administrative identity. It is
quite possible for pockets of deprivation within an administrative region
to exist that would not be described as disadvantaged using neutral or
objective criteria.
Increasing the scope of green box measures
The African Group in their 2006 communication proposed for an addi-
tional measure to be included under general services. The proposal was
for the inclusion of polices and services related to farmer settlement, land
reformand the redress of historical land ownership structures in develop-
ing country members. The proposed services that could be funded could
include the provision of infrastructure, land rehabilitation, soil conserva-
tion and food security programmes to promote rural development and
poverty alleviation. Anexaminationof Annex 2 of the Agreement onAgri-
culture reveals that there is no explicit provision for spending to address
land reform and farmer settlement programmes in general. Although
section (g) under general services allowed for spending on infrastruc-
ture, this excluded the subsidised provision of on-farm facilities. The
proposed section (h) to be included under general services could address
this gap. The inclusion of this provision would be of importance to those
African countries implementing or planning to implement substantial
land reform and farmer settlement programmes.
422 agricultural subsidies in the wto green box
Under the payments for regional assistance, Annex 2 states that pay-
ments shall be limited to the extra costs or loss of income involved in
undertaking agricultural production in the prescribed area. The African
Group proposed the explicit inclusion of livestock production in addition
to agricultural production.
Under public stockholding for food security purposes, Annex 2 of
the Agreement on Agriculture makes provision for developing countries
to acquire and release food stocks at administered prices. However, it
also stipulates that the difference between the acquisition price of food
stocks and the external reference price be included in the calculation
of the Aggregate Measurement of Support (AMS). The African Group
proposed the striking out of the requirement that the difference between
the acquisition and external reference be included in the calculation of
the AMS.
The August 2007 draft modalities and green box measures
The revised draft modalities for agriculture of August 2007 included most
if not all of the recommendations made by the African Group. The addi-
tional measure under general services proposed by the African Group
was adopted with some modications that are not expected to under-
mine the original intent of the African Group. Included in the August
Draft Modalities were most of the elements of the special and differential
treatment for developing countries proposed by the African Group. What
is not included is the proposal that conditions for payment under envi-
ronmental programmes should not apply to developing countries. The
draft modalities do not incorporate the African Group proposal on the
difference between the acquisition and external reference prices of food
stocks and instead propose that the difference should be included in the
de minimis support.
Contrary to the concerns of some African countries about decoupled
support, they remain as green box measures.
Conclusion
The constraints to increased productivity and income in agriculture
in Africa will not necessarily be relaxed through increased tariffs and
other trade measures. Tariffs and other measures may be attractive and
the preferred choice of some countries because they provide protection
african countries and the green box 423
through higher prices to the affected sectors and products without draw-
ing on the budget. Tariffs are insufcient and in some instances inappro-
priate instruments to deal with the constraints facing African agriculture.
The effective use of spending on green box measures will go a long way
to reduce the constraints facing African farmers. The green box measures
provide African countries with the policy space to address the constraints
facing agriculture. Public sector spending on agriculture in Africa has
not kept pace with social sector spending. The discussion on spending
on green box measures by African countries has shown that provid-
ing subsidies to agriculture is not limited by restrictions inherent in the
green box measures. Not all of the green box measures are being used
by African countries or may be considered priorities for African coun-
tries at this point in time. However, the categories of spending that may
be considered priorities for African agriculture for example, extension
services, research, soil conservation, pests and disease control, training
and infrastructure are all available under the green box measures with
limited restrictions on their use. If productivity in African agriculture
is to increase and if the goals of food security, livelihood security and
rural development are to be achieved, what is required is an increase in
the allocation of resources to the sector, as well as changes in the insti-
tutional framework and improvements in the management, organisation
and utilisation of resources in the sector.
African countries have made recommendations to widen their policy
space in the use of green box measures and several of these proposals have
been included in the draft modalities for agriculture. However, the effec-
tiveness of green box measures in promoting rural development, food
security and livelihood security is dependent on their implementation
within an appropriate policy context. The mere expansion of spending
ontraining facilities, extensionservice and the road network, for example,
is not sufcient to improve productivity and incomes. The different com-
ponents of the general services category of the green box measures must
be provided within a sector policy framework to ensure results as well as
within an overall macroeconomic policy framework that ensures stabil-
ity and reduces uncertainty. Thus, for example, an appropriate model of
extension service delivery must be developed to ensure the effective use of
funds provided for extension. The road policy must be clearly thought out
and implemented to improve access of farming communities to markets
for outputs and inputs.
The position of African countries is that green box measures are biased
against developing countries in general because provisions are included
424 agricultural subsidies in the wto green box
that developing countries do not have the necessary organisational or
institutional framework to implement. Decoupled income support is
unlikely to have any more or less production-distorting effects than sup-
port provided for pest and disease control or extension and advisory ser-
vices if effectively implemented. The challenges facing African countries
are to improve on policy making, strengthen the commitment and capac-
ity to implement policies, increase spending on agriculture and effect
the necessary institutional changes to achieve the objectives of food and
livelihood security, poverty reduction, rural development and growth.
PART IV
Green box subsidies and the environment
15
The environmental impact of green box subsidies:
exploring the linkages
ronald steenblik and charles tsai
Introduction
Over the past decade, the WTO AoA has overseen signicant reduc-
tions in the most trade-distorting forms of agricultural support. As WTO
members continue reform in this direction, attention is being redirected
towards forms of agricultural subsidy contained in the so-called green
box (Annex 2) of the AoA. Anyone concerned with the environmental
impacts of agriculture should welcome this development, as the most
trade-distorting kinds of agricultural subsidy are often those that create
the strongest incentives for increasing output, intensifying agricultural
activities and thus adversely affecting the environment.
The shift from more to less trade-distorting forms of agricultural sup-
port can be seen both in the signicant increases of green box subsidies
during the implementation period of the AoA and in the very large total
volume of green box subsidies today. In the US, green box subsidies
1
nearly doubled, from US$26,151 million in the period 1986 to 1988 to
US$50,057 million in 2000. Accounted for partly by the entry of three new
members following the period 1986 to 1988, green box expenditure by
the EU grew from9.2 billion to 22.1 billion in 2000.
2
The latter gure
is equivalent to roughly half of all EU spending on amber box subsidies
for that year. In Japan, green box subsidies represented nearly 24 per cent
of its total subsidies in 2000. Given the sheer size of green box subsidies
across the OECD economies, it is hard to imagine that its environmental
impacts are insignicant.
1 All data (with the exception of those for the EU) contained in the rst two paragraphs
come from domestic support notications to the WTO Committee on Agriculture.
2 The data for the EU alone come from the OECD.
427
428 agricultural subsidies in the wto green box
OECD countries are not alone in having increased green box subsidies
over time. China relies almost exclusively onthe greenbox for its domestic
support to agriculture,
3
and its green box subsidies grew by 32 per cent
from 1999 to RMB 242 billion (US$ 31.4 billion
4
) in 2001, which places
it above the EU and below the US gures for the same year. Brazils green
box support grew by roughly 88 per cent between the period 1986 to
1988 and 1995, but has recorded steady declines in overall levels since
then. In 1998, the last year for which data are available, Brazils green
box subsidies accounted for 91 per cent of total reported agricultural
support. Indias green box subsidies accounted for 36 per cent of its total
agricultural subsidies in 1998 and, at US$2.9 billion, had increased by
31 per cent since 1995. The sheer size, recent growth and scope for further
enlargement of green box subsidies make study of its environmental
impacts both positive and negative an important part of any effort to
understand the environmental effects of global agricultural subsidies in
the coming years.
In seeking to contribute to a better understanding of how the evolv-
ing topography of agricultural reforms across the WTO membership
will impact the environment, this chapter considers the environmental
impacts of green box subsidies as a means for efforts to consider how
existing green box rules may be improved. The current trade negotiations
under the WTO provide an important opportunity for policymakers to
reect onpotential improvements togreenbox rules, witha viewtoreduc-
ing its negative environmental impacts. This chapter describes the general
structure of green box subsidies; discusses the diversity of programmes
that qualify under it; reviews the possible impacts of green box subsidies
on production with attention to the environment; suggests areas for con-
sideration when approaching reforms; and concludes with thoughts on
research that would support the development of reforms to improve the
positive and minimize the negative environmental impacts of green box
subsidies.
Green box criteria
As green box subsidies come to represent an ever-increasing share of
total support to agriculture, understanding their environmental impact
3 Its notication to the WTO indicates that all support that would normally fall within the
amber box is below de minimis levels.
4 This conversion is based on an exchange rate of US$1 =RMB7.7.
the environmental impact of green box subsidies 429
becomes increasingly important. In the following paragraphs we briey
review how the rules of the green box are structured, and discuss how
green box criteria condition the environmental impact of subsidies in this
category.
The general structure and criteria of the green box
Annex 2 of the AoA the green box establishes three general conditions
that agricultural subsidies must meet in order to elude classication as
amber box subsidies. First, they must have no, or at most minimal, trade-
distorting effects or effects on production. The two additional criteria
that must be met include that:
r
the support in question shall be provided through a publicly funded
government programme (including government revenue forgone) not
involving transfers from consumers; and
r
the support in question shall not have the effect of providing price
support to producers.
5
The AoA thus establishes three general conditions related both to the
effect of green box subsidies and to the manner in which they are applied.
Green box subsidies must be at most minimally trade-distorting, must
be government-funded and must not involve transfers from consumers
or have the effect of providing price support to producers. The green
box also denes 12 separate types of government service programme
and indicates programme-specic criteria that subsidies must meet (in
additiontothe general criteria describedabove) inorder for eachtoqualify
as green box subsidies. The rst of the government services programmes,
entitled general services, is broken down further into seven specic
categories. Where appropriate, auxiliary conditions are specied to which
programmes must conform.
Notably, the at most minimally trade-distorting criterion has never
beenclariedvia subsequent rule-making inWTOnegotiations or dispute
settlement under the WTO.
6
Elaborated in the next section, the scope for
agricultural subsidies to be minimally trade-distorting and to still qualify
5 Paragraph 1 of the green box.
6 Analytical indexonthe WTOwebsite: http://www.wto.org/english/res e/booksp e/analytic
index e/agriculture 02 e.htm#ann 2B. It has been claried under the WTO Appellate
Body that green box subsidies may not be specic de jure or de facto, meaning that even
if a subsidy is provided de jure in a non-specic way, it may nonetheless be considered
specic if it is in practice accessible only by certain categories of agricultural products.
430 agricultural subsidies in the wto green box
as green box will condition the extent to which WTO members are able
to re-instrument amber box subsidies as green box, in order to increase
green box subsidies in general, and will thus have important implications
on the potential for green box subsidies to impact the environment.
Evaluating the link between production and environmental impacts
Agricultural support policies affect the environment through at least two
channels. Some, such as subsidies to compensate farmers for leaving strips
of landunploughed, or todelay harvesting hay while ground-nesting birds
are nesting, have a direct effect on environmental outcomes. Many more
policies affect the environment indirectly through the inuence they have
on the economic signals to which farmers respond when they decide on
the type, amount and location of crops or livestock they produce.
Just about any economic activity pursued by humans affects the nat-
ural environment in one way or another, but farming, because it relies
on natural biological and chemical processes, engages intimately with the
environment. The range of impacts from farming varies widely, how-
ever, depending on the location, what is produced and how the different
stages of agriculture, from soil preparation to harvesting, are conducted
(table 15.1). The initial preparationof landfor annual crops, if the landhas
never been farmed before, generally causes the most profound changes in
wildlife numbers and composition. Once that step has been taken which
is difcult to reverse, except when conducted on a limited scale, such as in
traditional shifting-cultivation systems the main environmental effects
of agriculture from then on result from ploughing, irrigating, controlling
pests and fertilizing.
On the other hand, while a farmed plot may be less natural than what
existed before humans started using it, it may still have more environmen-
tal attributes than most alternative uses of the land, such as for roads or
shopping centres. Indeed, some forms of agriculture can be environmen-
tally benecial. Livestock producers who practice management-intensive
grazing, for example, maintain meadows that are lled with a rich diver-
sity of herbaceous plants and soil biota.
7
Numerous weeds and birds have
adapted to agriculture and even depend on it. Many oral and faunal
species thrive at the margins of open and forested land.
7 For an example, see Michael Polans description of the Polyface Farm, located in Snope,
VA, USA (Polan, 2006). Polyfaces website (http://www.polyfacefarms.com) also contains
some useful information on the principles of permaculture.
the environmental impact of green box subsidies 431
Table 15.1 Illustrative table of environmental effects associated with
different agriculture-related activities
Ranges of practices
Positive (+) or
negative ()
Activity Best practice Worst practice environmental effects
Initial preparation of land
Clearing Care taken to
minimize
erosion
Little care taken to
minimize erosion
() Can destroy wildlife
habitat, reduce biodiversity,
increase soil erosion and
emit carbon through
burning of vegetative cover
or exposing of carbon in
soil
Grading or
terracing
Works with
contours
Increases erosion () Can increase soil
erosion
(+) Can reduce soil erosion
and control ooding
Draining Avoids draining
valuable
wetlands
Draining
implemented
indiscriminately
() Can change wildlife
habitat and lead to loss of
biodiversity in the case of
wetlands
(+) May reduce breeding
grounds for mosquitoes
Creation of
irrigation
structures
Designed to
account for
natural
surroundings
dependent on
pre-existing
waterways
Implemented
without attention
to pre-existing
natural contours of
the land
() Can lead to
canalization, loss of
biodiversity and increased
propensity to ooding
Annual use of land
Preparation
of land and
planting
Contour
ploughing, or
drilling
Ploughing does not
follow contours;
ploughing is deeper
than necessary
() Can increase rate of
soil erosion
(cont.)
432 agricultural subsidies in the wto green box
Table 15.1 (cont.)
Ranges of practices
Positive (+) or
negative ()
Activity Best practice Worst practice environmental effects
Ensuring
adequate
water for
plant
growth
Crops grown
consistent with
climate and soil;
mulch used to
conserve soil
moisture; drip
techniques used
where feasible
and irrigation is
necessary
Flood irrigation
used to grow crops
otherwise ill-suited
to climate; drainage
not provided,
leading to salt
build-up in soil
() May reduce water
available for needs of
nature; can increase
water pollution,
salinization and
soil erosion
(+) May temporarily
reduce soil erosion by
increasing ground cover
Supplying
nutrients
Nutrients
provided
through
rotation of
nitrogen-xing
crops, manure
or compost
Chemical fertilizers
used in excess of
what is needed
() If excess amounts of
nutrients used, nutrients
can leach into groundwater
or enrich surface waters,
leading to nitrication
Controlling
weeds
Weeds
controlled
through
proactive weed
management, or
thermal weed
control
Weeds controlled
through heavy and
frequent tillage, or
heavy doses of
herbicides
() Can increase the rate of
soil erosion
() Can increase mortality
of fauna and cause acute
or long-term damage to
human health
Controlling
faunal pests
Natural pest
control used
where possible;
where chemicals
are used, they
are non-
persistent and
toxic only to the
target species
Control through
application of
persistent or
broadly toxic
chemicals; more
applied than
necessary
() Can increase mortality
of fauna and cause acute or
long-term damage to
human health
the environmental impact of green box subsidies 433
Table 15.1 (cont.)
Ranges of practices
Positive (+) or
negative ()
Activity Best practice Worst practice environmental effects
Controlling
fungi
Fungal growth
controlled
through
biological
means; where
chemicals are
used, they are
non-persistent
and toxic only
to the target
species
Control through
application of
persistent or
broadly toxic
chemicals; more
applied than
necessary
() Can increase mortality
of non-target fauna and
cause acute or long-term
damage to the health of
humans
Harvesting
and post-
harvest
practices
Care taken to
minimize
erosion, such as
through leaving
residues on soil
(not a major
problem with
tree crops)
Land left fallow;
crop residues
removed, e.g. for
fuel
() Can increase rate of
soil erosion
What this means is that the fully complex and multifaceted environ-
mental effects of changes in agricultural output induced by agricultural
support policies (or by the market, for that matter) are difcult to pre-
dict ex ante. Moreover, changes in support levels cannot be assumed to
generate symmetrical environmental outcomes, especially if the scale of
change is large. Increasing support in one place, or reducing it in another,
may encourage the clearing of newland for agriculture, for example. Nor-
mally, once a forest is cut down for agriculture or grassland is ploughed,
the land does not immediately revert to its prior state once the subsidy is
withdrawn. Similarly, reducing support in one place (or increasing it in
another) may result in some existing land ceasing to be farmed and being
purchased or rented for non-agricultural uses. Some of the resulting land
use changes (such as short-rotation forestry) may be easily reversible, but
others (such as creating new parking lots) are not.
434 agricultural subsidies in the wto green box
The existing literature on the effects of agricultural policies on the
environment can be divided into three groups: (i) studies that measure
or predict induced changes in farming practices at the level of individ-
ual farms; (ii) studies that measure or predict overall changes in the
composition of farm output within the geographic jurisdiction covered
by the policy, as well as environmental effects in the aggregate; and
(iii) multi-regional studies (usually based on models) that measure or
predict production changes and broad environmental changes, such as
land use, at the global level.
Removal of subsidies can have positive or negative impacts on the
environment, under at least three scenarios, depending on whether:
r
new agricultural activities replacing previously subsidized activities are
less environmentally damaging;
r
the intensiveness of agricultural practices (generally correlated with
environmentally harmful chemical inputs) will be reduced or increased
as a result; and
r
increased agricultural production in some geographical areas to com-
pensate for decreases in previously subsidized areas is environmentally
less damaging.
For instance, removing a subsidy for a specic product in a developed
country may reduce production and increase world prices for that prod-
uct. As the production of that product is redistributed geographically,
the degree and manner of environmental impact can vary dramatically.
Anderson (1991) suggests that due to the generally less intensive nature of
agricultural productionindeveloping countries as a whole, increasedpro-
duction in such countries resulting from reduced production in OECD
countries is likely to be a net benet to the environment from a global
perspective. However, La Vina et al. (2006) observe that, since developing
countries tend to have more intact and fragile ecosystems compared with
developed countries, where land conversion has already taken place, the
environmental effects of increased agricultural production in developing
countries could be proportionately more damaging. For this and other
reasons, many analysts (for example CBD, 2005; Kirkpatrick and George,
2005) have called for anking measures at the international level. Such
measures, in their opinion, should support the uptake of the most envi-
ronmentally friendly productionmethods indeveloping countries as their
output increases and could take the form of subsidies through overseas
development aid.
the environmental impact of green box subsidies 435
One might also consider the perspective that intensive agricultural
practices in developed countries induce intensication in developing
countries. To date, however, this competition has been marked by unbal-
anced results due to the nancial limitations faced by governments and
producers in developing countries.
Although general and partial equilibrium modelling approaches have
been applied to the study of welfare effects resulting from agricultural
trade liberalizationand the reductionof agricultural subsidies onnational
and global levels, very few directly examine the effects of agricultural
subsidies froman environmental perspective (box 15.1). Aside fromfore-
casting the impact on production of reductions in agricultural subsidies,
and thus potentially their environmental effects in that respect, partial
and general equilibrium quantitative modelling techniques may provide
valuable insights into the net environmental impact of subsidies by assess-
ing three different types of second-order effect resulting from changes to
subsidy regimes. Those relevant to assessing environmental impacts from
subsidies include: (i) how the subsidies affect upstream and downstream
industries; (ii) how the subsidies affect the production of substitutes for
the subsidized product; and (iii) how the subsidies redistribute produc-
tion on a geographical basis. Information relating to how the removal of
subsidies is likely to impact economic activities under these three head-
ings allows for assessments of net environmental effects beyond that of the
subsidized product alone. In some cases, such analysis may even highlight
situations where altering an existing subsidy regime may actually result
in net harm to the environment.
box 15.1 modelling how the green box affects
the environment
The environmental impact of agricultural subsidies on a global level has not been
addressed extensively in the literature, and very little is known about the com-
prehensive environmental effects of green box subsidies. This situation results
partly from the relative novelty of the AoA and the sheer diversity of the agri-
cultural programmes that it governs. Moreover, empirically isolating the pro-
duction effects of green box payments is complicated by the presence of other,
non-green box subsidies and market price support. An additional complicating
factor is the fact that identically structured agricultural subsidy regimes, when
applied under the diversity of regional geographies and climatic conditions reected
across the WTO membership, are likely to result in widely diverging environmental
impacts.
436 agricultural subsidies in the wto green box
Assessments of the overall environmental impact of agricultural subsidies gov-
erned under the AoA tend to apply one of two approaches. They may rely on ex
ante methodologies, as in the case of OECD research that has ranked input and
output subsidies (essentially amber box subsidies) among the most environmen-
tally harmful (OECD, 2005c). Otherwise, they survey a number of anecdotal ex post
evaluations of changes in agricultural subsidy regimes, which reect wide variations
in ndings due to inconsistent application of criteria, methodologies and data. The
technical knowledge and sheer volume of data that more scientically rigorous and
globally comprehensive approaches would entail have apparently made such studies
resource prohibitive to date.
Further complicating analysis these days is the emergence of biofuels as a major
market for crops. Just a fewyears ago, researchers who constructed economic models
of agricultural markets for example, to measure the effects of changes in subsi-
dies and tariffs took into account a rather limited number of factors bearing
on the demand for agricultural products. These included population, per capita
income, factor costs and elasticities of supply and demand. Demand for food and
bre was assumed to grow with population and per capita income, but the low
elasticity of demand for food in general meant that the main effects of changes in
policy were assumed to manifest themselves in the composition of demand and
the location of production. Rising per capita income might translate into increased
demand for animal products and therefore feed (satised through grains and oilseed
meals), but per capita demand for total calories fromfood was assumed to approach
a limit a limit that was already satised (indeed, exceeded) in the developed
countries.
That comfortable assumption no longer holds. Nowadays, through a combi-
nation of increased prices for petroleum products and policies to promote the
use of biomass for energy, the demand for products grown on agricultural land
is determined by consumption not only of food and bre, but also of fuel a
much bigger market. Thus, agricultural subsidies, and other subsidies affecting
agriculture indirectly, must enter into a larger set of equations, including those
determining the demand for transport fuels (which can be supplied by agricul-
ture through biodiesel and ethanol) and fuels for direct heating or generating
steam (chiey wood). In the future, demand for other products of agriculture,
such as feedstocks for plastics or biodegradable disposable articles, may also become
signicant.
Thus, to the extent that subsidies ultimately affect land and product prices, the
issue is no longer only where a relatively xed amount of production takes place,
but also whether, for example, land is used to produce fuel.
the environmental impact of green box subsidies 437
Green box support and its direct and indirect environmental effects
In discussing each of the generic types of government service programme
set out in Annex 2 of the AoA, a distinction is made here between expected
direct and indirect environmental effects of particular measures. The
former result from government expenditure on programmes involving
production inputs such as pesticides or water, which tend to be most
germane in the case of general services, and for environmental payments.
Environmental impacts may also arise indirectly through the effects that
certain green box measures may have on the level, distribution, location
or type of production. Such production effects are likely to be stronger
for some forms of green box support than for others, but precise impacts
depend critically on how they are implemented at the national level.
Moreover, translating changes in production into actual environmental
effects also depends critically on the types of environmental and other
regulation in place and on the conditions attached to receipt of particular
forms of assistance.
Green box measures
General services
Governments around the world spend many billions of dollars a year on
what the AoA calls general services that is, expenditure (or revenue
forgone) in relation to programmes that provide services or benets to
agriculture broadly, or to rural communities. The AoA lists seven cate-
gories of support measure under the heading general services, several of
which relate to net government expenditure on either the creation of new
knowledge (including product-specic research) or the transmission of
knowledge to farmers (training services, extension and advisory services).
Research cannot be said to have a neutral effect onproduction indeed,
often the aim of research programmes in agriculture is to boost yields
or to lower production costs or on the environment, but the effects
are indirect and difcult to attribute to particular levels of expenditure.
Various environment-related research programmes among the OECD
economies include programmes (such as in the US) that seek to reduce
agricultures impact on soil and water resources. EUresearch is attuned to
better detection and prevention of plant diseases, for example, while New
Zealand focuses on sustainable land management and methods including
organic farming. Canadianresearchis highlightedby a strong emphasis on
assessing and improving the relationship between agriculture and global
438 agricultural subsidies in the wto green box
0 100 200 300 400 500 600 700 800
Research
Pest and disease control
Training
Extension and advisory services
Inspection services
Marketing and promotional
services
Infrastructure services
Other
G
e
n
e
r
a
l

s
e
r
v
i
c
e
s

c
a
t
e
g
o
r
y
(by proportion of national expenditure: 100% = 1,000)
China (1999)
India (1997)
Brazil (1998)
Figure 15.1 Comparison of general services expenditures by Brazil, China and India
Source: notications to the WTO Committee on Agriculture.
warming under its Climate Change Initiative for Agriculture (CCIA)
(OECD, 2005c). Comparatively few data on programmes in developing
countries are notied to the WTO. However, India spends by far the great-
est proportion of its general services expenditures on research, compared
with Brazil and China (gure 15.1).
Government-funded training, extension and advisory services may
help individual producers to become more efcient. Over the past two
decades, however, such programmes have also come to play an impor-
tant role in teaching farmers how better to manage the natural resources
on which they depend and with which they interact (OECD, 2005c).
A selection of environment-related programmes from OECD countries
include the Law for Promoting the Introduction of Sustainable Agricul-
tural Production Practices, which in Japan establishes technical assistance
programmes to help farmers to reduce their use of chemical fertilizers and
pesticides. Canada pairs its CCIA research programme with the Climate
Change Skills and Knowledge Transfer Programme, which facilitates the
uptake of best practices inareas suchas croprotation, fertilizer application
and reduced tillage. Although the EU provides comprehensive assistance
within its Member States, individual EU members may place emphasis
in certain areas. Belgium and Denmark, for example, stress education for
organic production (OECD, 2005c).
the environmental impact of green box subsidies 439
Other programmes, such as inspection services and marketing and
promotion services, may benet either producers or consumers, or both.
Governments practise different degrees of cost recovery for these services,
and it can be argued that some confer a benet by reducing costs that
would otherwise be borne by producers. However, the production effects
are likely to be small and limited by needs. Moreover, quarantine and
inspection services provide an important line of defence in maintaining
biosecurity. In addition to reducing the risk of importing pests that may
harmparticular agricultural products, such programmes also help to keep
out exotic species that may cause harm to natural ecosystems.
The environmental effects of public expenditure on pest and disease
control (when provided as a service rather than in the form of subsi-
dized pesticides) depend on how government agencies implement their
services. A government could, for example, establish a programme that
simply takes over the job from farmers of spraying pesticides, thus reliev-
ing farmers of both responsibility and an important input cost. The
government may even do it more competently. This kind of programme
is rare nowadays, but it existed in Turkey in the 1990s (OECD, 1994),
and probably elsewhere as well. Such expenditure could be regarded as
environmentally harmful, but perhaps less harmful than subsidizing pes-
ticides directly. Less ambiguously positive is expenditure on certain non-
chemical pest-control or eradication systems, such as natural predators,
and on information, such as early-warning systems, that can help farm-
ers plan more carefully their pesticide applications and thus reduce the
overall use of chemicals.
Finally, there is the catch-all category of infrastructural services, the
largest expenditure item under general services in many countries and
the second largest expenditure item in the whole of the green box in
countries such as Brazil and Japan. As dened in Annex 2, paragraph 2,
subparagraph (g), this category includes:
[E]lectricity reticulation [i.e. the connection of a farm to an electricity
grid], roads and other means of transport, market and port facilities, water
supply facilities, dams and drainage schemes, and infrastructural works
associated with environmental programmes. In all cases the expenditure
shall be directed to the provision or construction of capital works only, and
shall exclude the subsidized provision of on-farm facilities other than for
the reticulation of generally available public utilities. It shall not include
subsidies to inputs or operating costs, or preferential user charges.
Government expenditure on, for example, roads, ports and sewage-
treatment facilities normally falls under the category general
440 agricultural subsidies in the wto green box
120,000 100,000 80,000 60,000
Million RMB
40,000 20,000 0
Research
Pest and disease control
Training
Extension and advisory services
Inspection services
Marketing and promotional
services
Infrastructure services
Other
G
e
n
e
r
a
l

s
e
r
v
i
c
e
s

c
a
t
e
g
o
r
y
(Million RMB)
1999
2000
2001
Figure 15.2 General services expenditures by China (19992001)
Source: notications to the WTO Committee on Agriculture.
infrastructure in the ASCM, and so it is consistent that the AoA would
also exempt such expenditure from reduction commitments. The envi-
ronmental effects of road-building and port-deepening are rarely neutral,
but mitigating these effects is considered the responsibility of the mem-
ber economies. Clearly, there are potential environmental benets from
public expenditure on environmental infrastructure, and even electricity
reticulation (which should be considered distinct from subsidizing the
price charged for electricity) can help to reduce environmental pressures
by, for example, improving the ability of agriculture to better preserve
perishable food items and veterinary medicines. What is less clear is
whether the language excluding the subsidized provision of on-farm
facilities other than for the reticulation of generally available public util-
ities would affect the subsidized installation of off-grid electrical power
devices, for example, photovoltaic panels and small wind turbines.
It is interesting to note under this category that whereas India lav-
ishes its general services expenditures on research and development,
China spends a corresponding proportion on infrastructure services (see
gure 15.1). Infrastructure services are also the area in which Chinese
spending recorded the most vigorous growth in the period from 1999
and 2001 (gure 15.2). Japan is by far the leader in comparison with the
the environmental impact of green box subsidies 441
Research
Plant protection
Animal health control
Extension services
Facilitation of management of agricultural
organisations
Compilation of statistical data and
information
Extension and infrastructural services for
technological improvement of agricultural
production
including extension and infrastructure
Programmes for improvement of food
marketing, processing and consumption
Inspection and information services for
agricultural production materials
Infrastructural services for agricultural sector
and rural area
Disaster rehabilitation services
Infrastructural services for market facilities
Advisory services for structural improvement
Personnel expenses for government officials
General services for livestock industry,
Figure 15.3 Breakdown of Japanese general services expenditures (2003)
Source: notications to the WTO Committee on Agriculture.
EU and the US on infrastructure spending (gure 15.3). Australia also
devotes a large proportion of its general services budget to expenditure
under its National Action Plan for Salinity and Water Quality, with fund-
ing of AU$1.4 billion (US$1 billion) over the 2000 to 2008 period (Legg,
2007).
The key for the environment, however, is investment in irrigation
infrastructure and drainage, which can be highly specic to agriculture
and even to particular crops. Taking the paragraph as a whole, it would
appear that the AoA places no limits on government expenditure for
water supply facilities, dams and drainage schemes . . . directed to the
provision or construction of capital works only. The language also states:
[The exemption] shall not include subsidies to inputs or operating costs,
or preferential user charges. In combination, this could be read as say-
ing that government up-front expenditure on irrigation infrastructure
(dams, canals and transmission pipelines) is exempted from reduction
commitments, and any amount of subsidy short of full cost recovery for
operation and management is not that is, it would fall in the amber box.
In practice, most irrigation projects have been built with public
money that has subsidized the costs of operating and maintaining the
infrastructure and supplying water. Yet, such subsidization is notoriously
442 agricultural subsidies in the wto green box
under-reported in amber box notications. Still, there are signs
of progress. OECD (2005c) reports that [s]ome OECD countries
have . . . begun to encompass the principle of more comprehensive cost
recovery for water in policy. Notably, the EUadopted a Water Framework
Directive (No. 60/00) in 2000, which requires Member States to apply the
principle of cost recovery in relation to water services that accounts for
both environmental and resource costs (OECD, 2005c).
The last half of the nal sentence of the paragraph or preferential user
charges is also interesting. One could read this as disallowing exemption
of pricing practices that may involve no subsidy to operating costs in the
aggregate, but cross-subsidize agricultural users through differential user
charges.
8
This is a commonpractice inprojects that supply water (or water
and electricity) to municipalities and industrial users as well as to farmers.
However, identifying the subsidy element of preferential user charges is
often not simple: lower charges for water used for irrigation rather than
other uses cansimply reect differences inthe quality, interruptability and
delivery costs. Perhaps because of the difculty of estimating the subsidy
element in preferential user charges, few WTO members have included
this kind of support in a notication.
The lack of any guidance in the AoA regarding the scope of the def-
inition of inputs raises several questions. Could the language refer to
water itself? In particular, if the government is not charging a market
value for the water (usually the case), then does that count as an input
subsidy? A case could be made that providing impounded water from
a government-nanced dam at less than its market value could be con-
sidered government revenue forgone and thus not exempt. To the best
of our knowledge, no WTO member has reported government revenue
forgone through underpricing water in a notication.
Irrigation and drainage have long been two means of substantially
boosting agricultural production. However, irrigation and drainage can
also have enormous impacts on the environment, which are often (but
not always) negative. The positive environmental effects derive from the
maintenance of vegetative cover onlandotherwise subject towinderosion
or strong but infrequent rain, and in some cases from the moderation
of oods. For irrigation fed by water from surface sources, the negative
effects include:
8 Another question left open to interpretation is whether or not a user fee schedule that
chargedall users full operationandmanagement costs andrecoveredsome of the amortized
capital costs (or replacement costs) of the infrastructure, but gave preference to irrigators
(e.g. by exempting them from the capital-recovery element of the fee) would be covered
by the exemption.
the environmental impact of green box subsidies 443
r
changes in the volume or seasonable pattern of stream ow through
the diversion and evaporation of water to crops this reduction can
affect natural aquatic cycles and the amount of water available for
hydroelectric power;
r
increases in the temperature and nutrient and sediment loading of
water bodies receiving any return water; and
r
salt encrustation on irrigated lands.
For irrigation based on groundwater, the latter two of the above effects
may be manifest, and, if the rate of abstraction exceeds the natural rate
of replenishment, then the eventual consequence of irrigation will be to
deplete the aquifer on which it depends.
For any particular case, however, the environmental impact depends
greatly on how the money is spent. New expenditure on historically
irrigated lands, in order to reduce evaporation and improve the efciency
of delivering water to the crops root systems, should have a net positive
environmental effect. Similarly, although drainage of marshlands clearly
destroys many of the ecosystem services provided by such land, proper
drainage is vital in order to reduce the rate of salt build-up on irrigated
lands that were originally dry.
Public stockholding and domestic food aid
Paragraphs 3 and 4 of the green box exempt from reduction commit-
ments public expenditures related to, respectively, the accumulation and
holding of stocks of products that form an integral part of a food-security
programme, and the provision of domestic food aid to sections of the
population in need. This kind of expenditure benets domestic (and, if a
country is large, international) food consumers, by reducing general risks
of food shortages and increasing the food available to targeted recipients
(usually through a means test), allowing eligible recipients to buy food
either at market or at subsidized prices.
In both cases, food purchases by the government shall be made at
no less than the current market price, and the process of accumulating,
nancing, administrating and disposing of the food shall be nancially
transparent. Moreover, sales from food security stocks shall be made
at no less than the current domestic market price for the product and
quality in question. These clauses are meant to ensure that the schemes
are not used as mechanisms of market price support.
Of course, there is no language in the AoA to stop governments from
timing their purchases strategically for example, engaging in large-scale
purchases at times when the price of the food in question is seasonably
444 agricultural subsidies in the wto green box
low, and selling off some of the stockpiled food when prices are seasonably
high. Because the AoA stipulates that [t]he volume and accumulation
of such stocks shall correspond to predetermined targets related solely to
food security, there are limits to which governments can play the market.
However, because food is perishable, they could legitimately argue that
some turnover in stock is necessary.
The effects on production of such expenditure are likely to be small,
nevertheless, and therefore so are any environmental effects. The US
is by far the leading provider of domestic food aid subsidies among
the key developed economies. Among the developing countries, China
is the largest provider of such subsidies, with Brazil in second place
and India notifying no food subsidies to the WTO Committee on
Agriculture.
Direct payments
The greenbox describes several types of generic direct payment toproduc-
ers that are not subject to reduction commitments. As with other green
box measures, direct payments for which exemption from the reduction
commitments is claimed must meet the fundamental requirements of
paragraph 1. In addition, direct payments must satisfy specic criteria
set out for the enumerated types or, where exemption from reduction
is claimed for a type other than those specied in paragraphs 6 to 13
of Annex 2, the direct payment shall conform to criteria (b) to (e) in
paragraph 6 (decoupled income support) (box 15.2).
box 15.2 criteria (b) to (e) for decoupled income support
(b) The amount of such payments in any given year shall not be related to, or based
on, the type or volume of production (including livestock units) undertaken
by the producer in any year after the base period.
(c) The amount of such payments in any given year shall not be related to, or
based on, the prices, domestic or international, applying to any production
undertaken in any year after the base period.
(d) The amount of such payments in any given year shall not be related to, or based
on, the factors of production employed in any year after the base period.
(e) No production shall be required in order to receive such payments.
Source: Annex 2, paragraph 6 of the WTO Agreement on Agriculture.
the environmental impact of green box subsidies 445
Some of the eight categories of direct payments discussed in the green
box share common criteria, and for the sake of brevity they are discussed
below under only four headings.
Decoupled income support and payments under regional assistance
programmes Two types of direct payment are totally decoupled from
production: decoupled income support and payments under regional
assistance programmes.
9
Decoupled income support payments are those for which eligibility
is determined by clearly-dened criteria such as income, status as a
producer or landowner, factor use or production level in a dened and
xed base period.
Although such forms of subsidies are meant to be totally decoupled
from production, EU Member States, for example, retain the discretion
to implement subsidy packages for producers from which the portion of
payments not linked to production are deducted from the amber box and
placed in the green or blue box. The fact that such subsidies are linked to
historical patterns of production tends to ensure that the largest produc-
ers often also those with the most intensive production techniques
continue to receive the biggest payments. However, studies show that the
largest farms are also those that tend to have the resources by which to
implement the most sophisticated and efcient production technologies.
In comparison, smaller farms tend to apply less advanced production
technologies and do so less efciently, especially those managed by older
or less educated farmers. The result is that although large farms tend
to farm more intensively, they are also likely to adopt less risky farming
techniques and employ agrochemicals more efciently than small farms
(OECD, 2005c).
Payments under regional assistance programmes are similar to decou-
pled income payments (in particular, they must be unrelated to prices
or types or volumes of production in any year after a base period,
other than to reduce that production), but are restricted to producers
9 Where the regional payments differ substantially from normal decoupled income support
is in whether they can be based on production factors. In the case of decoupled income
payments, (d) The amount of such payments in any given year shall not be related to, or
based on, the factors of production employed in any year after the base period, whereas
in the case of payments under regional assistance programmes, (e) Where related to
production factors [currently used], payments shall be made at a degressive rate above a
threshold level of the factor concerned.
446 agricultural subsidies in the wto green box
in disadvantaged regions that is, clearly designated contiguous geo-
graphical areas with denable economic and administrative identities
considered as disadvantaged on the basis of neutral and objective crite-
ria arising out of more than temporary circumstances. These criteria
must be spelt out clearly in law or regulation. In addition, the payments
must be available only to producers in eligible regions, but generally
available to all producers within such regions and be limited to the
extra costs or loss of income involved in undertaking agricultural pro-
duction in the prescribed area.
An example of a regional assistance programme is the EUs Less
Favoured Areas (LFA) scheme, which is one of the principal areas of
spending in Pillar 2 (rural development) of the Common Agricultural
Policy (CAP). The scheme makes payments to farmers in agronomically
marginal areas that are designed to compensate them for the additional
costs and income forgone related to their natural handicap. Just seven
Member States account for two-thirds of total LFAspending. As described
by Brunner and Huyton (2007), the LFAs could potentially play an impor-
tant role in preserving wildlife habitat in areas of High Natural Value
(HNV) farming if they were targeted better:
LFAs are targeted geographically and not specically at farming systems
that support high levels of biodiversity, which have become known as High
Natural Value (HNV) farming. This means that intensive producers who
may be causing environmental damage through, for example, overgraz-
ing, receive the same payment as do HNV farmers. Even worse, farmers
who have overcome their natural handicap through environmentally
harmful practices such as irrigation expansion are still entitled to the same
payment as farmers who keep practising the traditional HNV manage-
ment. Furthermore, LFAdesignation has not captured all HNVfarming at
risk from abandonment, while it often includes areas where the problem
is marginal. There has been no effort made as yet to monitor the envi-
ronmental benets and disbenets of the scheme so that it can be better
targeted at environmental delivery.
The second-order environmental effects of these kinds of payment when
they are related to something other than the current use of production
factors (namely, income, status as a producer or landowner) are expected
to be small, as a producers current decisions relating to the volume or
choice of production, or inputs used, do not affect the amount received.
However, as discussed above, they can affect the viability of farming in a
particular region or country, which in turn can inuence whether land
continues to be grazed or cultivated.
the environmental impact of green box subsidies 447
Government nancial participation in income insurance and income
safety net programmes; payments for relief from natural disasters
These types of generic programme differ in the way in which they oper-
ate, but because they are cross-referenced (in paragraphs 7(d) and 8(e) of
Annex 2), they may be considered as linked.
Eligibility for payments under a government-subsidized income insur-
ance scheme or income safety net programme is supposed to be deter-
mined with reference solely to a loss of income derived from agricul-
ture compared with the producers income during a preceding three-year
period. In the case of payments for relief from natural disasters, eligibility
arises:
only following a formal recognition by government authorities that a
natural or like disaster (including disease outbreaks, pest infestations,
nuclear accidents, and war on the territory of the Member concerned) has
occurred or is occurring; and shall be determined by a production loss
which exceeds 30 per cent of the average of production in the preceding
three-year period or a three-year average based on the preceding ve-year
period, excluding the highest and the lowest entry.
Payments are limited to less than 70 per cent of the producers income
loss inthe year the producer becomes eligible to receive assistance through
an insurance scheme, and where a producer receives in the same year
payments under both types of scheme the total of such payments shall be
less than 100 per cent of the producers total loss.
Insurance schemes can inuence the kinds of risk-management strate-
gies that farmers might adopt in the absence of such schemes, which
in turn can have implications for the environment. For example,
as explained by UNCTAD (2007), crop insurance may encourage produ-
cers to bring risky marginal land which may or may not be environ-
mentally sensitive into production, or to plant more risky crops. In
addition:
Crop insurance might create an incentive for risk-averse producers to
increase output by using more inputs eveninthe face of probable lowyield.
On the other hand, if inputs are risk-reducing inputs, such as pesticides
in general, then the insured persons optimal decision could change as a
result of being insured and the producer could be inclined to use less of
the input. In other words, because the insurance contract reduces the loss
associated with the insured event, the producer might be willing to take a
more risky decision.
448 agricultural subsidies in the wto green box
UNCTAD (2007) notes that theoretical models in this area support the
conclusionthat the directionof the moral hazardeffect oninput use, out-
put, and expected indemnities is ambiguous unless strong assumptions
are made about risk preferences and input risk properties.
Structural adjustment assistance The AoA exempts three types of
structural adjustment assistance: (i) producer retirement programmes;
(ii) resource retirement programmes; and (iii) structural adjustment
assistance provided through investment aids. The rst refers to pro-
grammes designed to facilitate the retirement of persons engaged in mar-
ketable agricultural production, or their movement to non-agricultural
activities, andthe secondtoprogrammes designedtoremove permanently
land or other resources, including livestock, from marketable agricultural
production.
The environmental effects of the rst type of structural adjustment
assistance are likely to be negligible. In most cases, it can be assumed
that some other producer will acquire the retired farmers agricultural
assets and continue to use them for agriculture.
10
This will not always be
the case, of course, in which event the environmental effects will, as for
the second type of structural adjustment assistance, depend on how the
government disposes of the affected land. Subsequent land use could, in
theory, range from nature reserve to shopping centre.
The main resource retirement expenditure so far has been under the
US Conservation Reserve Program (CRP). First introduced in the 1985
Farm Bill, the CRP makes annual payments to farmers who agree to
take land out of agricultural production for a period of 10 years. In
its early years, the CRP was poorly targeted to reducing erosion and
protecting wildlife two objectives of the programme specied in the
Farm Bill but was very good at reducing crop surpluses and boosting
farm income (Bovard, 1991). Over time, however, the regulators have
tightened the criteria for enrolment of new land into the CRP, although
its environmental performance could still be improved through better
targeting (Greenhalgh et al., 2006).
10 The Heritage Council of Ireland (1998) claims that changes induced in the age prole
of farms through producer retirement schemes can affect stewardship of farmland, as
elderly farmers tend to be less development-minded and sometimes have more sympathy
with the natural environment than younger, development-conscious farmers. For this
reason, (wildlife) habitats that have remained intact for generations may be removed once
the farm is transferred.
the environmental impact of green box subsidies 449
The environmental effects of the third type of structural adjustment
assistance can vary widely. For this category, the AoA has in mind pro-
grammes designed to assist the nancial or physical restructuring of a
producers operations in response to objectively demonstrated structural
disadvantages. Eligibility for such programmes may also be based on a
clearly-dened government programme for the reprivatization of agri-
cultural land.
Financial restructuring for example, the forgiveness of debt
improves a producers viability and can make the difference between con-
tinuedoperationandinsolvency. Any environmental effects will be related
indirectly to effects on land use and production methods. Expenditure on
physical restructuring can imply any manner of changes to a particular
farm operation or operations, ranging from grading or terracing the land
(which can increase or decrease run-off) to consolidating farms through
the removal of hedges (thereby potentially removing habitat for small
birds and mammals, and reducing biodiversity).
Payments under environmental programmes Payments under environ-
mental programmes (agri-environmental payments) constitute a sig-
nicant category of expenditure under the green box. For the OECD as
a whole, they account for 8 per cent of green box expenditure; they are
also provided by Argentina, the Dominican Republic, Guatemala, India
and South Africa (Diakosavvas, 2007). The EU is the leading provider of
payments under this category, spending 5 billion on agri-environmental
schemes in 2002 (WTO, 2006c), mainly to compensate farmers for the
costs of maintaining particular landscapes or complying with environ-
mental regulations.
Paragraph 12 of Annex 2 states: (a) Eligibility for such payments shall
be determined as part of a clearly-dened government environmental
or conservation programme and be dependent on the fullment of spe-
cic conditions under the government programme, including conditions
related to production methods or inputs. (b) The amount of payment
shall be limited to the extra costs or loss of income involved in complying
with the government programme.
Setting aside issues of equity (namely, if one is not concerned about
violating the polluter-pays principle), and starting with the assump-
tion that whatever a farm does with its land is permissible as long
as it is not creating a public nuisance, then any programme that
pays to improve the environmental performance of that farm must
by denition be environmentally benecial. Subjecting such payments
450 agricultural subsidies in the wto green box
to reduction commitments would be counterproductive from that
perspective.
Nonetheless, second-order effects can arise from some types of envi-
ronmental payment. As UNCTAD (2007) points out, an environmental
payment could lower the costs of production if the environmentally supe-
rior technology also has lower operating costs than the one it replaced,
but because of high xed costs would not have otherwise been adopted in
the absence of the subsidy. Moreover, identifying the boundary between
when a subsidy is truly supporting investment in pollution control and
when it is actually supporting an integral part of a production process is
not always easy. In the US, for example, local governments have on several
occasions given ethanol plants access to so-called private-activity bonds,
which are tax-exempt, for a portion of their plants. They are allowed to
do so based on an interpretation of the tax code that classies the part
of an ethanol production facility that processes the wet slurry left over
from fermenting the maize (the stuff that eventually becomes a saleable
product, distillers dried grains with solubles) as a solid-waste treatment
plant (Domaskin, 2007; Koplow, 2006).
Numerous studies of particular environmental programmes have been
undertaken over the past decade to assess whether they actually generate
environmentally positive behaviour and outcomes. In many cases, early
analysis of such schemes pointed more to potential than to measurable
results. For example, the Heritage Council of Ireland (1998) undertook a
detailed study of its Rural Environment Protection Scheme (REPS), con-
cluding that the REPS was clearly successful fromthe viewpoint of farmer
participation, but that problems had arisen in the schemes execution.
Notably, the study found that the programme had insufcient ecological
expertise and no baseline study from which to make evaluations.
One of the largest assessments of agri-environmental policies took
place at the end of the 1990s in the EU. Oltmer et al. (2000), draw-
ing on standardized survey questionnaires and interviews conducted in
nine EU countries (Austria, Denmark, France, Germany, Greece, Portu-
gal, Spain, Sweden and the UK) and Switzerland undertook an analysis
of variance (ANOVA)-type meta-analysis of the environmental impacts
of agri-environmental policies. The study investigated whether specic
conditions under which agri-environmental measures are applied have
an effect on the behaviour of farmers with regard to three driving-
force indicators, N-fertiliser, livestock density and area of grassland.
Their results indicated that agri-environmental policy intervention was
indeed [having] a positive effect on the behaviour of participating
farmers with respect to the chosen indicators. However, the study
the environmental impact of green box subsidies 451
24.6%
4.7%
0.6%
0.0%
7.2%
2.9%
0%
5%
10%
15%
20%
25%
30%
EU (2002) Japan (2003) US (2000) Brazil (1998) China (2001) India (1996)
Figure 15.4 Environmental programmes as a proportion of total green box
expenditure
Source: notications to the WTO Committee on Agriculture.
also found that other factors, such as the current prices of meat and
livestock, might outweigh the environmental benecial effects of agri-
environmental payments.
Perhaps unexpectedly, Chinas total subsidies for agri-environmental
programmes are among the highest among WTO members whether
considered in relative or absolute terms. Although Chinas agri-
environmental subsidy levels are relatively less impressive when consid-
ered as a proportion of total green box subsidies (gure 15.4), this result
derives from the fact that China records no amber box spending. Never-
theless, absolute spending by China on agri-environmental programmes
is well over seven times that of the US, nearly 10 times that of Japan
and more than one-half that of the EU (gure 15.5). Little detail at the
programme level was found within the context of this study, meaning
that ample room exists for research to shed light on one of the largest
and yet least understood national regimes of environmental programmes
notied to the WTO Committee on Agriculture.
Policy lters affecting agricultures environmental impacts
Many support elements containeligibility or other conditions andare nor-
mally provided in the presence of environmental regulations, land-use
restrictions and conservation programmes. Environmental and related
452 agricultural subsidies in the wto green box
(For the most recent year data are available US$ millions)
3,758
230
309
0
2,269
70
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Brazil (1998) US (2000) J apan (2003) EU (2002) India (1997) China (2001)
Figure 15.5 Absolute spending on environmental programmes
(i)
Source: notications to the WTO Committee on Agriculture.
(i)
Exchange rate conversions applied included: US$1 =0.75, US$1 =117.543 yen
and US$1 =RMB7.7. All other countries reported spending in US$.
land-use policies can also have a tremendous inuence on the environ-
mental effects of changes in production caused by box shifting and expen-
diture on green box measures. An exhaustive survey of these policies is
clearly beyond the scope of a chapter of this length; the following, there-
fore, is intended only to give a avour of some general trends. In order to
predict the indirect environmental impacts of changes in production pat-
terns or levels induced by green box support, it is necessary to understand
how such conditionality and regulations may moderate such impacts.
Regulations affecting the environmental performance of agriculture
can be placed into one of three broad categories: (i) those imposed
as conditions on receipt of direct payments or compensation for costs
incurred in meeting environmental standards or providing an environ-
mental service; (ii) mandatory regulations imposed on agriculture or on
food independent of support levels; and (iii) other regulations that affect
agricultures impacts on the environment. The rst types of regulation are
of greatest interest in any discussion of the environmental effects of green
box subsidies, but they are not the only ones available to policymakers.
So-called environmental cross-compliance is becoming increasingly
common in OECD countries as policymakers attach environmental
the environmental impact of green box subsidies 453
conditions to the receipt of farm support, particularly decoupled and
non-decoupled direct payments. (Such conditions are much less com-
mon in non-OECD countries.) A typical form of environmental cross-
compliance is a requirement that the recipient of a headage payment
maintains stocking levels belowa specied density per hectare. Others are
tied to crop production; the Conservation Compliance provision of the
1985 Food Security Act, for example, requires US farmers to implement
soil conservation systems on designated highly erodible cropland in order
to remain eligible for farm programme payments (Smith and Weinberg,
2004).
In 2003, environmental cross-compliance became an integral part of
the EUs CAP by requiring that farmers observe a number of different
standards relating to the environment, public, animal and plant health,
and animal welfare, in return for direct payments under the Single Pay-
ment Scheme (Farmer and Swales, 2004). However, whether these envi-
ronmental cross-compliance measures are always effective is still an open
question. As recently as December 2004, for example, Farmer and Swales
(2004) concluded their study of the implementation of cross-compliance
measures across the EU-15 as follows:
At this stage it is difcult to judge whether a consistent environmental
baseline has been set, although there is evidence that Member States have
developed standards that account for both national and regional condi-
tions . . . The effective monitoring and evaluation of cross-compliance will
determine whether the recently reformed CAPwill provide consumers and
environmentalists with an increased condence that farming is becoming
more conscious of its role in sustainability. The policy of cross compliance
is, in the opinion of IEEP [Institute for European Environmental Policy],
one that will improve through the process of learning by doing. It is a
substantive policy measure that will take time to become effective.
The second type of regulation is also increasingly constraining what farm-
ers can do on and with their land. Regulations on the registration and
on-farm use of pesticides have been in force in most OECD countries
since at least the 1970s. These determine what chemicals can be used,
and in many cases also where and under what conditions they can be
applied. A few countries, such as Denmark, Norway and Sweden, have
even taxed pesticides in an effort to reduce pesticide consumption. Regu-
lations relating to acceptable limits of pesticide residues in marketed food
and beverages also indirectly affect such farm-level decisions as when to
spray crops and with what chemicals. Generally, over time, governments
have reduced acceptable levels of pesticide residues in food, especially as
454 agricultural subsidies in the wto green box
better-targeted (and usually more expensive), less toxic, less persistent
and less mobile chemical formulas have emerged to replace older pesti-
cides. This has had a knock-on effect up the food chain, such as when a
reduction by Germany in its acceptable levels of the pesticides tetradifon
and ethion in food prompted a major change in pesticide practices in the
Darjeeling tea-growing region of India (OECD, 2005b).
Some countries have legislated regulations intended to limit nitrate
pollution from agriculture. Under the EUs Nitrate Directive of 1991,
for example, EU Member States must identify waters that are or could be
affected by nitrate pollution from agriculture, and then designate agri-
cultural areas that drain into these waters and can be said to contribute
to their pollution as Nitrate Vulnerable Zones.
11
Member States must
draw up action programmes containing mandatory restrictions on agri-
cultural practices that are effective in preventing further nitrate pollution
from occurring in these zones. Among the restrictions are limits on the
amounts of livestock manure that can be applied to the land each year
(including by the animals themselves) and a requirement for the appli-
cation of fertilizers to farmland to be based on a balance between the
requirements of the crops and the supply to the crops from the soil and
from fertilization.
Intensive livestock operations, generally called concentrated animal
feeding operations (CAFOs) in the US, long under-regulated, have lately
been subject to new sets of regulations aimed in particular at controlling
water pollution. Speir et al. (2003), in a comparative study of regulations
in Canada, Mexico and the US, documented several types of regulation
in force, among which are those that require CAFO operators to obtain a
permit; to prepare a nutrient management plan or a manure management
plan; or to post a bond (or some other form of nancial guarantee) to
ensure the proper closure of manure management facilities, should the
livestock operation go out of business.
Such regulations, it should be stressed, mainly limit the allowed envi-
ronmental impact per operation rather than the overall environmen-
tal impact. Also, as with any environmental regulation, the quality of
enforcement varies widely. According to Speir et al. (2003), enforcement
is often hampered by agencies that are under-staffed, untrained in live-
stock issues, or both. In some cases, jurisdictional issues arise among
environmental agencies and agricultural agencies.
11 The criteria for designation are either a concentration of nitrate above 50 mg/l in fresh
surface waters and groundwater, or eutrophication, or water that may become one of
these in the near future, including estuaries, coastal waters and marine waters.
the environmental impact of green box subsidies 455
Other regulations indirectly affect agricultures impact and what hap-
pens to agricultural land when it becomes unprotable to farm. Land
use and zoning policies, for example, often restrict or at least slow down
the conversion of farmland into land for residential or commercial use
or forested land into farmland. A few countries, such as the Netherlands,
have national spatial plans that make it very difcult to change land
use, even within agriculture (for example, from pasture to glasshouse
agriculture). Although such planning has not prevented farmland from
being used for other purposes, it probably has reduced the rate at which
farmland has been converted permanently to other uses.
In most OECD countries, the rate of conversion of forested land into
farmland has declined to a trickle. This is because the remaining land
suitable for forest growth is usually less remunerative when used as farm-
ing or is tied up in state-owned forests, parks and wilderness areas. The
same is not the case in countries such as Brazil and Indonesia, which have
vast forests that could still be developed for agriculture in the future. Both
countries have laws or plans
12
that are supposed to place large areas of
virgin forest off limits to logging or agriculture, although enforcement
of these laws has at times of high pressure for development been want-
ing. Nonetheless, recent evaluations (for example, Nepstad et al., 2006a)
suggest that the creation of protected areas in Brazil signicantly reduced
rates of both deforestation and re, at least before crop prices surged in
2006 and 2007.
13
Several newinitiatives and proposals relating to forest protection could
further limit the spread of agriculture into tropical forests, by making
forest conservation relatively more remunerative. The government of
Australia, for example, has committed AU$200 million (US$160 million)
to help ght illegal logging and slow down global warming; this is one
of the largest funds ever established by a government to reduce tropical
deforestation. More signicant in the long run are proposals to create
12 According to the rainforest website, http://www.mongabay.com (Butler, 2006), Brazil has
vast protected areas and intends to add more under its Amazon Region Protected
Areas, a 10-year plan to create a network of protected areas and sustainable-use reserves
of 492,100 km
2
. The Brazilian Government has set aside large tracts of its forests (roughly
12.5 per cent its total land area) for its indigenous population. Indonesia has also des-
ignated nearly 400 protected areas, but according to http://www.mongabay.com the
sanctity of these reserves is virtually nonexistent.
13 Other evidence, in the case of Brazil, shows that more aggressive enforcement of environ-
mental laws in recent years has helped to reduce the rate of deforestation (to 13,100 km
2
in 200506, down more than 40 per cent from 200405 and the lowest gure since 1991).
See http://news.mongabay.com/2006/1026-brazil.html.
456 agricultural subsidies in the wto green box
a carbon nance mechanism (considered most recently at the Decem-
ber 2007 United Nations (UN) climate negotiations in Bali, Indonesia)
that would involve payments from industrialized nations to compen-
sate developing countries for avoided rainforest deforestation. But-
ler (2006), citing a World Bank study, claims that land worth US$200
to 500 per hectare as pasture could be worth US$1,500 to 10,000 if
left as intact forest and used to offset carbon emissions from indus-
trialized countries, and could generate between US$375 million and
US$5.6 billion a year for a country such as Indonesia, depending on
how much deforestation it could avoid and the market price for carbon
offsets.
Summary of the direct and indirect environmental effects
of green box support
Some greenbox measures directly affect the impact of agriculture onenvi-
ronmental outcomes, but whether on balance the net impact is positive
or negative is impossible to say denitively. Judging from the evaluations
carried out to date, payments under agri-environmental programmes
likely do little or no environmental harm, and in many cases they seem
to improve the performance of agriculture and protect environmental
amenities on land owned by farmers. At worst, a few programmes may be
perpetuating forms of agriculture in locations that, in the absence of the
programmes, might revert to land uses that could provide even higher
levels of environmental amenities.
To our knowledge, there have been few studies to date that have evalu-
ated the environmental effects of specic general service programmes, the
other category of green box expenditure that can inuence environmental
outcomes directly. It would, even so, be hazardous to generalize. Research
can, of course, lead to the development of crop varieties and farming
practices that reduce agricultures environmental impacts, although in
practice muchresearchis still directedat developing higher-yielding crops
and livestock, sometimes in ways that require even more chemical fertiliz-
ers and pesticides. Pest and disease control programmes can be designed
and operated in a way that reduces the need for chemical interventions,
or they can impose cheap, uniform approaches to dealing with problems.
Where better information and monitoring are most needed, however, is
on the environmental effects of expenditure on infrastructural services,
if only because this often attracts the greatest level of spending under the
general services category. Here, the potential for direct impacts on the
the environmental impact of green box subsidies 457
environment, through the funding of large-scale irrigation and drainage
works, is enormous.
The indirect environmental effects of green box measures, through
their production effects, are probably still moderate compared with
the environmental effects of amber and blue box measures, but poten-
tially they may be signicant. Production effects can occur through the
cost-reducing or productivity-enhancing changes brought about through
expenditure on general services, particularly pest and disease control and
infrastructural services, as well as through the general wealth-enhancing
and risk-reducing effects of direct payments. These effects will mean that
the pattern of agricultural production across the world is altered to some
degree by the existence of green box measures, against the counterfactual
of no green box measures. Determining whether, on balance and globally,
the environment benets because of them is beyond the capability of cur-
rent models and information on regional agricultural impacts. However,
given the trend towards ever tighter regulations affecting agricultures use
of fertilizers and pesticides, and even the allowed density of livestock on
pasture, local environmental impacts resulting from changes in produc-
tion levels and location are likely to be less nowadays than they would
have been in the past.
One common theme that runs through the literature of environmen-
tal evaluations of green box measures is that often the measures are
implemented before an adequate baseline of the environmental state of
agriculture has been established. That is not to argue that baseline studies
should always and necessarily precede the implementation of green box
programmes, but only that the lack of a baseline makes the task of iden-
tifying the specic benets of the programmes much harder. Fortunately,
many governments are cognizant of the need for better environmental
data and are devoting greater resources to collecting and processing such
data (OECD, 2006). In the future, therefore, the ability of researchers to
evaluate the cost-effectiveness of actual programmes should improve.
Proposals for reform
The WTO negotiating mandate for the green box contained in the 2004
July Package essentially includes three components.
14
The negotiations
are to reviewand clarify the rules of the green box with a viewto ensuring
that green box measures have no, or at most, minimal trade-distorting
14 Paragraph 16 of WTO (2005b).
458 agricultural subsidies in the wto green box
effects or effects on production. In doing so, the basic concepts, prin-
ciples and effectiveness of the green box are to remain, while due
account should be taken of non-trade concerns. The mandate nally
indicates that improving obligations for monitoring and surveillance
of the green box is to be particularly important. The Hong Kong Dec-
laration has provided additionally that negotiations on the green box
ensure that programmes of developing country members that cause not
more than minimal trade-distortion are effectively covered.
15
In short,
the two underlying themes of the negotiating mandate are to enhance
green box rules to reduce distortions in trade and production and to
do so in a manner that covers developing countries interests. These two
themes are intertwined throughout the changes proposed to programmes
contained in the green box.
Nowhere are the environmental implications of green box rules more
explicit than under environmental programmes (paragraph 12), where
Canadian proposals have sought to tighten further the rules to pre-
vent the possibility of compensation beyond the cost of compliance.
16
Under resource-retirement programmes (paragraph 10), Canada had at
some point submitted a proposal to require these programmes to be
time-limited, but has apparently withdrawn the proposal. Investment
aids (paragraph 11) have received proposals from Canada, supporting
increased transparency on justications for the programmes, and the
group of 20 developing nations (G-20), which supported wording to
make such programmes more accessible to developing countries as well
as requiring xed and unchanging base periods. There has also been
widespread support for the introduction of a new subparagraph 2(h)
under the existing category of general services payments to enable devel-
oping countries to cover expenses linked to settlement, land reform, land
rehabilitation, soil conservation and resource management (Hepburn
et al., 2007).
Decoupled income support (paragraph 6) received a multitude of pro-
posals. Considering decoupled income support a form of subsidy that is
particularly likely to induce production and distort trade, the G-20 points
out that such programmes are often a form of cross-subsidization. The
existence of incomplete decoupling seems to conrmthat layers of sub-
sidies from different AoA categories provided to an individual producer
15 Paragraph 5 of WTO (2004a).
16 Information regarding the negotiations contained in the next three paragraphs comes
from ICTSD (2007).
the environmental impact of green box subsidies 459
could have signicant trade-distorting effects. The G-20 and Canada in
particular target base-period updating as a practice that creates incen-
tives to increase production. However, whenconfronted with the question
of whether xing base periods permanently would obstruct the ability of
countries to change programmes even far into the future when the orig-
inal programme has become obsolete, Canada suggested that new base
periods would be allowed under its proposal, provided that the new pro-
grammes were clearly different from their predecessors. The existence of
requirements for factors of production to be in use under some green
box programmes such as those of the EU would be made illegal under
a proposal by the G-20, which would forbid receipt of subsidies being
contingent on them. However, minimum use to prevent environmental
degradation would be allowable under the G-20 proposal.
There seemed to be little disagreement among the US, the G-20,
Canada, the African Group and others that natural disaster relief (para-
graph 8) should be changed in order to allow 100 per cent compen-
sation (a departure from the normal 70 per cent limit) in the case of
destruction of animals and plants to control or prevent diseases. There
was similar agreement that the requirement for disadvantaged regions
to be contiguous in order to benet regional assistance programmes
(paragraph 13) should be relaxed in the case of developing countries.
Anin-depthanalysis of the environmental implications and not just the
production and trade implications of these proposals would be valuable.
To the extent that the reforms would truly reduce incentives to produce or
use specic resources, one could expect that in general they would benet
the environment.
Missing from the amendments to Annex 2 proposed so far by gov-
ernments are any references to subparagraph 2(g), on infrastructural
services. Of all the categories of support listed in the green box, however,
this category has one of the greatest potentials to affect production levels,
production costs and the environment. More and better information on
expenditure on infrastructural services, and its links with expenditure on
operations and maintenance of the infrastructure, is sorely needed.
Brunner and Huyton (2007), in their appraisal of the environmental
effects of the EUs green box programmes, point to another possible area
for reform. They argue that the restrictionset out insubparagraph12(b) of
Annex 2 stipulating that the amount of payment [under environmental
programmes] shall be limited to the extra costs or loss of income involved
incomplying withthe government programme has meant, insome cases,
that services with a public good nature (such as protection of wildlife)
460 agricultural subsidies in the wto green box
are not able to be funded adequately since, strictly speaking, very little
loss of income is involved. Brunner and Huyton suggest a redenition of
green box rules in a way that admits payments for environmental services,
contingent on a country being able to show that the payments are related
strictly to the achievement of measurable environmental benets.
Regardless of whether the language of the green box is eventually
amended, better information on the multitude of forces affecting agricul-
ture and the environment across the diversity of the WTO membership
is clearly needed. Continuing to develop and rene data on the amount
of expenditures provided under the green box, as well as on the state
of the environmental resources involved in agriculture, is therefore vital
(Funaki, 2004).
Conclusions and recommendations for further research
Designed as a form of best practice in agricultural subsidization, the
green box is likely to face increasing pressure for expansion in the coming
years, particularly if the current negotiations that have singled out amber
box and potentially blue box subsidies for further reductions are con-
summated. Assessing how green box subsidies impact the environment is
important because they are large and have much scope for growth. Doing
so is difcult because the effects of green box programmes are likely to be
subtle: the disciplines already forbid output and input subsidies, which
are the forms of subsidies most likely to generate negative environmental
repercussions.
This assessment of green box subsidies has thus focused on reviewing
green box programmes with a focus on whether they, despite restric-
tions on linkages to production, may inadvertently provide incentives
to increase production. Delving into the details of actual programmes
allowed under the green box, we have tried to draw out a salient overview
of concrete environmental effects stemming from such programmes.
Reecting on the importance of the policy lter, or the manner in
which national regulatory regimes condition the impact of green box
subsidies on the environment, a selection of environmental conditions
attached to receipt of agricultural subsidies was reviewed and discussed.
Our qualitative conclusions are that the design of the AoA is likely to
support WTO members in implementing agricultural reforms in a man-
ner likely to produce positive environmental externalities. By compelling
reductions in amber box subsidies, which are the most trade-distorting
the environmental impact of green box subsidies 461
and thus most production-enhancing forms of agricultural support, the
AoAhas reducedthe volume of subsidies that create the greatest incentives
for intensifying agricultural practices within the WTO membership.
Our overview of specic programmes nds that agri-environmental
subsidies are likely to be net benecial to the environment and that the
programme specicities, together with the green box rules that govern
them, are key to understanding their environmental impact. Programmes
under the general services heading of the green box can have varied effects
on the environment. Research can go both ways, as it may create tech-
nologies to facilitate the intensication of production or reduce negative
environmental impacts of farming practices. Inspection services are a
basic requirement for biosecurity, and pest and disease control may be
a net benet if its effect is to prevent uncoordinated and thus excessive
use by individual producers. Among infrastructure services, irrigation is
a signicant item requiring much additional research as the impact of
water management for the environment can be substantial.
Other green box programmes, such as domestic food aid, are not
likely to be greatly trade-distorting and thus in isolation should not have
dramatic effects on the environment.
The multitude of programmes provided for under direct payments
can have complex results for the environment. Despite the fact that large
farms tend to engage in more intensive agricultural practices, they also
tend to produce more efciently and in less risky ways. Small farms have
difculty adapting the most effectual practices due to limited resources;
they often produce less efciently and frequently overuse agrochemicals
as a precautionary practice. Income insurance and structural adjustment
both tend to allow for production that otherwise may not occur, as such
forms of support reduce risk to farms and inuence decisions to pro-
duce in instances where their absence might result in a decision not to
produce.
Expenditure under environmental programmes is disciplined under
the green box by conditions requiring that it does not exceed the cost
of compliance. Many such programmes are relatively recent and have
increased in effectiveness over time. The agricultural policy apparatuses
of both the EU and the US have signalled interest in expanding funding
for such programmes. These programmes address a variety of objectives.
Some concentrate on environmental regulations affecting agriculture and
food (for example, manure-spreading and pesticide residues). Others deal
with private standards as well as land-use restrictions affecting changes
462 agricultural subsidies in the wto green box
in land use and thus overlap with general environmental policies, for
example, protection of carbon sinks or credits for carbon sequestration.
Much scope exists for growth in this category of green box subsidy.
An important substantive issue for consideration in this area is the
trade-off between the efciency and cost-effectiveness of such pro-
grammes. By requiring conformity to stringent green box disciplines
as a prerequisite for applying an environmental programme under the
green box, some policies appear to have been designed to meet green box
criteria, but are much less cost-effective than would otherwise be possible,
which has signicant implications given the budgetary constraints faced
by governments. Some supporters of green box reforms argue that if green
box disciplines were different particularly the condition limiting pay-
ments to the cost of compliance then agri-environmental programmes
would be able to secure their environmental objectives at a much lower
cost to taxpayers. This issue is taken up extensively by Blandford and
Josling (2007) and is worthy of further research.
Although China has the highest ratio of agri-environmental payments
as a proportion of total agricultural subsidies and may be second only to
the EUinabsolute spendingvery little is knownof its agri-environmental
subsidy regime. Those interested in the environmental impact of green
box subsidies should consider this a key area for research for an array
of reasons. This gap in knowledge also reects the scarcity of research
on what impact green box subsidies notied to the WTO Committee on
Agriculture has on the environment from a global perspective. Chinas
absolute expenditure on agri-environmental programmes is well over
seven times that of the US.
Shifting amber box to green box subsidies should in and of itself have
positive implications for the environment. However, the quality of com-
pliance with existing green box disciplines should further major shifts
in domestic support between boxes be made ought to be a focus of
attention by policymakers and civil society at large. (More attention to
compliance would also be helpful.) Alterations to the existing green box
disciplines may strengthen its ability to ameliorate negative environmen-
tal impacts of agricultural subsidies or even improve the environment
directly as in the case of agri-environmental programmes. This approach
must, in spite of this, be weighed against the reality that raising the bar
for green box compliance may reduce the incentive for WTO members
to shift the generally more environmentally harmful amber box subsidies
into the generally less environmentally harmful green box.
the environmental impact of green box subsidies 463
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16
The environmental impact of EU green
box subsidies
ariel brunner and harry huyton
Introduction
With over 372 billion to be spent over the 2007 to 2013 budget period on
agricultural subsidies in the European Union (EU), these subsidies have
become a key determinant of farmers incomes, frequently accounting
for over one-half of European farmers annual earnings, and thus of land
use decisions. The way in which these subsidies have been allocated has
therefore shaped land use patterns across the EU and consequently had
a resounding impact on wildlife and the environment in rural areas. At
the same time, these subsidies have been accused of heavily distorting
world trade to the detriment of farmers in developing countries and have
become one of the principal stumbling blocks in the Doha Round of
negotiations at the World Trade Organization (WTO).
The Common Agricultural Policy (CAP) underwent signicant reform
in 2003. This reform was driven by negotiations at the WTO and, to a
lesser extent, by the environmental impacts of the CAP. It resulted in a
shift of CAPspendfromtraditional market andproduct support measures
to green-box-compliant schemes, namely, subsidies that are considered
to be non-trade-distorting. It also saw the introduction of minimum
environmental standards for all farmers in receipt of subsidies, known as
cross-compliance, and the strengthening of environmental schemes.
These trends are likely to continue with the ongoing health check
of the Common Agricultural Policy as well as the post-2013 EU budget
review, which provides an opportunity for substantial reform. Indeed,
environmental and landscape concerns are now widely used to justify the
EUs continued support for farmers.
1
1 . . . thanks to cross-compliance, these direct payments give farmers a strong incentive to
farmin the way the public wants respecting high standards of environmental care, animal
468
the environmental impact of eu green box subsidies 469
Critics argue that many green-box-classied subsidies actually have
trade-distorting effects (G-20, 2005) and consequently negative impacts
on developing countries. Furthermore, there are fears that green box pay-
ments are being used to disguise farm subsidies rather than to deliver
social and environmental objectives. Indeed, there are many examples of
green-box-classied payments in the EU that are actually causing envi-
ronmental damage, as discussed in this chapter.
The need to address this problem is urgent, as abuse of the green box
is damaging the reputation of agricultural support, which can deliver
genuine social and environmental benets. At the same time, the abil-
ity of green box payments successfully to deliver environmental benets
is effectively limited by WTO rules that place restrictions on how envi-
ronmental payments can be calculated. This hampers efforts to reverse
biodiversity decline anderodes the social acceptance of international trade
rules.
This chapter argues that although there are legitimate environmen-
tal and social reasons for ensuring that both developed and developing
countries are able to provide some kind of agricultural subsidy, there is
evidence to suggest that the current subsidy regime does not adequately
protect and promote environmental objectives in both developed and
developing countries. The Doha Round mandate
2
for a review and clar-
ication of green box subsidies provides an important opportunity for
governments to ensure that payments in this category promote and do
not undermine sustainable development objectives.
The objective of this chapter is to provide trade negotiators and policy-
makers with an assessment of the positive and negative environmental
impacts of EU agricultural subsidies categorized as green box and, on
the basis of this analysis, to make recommendations for future reform
of EU green box subsidies and to suggest possible changes to green box
criteria in order to ensure optimal delivery of environmental goods and
minimum opportunity to abuse the system.
Given the huge scope of environmentally related subsidies, we focus
on the relationship between EU green box subsidies and biodiversity
conservation. It is important, however, to note that most comments
are equally relevant to other environmental goods, such as water, soil
and landscape. Biodiversity is a particularly useful example of a public
welfare and public health. This reinforces farmers traditional and vital role as stewards
of the land (Fischer-Boel, 2007).
2 See WorldTrade Organization(2004), para. 16, andthe HongKongMinisterial Declaration,
WT/MIN(05)/DEC, para. 5 (WTO, 2005).
470 agricultural subsidies in the wto green box
good that is rarely rewarded by the market. Its conservation therefore
depends on biodiversity being given a market value through public
support.
The common agricultural policy: a journey to the green box
The CAP is the worlds largest system of agricultural subsidies, with 372
billion to be spent over the 2007 to 2013 budget period. It therefore plays
a key role in EU politics and world trade negotiations. Critically, from
an environmental perspective, it has considerable impact on how land is
used, both in the EU and globally.
The CAP was introduced in 1957 as part of the Treaty of Rome. The aim
of the CAP was to put an end to post-war food shortages and widespread
rural poverty. The main delivery tools at that time were guaranteed prices,
intervention buying, high import tariffs and export subsidies. These poli-
cies were so successful in encouraging production that, through a com-
bination of intensication and expansion in the area under production,
they quickly led to surpluses and the infamous butter mountains and
wine lakes of the 1980s.
It was a combination of the need to address these surpluses and the
growing pressure from trade negotiations that initiated the rst of the
major CAP reforms. The MacSharry reform in 1992 aimed to reduce
these surpluses by decreasing price support and introducing direct com-
pensationpayments tofarmers. This process was continuedby the Agenda
2000 reform, which reduced price support further and increased farmer
compensation through direct payments. A second pillar of the CAP, aside
from normal income payments to farmers, was ofcially created to pay
for rural development measures.
The third and most signicant reform took place in 2003 as part of the
Mid Term Review of the Agenda 2000 reform. This reform resulted in the
replacement of most direct subsidies by a single farm payment scheme
that is based on area and historic subsidy allocations, moving most EU
payments into the green box classication.
The role of the CAPs second pillar, namely, rural development, was
strengthened with the introduction of modulation, a process whereby
funds are shifted fromthe rst to the second pillar. As rst pillar payments
are still coupled partially to production, modulation also contributes to
the shift of CAP subsidies into the green box.
the environmental impact of eu green box subsidies 471
Greening the common agricultural policy
By generously rewarding production at any cost, the CAP has driven the
intensication of agriculture in Europe. This has, in turn, been the main
cause of the collapse in biodiversity, demonstrated by the decline in farm-
land bird populations (Donald et al., 2001) in the EU. With production
subsidies making up over one-half of farmers incomes in many instances,
it is clear that such subsidies have played a fundamental role in farmers
decisions, resulting in intensication well beyond the level that would be
delivered by the market alone.
Intensication has been achieved through increasing yields and stock-
ing densities, expanding elds and removing hedgerows and other impor-
tant habitats, and increasing massively the use of pesticides and arti-
cial fertilizers. Besides the collapse of farmland biodiversity, agricultural
intensication is linked to a wide range of environmental problems, such
as water pollution and eutrophication, over-abstraction of water, and soil
erosion and degradation (European Environment Agency, 2006).
The journey to the green box has supposedly been accompanied by
a journey from a coarse and environmentally damaging system of farm
support to one that now encourages sustainable farming through the
removal of the link between payments and production and the introduc-
tion of minimumstandards and incentive payments for higher standards.
The MacSharry reform began this process in what can be seen as a
landmark moment for agricultural policy in Europe. It resulted in ofcial
recognition of the environmental problems caused by modern farming,
and the introduction of agri-environment schemes as a tool for Member
States to address them. Agri-environment schemes pay farmers for good
environmental practices, rewarding them for being good stewards of the
countryside.
This recognition of agricultures negative impacts on the environment
grew throughout the 1990s and has been supplemented by a new under-
standing of the role played by some, mainly traditional, agriculture prac-
tices in conserving and enhancing biodiversity, epitomized by the Euro-
pean Environment Agencys project to identify and map Europes high
natural value (HNV) farming areas.
The 2003 reform was the most important for the environment. The
decoupling of agricultural support from production nally removed the
perverse incentive to overproduce and thus cause environmental damage.
The introduction of cross-compliance has, at a minimum, put a much
472 agricultural subsidies in the wto green box
greater importance on complying with EU environmental legislation,
such as the Birds and Habitats Directive, through linking compliance
to the receipt of subsidies. Furthermore, the new EU rural development
policy, which is paid for through the second pillar of the CAP, has a strong
emphasis on the environment and identies biodiversity conservation as
a key objective.
The CAP remains a long way from an environmental policy, and many
parts still threaten the environment, but it is certain that the CAP has
become signicantly greener (Schmid and Sinabell, 2007; Hofreither
et al., 2007). The journey of the CAP is thus also one from environ-
mentally harmful subsidies to greater use of environmental payments.
The case for public payments for land management in the EU
Environmental payments for farmers, alongside a high regulatory base-
line, are a necessary policy tool if agriculture is to deliver the range of
environmental and social public goods that society expects of it. Thriv-
ing wildlife, beautiful landscapes upon which rural tourism depends,
clean water and well-functioning watersheds are all products of agricul-
ture in Europe, given that agriculture is responsible for the management
of approximately three-quarters of European land. Wider society values
these services, but they have no market value. This results in a market
failure in which suboptimum levels of these public goods are delivered,
resulting in biodiversity decline, water pollution and degraded landscapes
and soils.
The relationship between agriculture and biodiversity in Europe is a
particularly close one. Agriculture has shaped the European landscape,
with much of Europes biodiversity intimately dependent on traditional
farming (Baldock et al., 1995). Traditional mowing and low-intensity
grazing, for example, have for centuries maintained a range of semi-
natural, biodiversity-rich grasslands that would have otherwise reverted
to scrub and forest. The actions of big wild herbivores and large-scale
geomorphologic phenomena that used to maintain open landscapes in
past eras have mostly gone forever. This means that abandonment of
traditional agricultural practices is as much a threat to biodiversity as
intensication (DLG: Government Service for Land and Water Manage-
ment, 2005). Most traditional HNV farming is not economically viable
on its own, but its viability can be improved through targeted rural devel-
opment aid and agri-environment support.
the environmental impact of eu green box subsidies 473
Land use policy, and principally agri-environment policy, is the best
tool available to address this market failure and reverse the decline in
biodiversity, both at the macro landscape scale and at the more special-
ized species and habitats scale, including the Natura 2000 protected area
network. Agri-environment schemes pay farmers to adopt or maintain
specic farming practices based on an income forgone formula. These
schemes have been shown to be able to deliver for the needs of specic
species (Leitao et al., 2006; Vickery et al., 2004) and are expected to be
able to deliver higher environmental standards throughout the country-
side (Donald and Evans, 2006).
Climate change places a further importance on improving the sustain-
ability of agriculture and its value to wildlife. The quality of agricultural
habitats will determine the ability of many species to move effectively
betweenprotectedareas inorder tofollowtheir shifting climate envelopes,
i.e. the areas with the climatic conditions appropriate for the species in
question.
EU green box subsidies
This section looks at each of the major green box funding schemes in the
EU following the 2003 CAP reform and asks:
(a) Is the scheme targeted at the delivery of an environmental objective?
(b) Is this public benet not being supplied by the market already, that
is, is a market failure taking place?
(c) What are the environmental impacts, both positive and negative, of
the scheme?
(d) Are the objectives quantied and measurable? Is there a monitoring
and feedback system?
(e) Do payments reect the environmental benet?
These questions are designed to test the validity of the subsidy and are
based on the principle that support should be used only to deliver public
goods that would otherwise not be delivered by the market. Food pro-
duction in the EU might have passed this test 40 years ago when the CAP
was conceived, but it no longer does so, whereas schemes that reward
farmers and other land managers for the delivery of positive externalities,
such as wildlife, ecosystem services and landscapes, would pass the test.
Questions (d) and (e) seek to establish whether the mechanism is t for
474 agricultural subsidies in the wto green box
Life+ (other);
0.12
Life+
(biodiversity);
0.08
Rural
development,
12.40
Structural funds,
54.90
Other,
16.30
Pillar 1, 42.70
Figure 16.1 Overview of EU budget in 2007, in billion.
purpose by asking whether it has the basic attributes of a scheme that is
able to deliver on its stated objectives (Evans et al., 2002).
Note that although some blue box support remains, including partially
coupled payments and export refunds, these are not examined in detail
in this chapter as they can be assumed to be generally environmentally
harmful (OECD, 2002a).
Overview of CAP spending
Figure 16.1 gives indicative
3
annual spend on the principal chapters of
the EU budget. Life+ is made explicit as it is the only dedicated spend
on biodiversity, demonstrating the relative size and importance of agri-
environment and other agricultural spend for conservation in the EU.
Pillar 1 includes all market support mechanisms, such as export subsi-
dies and intervention, but consists principally of decoupled and partially
coupled direct payments. In 2003, approximately 75 per cent of pillar 1
spending went to direct aid, and this proportion can be expected to have
increased with reform.
3 Exact spend data are currently not available. Agri-environment spend is estimated based
on Member State spending patterns in the nancial period 200006.
the environmental impact of eu green box subsidies 475
Pillar 2 of the CAP consists of measures that fall into three axes:
Axis 1 competitiveness of agriculture: aims to increase the economic com-
petitiveness of the farm sector and includes investments in infrastruc-
tures, modernization of farm holdings, land consolidation, training
and other measures.
Axis 2 land management and the environment: aims to improve the
countryside and the environment through supporting particular types
of land management. Includes less favoured area (LFA) payments, agri-
environment and afforestation, all of which are considered separately
in this section.
Axis 3 improving quality of life in rural areas: aims to achieve diversi-
cation of the rural economy and increase the quality of life in rural
areas. Includes investments in rural tourismand recreation and in rural
infrastructure.
Axis 2 measures are of greatest interest in terms of environmental
delivery, and they are given special attention in this section, but the
environmental impacts of Axes 1 and 3 are also considered.
Decoupled and partially coupled direct payments and cross-compliance
Direct payments are the principal subsidy for EU farmers following the
2003 reform and are aimed at maintaining farmers incomes. Individual
payments are calculated on the basis of either historic subsidy allocation
in 2000 to 2002 or area, or a combination of both. This decision has been
made at the Member State level, and in some instances at the regional
level, with a preference towards historical allocation. Average yearly pay-
ments for the whole EU are estimated at 237/ha (Farmer et al., 2008),
but individual payment can range from few /ha/year to maximums of
approximately 700/ha for farmers who grew sugar during the reference
period in France and are even higher for olive oil and tobacco-related
support.
Although in principle these payments are decoupled from production,
Member States have had the option to retain partial coupling of up to
25 per cent of the payment for cereals and up to 100 per cent for suckler
beef in order to avoid land abandonment. This system of direct payments
is being phased in over a 10-year period in the new Member States and
will be implemented fully by 2013.
476 agricultural subsidies in the wto green box
Decoupling payments from production will lessen the incentive to
intensify and therefore will deliver environmental benets relative to
the pre-2003 system of support (Schmid and Sinabell, 2007; Hofreither
et al., 2007). However, environmental criteria have not been considered
in the calculation of direct payments, and farmers who reduced produc-
tion during the reference period as part of an environmental scheme
may even be penalized by the system. Indeed, the historical allocation of
payments, which has been the preferred method of distribution in most
Member States, will favour the most intensive producers during the refer-
ence period, essentially rewarding those with a record of environmentally
destructive practices instead of redistributing funds to smaller farm units
and HNV.
The receipt of direct payments is, however, linked to the respect of a
set of statutory management requirements (SMRs) and to keeping eli-
gible land in good agricultural and environmental condition (GAEC).
The expressed aim of these conditions, known as cross-compliance, is to
maintain environmental, food safety, animal and plant health, and animal
welfare standards.
Cross-compliance seeks to protect the environment, but the demand
placed by these standards on farmers, and consequently the benets they
deliver, are disproportionately small relative to payments. Thus, the bulk
of the direct payment scheme is not about maintaining these standards,
but about improving farmer incomes. On a 181-hectare arable farm in
Cambridgeshire, England, for example, it was calculated that the costs
of implementing cross-compliance were approximately 75 compared to
27,000 received in direct payments.
4
Cross-compliance requirements are basic rules, theoretically prohibit-
ing the worst practices, such as the destruction of the most important
habitats on farms, and requiring management plans to be drawn out.
They are, however, by no means comprehensive: permanent grassland,
which is one of the most valuable farmland habitats in Europe, is not
protected fully and can still be ploughed up in many circumstances, while
many landscape features, including ancient trees and hedgerows, can still
be destroyed, depending on how member states interpret the EU rules.
In summary, cross-compliance is likely to deliver limited benets
depending on how it is implemented at the Member State level. It has,
as a minimum, given a signicant boost to the importance of farmers
4 Information from the Royal Society for the Protection of Birds (RSPB) for RSPB Hope
Farm, Cambridgeshire, UK.
the environmental impact of eu green box subsidies 477
complying with European law, but its effectiveness in delivering environ-
mental benets will not be clear as there are no measurable targets or
output monitoring, and the payments are massively disproportionate to
the requirements.
Agri-environment
Agri-environment is the only compulsory part of the second pillar of the
CAP, although farmer and land manager participation is voluntary. The
aimis tosupport the sustainable development of rural areas andrespond
tosocietys increasingdemandfor environmental services by supporting
agricultural production methods compatible with the protection and
improvement of the environment, the landscape and its features, natural
resources, the soil and genetic diversity.
5
Agri-environment schemes are designedandimplementedat the Mem-
ber State or regional level and pay farmers to enter a management agree-
ment that requires specic environmentally friendly standards to be met.
Contracts with farmers usually run for ve years, but in some cases they
run for anything between two and 10 years.
Payments are annual and are calculated on the basis of costs incurred
and income forgone, with the option of adding up to 20 per cent for
what are now known as transaction costs, but previously were known
as incentive payments. This formula is necessitated by the green box
denition, but fails to recognize the value of the environmental bene-
ts delivered; as a result, it is not always attractive for farmers to enter
agri-environment schemes. Furthermore, although the formula works for
improvement and enhancement work, it is not appropriate for maintain-
ing systems that are already delivering environmental benets.
Use of agri-environment varies widely betweenMember States. Insome
Member States, it is the most important part of their rural development
programmes, receiving over 70 per cent of total rural development funds
in Finland, Ireland, the UK and Austria. At the other end of the spectrum
are Romania, Bulgaria, Malta, Belgium, Latvia andthe Netherlands, which
have allocated less than 30 per cent of the total rural development budget
(Farmer et al., 2008).
The design, and therefore the effectiveness in terms of delivery, of
agri-environment schemes varies widely, and there is growing evidence
5 European Council Regulation on support for rural development by the European Agricul-
tural Fund for Rural Development 1698/2005.
478 agricultural subsidies in the wto green box
that as well as there being a large number of schemes that are delivering
for the environment, there is a signicant problem with schemes that
are failing on their objectives for a variety of reasons. Fifteen years of
implementation of agri-environment schemes in Europe has meant that
we are able to specify what makes an effective scheme; this is summarized
in Better Design and Implementation below:
r
Targeting specic environmental benets: where schemes do not speci-
cally target the delivery of a particular environmental benet, they do
not deliver and can be little more than a disguised subsidy. One example
is a scheme in Germany that pays farmers 100/ha not to use growth
regulators.
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Budget: schemes frequently have insufcient budget to deliver their
objectives. An example is the Castro Verde zonal scheme in Portugal,
which has proved its potential to benet a whole range of threatened
birdspecies, andyet its budget has beenreduced, causing a decline inthe
area under favourable management. Furthermore, voluntary schemes
such as agri-environment will be attractive only if they are competitive
with alternative land uses. This means that payments must cover the
farmers real cost of implementation and include a reasonable incentive
that reects the benets delivered. Over-compensation, on the other
hand, must also be avoided.
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Good science: schemes based on sound science, such as the Entry Level
Scheme in England, deliver on their environmental objectives, but in
the absence of good science they will not. The principal scheme in
the Netherlands, for example, has been criticized for failing to protect
meadow birds for this reason (Kleijn et al., 2001, 2004a, 2004b) and is
now being improved (Evans et al., 2002).
6
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Agronomically feasible: schemes must be simple and exible, and the
management prescriptions should be tested for agronomic feasibil-
ity in a pilot scheme. Research into agri-environment schemes in the
Netherlands, for example, found that management prescriptions that
have proven to be effective under experimental conditions are not
necessarily effective when implemented on real farms.
r
Iterative design: schemes should be able to change and adapt as situa-
tions change, experience is gained and our knowledge develops.
6 An example of a scheme based on good science is the Entry Level Scheme in England. This
scheme gives farmers a variety of options, such as creating skylark plots and beetle banks,
all of which are based on detailed ecological study that shows take-up of these options will
deliver biodiversity gain. The scheme has also been piloted in four separate regions to test
its practicability.
the environmental impact of eu green box subsidies 479
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Monitoring: all public policy, andparticularly where it entails signicant
expenditure of public money, should have its outcome measured so that
it can be evaluated against its aims and be improved. Unfortunately,
examples of schemes that are accompanied by a monitoring system are
extremely rare in Europe.
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Stakeholder participation: where stakeholders have been involved in the
development and implementation of agri-environment schemes, they
have generally been more successful in terms of uptake and delivery.
Environmental groups, academics and farmers, for example, all have
specialist knowledge and skills that should inform scheme design.
Where these criteria are not followed, agri-environment will often be
ineffective and can legitimately be challenged as an unnecessary subsidy.
A well-known example of this is the prime ` a lherbe scheme in France,
which absorbs a very signicant portion of the agri-environment budget
without delivering any signicant biodiversity benets.
Where these criteria are followed, agri-environment can be a critical
tool for conservation, and there are already many examples of successful
agri-environment schemes that have prevented local extinction, such as
the cirl bunting scheme in England and the great bustard scheme in
Portugal, and delivered reductions in water pollution.
There is clearly a problem with misuse of agri-environment that needs
to be addressed, and we propose that these criteria could form the frame-
work for all agri-environment schemes.
Agri-environment is critical for Europeanconservationand for catalyz-
ing the move towards more sustainable farming systems, but it is clear
from the agri-environment experience in the EU that without strict rules
to ensure its proper use, the tool will be abused both accidentally and
wilfully, as a means for disguising income or even production support.
A range of additional tools has been introduced by the Rural Devel-
opment Regulation for the period 2007 to 2013 that are similar to
agri-environment:
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forest environment schemes, which is agri-environment for forest
managers;
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non-productive investments, which pay for one-off habitat improve-
ments or the creation of ecological infrastructure; and
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Natura 2000 payments, which can be used to compensate farmers for
specic management prescriptions imposed in protected areas.
The above tools have not been implemented yet, and it seems unlikely
that they will be used on a large scale.
480 agricultural subsidies in the wto green box
Less favoured areas
The LFA scheme is a part of the Rural Development Regulation and is
the other principal area of spend in Pillar 2 of the CAP, alongside agri-
environment, receiving approximately one-fth of rural development
spending. In some countries, the role of LFAs is extremely important,
with just seven Member States accounting for two-thirds of total LFA
expenditure. The scheme pays compensation to farmers in agronomically
marginal areas for the additional costs and income forgone related to their
natural handicap.
The predominant aim of LFAs is socioeconomic, but the Rural Devel-
opment Regulation also notes that the continued use of agricultural land
will contribute to maintaining the countryside and maintaining and
promoting sustainable farming systems.
LFAs contribute to the prevention of the abandonment of traditional
farming in marginal areas, which can often be critical to the provision
of habitats for farmland biodiversity. Land abandonment is a problem in
many parts of the EU, but particularly in the Mediterranean, Scandinavia
and the EUs new Member States; for example, in Estonia and Poland,
respectively, 10.1 and 17.6 per cent of land is categorized as abandoned
(DLG: Government Service for Land and Water Management, 2005).
Land abandonment will cause signicant biodiversity loss when semi-
natural farming systems are lost. Whensemi-natural grasslands inCentral
and Eastern Europe are abandoned, for example, they are replaced by
species-poor and more homogeneous forest vegetation. Abandonment
or extensication may also be positive for the environment, however,
when it results in a reduction of damaging practices such as over-grazing.
LFAs are targeted geographically and not specically at farming sys-
tems that support highlevels of biodiversity, whichhave become knownas
HNV farming. This means that intensive producers who may be causing
environmental damage through, for example, over-grazing, receive the
same payment as HNV farmers. Even worse, farmers who have overcome
their natural handicap through environmentally harmful practices such
as irrigation expansion are still entitled to the same payment as farmers
who keep practising the traditional HNV management. Furthermore,
LFA designation has not captured all HNV farming at risk from aban-
donment (European Environment Agency, 2004), while it often includes
areas where the problem is marginal. There has been no effort made to
monitor the environmental benets and drawbacks of the scheme so that
it can be better targeted at environmental delivery.
the environmental impact of eu green box subsidies 481
Approximately 1 million holdings and 33 million hectares benet from
LFA payments, with average payments varying widely from 20/ha in
the UK to 180/ha in Finland (European Commission, 2003). Payment
calculations also vary widely, with some countries opting for a simple at
rate payment, but others, such as Austria, making detailed calculations
at the farm level. It has been shown that in countries where payments
are low and calculated coarsely, such as Italy and Spain, LFAs have little
impact on whether farming continues in an area, but where payment
levels are higher and calculated accurately, such as in Austria, they can
play an important role in maintaining agriculture (Institute for European
Environmental Policy, 2006).
Insummary, the environmental benets of the LFAscheme are indirect,
inconsistent and incidental. The LFA scheme has a great potential to sup-
port HNV farming and the environmental benets these systems deliver,
but signicant changes would be required, particularly with regard to the
designation criteria and the conditions attached to payments. The LFA
scheme is currently under review and the areas will be redened, but it is
unclear whether this will result in any greater environmental benet.
Afforestation
As part of the Rural Development Regulation, afforestation schemes,
which make annual payments for the establishment and maintenance of
new forests, have been popular with both Member States and farmers
across the EU. Around 1 million hectares of forestry plantations were
established between 1994 and 1999 under the original programme,
7
and
more have been established since.
Subsidies for afforestationwere originally introducedas part of aneffort
toreduce over-productioninEUagriculture. The scheme is nowpresented
as an environmental and climate change mitigation scheme, although it
is also motivated by socioeconomic aims through the establishment of
productive forest.
Although it is justied as an environmental scheme, the success indi-
cator of most afforestation schemes in Member States is forest cover, not
increased biodiversity, enhanced ecosystem services or improved green-
house gas balance. This is based on the incorrect assumption that all
forestry delivers in these areas.
7 European Council Regulation on agricultural production methods compatible with the
requirements of the protection of the environment and the maintenance of the countryside
2078/92.
482 agricultural subsidies in the wto green box
In reality, afforestation can have both positive and negative environ-
mental impacts (International Union for the Conservation of Nature and
Natural Resources, 2004). When carried out on a small scale within inten-
sively farmedlandscapes, afforestationcanbe benecial for biodiversity by
increasing landscape heterogeneity and habitat diversity. It can also play
a positive role in watershed management and increase carbon storage.
On the other hand, poorly located and/or designed afforestation schemes
can have devastating effects on biodiversity. When trees are planted on
valuable open habitat, such as grassland, within a few years they lead to
the loss of species typical to these habitats. In the worst cases, afforestation
schemes establish plantations of exotic species that have no biodiversity
value at all. Poor design and siting of afforestation can also result in neg-
ative impacts on soil and water quality. Pine and eucalyptus plantations
established in upland areas of the Mediterranean, for example, can lead
to increased soil erosion and water run-off as a result of the destruction
of herbaceous and scrub layers, which provide more effective protection
(de Wit and Brouwer, 1998).
From a biodiversity conservation perspective, Europe holds many
threatened species that rely on open habitats, while the most endangered
forest species are those that rely on old growth forests and are unlikely to
colonize newly established forests for decades or centuries. Furthermore,
afforestation is happening naturally in many parts of Europe without the
aid of this scheme as a result of large-scale land abandonment (DLG:
Government Service for Land and Water Management, 2005).
Payments for afforestation schemes reect establishment costs and
income forgone, not environmental benets. Afforestation payments are
often more attractive, are less demanding and offer longer commitment
periods than agri-environment payments. This means that in many areas,
agri-environment is losing out to afforestation.
Given the high chance of causing environmental harm through
afforestation, the current scheme can hardly be called an environmental
scheme, although some benets do occur in some areas. Stricter condi-
tions and targeting to ensure that important land uses are not lost and
that siting is optimal could help to address this.
Rural development axes 1 and 3
For 2000 to 2006, about 40 per cent of EU rural development funds were
devoted to farm, infrastructure and other investment schemes outside
the environmental axis (European Court of Auditors, 2006). This has
the environmental impact of eu green box subsidies 483
increasedtoapproximately 46per cent for the 2007to2013period(Farmer
et al., 2008). Fund allocation is extremely variable among Member States.
In the period 2007 to 2013, Member States are required to respect a
minimum spending threshold of 10 per cent on axis 1, 25 per cent on axis
2 and 10 per cent on axis 3. In practice, few Member States are likely to
allocate more than 15 to 20 per cent of rural development funds to axis
3 (diversication and quality of life). Although some countries, such as
Austria and the UK, will allocate the maximum allowed for axis 2, most
countries favour the competitiveness axis.
By denition, measures under axes 1 and 3 have socioeconomic and
not environmental objectives. However, the new rural development reg-
ulation asks Member States to make sure all three axes are coherent with
each other and strongly encourages the creation of synergies through,
among other tools, an obligation to carry out a strategic environmental
assessment of new plans. Axis 3 also includes some provisions for nanc-
ing management plans for protected areas and other options that could
be used to promote biodiversity conservation.
Very little systematic analysis of the environmental impacts of these
measures is available. However, widespread anecdotal evidence from
environmental non-governmental organisations suggests that many such
investments are causing signicant damage to biodiversity (Keenley-
side, 2006). Most Member States concentrate investments on agricultural
intensication. Some common investments are particularly damaging.
Irrigation expansion, often nanced through rural development mea-
sures, has caused widespread destruction of steppe habitats in the Iberian
Peninsula and elsewhere in the Mediterranean region. Investments in
drainage improvement are particularly popular among the new Member
States, often leading to the degradation of wet meadows and the removal
of biodiversity-rich vegetation strips that developed on Soviet-era ditches
that have now fallen into disuse. Expansion of forest roads and other
infrastructure can increase habitat fragmentation and disturbance to
sensitive wildlife.
On the other hand, there is a wide variety of environmentally benign
rural development measures, such as installing visitor facilities at wildlife
sites, increasing accessibility and the amenity value of natural habitats.
Diversicationmeasures have beenusedtohelpfarmers move intonature-
linked rural tourism. Axis 1 measures can play a key role in increasing
the viability of HNV farming by helping farmers increase their income
from traditional products through on-farm processing, direct marketing
and product promotion, by supporting certication processes and by
484 agricultural subsidies in the wto green box
providing small marginal farmers with infrastructure that they could
not afford, such as watering points for extensive grazing.
What changes are needed to Common Agricultural Policy subsidies?
This analysis suggests that within the limits of the current green box
denition, there is great scope for making the CAP more environmentally
friendly. Beyond the obvious need to phase out environmentally harmful
subsidies, much could be done to ensure that subsidies compatible with
the green box actually deliver for the environment in general and for
biodiversity in particular. We suggest this would require the following:
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shifting funds from untargeted subsidies to environmentally targeted
schemes with a much greater focus on outcomes such as biodiversity
conservation;
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better design and implementation of agri-environment and other rural
development schemes; and
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effective coherence of environmental schemes with socioeconomic
schemes (rural development axes 1 and 3).
The greenbox denitiondoes, however, limit the potential for CAPreform
to deliver environmental objectives. This is addressed in What Changes
Are Needed to the Green Box Criteria? below.
Retargeting subsidies
Under the current system, it is extremely difcult to assess and quantify
the environmental impact of the various agricultural support schemes
that make up the CAP, but the following is clear:
r
Pillar 1 support, which accounts for most of the CAP budget, addresses
the environment in an incoherent and inadequate way, and inconsis-
tently across the EU. Payments are vastly out of proportion relative to
the benets delivered.
r
Pillar 2 support consists of environmentally harmful measures that
encourage intensication (for example, afforestation, drainage) as
well as some extremely benecial measures (for example, agri-
environment).
Based on planned spend for the current EU budget period, we esti-
mate that approximately 8 per cent of total CAP spend is allocated to
the environmental impact of eu green box subsidies 485
agri-environment schemes (Farmer et al., 2008) and is thus targeted at
the delivery of environmental benet. However, a proportion of this is
ineffective due to poor design and occasional misuse of the instrument
and part of the allocated sums do not actually get spent.
More widely, pillar 2 of the CAP has great potential to deliver a more
sustainable agriculture through targeting spend at the delivery of social
and environmental benet and maintaining a consistent approach across
the EU, while allowing the adaptation of schemes to local conditions.
The minimal budget of pillar 2, alongside the fact that it is co-funded
by Member States, does, however, severely limit its potential. Greatly
increasing its funds at the expense of pillar 1 support would allow agri-
environment and other schemes to be scaled up from specialist measures
to schemes that are applied at the landscape level across the countryside
and are able to deliver EU-wide environmental and social objectives,
including the reversal of biodiversity decline on farmland.
Better design and implementation
If agricultural support systems are to play a positive role in environ-
mental conservation and encouraging sustainability, then they must be
much more effective. This would require amendments to the Rural Devel-
opment Regulation and the European Commissions Strategic Guide-
lines for Rural Development programmes, so that schemes are required
to adhere to the principles of effective scheme design, as discussed in
Agri-environment above. In addition, evidence suggests (Brunner
and Huyton, 2005; Or eade-Br` eche, 2005) that schemes should:
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pay farmers only for the delivery of specic public goods that benet
society; agricultural support is paid for by taxpayers, and therefore it is
reasonable to expect specic benets in return for support; and
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have clear objectives that are expressedinterms of measurable outcomes
and targets, in order to promote greater understanding of agricultural
support and assess its effectiveness.
This would also require greater Commission control over Member
State programmes, because although some of these practices are already
required, many Member States have succeeded in ignoring them (Keen-
leyside, 2006). This would not only ensure the effectiveness of support in
delivering environmental objectives, but also make environmental mea-
sures more difcult to misuse.
486 agricultural subsidies in the wto green box
Effective coherence of environmental schemes with socioeconomic
schemes (rural development axes 1 and 3)
Socioeconomic rural development support should seek to contribute
to environmental sustainability where synergies exist and should never
undermine or conict with environmental objectives by paying for
destructive practices such as insensitive intensication, the destruction
or degradation of valuable habitats, soil degradation and unsustainable
water abstraction.
Perhaps one of the greatest synergies between environmental and social
objectives in rural areas is the maintenance of HNV traditional farm-
ing systems. Much of Europes biodiversity depends on the continuation
of traditional extensive farming practices that are now threatened by
abandonment or intensication. The continued production of the envi-
ronmental and social benets of these farming structures is therefore
threatened by their economic viability a market failure that requires
government intervention. Many of the areas where these practices are
concentrated coincide with LFA(see Less Favoured Areas above), which
we suggest could be reformed to target specically the benets delivered
by HNV farming.
Furthermore, rural development support should aim to revital-
ize the local economy, particularly through competitive schemes that
seek to build the market value of the biodiversity conservation and
landscape maintenance benets delivered by HNV farming. Exam-
ples include encouraging sustainable tourism and recreation, support-
ing the development of high-quality and speciality food production,
and developing marketing schemes. A few key principles should guide
this process of making the Rural Development Regulation support
sustainability:
r
all rural development measures should be screened for harmful envi-
ronmental impacts, and damaging schemes should be excluded;
r
axis 1 measures should prioritize increasing the competitiveness of
HNV farming systems;
r
competitiveness should be increased by adding value rather than by
increasing production; and
r
increased investment should be made in axis 3 measures, in particular
those that exploit the value of the biodiversity and landscape benets of
HNVagriculture, such as the development of sustainable rural tourism
and recreation.
the environmental impact of eu green box subsidies 487
What changes are needed to the green box criteria?
Although further CAP reform could deliver substantial environmental
benets, and the introduction of a more prescriptive scheme based on
good practice at the EU level could contribute to this as well as reduce
the misuse of green box support, the green box denition restricts the
effective use of environmental support payments.
This is particularly true for the support of HNVfarming systems, where
the green box denition is a signicant obstacle to the development of an
effective scheme that would support these systems and the benets they
deliver. The section above noted that this is a serious market failure that
requires addressing. It is also good economic and environmental sense
to focus conservation efforts on maintaining existing biodiversity rather
than losing it and paying to recreate it in the future (Hanski, 1999).
We have suggested that the maintenance of these systems would require
rural development aid to be targeted at their delivery, but that some form
of direct payment for the continued delivery of the environmental and
social benets delivered by this form of farming will be required to main-
tain its economic viability. However, the green box requires environmen-
tal payments to be based on income forgone. Although this formula can
work in intensive agricultural landscapes where payments are being made
for some form of extensication, it is much harder to apply to situa-
tions where the benets are already being delivered and there is very little
income in the rst place. This results in environmental measures that
unfairly favour farmers with higher previous income levels rather than
those best able to deliver environmental benet.
This is true not only in the EU, but anywhere where there is econom-
ically marginal land providing public benets that could be lost through
the conversion of this land into a use that would generate greater eco-
nomic gain, but at the expense of the environmental and social benets.
Rainforests, for example, are the most important terrestrial habitat for
biodiversity, hold huge stocks of carbon and play a key role in climate
stabilization and water cycles. Devising an effective system that would
support the maintenance of this land use that reects these global ben-
ets is a vital requirement for their protection. A group of developing
countries led by Papua New Guinea and Costa Rica, called the Coalition
for Rainforest Nations, has put forward such a proposal that includes a
commitment to limit tropical deforestation in their countries in return
for payment from developed countries. The proposal was generally wel-
comed at the Conference of the Parties to the Climate Convention in
488 agricultural subsidies in the wto green box
Montreal in December 2005, is currently under discussion by a group
established under the Convention and some form of such mechanism is
now likely to be part of any future post-Kyoto agreements.
The case for paying for the maintenance of traditional extensive farming
practices is similar in that public support that reects the environmental
andsocial value of the landuse is requiredtosecure it intothe future. Pillar
2 of the CAP, and particularly the LFA scheme, provides a framework for
doing this, but restricting the direct payment for the delivery of these
goods to income forgone makes it impossible to design an instrument
that would be t for purpose.
It is therefore necessary to amend the green box denition in order to
allow payments that are based on the value of the environmental benets
and services delivered as well as any income forgone. We suggest the
following:
r
A second fundamental requirement should be introduced, in addition
to the current requirement that green box support has no, or at most
minimal, trade-distorting effects on production. This should require
greenboxsupport tobe targetedspecically at delivering environmental
and social benets, i.e. public benets that are not already delivered
by the market.
r
All payments notied as green box should be reviewed by an indepen-
dent authority, andthose that are shownnot tomeet these requirements
should be reclassied as blue box. This authority should have compe-
tence in both environmental and trade issues and could build upon
existing institutions such as the UN Environment Programme (UNEP)
and the Agriculture Committee established in Article 17 of the Agree-
ment on Agriculture.
r
Payments for environmental programmes shouldbe allowedtobe based
on a combination of income forgone and the value of the social and
environmental benets they deliver.
r
Countries should be required to make the details of their agricultural
spending publicly available. Transparency
8
is a key tool in assuring
the correct use of subsidies. Although the WTO is not the appro-
priate forum for evaluating schemes effectiveness and their targeting
towards real public goods, the WTO mechanism can help to increase
8 This need is already recognized in the July Framework (World Trade Organization, 2004):
Article 18 of the Agreement on Agriculture will be amended with a view to enhancing
monitoring so as to effectively ensure full transparency.
the environmental impact of eu green box subsidies 489
the accountability of countries towards their own citizens as well as
towards their trading partners.
Finally, there is the question of equity. Green box reform should better
shelter developing countries from subsidy regimes that unfairly disad-
vantage them as well as address their specic socioeconomic and envi-
ronmental needs (G-20, 2005). However, although the EU and other
developed countries have the funding available for environmental and
social schemes, the potential for their use is much more restricted in
developing countries.
The globalized nature of agriculture and agricultural externalities sug-
gests that considerable benet could be derived from greater funding of
environmental and social support programmes for agriculture in devel-
oping countries. Examples of environmental externalities of agriculture
in developing countries with global impact include the following:
r
The effects of nitrogen pollution on marine biodiversity: there are now200
marine dead zones deoxygenated areas where marine life struggles
to survive worldwide. These areas are caused principally by nitro-
gen fertilizer run-off and are increasingly apparent around developing
countries, where most nitrogen fertilizer is now used.
r
Soil erosion, leading to desertication: this is caused mostly by over-
grazing and other poor practices. Some 10 to 20 per cent of drylands
worldwide are now desertied, losing their ability to provide goods
and services, and poor people are disproportionately affected (World
Resources Institute, 2005).
It is clear that adequate funding for programmes to address these exter-
nalities will be found, for the moment, only in developed countries. We
suggest, therefore, that developed countries make a contribution to green
box payments in developing countries equivalent to a percentage of their
own green box spend. An international fund such as the Global Environ-
ment Facility (GEF) could administer these funds so that they are used for
similar payments in developing and least developed countries. Although
this may appear to be politically unrealistic, there is precedent in that the
Aid for Trade funds pledged at the WTO Ministerial Conference in Hong
Kong in 2005 were meant to address a similar market failure, paying for
the establishment of infrastructure to facilitate trade that was not being
delivered by the market.
In summary, the need for reform of the green box is clear, both from a
social anddeveloping country perspective (ActionAid, CIDSEandOxfam,
490 agricultural subsidies in the wto green box
2005) andfromanenvironmental perspective. Inthe annex to this chapter
we have proposed the changes to the relevant paragraphs in Annex 2 of
the Agreement on Agriculture that would be needed if the green box
denition was to be tightened while allowing members to use agricultural
support for the delivery of environmental and social public benet.
Appendix: proposed amendments to Annex 2 of the
Agreement on Agriculture
Only relevant paragraphs are included here. Additional text proposed by
the G-20 is underlined, while text that the G-20 has proposed be deleted
is struck through. Authors proposals are in bold, and authors comments
are in italic.
5. Direct payments to producers
(a) Support provided through direct payments (or revenue forgone,
including payments in kind) to producers for which exemption from
reduction commitments is claimed shall meet the basic criteria set
out in paragraph 1 above plus specic criteria applying to individual
types of direct payment as set out in paragraph 6 through 13 below.
Direct payments shall not be linked to production levels, including
input levels therein. When members make such payments, they shall
notify the base periodand all other relevant criteria, as well as the laws,
regulations and administrative decisions of such programmes made
under this provision. Further notications under paragraph5(a) shall
include regular and periodic information on how the programmes
under this provision achieve the stated objectives. This information
should be made publicly available and should be updated when
necessary. The following data should be included:
1. The general objectives of the payment.
2. The justication of the payment in terms of how they will meet
the stated objectives.
3. How the outcomes will be monitored.
4. Nominal and geographic identication of beneciaries.
Increased public scrutiny of subsidies within countries reduces the risk of
abuse. Although it is not up to the WTO to judge public policies, trading
partners should be assured that countries are using payments to deliver
clear public goods rather than to disguise support for producers.
the environmental impact of eu green box subsidies 491
6. Decoupled income support
(a) Eligibility for such payments shall be determined by clearly
dened criteria such as of low levels of income, status as a
producer or landowner, landholding and production level in a
notied, dened and xed and unchanging base period. Developing
country members who have not previously made use of this type
of payment, and thus have not notied, shall not be precluded
from establishing an appropriate base period, which shall be xed
and unchanging and shall be notied. Eligibility for such pay-
ments shall be determined by clearly dened criteria such as of low
levels of income, status as a producer or landowner landholding and
production level in a notied, dened and xed and unchanging base
period.
(b) The amount of such payments in any given year shall not be related
to, or based on, the type or volume of production (including live-
stock units) undertaken by the producer in any year after the base
period.
(c) The amount of such payments in any given year shall not be
related to, or based on, the prices, domestic or international,
applying to any production undertaken in any year after the base
period.
(d) The amount of such payments in any given year shall not be related
to, or based on, the factors of production employed in any year after
the base period.
(e) Land, labour, or any other factor of production shall not be required
to be in agricultural use and no production shall be required in
order to receive such payments.
(f) Environmental conditionality may be applied to payments. This
can include restrictions on grazing levels where these are shown
to be ecologically necessary in order to meet environmental goals.
There are many situations where environmentally appropriate land
management requires optimal levels of grazing. Requirements to make
the ecological case for these payments and for public scrutiny would
minimize misuse of this clause.
(f) Such payments shall not be made in conjunction with AMS support
and support under Article 6.5, if the sum of such support, as
appropriate, exceeds X per cent of the annual value of production
of a given product.
492 agricultural subsidies in the wto green box
12. Payments under environmental programmes
(a) Eligibility for such payments shall be determined as part of a clearly
dened government environmental or conservation programme and
be dependent on the fullment of specic conditions under the
government programme, including conditions related to production
methods or inputs.
(b) The amount of payment shall be calculated on the basis of the extra
costs or loss of income involved in complying with the government
programme and the value of the environmental benet delivered.
The methodology for the calculation of the environmental bene-
t should be explained clearly, be made publicly available and be
subject to periodic multilateral assessment. Income forgone and cost
incurred alone cannot provide the incentive needed for the large-scale
implementation of environmental schemes. This formula also penal-
izes extensive and less productive farmers who often deliver the most
environmental benets at the lowest cost.
13. Payments under regional assistance programmes
(a) Eligibility for such payments shall be limited to producers in dis-
advantaged regions whose land management activity is delivering
clearly dened public goods, such as landscape and biodiversity
conservation. Each such region must be a clearly designated con-
tiguous geographical area with a denable economic and administra-
tive identity, considered as disadvantaged on the basis of neutral and
objective criteria clearly spelt out in law or regulation and indicating
that the regions difculties arise out of more than temporary cir-
cumstances. Developing country members shall be exempted from
the condition that disadvantaged regions must constitute a clearly
designated contiguous geographical area with a denable economic
and administrative identity. Developing countries shall be free to
derogate fromthe public goods conditiononsocial and cohesion
grounds. In underdeveloped areas, such support can be justied purely
on social grounds.
(b) The amount of such payments in any given year shall not be related
to, or based on, the type or volume of production (including live-
stock units) undertaken by the producer in any year after the xed
and unchanging base period, which shall be notied, other than to
reduce that production. Developing country members who have not
previously made use of this type of payment, and thus have not
the environmental impact of eu green box subsidies 493
notied, shall not be precluded from establishing an appropriate base
period, which shall be xed and unchanging and shall be notied.
(c) The amount of such payments in any given year shall not be related
to, or based on, the prices, domestic or international, applying to any
production undertaken in any year after the base period.
(d) Payments shall be available only to producers in eligible regions, but
generally available to all producers within such regions.
(e) Environmental conditionality may be applied to payments. This
may include restrictions on grazing levels where these are shown
to be ecologically necessary in order to meet environmental goals.
(e) Where related to production factors, payments shall be made at a
degressive rate above a threshold level of the factor concerned.
(f) The payments shall be calculated on the basis of the extra costs or
loss of income involved in undertaking agricultural production in the
prescribed area, and the value of the environmental benet deliv-
ered. The methodology for the calculation of the environmental
benet should be explained clearly, be made publicly available and
be subject to periodic multilateral assessment.
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17
The environmental impact of
US green box subsidies
jane earley
Introduction
This is an effort to focus not on the trade-related features of US green
box payments, but on their environmental effects. It is easy to assume
that they are benign, since many environmental programs are notied
as green box measures. However a closer investigation reveals that this
may not always be the case. Even though they are assumed to have no
production-enhancing features, some do and increased production can
be harmful to the environment since US agriculture at scale almost always
involves cropping systems that deplete soil and water resources and release
carbon. Other US green box measures can be equally disruptive to the
environment. Emergency natural disaster payments cankeep producers
on marginal lands in business if the payments are as annual as some of
the crops they grow. Furthermore environmental programs with the best
intentions can reward producers for doing what they would do in any
case, even though it is not better than what is normal for the region or
the crop.
There are many safeguards in place to ensure that programs are effec-
tive and achieve their objectives, but what happens to programs based on
market mechanisms when the market rewards poor environmental per-
formance? Finally, what alternatives might be suggested to more closely
align green box programs with their intended use? These and other rele-
vant issues are discussed below.
Background
The green box is not green
The green box is of course not green in the environmental sense.
Programs do not qualify for the green box because of their environmental
496
the environmental impact of us green box subsidies 497
effects, but because they fall within the terms of government payments
dened by the WTO Agreement on Agriculture (AoA) as having no, or
at most minimal, trade-distorting effects. The agreement sets forth 13
categories of programs eligible for green box treatment.
The environmental impacts of government programs intendedtobene-
t the agricultural sector are not always readily apparent. These programs
are not generally assessed in terms of their environmental successes or
failures unless they are also intended to benet the environment. US law
1
requires assessment of the environmental effects of federal programs if
they are determined to have a signicant effect on the human environ-
ment. However, many, if not most, of the programs notied to the green
box have not received environmental impact assessments.
Green box programs are often measured for effectiveness in other ways.
Programs can also have direct and indirect effects on the environment.
Effects on agricultural production or productivity are one index often
used to assess the success of agricultural programs. Likewise, the social
effects of a program may also be important in terms of the environment.
The programs success in attaining its objectives may also be relevant.
Some programs may also benet the US agricultural sector although
they are not administered by the US Department of Agriculture (USDA).
These may or may not be notied to the WTO under the Agreement
on Agriculture. Among such programs are those that provide indirect
benets to the sector by, for instance, providing support for irrigation
or transport infrastructure, supporting research on pesticides and regu-
lating groundwater pollution. Future programs may include government
payments for carbon sequestration.
The 2007 US green box notication
This effort to assess the environmental effects of green box programs in
the US coincided with the rst US notication of its agricultural subsidies
to the WTO since 2002.
2
Much of the analysis is therefore structured to
cover those programs included in the US notication. The year 2005 has
been used as illustrative of US program spending on green box activities,
but signicant program reductions or outlays for other years are also
noted. For 2005 the US notied a total of over $71 billion in green box
spending (see chapter 7 in this volume).
1 The National Environmental Policy Act of 1969 (NEPA), 42 USC 432147.
2 US Notication, World Trade Organization, Committee on Agriculture, G/AG/N/USA/60,
9 October 2007.
498 agricultural subsidies in the wto green box
However authoritative the US notication, the programs notied are
almost exclusively USDA programs, which are not the only programs
conceptually eligible for US green box notication. Activities of federal
agencies other than the USDA obviously provide many benets to the US
agricultural sector. Some of those agencies, like the US Environmental
Protection Agency and the Department of the Interior, are listed below.
The federal programs of others, such as the Food and Drug Adminis-
tration, are less obvious, but of enormous signicance to the agriculture
sector.
3
Relevant environmental effects
Agriculture, particularly at the scale at whichit is practisedinthe US today,
is associated with many kinds of environmental effects. These include
effects on soil quality (including erosion), air quality, water quality and
use, and of course also emission of greenhouse gases and carbon. Rather
thansummarizing the large body of literature onthe environmental effects
of agriculture, this chapter makes reference to relevant sources in the
bibliography.
Little analysis to date has examined specic agricultural programs and
their direct and indirect environmental effects. However, the economic
literature can provide some clues to the effects of specic programs even
where environmental impact assessments are lacking. There is general
agreement that programs that are production-enhancing canintensify the
effects of certain kinds of agriculture and therefore cause more stress on
the environment because marginal lands may be brought into production
with more exposure to pesticides and fertilizers, more habitat destruction
and more land degradation (Mayrand et al., 2003). There is also evidence
that environmental payments in agriculture can enhance production, but
at relatively low rates.
4
3 Potential programs for future inclusion might include Interior Department water
projects, Labor Department programs for seasonal and migrant workers, Transportation-
Department-administered maritime subsidies for exported grains and Environmental Pro-
tection Agency (EPA) grants for water quality protection. Total outlays for some of these
are signicant and of obvious benet to US agriculture. An Environmental Working Group
report online gives further details: http://www.ewg.org/reports/powersubsidies.
4 Recent OECD analysis suggests that if agri-environmental payments are increased by
50 per cent, production, on average, would increase by 2.1 per cent.
the environmental impact of us green box subsidies 499
Programs that drive crop selection necessarily intensify the environ-
mental effects of particular crops.
5
Each crop has specic environmental
demands and risks associated with it. These can differ greatly in terms of
their effects on soil, water use and inputs amount of nitrogen fertilizer,
pesticide and fungicides, etc.
6
Programs that advantage certain classes of producers would also neces-
sarily advantage some kinds of production methods and crop selections,
and therefore the environmental consequences of those productionmeth-
ods and crops. For instance, economies of scale are leading to concen-
tration in the US dairy sector so that large producers can take advantage
of lower production costs. This leads to larger farms, and more difcult
manure disposal and other environmental problems.
7
Finally, programs
that advantage domestic producers can act to the detriment of foreign
ones, and vice versa. This can affect not just what kinds of crops are
planted relative to alternative crop selections, but also where, how and
with what kinds of environmental and social safeguards they are planted.
This chapter focuses primarily on the production-enhancing effects of
green box programs and assumes they add to increased adverse environ-
mental effects, particularly when production is expanded on marginal
lands.
US agricultures environmental effects a very short and
selective history
Much of the history of the US is the history of agriculture, and expansion
of agriculture on the continent has perhaps been the most profound
change to land use in North America. Agriculture has also caused great
environmental damage.
Drought and devastating agricultural practices in the Great Plains
caused the dust bowl and a mass migration off the land, lengthening
the Great Depression of the 1930s. These social and environmental effects
were largely responsible for the New Deal, which established the social
framework for the country for the rest of the 20th century and ele-
vated the Department of Agriculture to a central role. The Agricultural
5 See Agricultural Outlook, October 2000, for a thumbnail description of how farm
programs change planting decisions: http://www.ers.usda.gov/publications/agoutlook/
oct2000/ao275e.pdf.
6 See Clay, 2004, for an excellent description of each crop and its environmental impact.
7 MacDonald et al., 2007.
500 agricultural subsidies in the wto green box
Adjustment Act of 1933 initiated crop and marketing controls, and in
1936, the Soil Conservation and Domestic Allotment Act linked farm
programs with conservation. Post World War II programs intensied
production by encouraging greatly increased yields with nitrogen fertil-
izer, specialized crop breeding programs and more specialized, capital-
intensive farms.
In the 1960s and 1970s, some of the effects of intensive agriculture
beganto become apparent and actionable. The 1962 publicationof Rachel
Carsons Silent Spring highlighted the effects of pesticides on bird popu-
lations and human health, launching the US environmental movement,
and encouraging a new focus on some of the unintended costs associ-
ated with intensive agricultural techniques. In 1972, the newly created
Environmental Protection Agency banned the use of DDT, and major
environmental legislation was passed to limit air and water pollution and
to regulate toxics.
In the 1970s and 1980s, crop nutrients and pesticides began to show
up in groundwater as well as surface water. Growing levels of soil loss
and soil degradation were veried, and increasing amounts of pesticide
residues in food were documented. In addition, irrigation was identied
as responsible for depleting groundwater sources faster than the ability
to recharge them. Energy shortages in the 1970s focused attention on the
fossil-fuel dependency of the fertilizers, pesticides and farm equipment
used in much of US agriculture.
By 1985, when the Food Security Act lowered government farm sup-
ports, promoted exports and re-initiated the Conservation Reserve Pro-
gram to retire productive acreage for conservation (and supply manage-
ment) purposes, the link between export-oriented production agriculture
and environmental conservation was relatively well established.
Congress passed the Food Security Act in 1985, which funded sustain-
able agriculture research. This was accompanied in 1988 by research on
alternative farming systems, and later by the Sustainable Agriculture
Research and Education Program. The Conservation Security Program
was established in the 2002 Farm Bill to pay farmers for certain con-
servation practices, and organic farming regulations became effective
in 2002 after a public notice and comment process that garnered the
most comment from the public of any US Government regulation in
history.
For the most part, late 20th century US agriculture has been charac-
terized by strong government support to an increasingly concentrated
the environmental impact of us green box subsidies 501
and export-oriented grain and oilseed row crop industry relatively well
shielded from world market price volatility. Major government price and
income support also extends to the US dairy, cotton and sugar industries.
Until the adoption of biofuels mandates that, together with rising energy
prices, have contributed to raising corn and other food and feed prices to
extraordinarily high levels and bringing more cropland into production,
US Government support to grains and oilseeds was also characterized by
record government payments.
A number of programs are now supported by the USDA, and by other
federal and state agencies to enhance the sustainability of modern agri-
cultural practices, and to make locally grown food available to urban
populations. US environmental and conservation policy has tended to
focus on removing land from production rather than enhancing produc-
tion methods, but working lands programs such as the Conservation
Security Program are increasingly becoming available. The advent of car-
bon accounting and payment for environmental services may increase
opportunities for conservation, but current high price levels may also
make it more expensive.
The increasing concentration in the food and agriculture sector, com-
binedwitha cornethanol andbiodiesel investment surge, has perpetuated
and intensied the environmental problems resulting from post-WWII
intensied agricultural production. Although critics of these policies have
long supported an in-depth review of US agricultural programs, the 2008
Farm Bill has basically extended the 2002 legislation with a few minor
revisions.
US law requires environmental impact assessment of green box
programs, but few such assessments exist
All US federal-level programs are subject to the National Environmental
Policy Act (NEPA). That Act, simply put, requires federal programs to
undergo an environmental assessment if they will have a signicant effect
on the environment. This requires federal agencies to incorporate envi-
ronmental considerations intheir planning and decision-making through
a systematic interdisciplinary approach, to prepare detailed statements
assessing the environmental impact of and alternatives to major federal
actions signicantly affecting the environment (environmental impact
statements) and to lend appropriate support to initiatives and programs
502 agricultural subsidies in the wto green box
designed to anticipate and prevent a decline in the quality of mankinds
world environment.
8
Most federal agencies have promulgated regulations that govern their
compliance with the requirements of this legislation, which also allows
for categorical exclusions of programs deemed unlikely to affect signi-
cantly the environment. Under this provision, the USDA has exempted
the programs of many of its agencies unless the agency head determines
that a program is likely to have a signicant environmental effect.
9
All US agencies are also responsible for compliance with Executive
Order 12114, Environmental Effects Abroad of Major Federal Actions.
The provisions of this Executive Order generally parallel those of NEPA,
and it also allows categorical exceptions. The categorical exceptions listed
in the Executive Order include some relevant to agriculture: export
licences or permits or export approvals, and disaster and emergency relief
action.
10
The USDA states that it is actively complying with NEPA, but a search
of environmental impact statements for US-notied green box programs
returned very few environmental impact assessments, none for the 2002
Farm Bill as such, although one was reported to have been prepared, and
none under Executive Order 12114 for environmental effects abroad.
If such assessments had been prepared they most likely would have
found no available alternative options, since all of the programs were
legislatively mandated, and environmental effects from most policies not
aimed squarely at the environment were not likely to be considered ger-
mane. For example, a programmatic environmental impact study was
prepared for the 2002 Farm Bills provisions to implement the sugar pro-
gram and sugar storage facility loan program, but that assessment found
no environmental signicance to the program, largely on the basis that
increases in acreage were not projected.
11
Environmental assessments
were completed for conservation programs such as the Conservation
Reserve Program, although they examined no options not contemplated
by the legislation. NEPA review is required for individual Farm Credit
Agency guaranteed loans.
8 http://www.epa.gov/compliance/basics/nepa.html.
9 http://www.nrcs.usda.gov/technical/ECS/environment/7cfr1b.pdf. Many agencies and
programs are excluded by USDA from NEPA requirements.
10 Executive Order 12114. Acopy can be obtained fromthe General Services Administration
website portal at http://www.gsa.gov.
11 http://www.fsa.usda.gov/Internet/FSA File/sugarfonsi.pdf.
the environmental impact of us green box subsidies 503
US subsidies and their geographical distribution
Information on crop subsidy payments is easier to come by, thanks to the
activities of the Environmental Working Group (EWG). The EWGreports
that crop subsidies in the US in crop years 2003 to 2005 (including direct
payments and conservation payments) totalled over $34.8 billion. During
that period, the top 10 per cent of beneciaries accounted for 66 per cent
of payments.
Subsidies are reported as provided to individual operators, whose loca-
tion can usually be determined directly or from other data. The EWG has
broken this down geographically (by state and congressional district), but
not to the degree necessary to overlap a map of subsidies with the more
granular USDA data produced by CEAP. However, a rough comparison
reveals the obvious, as does the USDAs own research. As reported by
the ERS, overall, 86 percent of all cropland and about 83 percent of
highly erodible cropland is located on farms that receive farm program
payments.
12
Farms receiving conservation payments, primarily under the Conser-
vation Reserve Program (and two-thirds of conservation payments went
to producers participating in the CRP in 2005) are concentrated in the
Plains and western Corn Belt where cropland is prone to drought and
wind erosion.
13
About 25 per cent of cash grain and soybean farms and
nearly 40 per cent of other eld crop farms received conservationprogram
payments in 2004 (compared to 10 per cent or less of farms specializing
in livestock production).
Likely environmental effects of US green box programs
This section summarizes the US green box notication for 2005
14
in those
categories of the AoA for which the US reported program outlays, and
discusses the likely environmental effects of the programs notied.
General services
The US notied funding of $11,345 million in 2005 in this category.
This excludes administrative costs and other expenses not related directly
to internal support of production agriculture. The US notication of
subsidies in this category includes all funding allocated to a number of
12 Claassen, 2006. 13 Claassen, 2006.
14 US WTO notication G/AG/N/USA/60, 9 October 2007.
504 agricultural subsidies in the wto green box
agencies within the US Department of Agriculture. These programs can
be loosely grouped under four headings:
r
research, including economic analysis and statistical data gathering;
r
extension and training, including technical assistance and trade adjust-
ment assistance;
r
inspection and grading; and
r
marketing and promotion.
Research
US agricultural research is primarily conducted by the USDAs Agricul-
tural Research Service (ARS), but many other USDA agencies are also
relevant. ARS research focuses primarily on food safety, quality (includ-
ing environmental) and nutrition. Biomass research and development is
captured under this heading, and much recent US agricultural research
has also focused on agricultural biotechnology.
Much research of agricultural signicance is conducted outside the
USDA. FDAs Center for Food Research and Applied Nutrition con-
ducts research relevant to agriculture, as does EPA, which operates a
National Center for Environmental Research and partners with the USDA
in research on pesticide use and sustainable agricultural production,
the impacts of agriculture on water quality and many other topics. The
Department of Energy likewise has contributed generously to knowledge
of agricultural development of bioenergy crops and other agricultural
linkages. It operates the Oak Ridge National Laboratories, a national cen-
tre for energy research and development. None of these programs was
notied under this heading.
There is no doubt that public research elevates the competitiveness
of an industry relative to others in the market, and reduces costs that
might otherwise be incurred by the private sector. Advances in technology
can allow an industry to outpace others, particularly in elds that are
technology-intensive, such as biotechnology and bioenergy development.
Whether this is environmentally benecial is another question.
One recent study attributes many adverse environmental effects of
Great Plains agriculture to crop yield increase research. It notes that
increases in crop yield on the Great Plains depend on increased irriga-
tion, pest management and fertilizer applications, improved tillage prac-
tices and improved plant varieties, all major subjects of US agricultural
research. Yield increases have also been accompanied by negative environ-
mental effects. These include loss of soil carbon, increased nitrous oxide
the environmental impact of us green box subsidies 505
and other problems. In addition, more intensive use of irrigation, nitro-
gen fertilizer, herbicides and insecticides results in leaching of nitrate,
pesticides and herbicides into groundwater, reduction of deep aquifers
and fossil water supplies, increased nitrous oxide emissions and increased
run-off of agricultural chemicals into lakes and ponds.
15
While publicly funded research has provided a historical basis for tech-
nology change in agriculture, the private sector is increasingly playing a
major role. The life sciences industry has movedaheadwithgreat advances
in yield-increasing biotechnology with both breeding and environmental
implications. There is no reason to think that bioenergy research will not
follow a similar trajectory. At the same time, there is pressure to increase
funding for research on non-intensive agricultural technologies, such as
organic agriculture, and to address issues in intensive food production
systems such as disease vectors in conned animal feeding operations.
In conclusion, it is safe to speculate that the long-term environmental
effects of agricultural research are likely mixed. However, the full range of
research in this category should probably be notied as a green box outlay
even if it does not originate with the US Department of Agriculture.
Extension and training
Extension and training has a long history in the US, where the USDAs
Agricultural Extension Service has served for decades to educate farmers
and non-farmers on production methods and other aspects of best agri-
cultural practices. Its effectiveness has rarely been questioned, but its role
is more ambiguous in an information-intense modern environment. Like
research, extension and training is assumed to have both benecial and
adverse environmental effects.
The technical assistance element of Trade Adjustment Assistance is also
captured in the general services heading of the green box notication.
16
To the extent that the program retires poor performers from the sector,
it is most likely benecial since poor performers in an environmental
sense are often the same as those in an economic sense. However, to the
extent that it teaches them better ways to compete without internalizing
environmental costs of doing business, it could be detrimental.
15 Parton et al., 2007.
16 This program aims to assist farmers and shermen to adjust to import competition
throughthe provisionof technical assistance, cashpayments (upto$10,000) andeligibility
for certain Department of Labor retraining benets.
506 agricultural subsidies in the wto green box
Inspection and grading
Programs under this heading include those that administer the US
sanitary and phytosanitary regime,
17
grain inspection and livestock
marketing,
18
and food safety inspection and rulemaking.
19
For the most
part, these programs administer domestic, science-based regulations and
are therefore supportive of environmental science although primarily
focused on human, animal and plant health. This should make them rel-
atively neutral in terms of domestic environmental effects, although their
standards are largely based on industrial-scale agricultural production
systems common to the US and technologies in common use there (such
as the use of genetically modied (GM) technology). In terms of their
extra-territorial effects, however, they are often seen as promoting US
standards to the disadvantage of foreign producers. Whether high envi-
ronmental standards domestically can be seen as environmentally inju-
rious to developing countries is an issue most often associated with the
private-sector standards now commonly used in global agriculture trade,
not government-required SPS measures. Since these agencies enforce only
sanitary and phytosanitary standards that are for the most part consistent
with international standards, their activities would most likely be seen as
environmentally neutral.
Marketing and promotion
This category includes a host of programs focused on standards for
commodities, plants, pesticide levels, organic foods and produce.
20
The
AMkS-administered marketing and promotion programs are unlikely
to have either domestic or international adverse environmental effects.
They are not engaged in export promotion (which is performed by the
17 This programis administeredby the Animal andPlant HealthInspectionService (APHIS),
which has diligently made use of environmental impact statements, including on intro-
ductions of genetically engineered organisms.
18 The Grain Inspection, Packers and Stockyards Administration (GIPSA), formerly the
Federal Grain Inspection Service (FGIS) and the Packers and Stockyards Administration
(PSA).
19 The Food Safety and Inspection Service (FSIS) administers food health and safety regu-
lations, and operates inspection of products and handling and processing facilities.
20 The USDAs Agricultural Marketing Service (AMkS) provides standardization, grad-
ing and market news services for six commodity programs Cotton, Dairy, Fruit and
Vegetable, Livestock and Seed, Poultry and Tobacco and enforces the Perishable Agri-
cultural Commodities Act and the Federal Seed Act. The AMkS also administers the
National Organic Program (NOP).
the environmental impact of us green box subsidies 507
Foreign Agricultural Service). To the extent that their news and informa-
tion services make markets more transparent, their effect is most likely
benecial.
Domestic food aid
Program outlays for domestic food aid represent the largest budgetary
outlay of any agricultural green box program, and indeed any agricultural
program, exceeding even commodity payments. In 2005, total outlays
under this heading amounted to $50,672 million.
21
While domestic food
aid has not itself raised environmental concerns, it does fall into a category
of payments to consumers that boost demand and arguably increase food
prices in domestic food markets and thus send distorted market signals.
Distorted market signals can have adverse environmental effects when
they promote added production leading to land use changes.
It is mostly foreign, rather than domestic, food aid that has sparked
criticism, including the charge that U.S. food aid policy may even be
creating starving customers through the environmental costs of the pro-
gram. The policy props up industrial agriculture and factory farms, which
are a huge source of pollution that contributes to climate change.
22
Domestic food aid is unlikely to starve its beneciaries domestically,
but the programs do complement USDA price and market support goals
by providing outlets for the distribution of surplus commodities. There
are likely to be negligible effects from these programs, but it is possi-
ble to assume that the effect of US Government commodity purchases
for whatever purposes can be cumulative and as such can have produc-
tion effects. A 2002 ERS study that hypothesized both a cut in food
stamp benets and a cash-out of the Food Stamp Programshowed reduc-
tions in food demand and farm production. The reverse case can also be
assumed.
23
Direct payments to producers and decoupled income support
Like other payments qualifying for green box treatment, direct payments
to producers under the WTO AoA must have no, or at most minimal,
trade-distorting effects or effects on production. The AoA also requires
21 The US notication under this section reports outlays under two major programs: the
Food and Nutrition Service (FNS) and the AMkS.
22 Tady, 2007. 23 Hanson et al., 2002.
508 agricultural subsidies in the wto green box
that direct payments meet specic criteria applying to individual types of
direct payments. One such type is decoupled income support. Payments
are decoupled income support if the amount of such payments in any
given year [are not] related to, or based on, the volume of production
(including livestock units) undertaken by the producer in any year after
the base period.
The US notied three kinds of direct payments to producers in 2005
as decoupled income support: the rst under Farm Service Agency (FSA)
Direct Payments, the second a peanut quota buyout and the third a
tobacco quota buyout. The FSA direct payments are described in the
notication as payments made to producers and landowners based on
acreage and production in a prior base period, as specied in the Farm
Security and Rural Investment Act of 2002. The environmental effects of
these programs are discussed below.
The Appellate Body Ruling in the WTO Cotton case has some impli-
cations for subsequent US notications under this section.
24
Essentially,
under most scenarios, implementing the ruling would remove certain
payments under this section from green box treatment and subject these
programs to reduction commitments under the amber box. For the pur-
poses of this chapter we have chosen to treat direct payments as green-
box-notied in order to assess their environmental effects.
Since decoupled income support arguably reduces the net cost of pro-
duction, and might also have a wealth effect and signicantly affect total
acreage decisions,
25
US payments under this heading are particularly rel-
evant to examine for environmental effect. The USDAs direct payments
are one of two forms of payments to farmers under FSA programs; the
other formconsists of countercyclical payments. Direct payments are tied
to historical acreage bases and yields.
26
Payments are given to producers
of barley, oats, wheat, corn, soybeans, sorghum, peanuts, rice, upland cot-
ton and other oilseeds (canola, crambe, ax, mustard, rapeseed, safower,
sesame and sunower).
Eligible producers are required to comply with conservation and wet-
land protection requirements on all of their land, to protect all base
24 WTO, United States Subsidies on Upland Cotton, DS267.
25 UNCTAD India Team, 2006.
26 Direct payments are based on 85 percent of the farms base acreage times the farms
direct payment yield times the direct payment rate for each commodity. The USDA also
explains that: Direct payments are not based on producers current production choices.
Because direct payments provide no incentive to increase production of any certain crop,
the payments support farm income without distorting producers current production
decisions.
the environmental impact of us green box subsidies 509
acres from erosion, including providing sufcient cover as determined
necessary by the county FSA committee, and to control weeds (cross-
compliance).
27
However, it should be noted that since 50 per cent of
the countrys 2 million farmers currently receive federal farm program
benets, another 50 per cent who do not receive these benets are not
affected by cross-compliance, as currently designed.
Under the 2002 Farm Bill authorizing these payments, restrictions
apply on production of wild rice, fruits, nuts and most vegetables
(WR/FAVs). There are some exceptions to these provisions, but the
general rule during the period of time of the US notication clearly
favoured direct payments to producers of grain and oilseed rowcrops and
excluded producers of fruits, nuts, vegetables, wild rice and other peren-
nial crops (specialty crops). The 2008 Farm Bill provided payments
to producers of specialty crops and also funded pilot programs in seven
states to allow production of specialty crops on acreage eligible for direct
payments.
This could be signicant from an environmental point of view. There
is an advantage to cross-compliance, although most of the enforcement
apparatus appears to be aimed at producers who plant the wrong crops
rather than those who plant the right ones badly. The environmental
signicance in the long term of favouring annual grains and oilseeds
over perennial fruits, nuts and vegetables is the issue: perhaps debatable
in terms of pesticide applications and other inputs, but more evident
when carbon sequestration is considered, where the advantages of peren-
nial crops would be presumed to outweigh annual ones. However, in
the past, the programs with which compliance is necessary to obtain
direct payments are thought to have reduced soil erosion by a signicant
amount. The chart below tracks soil erosion diminution attributable to
cross-compliance between 1982 and 1997. The effects of swamp-buster
compliance are less clear, in part because other provisions apply to wet-
lands, according to a recent report, and because swamp-buster will be
used only when conversion is protable.
28
27 Cross-compliance mechanisms were rst enacted in the Food Security Act of 1985 (PL
99198) for highly erodible land, mostly in the Great Plains. Three specic programs
are relevant: Conservation Compliance, which requires eligible farmers to implement an
approvedconservationplantoreduce erosionby 75per cent; Sodbuster, requiring produc-
ers to hold erosion to no more than the soil loss tolerance level; and Swampbuster, which
denies eligibility for benets to producers converting a wetland area. Cross-compliance
provisions also apply to natural disaster and crop insurance payments.
28 Claassen, 2007.
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the environmental impact of us green box subsidies 511
Peanut quota buyout
The buyout program for peanut quota holders was enacted in the 2002
Farm Bill. Payments were made in ve annual instalments. For 2005, the
US reported $6 million in green box payments. The peanut quota buyout
was strongly supported because it did not prohibit future planting of
peanuts, but only the price support they received. However, the net effect
of the program was also thought to be a transfer of subsidy level and kind
rather than a net return to market signals. The Environmental Working
Group had documented that 10 per cent of peanut quota holders received
60 per cent of the quota payments under the old system. More recent data
reveals the same general pattern under the new one. Whether payment
concentration by itself is indicative of environmental problems or benets
is an issue further discussed below.
In the meantime, there has been a signicant increase in peanut acreage
inFlorida andother states since the eliminationof the quota system. Prices
of peanuts have remainedlowalthoughinput costs have increased, leading
to the need for increased efciency and yield in production systems. This
has resulted in the use of GM crops, conservation (reduced) tillage and
precision application of inputs.
29
Since peanuts are irrigated in many
parts of their growing range, use of water is also an issue, particularly
in drought conditions such as those experienced in the Southeast US in
recent years.
The peanut buyout is generally agreed to have beneted domestic pro-
ducers rather than foreign ones,
30
and therefore an increased production
effect would have been felt on the domestic environment, while transition
effects would be felt elsewhere (environmental effects resulting fromshifts
in crop selection). The US was already a net peanut exporter imports
were articially drawn in primarily because of the high domestic price
under the quota program.
Tobacco program buyout
A buyout of marketing quotas for tobacco was enacted in the Fair and
Equitable Tobacco Reform Act of 2004.
31
As was the case with the peanut
buyout program, the Environmental Working Group reported that a
29 Wright et al., 2002. 30 Orden, 2007.
31 The legislation terminated the tobacco price and income support programs at the end of
the 2004 marketing year. The US reported $939 million in payments under this provision
in 2005.
512 agricultural subsidies in the wto green box
small number of producers would receive most of the money.
32
While
production diminished in the short term, US output is likely to rise in the
long term with the buyout, displacing imports.
The environmental effect of these programbuyouts is most likely negli-
gible. Peanut producers continued to produce peanuts, while less tobacco
was being produced due to the buyout and other factors (although more
will be produced in the long term), but other crops have taken their place.
There is little net difference in most of the producing areas between the
cropping methods and environmental effects of planting peanuts, tobacco
and corn.
The road not taken should support for biofuels be notied in the
green box?
The US did not notify under this heading either the blender credit/tax
rebate awarded to ethanol producers or any other payments to producers
for the purposes of supporting production or development of bioenergy.
Rather, the US notied Bioenergy Program Payments in the 2002 to 2005
period to corn, soy, sorghumand wheat producers under product-specic
AMS. Research and development for biomass was green-box-notied,
however, in the amount of $8 million in 2005.
Bioenergy research, development, support and some forms of direct
payment are increasing in 2007 energy legislation and Farm Bill propos-
als. Also relevant to future notications are payments for environmental
services, such as water use and pollution abatement. Carbon credits or
offsets are also potentially relevant under government programs. Where
and how these payments are notied will make a difference in aggregate
levels of support allowed to the US in present and future multilateral
instruments.
Income insurance and safety-net programs
The US notied its revenue and income insurance programs as non-
product-specic AMS. While not a green-box-notied program, it is
worth noting that crop insurance can have specic environmental effects.
Essentially, crop insurance can insulate producers from risk and make
them more likely to plant on marginal land or increase the area planted.
32 The EWGfound that more than 400 large quota holders would receive $1 million or more
and that 10 per cent of those eligible would receive 67 per cent of the money (Hulse,
2004).
the environmental impact of us green box subsidies 513
This can have important environmental consequences for resource or
input-intensive crops, suchas sugarcane, whichrequires copious amounts
of water from natural sources or irrigation to produce good yields, and
cotton, which requires intensive use of pesticides.
33
Payments for relief from natural disasters
The US notied payments under a number of programs
34
under this
heading for 2005, the year of Hurricane Katrina, which, in August 2005,
devastated the Gulf Coast and the City of New Orleans. Prior to Hurri-
canes Katrina and Rita, portions of the Midwest experienced signicant
2005 crop losses caused by a prolonged drought.
Four points are relevant with respect to the environmental effectiveness
of assistance for natural disasters. The rst is that if such assistance is given
repeatedly, as it was under previous Farm Bills, it can distort planting
decisions and incentivize farmers to plant more marginal areas with the
expectation that losses will be compensated. This will be accentuated if
disaster assistance is crop-specic.
35
A Washington Post editorial recently
observed that:
not much rain falls on Oklahoma, the Dakotas or the Texas panhandle.
Thats just the way it is. Between 1985 and 2005, more than 12,000 pur-
portedly drought-stricken agricultural producers in those states claimed
federal disaster payments at least every other year. This group collected
$1.4 billion in all, about 60 percent of total federal farm disaster relief aid
during those two decades.
36
The next Farm Bill may not change this situation. One widely sup-
ported proposal on the table at this time would create permanent disaster
assistance payments to some producers.
The second point, one made in a more general context, is that it may
be a more environmentally benecial policy to remove the assisted activ-
ity from a disaster-prone environment than to compensate production
failures repeatedly. On that basis, payments under this heading would
be environmentally benecial if they provided incentives to change the
location or the nature of the activity.
33 FN 1 ERS October Agricultural Outlook 2000. 34 Payments totalled $169 million.
35 Disaster assistance that addresses crop-specic production problems can be viewed as
similar tocropinsurance, affecting planting decisions by reducing riskandlikely leading to
expanded production of those crops. In contrast, less specic disaster assistance payments
would impact aggregate production more generally (Westcott, 2000).
36 Washington Post, Sunday, 28 October 2007.
514 agricultural subsidies in the wto green box
Thirdly, coordinated assistance is also more effective than non-
coordinated assistance. Much of the damage wrought by hurricane
Katrina was to Gulf Coast shipping infrastructure used to move com-
modities from the US Midwest to export destinations.
37
Indemnifying
local producers for hurricane destruction does no good if the infrastruc-
ture is not also restored. Restoration of this infrastructure is not notied
under this heading, but could well be if it otherwise fulls the conditions
of green box notication.
Finally, disaster assistance should also be designed to be effective. The
federal programusedto redress the forestry disasters of Hurricane Katrina
and Rita
38
by funding forest producers to replant trees was apparently
ineffective because it was designed onthe same model as the Conservation
Reserve Program. This required producers to forego all timber harvests
on all of their land for 10 years if they accepted funds to replant any part
of it.
39
Structural adjustment through investment aids
The US notied both the Farm Service Agency (FSA) Farm Credit Pro-
grams and State Mediation Grants under this heading.
40
Farm-credit-
guaranteed loans are subject to the environmental assessments required
under the National Environmental Policy Act (NEPA), as are FSA loan
guarantees.
41
Farm credit is provided by FSA to farmers and owner-
operators in situations of structural disadvantage. This means that it
can be used to keep marginal producers in business that might otherwise
be unable to continue (or start).
The environmental effects of farm credit are unclear. To the extent
that it awards producers on marginal land the means to increase produc-
tion, it could be damaging. Although environmental impact assessment
is required for loans, it is unclear whether the FSA also uses or requires
investment screening to rule out loans that would be environmentally
damaging. To the extent that it brings socially disadvantaged farmers into
the system, it could be credited with social benets to the rural economy.
37 Schnepf and Chite, 2005.
38 The hurricanes have caused an unprecedented tree die-off which is estimated to have
contributed as much carbon to the atmosphere in one year as that sequestered by the
entire US forest system. ScienceDaily, 16 November 2007.
39 Washington Post, Friday, 16 November 2007.
40 Pay-outs amounted to $79 million.
41 http://www.fsa.usda.gov/Internet/FSA File/guartd loan asst and env comp.pdf.
the environmental impact of us green box subsidies 515
The effects of farm credit in connection with direct payments and
countercyclical payments should also be considered, since farm credit
(usually commercially obtained) is intrinsic to the large capital outlays
necessary to conduct agriculture at the scale and intensity that produces
prot in todays agricultural economy. Many farmers routinely use their
subsidies to pay off their loans. One farmer captures the relationship in
the following statement:
There is absolutely nothing sustainable about such heavy debt loads for
a farm. And just as in the developing world, heavy debt usually means
heavy environmental tolls. Debt means that experiments in new ways of
farming cant be tried. Conversion to untried sustainable methods must
be put aside for the plant, spray, spray, and pick method of modern row
crop farming.
42
Environmental programs
As noted above, US environmental programs date fromthe NewDeal and
the dust bowl, but recently established environmental programs reect
demand for improved water and air quality, enhanced wildlife popula-
tions, water conservation, open space, carbon sequestration, and energy
productionandconservation. The twolargest programs are the Conserva-
tion Reserve Program (CRP)
43
and the Environmental Quality Incentives
Program (EQIP).
44
The newest program is the Conservation Security
Program (CSP),
45
established under the 2002 Farm Act.
42 Suttereld, 2007.
43 The Conservation Reserve Program (CRP) is a voluntary program through which farm-
land owners bid to retire highly erodible and other environmentally sensitive cropland
from production for 1015 years. Farmers receive payments for retiring the land, which
also cover the costs of establishing the required permanent cover crop and maintaining
specied conservation practices. Program outlays reported for 2005 were $1,848 million.
44 The Environmental Quality Incentives Program(EQIP), which cost $754 million in 2005,
offers nancial and technical assistance to help livestock and crop producers address soil,
water, air and related natural resource concerns on their working lands. EQIP contracts
provide incentive payments and cost-shares for a maximum term of 10 years. EQIP is
the only large conservation program targeted to livestock production, as 60 per cent of
the funds each year must be spent on practices that address associated problems, such as
waste management.
45 Outlays for this program in 2005 were reported at $172 million. The Conservation
Security Program (CSP) provides payments to farmers to reward good conservation per-
formance and encourage the implementation and maintenance of conservation practices
on working lands (ERS Farm and Commodity Policy: Basics of US Agricultural Policy,
http://www.ers.usda.gov/Brieng/Archive/FarmPolicyPre2008/FarmPolicyBriengRoom
19962007.pdf. Critics of CSP implementation argue that it has been limited by the
516 agricultural subsidies in the wto green box
The US notied a total of 13 programs under the heading of environ-
mental payments in its 2005 green box notication, amounting to $3,400
million. However, as noted above, other programs that clearly function
to the benet of agriculture are not notied here. For instance, EPA pro-
grams directed to addressing non-point source pollution clearly work to
the advantage of agricultural operations, in which concentrated animal
feeding operations (CAFOs) present special problems.
Although all of the programs notied as environmental payments pre-
sumably aim for effectively benecial environmental results, it is worth
noting how they have operated in fact. The CRPs original aim was not
only to reduce soil erosion, but also to protect soil productivity, control
surplus production and stabilize land prices (which were declining in the
mid-1980s). The CRP program has been criticized for many reasons: lack
of environmental criteria for retired land, underfunding of the program,
use of the CRP for supply management and more recently erosion of the
CRP as farmers put land back into corn for ethanol production. However,
the CRP has been estimated to be the most important driver of cropland
change from 1982 to 1997, and may have offset some of the increase in
agricultural output associated with other direct federal farm payments.
46
The 2002 Farm Bill increased the land-idling authority of the CRP to
39.2 million acres.
Since cropland shifting in and out of production has been found to be
more environmentally sensitive andless productive thanother cropland,
47
the effectiveness of the CRP must be examined. Critics of the CRP note
that whatever the environmental gains fromsetting land aside on a long-
term basis, the reality has been that such policies only have been enacted
when prices are depressed and the environmental goal aligns nicely with
a goal of shoring up commodity markets. When prices rise and appear
likely to stay up, conservation reserves have been abandoned.
48
Inthe rushto cornethanol, this appears to be againthe case for the CRP.
Babcock and Secchi (2007) estimate that at $3 corn, almost a million acres
of CRP land in Iowa alone would go back into production, about 460,000
acres of which is designated as highly erodible. They conclude that land
currently enrolled in the CRP offers signicant environmental benets
that could be lost under higher commodity prices, but that maintaining
Bush Administration and that Congress has contributed to the limitations by repeatedly
reprogramming funds destined for CSP to other purposes such as disaster relief
(Hanrahan and Zinn, 2005).
46 Lubowski et al., 2006. 47 Op. cit.
48 David Orden, What is the U.S. Farm Policy Future?, ICTSD Draft.
the environmental impact of us green box subsidies 517
current levels of environmental quality will require substantially higher
spending levels.
The administration has announced that it will offer no new Conserva-
tion Reserve Program enrolments in 2007 and 2008. However, the FSA in
2006 offered holders of general sign-up contracts set to expire between
2007 and 2010 (27.8 million acres) the opportunity to re-enrol or extend
their contracts, dividing expiring contracts intove categories basedonan
environmental benets index and giving the longest contract extensions
to those scoring highest in environmental sensitivity.
49
The CSP, on the other hand, is clearly meant to reward environmen-
tal stewardship. The program claims that it will help producers main-
tain conservation stewardship and implement additional conservation
practices that provide added environmental enhancement, while creating
powerful incentives for other producers to meet those same standards of
conservation performance.
50
While it has received good reviews for its
design, it also has its critics. Some, including the OMB, question whether
it provides effective conservation incentives, since the bulk of its pay-
ments go to producers who meet minimum standards. Others question
whether it is properly notied in the green box, since program payments
could exceed the extra costs or loss of income involved in complying with
the government program. However, most see it as a workable model for
enhanced conservation on working lands, and hope that it will be funded
as intended.
Some of the other environmental programs notied will be assessed for
environmental effectiveness by the USDAs Conservation Effects Assess-
ment Project (CEAP). These include the Environmental Wetlands Reserve
Program, Grasslands Reserve Program, Wildlife Habitat Incentives Pro-
gram and Conservation Technical Assistance.
One would hope that the environmental effects of programs intended
to benet the environment would in fact be benecial. Indeed, this is
most likely the case, but at different levels for the different programs.
The Conservation Reserve Program has been instrumental in providing
increased habitat and retirement of marginal lands, but this acreage can
be brought back into production if prices are high. Such price effects
have accounted for the periodic shrinkage of program acreage in the
past and could well do so in the future, particularly with current high
49 Farm Service Agency, News Release No. 1442.07.
50 NRCS Fact sheet, March 2005, http://www.nrcs.usda.gov/programs/csp/pdf les/csp
fs3 05.pdf.
518 agricultural subsidies in the wto green box
corn prices in response to biofuels mandates.
51
Planning for the long-
term viability of conservation reserve programs must take prices into
account. Similarly, one couldquestionthe extent towhichthe CSPrewards
the additionality that should characterize environmental performance
above and beyond the base, and whether EQIP can meaningfully address
the scale of waste management and water quality problems caused by
CAFOs.
EQIP and CSP programs are likely to be used differently by small
farmers than by large ones. The ERS reports that operators of small
farms and those not primarily focused on farming are less likely to adopt
management-intensive, conservation-compatible practices and to par-
ticipate in working-land conservation programs than operators of large
enterprises whose primary occupation is farming.
52
Beyond the obvious environmental and best agronomic practice incen-
tives provided by the programs, there is an additional element that should
be considered. To the extent that these programs are subsidizing inter-
nalization of environmental costs, they are providing a competitive edge:
producers in most developing countries do not benet fromsuch govern-
mental largesse. The conditions of competitioninthe foodandagriculture
industry have become largely a matter of which producers can produce
at economies of scale at the lowest cost. Some of this cost is reected in
environmental costs. Producers in countries with no effective environ-
mental compliance may be able to avoid internalizing these costs, but at
the ultimate cost of environmental degradation. Producers in countries
with effective environmental conditionality, but who are not subsidized,
may be less competitive.
The USDAs Conservation Effects Assessment Program has provided
excellent bibliographies of work on all of the environmental effects of the
USDAconservation programs. These include both granular and overview
effects on climate change and air quality, soil, water, wildlife habitat,
other environmental effects and multiple environmental problems.
53
They report primarily good, albeit mixed results. However, they do not
report on any effects outside the US. This is particularly interesting in
51 The Soil Bank has had shrinkage of this nature. In the late 1950s and early 1960s, it
enrolled several million acres of hayland and established an additional 21 million acres
of cover under multi-year contracts. However, when the contracts expired, virtually all of
this land was returned to crop production. Cacek, 1988.
52 Lambert et al., 2006.
53 http://www.nal.usda.gov/wqic/ceap/index.shtml andhttp://www.nal.usda.gov/wqic/ceap/
ceap01.shtml.
the environmental impact of us green box subsidies 519
connection with programs designed to benet the environment in terms
of transboundary environmental issues, such as water quality and climate,
and perhaps also representative of the general lack of sustained attention
given to the effects of US agriculture on the environment beyond US
boundaries.
Relating green box subsidies to environmental effects
Assessing environmental effects
Quantifying the environmental impacts of these programs is outside the
scope of this chapter, but this section will discuss some probable effects
of three of the kinds of programs discussed above; direct, or decoupled
payments, natural disaster emergency assistance and the environmental
programs.
Of the three kinds of programs, distributional data exists for all of them,
but actual assessment of environmental effects is largely lacking for all but
the conservation programs.
54
As noted above, it is rare that the environ-
mental effects of green-box-notied programs have been addressed. It
is even more unusual that they would have been quantied. Yet more
unusual is that their impact would have been assessed in a cumulative
framework under NEPA, such as that recommended and required by
EPA.
55
As observed above, virtually no assessments of benet or harm
beyond US boundaries exist for these programs.
The expenditure to distribution ratio
It is well known that most US direct payments go the top tier of farm-
ers. USDA data prior to the 2002 Farm Bill showed that: Farm house-
holds with sales above $250,000 participating in the program account for
20 per cent of recipient farms but received 56 percent of total PFC
payments in 2001, suggesting that decoupled payments underwrite the
54 The USDA has prepared an excellent summary of the costs and effects associated with
its conservation programs over the course of the 2002 Farm Bill. This is available as
United States Department of Agriculture 2007 Farm Bill Theme Papers, Conservation
and the Environment, Executive Summary, June 2006, http://www.usda.gov/documents/
FarmBill07consenvsum.pdf.
55 Consideration of Cumulative Impacts in EPA Review of NEPA Documents, US Environ-
mental Protection Agency, Ofce of Federal Activities (2252A) EPA 315-R-99-002/May
1999, http://www.epa.gov/compliance/resources/policies/nepa/cumulative.pdf.
520 agricultural subsidies in the wto green box
largest, more efcient, operators.
56
These data also suggest that the recip-
ients of these payments also harvest more land.
Since then, the USDA has further documented that US agricultural
production is shifting towards larger farms; that commodity program
payments (including disaster assistance, but not conservation payments)
are shifting toward certain commodities; and that these payments are
shifting to larger farms and higher income households, with the largest
shifts at the highest incomes.
57
The distribution of conservation payments is a bit different. About
25 per cent of cash grain and soybean farms and nearly 40 per cent of
other eld crop farms received conservation program payments in 2004.
In 2004, 14 per cent of rural residence farms, 16 per cent of interme-
diate farms and 24 per cent of commercial farms received conservation
payments. Farms with net cash farm incomes of $100,000 to $200,000
received 14 per cent of conservation payments and accounted for 9 per
cent of farms receiving conservation payments. Farms with household
incomes of $200,000 or more received 11 per cent of conservation pay-
ments and accounted for 10 per cent of farms receiving conservation
payments.
58
The expenditure to effects ratio
The USDA has studied the effects of farm payments, nding that for the
most part, decoupled program payments account for an improvement
in the overall well-being of recipient households that own base acres,
where well-being is dened broadly to encompass income, wealth, and
consumption, as well as how people choose to spend their time.
59
However, an assessment of environmental effects of farm payments
would focus on the extent to which these payments, whether they are
for conservation or decoupled from production (for example, direct),
inuence production decisions. The USDA reported in the 1990s that:
Although PFC payments
60
do not distort price incentives for producers,
they can still alter production decisions because payments increase farm
operators income, and the expectation of xed, future payments increases
56 Lubowski et al., 2006. 57 McDonald, Hoppe and Banker, 2005.
58 US Department of Agriculture, United States Department of Agriculture 2007 Farm
Bill Theme Papers, Conservation and the Environment, Executive Summary, http://
www.usda.gov/documents/FarmBill07consenvsum.pdf.
59 McDonald, Hoppe and Banker, 2005.
60 PFCpayments were production exibility contract payments under the 1996 FarmBill,
replaced by direct payments in the 2002 legislation.
the environmental impact of us green box subsidies 521
their wealth. Increased income and wealth from PFCs, as from any other
source of income, have lasting effects on households decisions about how
much to spend, save, and work. These household decisions can in turn
change the supply of capital and labour in agriculture, and lead to changes
in aggregate agricultural production.
61
Moreover, the USDA found that the additional income and wealth of
PFC recipients increases the level of risk they assume and the acres they
plant.
62
Prior to the 2002 Farm Bill, the same study found that decoupled
payments by themselves account for an 8-percent increase in aggregate
land asset values. The 2002 Farm Bill also allowed farmers to update
their base acreage, the basis of direct payments. By the USDAs own logic,
this arguably alters producers expectations of future changes in program
eligibility criteria, which then inuence their planting decisions.
Amore direct link between direct payments and aggregate land use and
productivity is suggestedby Westcott andYoung, whopropose that decou-
pled payments can have effects through producers wealth and invest-
ment, through sector consolidation, through programeligibility and pay-
ment basis considerations, and through ad hoc programs and changes in
producer expectations over time.
63
Recommendations
One might conclude from the above discussion that US green box pay-
ments may have perpetuated environmental problems if they have not
actually been themselves the source of environmental harm, in that:
r
direct payments stimulate some production (even if unintended),
including on marginal lands, and reward annual row crops over peren-
nial ones;
r
regularly awarded disaster assistance most likely encourages continued
production on marginal lands, as perhaps does some farm credit;
r
the Conservation Reserve has shrunk when prices are high, is shrinking
now due to biofuels production, and is too small and underfunded to
admit many of the kinds of lands it should protect;
r
Conservation Security payments have been awarded without a showing
of additionality from producers and the program has been chronically
underfunded;
61 US Department of Agriculture, Economic Research Service (2003).
62 Ibid. 63 Westcott and Young, 2002.
522 agricultural subsidies in the wto green box
r
most conservation payments go to large producers who are more likely
to use them to maintain production than to retire land, and perpetuate
grain and oilseed cropping; and
r
the cumulative effect of green box and other payments may be produc-
tion enhancing, with concurrent adverse environmental effects.
Critics of the 2007 Farm Bill would argue that critics of the 2002
Farm Bill were correct when they argued that it perpetuates outmoded,
commodity-oriented policies that tie support to the prices of a few major
rowcrops; withlegislatedtarget prices andloanrates set well above market
prices, distorting market prices and global trade.
64
However, if bioenergy mandates (and other market forces) raise prices
for grains and oilseeds to the extent that even without subsidies these
would act as an incentive to stimulate production, are even cumula-
tive effects of greenboxprograms relevant? If market forces are responsible
for production increases and land use changes, can policies that promote
the same effects be held responsible?
Designing green box programs for non-adverse environmental effects
Designing green box programs for reduced adverse environmental effects
could be approached by additional limitations on green box programs,
or by redesign of the programs themselves. With respect to the programs,
several observations might be relevant. The rst is that they are not for
the most part the subject of environmental impact assessment in terms of
their domestic effects, and assessment of extraterritorial or transbound-
ary effects are totally lacking. If such assessments were made, even under
the constraints imposed by the NEPA process, they would be more trans-
parent, both for domestic and foreign policymakers.
The environmental programs
The environmental programs are perhaps the most promising in terms
of initiating good agricultural practices. A shift towards working lands
programs has enabled the CSP to achieve success in many areas. A larger
and more diverse CSP program with higher standards for participation
could be the basis for environmental services payments of many kinds
that would redirect emphasis towards achieving conservation on working
64 Becker, 2002.
the environmental impact of us green box subsidies 523
lands where it is most needed. Properly incentivized, these could provide
the basis for a greener green box in the form of payments for many
kinds of environmental services.
However, there is concern that the CSP and its potential add-ons may
not properly t into the green box at all. The WTO Agreement on Agri-
culture, Annex 2, provision 12(b) states that environmental payments
shall be limited to the extra costs or loss of income due to requirements
of a government program, including conditions related to production
methods or inputs. Thus, many kinds of incentive payments may bring
the qualication criteria into question.
65
Such limitations on green box
criteria are not helpful to future efforts to reward environmental per-
formance, in particular for carbon sequestration, and changes to them
should be considered.
A less vulnerable conservation reserve program, insulated from price
shifts, with payments awarded rst on the basis of environmental assess-
ment of critical conservation needs, could also be extremely important.
Keeping land in the CRP is expensive at high prices and unlikely to
be effective.
66
A shift from the idling of whole elds for conservation
purposes towards implementing high-priority buffer practices (for
example, lter strips, grassed waterways) has, in the past, been attributed
to high prices.
67
This may intensify with further corn planting for fuel
ethanol, an issue that can be addressed in the context of energy policy as
well as farm policy. However, large environmental benets could perhaps
be achieved at lower cost using targeted conservation programs because
owners of low-quality and environmentally sensitive land might require
less payment to remove land from production than would owners of
higher quality land.
68
EQIP has been successful particularly in addressing livestock issues, but
it cannot be expected to compensate for CAFOpractices whose long-term
sustainability issues have not been addressed. Some of its shortcomings
and those of other environmental programs could be addressed by virtue
of updated and rigorously enforced cross-compliance. However, even so,
this will only address the 50 per cent of producers who receive farm pay-
ments. By making recipients of commercial farm credit subject to these
requirements, this pool might be expanded. Using investment screening
toweedout producers not using best management practices or sustainable
65 Becker, 2002. 66 Babcock and Secchi, 2007.
67 US Department of Agriculture, United States Department of Agriculture 2007 Farm
Bill Theme Papers, Conservation and the Environment, Executive Summary.
68 Lubowski et al., 2006.
524 agricultural subsidies in the wto green box
commodity standards might also prove to be useful in raising environ-
mental standards. Promotion of public-private partnerships in adopting
and using such standards might also be increasingly useful as certication
and safety and quality assurance become more common and central to
the agriculture sector.
Direct payments
The production linkages between direct payments and other payments, as
well as their cumulative effect on production, should be examined. This
could prove important in assessing and addressing the environmental
effects that ow from direct payments in specic geographical areas.
The assumption behind much of the concern about green-box-notied
decoupled or direct payments is that even though they are delinked to
production, they will lead to increased production and this will have
adverse environmental effects. While it is likely that increased production
will have these effects, it is not likely that direct payments will have as
much of an effect on increased production as other market forces, like
high commodity prices. These have most recently been associated not
with direct payments, but with energy, specically biofuels mandates,
and high oil prices.
Studies documenting the effect of high prices on environmental pro-
grams, and more specically the environmental effects of withdrawal of
CRP acreage, show signicant environmental effects associated with the
high prices that are causing farmers to put land back into production.
One study estimates that:
the environmental impacts increase drastically as higher corn prices bring
intoproductionmore andmore environmentally fragile land. For example,
sediment losses increase from less than 1 million tons for the almost
2 million acres in CRP to almost 5 million tons at $5 corn, when over
1.35 million acres would go back into production. We estimate that if
all CRP land in Iowa were put back into a continuous corn rotation, the
sediment losses would exceed 9 million tons. Nitrogen losses follow a
similar pattern.
69
Atopic that has arisen in connection with the 2007 FarmBill is the expan-
sion of current programs so that a producer can insure the revenue of the
entire farm (possibly including livestock), rather than individual crops.
70
Whether or not this would also replace direct payments is unknown,
but, from an environmental point of view, using a single payment would
69 Babcock and Secchi, 2007. 70 Babcock and Hart, 2005.
the environmental impact of us green box subsidies 525
eliminate the lack of transparency incurred by multiple payments from
commodity, disaster and crop insurance programs, also allow for more
effective cross-compliance and enhance the ability to assess cumulative
effects. A single program would also, according to Iowa State agricultural
experts, eliminate program duplication, reduce administrative costs and
largely eliminate over- and under-compensation of farmers.
71
Finally, caps on farm payments could possibly have some environmen-
tal effects, although the USDA did not consider caps on payments to have
any environmental effects in the 2002 Farm Bill.
72
We do not know if
the reverse is also the case (for example, if concentration of payments
is thought to be environmentally signicant). Proposals to cap payment
levels are likely to be enacted in the next US Farm Bill, although these are
very unlikely to reverse the trend towards high payments to the largest
and most efcient grain and oilseed farmers.
Other programs
Disaster insurance and farm credit programs both play a large policy role
in perpetuating present patterns of production in the US. Their roles
in the environmental context should also be claried. Both should be
examined in light of their long-term environmental impacts at national
and regional levels, particularly in light of land-use changes necessitated
by anticipated climate changes. Similarly, research oriented towards less
intensive production methods could prove environmentally benecial, as
couldprogramevaluationandresearchonways tomake current programs
more effective.
Green box notications
One of the interesting aspects of the US notication of the 2005 green
box programs is that it is as notable for the information not present
as it is for the information presented. The plethora of USDA program
acronyms account for a host of programs and spending on agriculture,
but they by no means account for all of the benets received by the
US agriculture sector. Even the US Ofce of Management and Budget
has chosen to include in its evaluation of agricultural programs some
that did not make the USDA list. Whether or not these are properly
green box programs is an open issue, but certainly some discussion of
71 Babcock and Secchi, 2007.
72 Federal Register: 1 October 2002 (Vol. 67, No. 190), pp. 6146870.
526 agricultural subsidies in the wto green box
which non-USDA programs might qualify in light of green box criteria,
present and proposed, is in order. As state programs begin to venture into
carbon payments to agriculture, some discussion of them might also be
timely.
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Farm Bill, Iowa Ag Review Online, Spring, http://www.card.iastate.edu/
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18
Biofuels subsidies and the green box
timothy josling and david blandford
The dramatic rise in the production of biofuels, chiey ethanol and bio-
diesel, in the last few years has created a number of opportunities and
an equal number of challenges for agriculture and the trade system. The
prospect of being able to turn agricultural crops, and eventually agricul-
tural waste products, into fuel is revitalizing many parts of the farming
community. The lure of renewable fuels has considerable resonance across
the political spectrum, from those concerned about the present reliance
on fossil fuels and its global environmental consequences to those who
see the strategic value of reduced dependence on imported oil. The reac-
tion of a number of countries has been to encourage the development of
renewable energy sources and to promote the use of biofuels. Developing
countries see a possible new outlet for their agricultural raw materials,
such as sugar and palm oil, which could benet from a growing market
and provide employment in processing activities. However, challenges
are beginning to emerge, as the use of corn for ethanol appears to add
to upward pressure on food prices and the total emissions of greenhouse
gases associated with the production of ethanol may be as high as those
from conventional fuels. If biofuels are to make a constructive contri-
bution to sustainable development, it is clear that public policy needs
to evolve on the basis of careful assessment of their contribution and
appropriately targeted policies.
This chapter is intended as a contribution to the ongoing discussion on
public policy and biofuels. It focuses on one particular aspect, the rela-
tionship between biofuel subsidies and constraints on the use of agricul-
tural subsidies negotiated in the context of the World Trade Organization
(WTO). Subsidies for the production of biofuels and their incorpora-
tion into gasoline and diesel appear to pose challenges for WTO rules
on agricultural trade and policy. Symptomatic of the uncertainty is a
lack of agreement on whether biofuels are covered by rules relating to
530
biofuels subsidies and the green box 531
agricultural products or whether they are industrial products and thus
covered by other rules. If biofuels are to be considered agricultural in
nature, then subsidies designed to promote their production should be
notied to the WTO as such, and may be subject to limitations under
the terms of the Agreement on Agriculture (AoA). If not, they would still
have to be notied, but would be subject to the Agreement on Subsidies
and Countervailing Measures (ASCM).
If biofuel subsidies are counted as agricultural subsidies, the issue arises
as towhether they shouldbe notiedas trade distorting (under the amber
box category of support) or trade-neutral (under the green box). Some
biofuel subsidies could be considered as providing indirect support to the
producers of feedstock, mainly corn and oilseeds, and as such would be
coupled to production. This would place the subsidies in the trade-
distorting category and they would fall under the disciplines of the AoA.
However, others might be consistent with those classied as minimally
trade-distorting, for example, if the feedstock was a waste product or
cellulosic material that is not a marketable agricultural product. In that
case, biofuel subsidies could t within the green box, as currently dened
or that might emerge from a negotiated modication.
1
While the precise answer tothese questions involves legal interpretation
of the rules involved, and may eventually require a ruling under the WTO
dispute settlement procedure, it is possible to lay out the issues involved.
These are of interest both to countries that currently subsidize biofuel
production and their competitors in the emerging international market
for biofuels. The questions are also relevant for those who may wish to
include such products in future economic development plans.
To examine the interface between the green box and biofuel subsidies it
is necessary to examine the context for each and specify the ways in which
the two are linked. This entails discussing current biofuel policies inmajor
producing countries as well as describing the WTO treatment of biofuel
subsidies. We then discuss the current level of green box spending in
producing countries and the extent to which their biofuel policies might
t under the various categories of subsidy in the green box. The chapter
concludes with some comments on changes likely to be considered in the
1 The Agreement on Agriculture usually refers to agricultural products as the scope of its
coverage: Annex 2, paragraphs 9 and 10 of the Agreement, however, mention refraining
fromthe production of marketable agricultural products when specifying the conditions
under which payments for structural adjustment (e.g. land retirement) can be included in
the green box.
532 agricultural subsidies in the wto green box
Table 18.1 Classication of types of biofuel policy
Types of subsidy Example
Subsidy to biofuel producers Per unit subsidy
Capital cost subsidy
Subsidy to biofuel users Tax exemption
Subsidies on feedstocks General subsidies
Subsidies specic to biofuel feedstock
Use of set-aside land
Regulations Mandates for blending
Blending requirements
Sustainability criteria
Performance criteria
Source: Based on Howse et al., 2006.
Doha Round of WTO negotiations and offers suggestions on nding an
agreed approach on handling biofuel subsidies in the WTO.
Biofuel policies in major countries
Steeply rising prices for crude oil have sparkedintense interest inincreased
use of biofuels and other alternative sources of energy. A similar develop-
ment in the 1970s was cut short by a subsequent steady fall in oil prices
(after adjusting fromination) from1981 to 1998. Helping to drive inter-
est in biofuels has been the notion that there are environmental benets
from renewable energy sources: plants used as feedstocks absorb green-
house gases and so offset the impact of emissions from burning biofuels.
The prospect of carbon-neutral fuel sources coupled with the widespread
availability of feedstock (biomass) compares well with the continued use
of nite supplies of fossil fuels located unevenly around the world.
The problem with such a future is that oil (and other fossil fuels) is still
among the cheapest ways of running power stations, fuelling transport
vehicles and heating homes. Only through substantial public intervention
is the switchtobiofuels andalternative energy more generally likely totake
hold. This introduces a variety of political issues, such as the extent and
nature of the domestic policies designed to stimulate the use of renewable
fuels and their implications for international commercial relations.
The range of policies devised to promote the productionand marketing
of biofuels is summarized in table 18.1. Subsidies provided to the biofuel
industry can be capital nancing loans and grants in the start-up or
biofuels subsidies and the green box 533
expansion phase or per unit assistance for ongoing production. Subsidies
to users of ethanol and biodiesel are usually in the form of a tax credit
or exemption, requiring less administration and perhaps disguising the
nancial cost. Subsidies to producers of feedstock (corn, sugar, oilseeds,
etc.) can either be through price supports as a part of more general
farm policies or specic to energy crops. In some cases the use of set-
aside land or land under conservation programs is allowed for biofuel
crops, conferring a benet to producers who might otherwise not have a
marketable product from those lands.
Somewhat more indirect subsidies can be provided through regulatory
policy instruments. Common among these are blending mandates that
specify the use of biofuels when economic considerations would other-
wise make this too expensive. Such mandates can have varying enforce-
ment mechanisms and may be combined with scal incentives. Blending
requirements can be used alone, without quantitative mandates for total
use. Other regulations can specify the conditions under which biofuel is
to be produced, or specify other criteria for the product in question.
The relevance of WTO rules in general and the Agreement on Agri-
culture in particular will vary with the way in which a subsidy for the
production and marketing of biofuels is implemented. This requires a
brief discussion of the biofuels policies of the major countries that are
active in this area.
The United States
Government support for biofuels in the United States (US) can be traced
back to the sharp rise in oil prices following the 1973 Arab-Israeli war.
A federal fuel-excise tax exemption was introduced for gasohol (now
more often called E10, indicating a 10 per cent ethanol blend) in 1978.
Several states also established lower tax rates for gasohol than for gasoline.
However, the Federal Highway Trust Fund into which the excise tax was
placed suffered from the loss of revenue; in 2004 Congress eliminated
the exemption and introduced a $0.51 per gallon tax credit for ethanol
in its place. This Volumetric Ethanol Excise Tax Credit (VEETC) has
remained to the present day and constitutes a major support for the
industry (Steenblik, 2007). The amount of the credit, however, fell to
$0.45 per gallon in January 2009.
The tax credit is available for blending ethanol obtained from both
domestic and foreign sources. To promote the use of domestically-
produced ethanol in preference to imports, an import duty of $0.54
per gallon was introduced in 1978. The additional duty was paid over
534 agricultural subsidies in the wto green box
and above the normal (MFN) duty of 2.5 per cent, and appears to have
been designed to circumvent the US tariff bindings.
2
The US entered the
additional duty in its Uruguay Round schedule of bound tariffs under
the heading of other duties and levies and treats it as an autonomous
measure not subject to negotiation.
3
The 2008 Farm Act extends the duty
through to the end of 2010.
To bolster the impact of the volumetric tax credit, the US Congress in
2005 introduced a mandate to increase the use of ethanol in the trans-
portation fuel supply. This mandate, known as a renewable fuel standard
(RFS), acts as botha target toprovide some assurance onfuture demandto
investors and as a way of imposing a blending standard on the industry. As
de Gorter and Just (2007) have aptly pointed out, the mandate should be
unnecessary if the tax credit works. Furthermore, the tax credit is super-
uous if the mandate is effective. Therefore, the result is that blenders
receive compensation through the tax credit for what they would have
had to do through the mandate. This benet will tend to be passed on
as a higher price for ethanol, and this in turn could increase the price of
corn (as has clearly happened).
4
The Energy Policy Act 2005 mandated
the use of 4 billion gallons of ethanol by 2006 and 7.5 billion gallons
by 2012. This was superseded by the Energy Independence and Security
(EIS) Act 2007, which mandated a new renewable fuel standard (RFS) of
9 billion gallons of biofuels by 2008 and 36 billion gallons by 2022. Of
this amount, 15 billion gallons will come from ethanol from corn: the
remainder is assumed to be derived from second generation feedstocks
such as crop waste and cellulosic material. The EIS Act also mandates the
use of 1 billion gallons of biodiesel by 2012, up from 500 million gallons
in 2009.
The European Union
The European Union (EU) has also moved towards the use of alternative
fuels for transportation. The fuel of choice in the EU is biodiesel derived
from various oilseeds, including rapeseed and soybeans, as a feedstock.
2 At an import price of 50 cents per litre, this would represent a 28 per cent tariff (Steenblik,
2007).
3 Ethanol suppliers under NAFTA and other FTAs, together with CBI countries, have duty
free access. In most cases, the amounts are restricted to a duty-free quota that is tied to US
production.
4 De Gorter and Just argue that the price of gasoline is also reduced relative to the effect of
the mandate alone, and thus gasoline consumption is higher than otherwise.
biofuels subsidies and the green box 535
Biofuel policy is set at the EU level, but is implemented by the Member
States. The Biofuels Directive of 2003 established the framework for such
national action. It was reinforced by agreement on a strategy for curbing
greenhouse gas emissions in March 2007. The target is to secure 20 per
cent of EU energy supplies from renewable sources by 2020 (compared to
6 per cent in 2005) and to achieve a 10 per cent blend of biofuels in the
transport sector by 2020 in each Member State. Countries are encouraged
to reduce taxation on biofuels so as to achieve the target.
The EU has been active in promoting renewable energy production
in agriculture for some time. The reform of the Common Agricultural
Policy (CAP) in 2003 included a payment of 45 per hectare (subject
to a maximum of 2 million hectares in the EU27) for the production of
energy crops. However, this policy is considered to be superuous due to
the high prices of such crops, and the Commission has sought to remove
it in the current Health Check review of the CAP.
5
Other measures
to stimulate biofuel production have included the option of growing
biomass on set-aside land and the encouragement of rural development
grants under Pillar 2 of the CAP. Furthermore, the distillation of surplus
wine into ethanol has been a part of the wine price support policy for
years, although recent proposed policy reforms would eliminate this.
6
The imposition of tariffs (unlike excise duties) is the responsibility of
the EU, rather than of the Member States. The EU has a 5.5 per cent
MFN tariff on biodiesel, although imports have been low until recently.
7
Ethanol is subject to a 19.2 per hectolitre MFNtariff (equivalent to an ad
valorem rate of roughly 63 per cent at recent prices), although the bulk of
imports enter duty-free under EUtrade agreements, including those with
the EFTAcountries and under the EUs Generalized Systemof Preferences
(GSP).
8
Biofuel tax incentives are embedded in national tax codes. Germany
has a tax on mineral oils, thus giving biofuels an advantage. Recently the
5 The energy crop supplement is attached to the Single Farm Payment introduced in 2003.
As such it goes against the objective of keeping the Single Farm Payment decoupled from
production decisions.
6 There are no limits on the use of domestic sugar for the production of ethanol, and price
reductions under recent policy reform could stimulate such usage.
7 EUbiodiesel producers have complained about the growing practice of importing biodiesel
from the US that has beneted from the blending subsidy in that country. The product
concerned has a small amount of non-biodiesel (B99), but still qualies as pure biodiesel
in the EU. Biodiesel from palm oil is sent from Indonesia and Malaysia through the US
and on to Europe. This so-called splash and dash trade reached 1 million tons in 2007.
8 Denatured ethanol is subject to a tariff of 10.2 per hectolitre (Steenblik, 2007).
536 agricultural subsidies in the wto green box
tax relief has been modied somewhat and a blending mandate intro-
duced in line with EU goals. The UK has an abatement of the petrol tax
of about 40 per cent, and has introduced more comprehensive incentives
to use renewable energy, including tradable obligation certicates. Aus-
tria, France, the Netherlands, Luxembourg and Spain have mandates for
biofuel use, and most other EU Member States have targets (Steenblik,
2007).
Brazil
As a reaction to the high oil prices of the 1970s and the vulnerability of
the countrys plans for industrial expansion, Brazil embarked on a bold
experiment to move away from the use of gasoline in transportation.
Ethanol blending was introduced, together with low interest loans for
sugar companies to build ethanol plants and support for the construction
of a national distributionnetwork(Howse et al., 2006). However, subsidies
were reduced in the 1990s and the industry had to reorganize. A surplus
of sugar revived the plans and the introduction of ex-fuel cars hastened
the switch of a signicant part of transportation energy requirement to
biofuels.
9
Investment in infrastructure continued to be heavily supported
by the government and the biofuel industry has enjoyed widespread polit-
ical support.
Currently, the main instrument in Brazilian biofuel policy is a 20 to
25 per cent mandatory blend of ethanol in gasoline. In addition, ethanol
(both pure and for blending) is exempt from the excise tax (CIDE) on
gasoline (amounting to some $0.62 cents per gallon). Several states also
charge lower tax rates onethanol. Subsidized credit is available for ethanol
storage and ex-fuel cars benet from a partial exemption from a sales
tax (the IPI) (Nassar, 2008).
Other countries
Many other countries have established policies to encourage biofuel pro-
duction and use. In Asia, the emphasis has been on ethanol. China is the
third largest ethanol producer and provides subsidies to its state-owned
ethanol plants. The level of subsidy varies with the protability of the
plants. Japan has been considering an ethanol blending mandate, but as it
imports most of its corn it is unlikely to pose any threat to other ethanol
9 Biodiesel consumption in Brazil is small despite the abundance of oilseeds.
biofuels subsidies and the green box 537
producers. Thailand has been developing ethanol production from cas-
sava, sugarcane and molasses and provides tax incentives to reners to
blend the product with gasoline. Tax incentives for the production of
ex-fuel cars are currently under consideration. India has been devel-
oping ethanol production from sugarcane. It has a mandatory blending
requirement of 5 per cent, shortly to be raised to 10 per cent, and xed
prices for purchases of domestically produced ethanol.
Other agricultural exporters are looking at biofuels as a part of a diver-
sication strategy, adding value to basic commodities. Australia has been
developing ethanol production based on molasses, waste starch and grain.
Domestically produced fuel ethanol is exempt from the excise tax on
petroleum until 1 July 2011. The tax will then increase gradually until
it is roughly one-third of that on petroleum. South Africa was actively
pursuing the development of ethanol from corn and the introduction
of a mandatory 10 per cent blending requirement until recent increases
in corn prices. Attention is now shifting to the use of sugar as a feed-
stock, but the government has been reluctant to provide subsidies for
the construction of renery capacity. Argentina has introduced a manda-
tory blending requirement of 5 per cent for both ethanol and biodiesel
by 2010. Tax incentives are provided for domestic use, but the primary
interest is on unsubsidized production for export (exports are subject
to taxes). Ethanol production is focusing on molasses, sugarcane and
corn; soybeans are the primary feedstock for biodiesel. Colombia has a
10 per cent blend requirement that must be met by 2009 and will impose
further increases thereafter. Malaysia, Indonesia, the Philippines and the
Caribbean countries have all begun to explore the prospect of producing
ethanol for export: they presumably have a keen interest in the treatment
of the ethanol subsidies in the US, Brazil and the EU within the WTO.
The WTO and biofuel subsidies
The treatment of subsidies in the WTO has a complex legal history built
on the experience of the General Agreement on Tariffs and Trade (GATT).
Subsidies are not necessarily inconsistent withthe articles of the WTO, but
they are closely circumscribed. In so far as biofuel policy involves actions
at the border, the provisions of the GATT are relevant, particularly those
that guard against discrimination among suppliers or against imports
in general. The main part of the WTO that deals with subsidies is the
Agreement on Subsidies and Countervailing Measures (ASCM), negoti-
ated in the Uruguay Round. For agricultural products there are further
538 agricultural subsidies in the wto green box
Table 18.2 Applicability of WTO to biofuel policies and
main issues raised
GATT (Articles I, III, XX) Non-discrimination
National treatment
Natural resource exemption
ASCM (Articles 1, 5 and 6) Financial contribution
Conferral of benet
Specic subsidy
Adverse effects
Injury to domestic industry
Nullication or impairment of benets
to trading partners
Serious prejudice to another country
AoA (Annex 1, Annex 2) Agricultural product or not?
Exempt subsidy rules (green box)
Doha Round Environmental goods denition
Tariff cuts in industrial goods
Agricultural tariff cuts
Agricultural subsidy cuts
Changed denition of green box
Source: Based on Howse, et al. (2006).
disciplines in the Agreement on Agriculture (AoA). If the policy involves
regulatory measures and standards, then other provisions of GATT/WTO
are relevant. Finally, the Doha Round of multilateral trade talks has the
potential to address some of the ethanol issues in a limited way, mainly
through improvements in market access, but also as a result of changes in
the Agreement on Agriculture, and this could have an impact on the use
of subsidies.
The various WTO aspects of relevance to biofuel policy are summa-
rized in table 18.2. Many of these are embedded in the GATT.
10
The
basic principle of non-discriminationamong overseas suppliers of ethanol
and biodiesel is uncontroversial, but with the proliferation of bilateral,
regional and preferential trade agreements its practical effect is small.
National treatment refers to the comparable treatment of domestic and
10 Intechnical jargon, GATT(94), agreedas part of the Uruguay Round, replacedthe original
GATT (47) with only minor changes.
biofuels subsidies and the green box 539
imported biofuels when they reach the domestic market. Most countries
have crafted their domestic tax and regulatory policies to conform, at least
on the surface, to the GATT obligation.
The ASCM gives a legal denition of the term subsidy. According to
that agreement, a subsidy must have three basic elements:
11
r
it must entail a nancial contribution;
r
it must be made by a government or any public body withinthe territory
of a member; and
r
it must confer a benet.
However, even if a measure qualies as a subsidy under the ASCM, it is
not subject to the full disciplines of that agreement unless it is a specic
subsidy.
12
Specic subsidies are further divided into two categories: those
that are prohibited and those that are allowed, subject to constraints.
Two types of subsidies are prohibited: export incentive subsidies that are
contingent on export performance; and local content subsidies granted
for the use of domestic inputs over imported goods. Other subsidies are
deemed actionable in that they are potentially subject to challenge.
The ASCM provides a clear process through which actionable subsidies
are identied. A member can initiate remedial measures if it can prove
that non-prohibited actionable subsidies cause serious prejudice to its
interests. Serious prejudice may arise where one or more of the following
apply: displaced imports into the market of the subsidizing country;
displaced exports to third-country markets as a result of the subsidy;
signicant price suppression as a result of the subsidy; and an increase in
world market share by the subsidizing country.
13
In addition to a challenge based on serious prejudice, a subsidy can
be countervailed if it causes injury to domestic producers. Such injury
could also trigger other safeguard actions under Article XIX. European
biodiesel makers could, for instance, attempt to show that US pro-
ducers were causing them harm through subsidized splash and dash
trade. Less likely, though still plausible, is the possibility of challenge
under the nullication or impairment conditions (Article XXIII): a
country could argue that ethanol subsidies were unexpected at the
time when tariff schedules were agreed and that benets accruing to
11 Agreement on Subsidies and Countervailing Measures (ASCM), Art. 1.
12 ASCM, Art. 2. The denition of a specic subsidy is discussed in Howse et al., 2006.
13 ASCM, Art. 6:3.
540 agricultural subsidies in the wto green box
it directly or indirectly under WTO agreements are being nullied or
impaired.
14
The treatment of ethanol subsidies under the Agreement on Agricul-
ture is more complex. The AoA (Annex 1) indicates that it covers HS
(harmonised system for coding products, established by the World Cus-
toms Organization) Chapters 1 to 24 less sh and sh products, plus
some other products. There is no specic entry for bioethanol for fuel
under the harmonized system. However, ethanol is traded under HS 2207,
which includes both undenatured (HS 220710) and denatured alcohol
(HS 220720). Biodiesel is covered by HS 382490. Consequently, there
would seem to be a prima facie case that ethanol would be a covered
product under the AoA, whereas biodiesel would not.
Article 1a of the AoA indicates that all support provided for an agricul-
tural product in favour of the producers of (a) basic agricultural product or
non-product-specic support provided for agricultural producers in gen-
eral, other than support provided under programs that qualify as exempt
from reduction under Annex 2 (green box) (emphasis added) should be
included in a countrys aggregate measurement of support (AMS). This
is subject to each countrys commitment on the nal bound total AMS
agreed in the Uruguay Round. A basic agricultural product in relation
to domestic support commitments is dened as the product as close as
practicable to the point of rst sale as specied in a members schedule
and related supporting material (Article 1b). The AoA goes on to state
that: Any domestic support measure in favour of agricultural produc-
ers, including any modication to such measure, and any measure that
is subsequently introduced that cannot be shown to (be exempt from
reduction) . . . shall be included in the Members calculation of its Cur-
rent Total AMS (Article 7:2a). So a key issue would seem to be: if ethanol
is judged to be an agricultural product, do any of the measures used to
promote the production of ethanol constitute support for the producers
of a basic agricultural product (for example, corn or sugar)? Alterna-
tively, if it cannot be shown that the support is specic to a particular
14 GATT Art. XXIII (para. 1) states that a country can bring a complaint to the WTO on the
basis of any one of the following conditions:
a. the failure of another contracting party to carry out its obligations under the GATT
Agreement, or
b. the applicationby another contracting party of any measure, whether or not it conicts
with the provisions of the Agreement, or
c. the existence of any other situation.
In practice most complaints are based on condition a.
biofuels subsidies and the green box 541
basic agricultural product (for example, due to the possibility of using
various feedstocks to produce ethanol), would it fall under the heading
of non-product-specic support and as such also have to be included in
the calculation of the current AMS?
Determining the AMSassociatedwithparticular biofuels policies seems
to be feasible. Payments made to US producers for use of agricultural
products in the production of bioenergy and biodiesel have already been
notied to the WTOfor 2002 to 2005 under the product-specic category
of support.
15
Beyond this, it might be argued that a mixing requirement
for ethanol, combined with protection from imported ethanol, serves
to increase the domestic demand for ethanol feedstocks and hence their
price. This policy mix for the agricultural product (ethanol) provides
support in favour of the producers of basic agricultural products such
as corn and sugar cane by acting as a form of price support policy.
There might be issues associated with the magnitude of the subsidy for
a particular basic product due to the fact that the subsidy accrues to the
processor (blender) rather than directly to agricultural producers such
that part of the transfer is retained by the processor, but the same issue
applies to existing price support policies that are implemented through
processors (for example, US dairy and sugar policies).
16
If processors have
the ability to substitute among agriculturally derived feedstocks, a non-
product-specic estimate could be obtained. Consequently, if measures
used to promote domestic production of ethanol are judged to fall under
Article 1a of the AoA cited earlier, it would seem that they should be
treated as amber box support and included in a countrys estimate of its
current total AMS.
Doha Round
The potential inclusion of (at least some) ethanol subsidies in the total
AMS could be signicant for the EU and the US if agreement is nally
15 The programconcernedis the Bioenergy Programadministeredby the Commodity Credit
Corporation of the US Department of Agriculture. This involved corn and sorghum
(entire period) and wheat (200203 only) for bioenergy and livestock and soybeans for
biodiesel. Note that this notication appears to accept a broad denition of biofuels as
agricultural products.
16 Specicity could be an issue if agricultural and non-agricultural feedstocks can be used
to produce ethanol. This is not common at the moment, but would be more important if
processes for the production of cellulosic ethanol are developed and adopted. In that case,
the price-enhancing effects of basic agricultural policies to promote ethanol production
would, at the very least, be diluted.
542 agricultural subsidies in the wto green box
reached in the Doha Development Round negotiations. The draft modal-
ities would imply reductions of 70 and 60 per cent, respectively, in the
total AMS for the EU and US. The allowable de minimis would be cut
from 5 and 2.5 per cent; overall trade-distorting support (the sum of
the total AMS, de minimis and blue box) would be capped and reduced
signicantly (proposed reductions are between 75 and 85 per cent for the
EU and 66 and 73 per cent for the US). Such reductions would constrain
the roomfor manoeuvre in the provision of domestic support (Blandford
and Josling, 2007). The inclusion of additional components in the AMS
would tighten that constraint.
The status of ethanol and other biofuels in the WTO could also be
affected by negotiations on the status of so-called environmental goods.
The Doha Ministerial Declaration calls for the reduction or, as appropri-
ate, elimination of tariffs and non-tariff barriers to environmental goods
and services (WTO, 2001, paragraph 31(iii)). Negotiations have centred
on trying to reach agreement on a common denition of which envi-
ronmental goods should be included. Discussions have focused on two
classes of goods: those relating to established environmental technolo-
gies (such as equipment used for reducing water and air pollution or for
water purication) and environmentally preferable products (such as
biodegradable materials or natural dies and organic soaps) (Howse and
van Bork, 2006). In 2007, Brazil proposed that ethanol and other biofuels
should be classied as environmental goods and should therefore be sub-
ject to deep tariff cuts. This proposal was opposed by the EU and the US.
If the Brazilian proposal is accepted, substantial tariff reductions could
severely constrain the ability of both the EU and the US to promote the
consumption of domestically produced biofuels by protecting these from
lower priced imports.
17
Possible pressures on domestic support and tariff protection that could
emerge from a Doha Agreement make other options increasingly attrac-
tive. The EU and the US, in addition to many other countries, are looking
to so-called green box payments as a means of pursuing agricultural and
related policies in ways that are consistent with tighter disciplines on con-
ventional means of support. Consequently, we now move our attention
to green box issues.
17 It is notable that part of the US argument against the Brazilian proposal was that the
proposed liberalization was designed to apply to industrial products and that agricultural
products were not covered. This seems to imply that the US accepts that biofuels should
be treated as agricultural products.
biofuels subsidies and the green box 543
Green box spending in major countries
The concept of the green box, a label for agricultural subsidies that are
viewedas having no(or at most minimal) productionandtrade-distorting
effects, was introduced in the AoA. It provided a direct link between the
parallel processes of domestic agricultural policy reform and reform of
the multilateral trading system. The process of moving fromprice support
to direct payments has been an essential part of the domestic reforms in
developed countries, offering better targeting of support and reducing
surplus production. However, the process has taken different forms in
different countries. A review of the main instruments that have been
classied as green box subsidies in the main countries is a useful basis
for considering the place of ethanol subsidies in the WTO classication
scheme.
Green box and US farm policies
Green box payments are an important component of the support pro-
vided to US agriculture. The annual average of US$50 billion of support
provided under this category was 78 per cent of total support notied to
the WTO for 1995 to 2005 (table 18.3). Domestic food aid, in particu-
lar the Food Stamp program, accounted for 69 per cent of total notied
support under the green box.
The US notied direct payments provided to producers under the 1996
Farm Act as green box. These payments replaced the blue box deciency
payments of the former legislation. However, the ruling in the US upland
cotton case
18
(discussed below) cast doubt upon the way in which these
policies shouldhave beennotied. This has ledtoa follow-upcase brought
by Brazil and Canada that questions the calculation of the Total Aggregate
Measurement of Support (TAMS) in recent years. Should the US be
found not to have been in compliance, the remedy presumably would
be to renotify domestic support using different classications for direct
payments. The question of ethanol subsidies compounds the problem.
Together, an adverse ruling on direct payments and a requirement to
notify ethanol subsidies withinthe AMS wouldhave a considerable impact
on the ability of the US to adhere to its commitments under the Uruguay
Round Agreement on Agriculture.
18 United States Subsidies on Upland Cotton, dispute DS267, http://www.wto.org/english/
tratop e/dispu e/cases e/ds267 e.htm.
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biofuels subsidies and the green box 545
The key issue in terms of the status of the ethanol subsidy (regardless of
whether ethanol itself is considered to be an agricultural product) may be
whether the benet provided to the producers of agricultural feedstock
used to produce the ethanol is a subsidy for a marketable agricultural
product. Corn is indeed a marketable agricultural product, so a subsidy
that confers a benet on corn producers should be counted under the
amber box. Subsidies that are paid for the production of an agricultural
product are disallowable under the green box, regardless of the ultimate
use of that product.
19
Benets that arise as a result of subsidies for the
non-agricultural use of a farm product would also seem to be excluded
from the green box. Other forms of aid, for example, investment aids for
processing plants that are specic to these agricultural products might
also be subject to challenge if notied as green box.
Green box and the CAP
Prior to recent changes in the Common Agricultural Policy (CAP), the
green box was a less important component of the support provided to
EU agriculture than in the US. The annual average of 20 billion of
support provided under this category represented roughly 24 per cent
of the total support notied to the WTO for 1995 to 2003. The three
leading categories of support were general services, investment aids and
environmental payments, eachof whichaveragedfrom4.5to5.5billion
per year (table 18.4). Regional assistance was the other signicant category,
averaging roughly 2.7 billion annually.
Because of the lack of more recent notications, the gures in
table 18.4 do not show the effects of the signicant changes in the CAP
since 2003. The introduction of the single farm payment (SFP) scheme
in 2005 would probably result in a substantial increase in the amount of
decoupled income support that will be notied to the WTO. It is difcult
to estimate precisely what the impact would be, but a rough indication
of an order of magnitude can be derived from the notications. Over the
period 1995 to 2003, roughly 26 per cent of the support notied to the
WTO was in the blue box. If roughly 80 per cent of the support provided
under the SFP would qualify for the green box, this would have almost
19 Many agricultural crops, e.g. corn, are usedinthe productionof a range of industrial prod-
ucts, but there has been no attempt in the notications to adjust estimates of agricultural
subsidies for this.
546 agricultural subsidies in the wto green box
Table 18.4 EU green box notications ( billion)
Category 1995 1996 1997 1998 1999 2000 2001 2002 2003
General services 5.01 6.47 5.52 5.02 6.73 4.74 5.64 5.23 5.02
Public stockholding/
food security
0.00 0.00 0.00 0.02 0.02 0.02 0.02 0.02 0.06
Domestic food aid 0.29 0.40 0.30 0.28 0.28 0.27 0.24 0.28 0.31
Decoupled income
support
0.24 0.22 0.21 0.13 0.96 0.49 0.17 0.00 0.01
Income insurance/
safety nets
0.00 0.00 0.00 0.00 0.00 0.01 0.01 0.00 0.01
Disaster relief 0.33 0.38 0.33 0.18 0.37 0.39 0.40 0.81 0.71
Producer retirement 0.15 0.95 0.62 0.71 0.79 0.66 0.80 0.85 0.81
Resource retirement 1.03 1.53 0.33 0.43 0.12 0.45 0.09 0.11 0.12
Investment aids 6.60 4.97 4.90 5.40 2.31 5.86 5.36 5.26 6.82
Environmental
payments
2.78 4.22 3.69 4.97 5.46 5.73 5.52 5.01 5.23
Regional assistance 2.29 2.99 2.27 2.04 2.90 3.23 2.42 2.83 2.98
Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total 18.72 22.13 18.17 19.17 19.93 21.84 20.66 20.40 22.07
Note: detail may not add up to the totals shown due to rounding.
Source: WTO notications.
doubled this category of support over the notication period to around
42 per cent of the total.
20
In the future, green box support may become even more signicant for
the EU as a result of the following:
r
reform of the sugar regime in which a reduction in the support price
for white sugar is being replaced by a decoupled payment;
r
the potential adoption of direct payments for other commodities, par-
ticularly wine and fruit and vegetables; and
r
possible replacement of remaining coupled components of direct pay-
ments made to commodities covered by the 2003 reforms.
As in the US, much attention has been directed recently to increasing the
supply of bio-energy in the EU. Under the 2003 changes to the CAP, an
20 This is probably a conservative estimate of the impact of CAP reform on the composition
of EU support, since it will also have affected the size of the AMS.
biofuels subsidies and the green box 547
aid of 45 per hectare is offered to farmers who produce energy crops. A
maximum of 1.5 million hectares of eligible area was originally specied,
but it was later increased to 2 million hectares. There is also a proposal to
allowMember States to provide investment subsidies for up to 50 per cent
of the costs of the establishment of multi-annual energy crops. Whether
these would be included in the amber box would depend on whether or
not the crops would be considered to be agricultural.
21
Although payments under bio-energy schemes are yet to be notied to
the WTO, it seems likely that these will primarily fall under the amber
box rather than the green box. As in the case of US policies in this area,
it seems unlikely that production-linked aids for marketable agricultural
crops used in the production of bio-energy will be eligible for inclusion
in the green box.
Use of the green box by other countries
Although the EU and the US are the largest users of green box subsi-
dies, they play an important role in the farm policies of other countries.
Among the other developed countries, domestic support in Japan is par-
ticularly signicant, both in magnitude and in its external visibility. Green
box payments forman important part of total domestic support in Japan.
From1995 to 2006, these payments varied between 1.8 and 3.2 billion Yen
(table 18.5). The vast majority of these payments fall under the general ser-
vices category. This has accounted for between 75 and 85 per cent of total
green box payments since 1995. The largest sub-category of expenditures
is on infrastructural services for the agricultural sector and rural areas,
includingthe constructionof irrigation/drainage facilities andrural roads,
and for land consolidation. This sub-category has typically accounted for
at least half of total greenbox expenditures by Japan. Japanese government
expenditures on infrastructure are a large proportion of GDP (roughly
15 per cent in recent years) and there is pressure to reduce these expen-
ditures due to persistent budget decits. It is possible that this will be
reected in reductions in green box expenditures, particularly for infras-
tructure projects for agriculture, in future notications to the WTO.
The notication of domestic support in Japan changed signicantly
in 1998, when a modication to the rice policy abolished the system of
administered prices, although protection at the border was not reduced.
21 As mentioned above, if the feedstock has no agricultural use, its subsidized production
on retired land should not run afoul of green box rules.
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biofuels subsidies and the green box 549
As a result, the notied total AMS fell sharply. Green box expenditures
accounted for roughly 45 per cent of total domestic support before the
rice policy change. Since then, the green box expenditure has risen to over
70 per cent of the total notied domestic support.
The totals for green box payments in several other countries are given
in table 18.6.
22
The table also shows green box payments as a percentage
of total domestic support (the sumof current total AMS, de minimis, blue
box and green box payments) for the years for which data are available
from the WTO notications. Green box payments make up the bulk of
domestic support in a few developed countries such as Australia and New
Zealand and in many of the developing countries included in the table
(such as Indonesia and Malaysia, which did not report any non-green
support). This proportion acts as a measure of the degree to which direct
payments and income support has taken over from price support policies
and input subsidies. Green box subsidies have increased in importance
in several countries, most notably South Africa, India and Switzerland,
in recent years as policies are modied. However, Norway did not signi-
cantly shift to green box policies over this time period. Brazil moved away
from such policies in 1999.
An overall picture of the changing composition of support in WTO
member countries from 1995 to 2001 is shown in gures 18.1 and 18.2.
These charts are aggregations based on all available WTO domestic sup-
port notications expressed in US dollars. Since not all WTO countries
have notied their green box support for the entire period, and the dollar
tended to increase in value against many currencies over the period con-
sidered, the data in gure 18.1 may overstate an apparent reduction in
total support. Despite this, gure 18.2 suggests that green box support has
become increasingly important, rising from 44 per cent of total support
in 1995 to 51 per cent by 2001. Although it is difcult to compute more
recent aggregate gures due to the absence of notications in many coun-
tries, it is highly likely that the change in policy in the EU alone as a result
of the 2003 reforms will have increased this proportion even further.
This tendency to switch to green box policies is clearly in the direction
indicated by the incentive structure of the AoA. It can be viewed by those
who support the concept of the green box as an indicator of success in
the reform of domestic policies. However, it might also be considered a
22 It should be noted that the numbers for developing countries do not include notications
of aid provided under the Special and Differential Treatment provisions for development
programs (Art. 6.2 of the AoA).
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552 agricultural subsidies in the wto green box
0
50
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1995 1996 1997 1998 1999 2000 2001
B
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Green
Blue
Amber
Figure 18.1 Trends in total notied domestic support
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 1996 1997 1998 1999 2000 2001
%

o
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Green
Blue
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Figure 18.2 Composition of total notied domestic support
Source: ERS (USDA).
biofuels subsidies and the green box 553
source of concern by those who viewthe green box as simply a convenient
means for sheltering subsidies from international disciplines.
Compatibility with green box rules
Much of the discussion of the compatibility of existing programs with the
green box in general, and biofuels programs in particular, is by nature
speculative. There has been no WTO dispute panel ruling specically
on green box compatibility. No government has challenged the green box
notications of others. Inthe one case where a noticationwas questioned
by a panel (the US cotton case, see below), no consequences have ensued.
No country has so far demanded that the US re-notify domestic support
(AMS) totals for previous years though the TAMS case brought by
Canada and Brazil may have this effect.
23
Lack of successful challenges to the compatibility of country policy
with green box rules thus far does not mean that none is possible in
the future. One such challenge could be on the basis that a particular
payment for environmental services does not simply compensate pro-
ducers for compliance costs or income foregone, but actually provides a
net benet. The ability to expand environmental programs is particularly
pertinent to the issue of the classication of biofuels as environmental
goods in the Doha negotiations. Most programs that involve payments
for environmental services include an incentive component, namely, an
element that rewards producers for adopting environmentally friendly
practices.
24
As such this may be actionable under the ASCM. The US has
argued for a renewal of the Peace Clause in part to avoid such challenges,
but this may only be effective if the policies are green-box compatible.
The likelihood of establishing a Peace Clause that covers AMS payments
is more remote. Therefore, the possibility of such a challenge remains.
Legislation needs to be crafted with this in mind. In particular, payments
should not be restricted to specic farms, although they can be regionally
based, and should involve a mechanism through which a reasonable level
for the payment can be determined.
25
23 This may be a result of the delay in notication, which makes retrospective challenges
less plausible, or due to the fact that countries have been engaged in negotiating a
comprehensive trade agreement in the WTO.
24 In fact, in the absence of personal costs of benets associated with an environmental
issue or altruistic behaviour, it is difcult to imagine that producers would participate in
environmental programs without such an incentive component.
25 The use of an auction mechanism, similar to that employed in the Conservation Reserve
Program of the US, can provide a way to establish the payment necessary to yield the
554 agricultural subsidies in the wto green box
The more serious challenge is not that of serious prejudice under the
ASCM, but of non-compliance with the denition of the green box in the
Agreement on Agriculture. Payments for environmental services would
clearly meet the general conditions of not being tied to production or
prices. The specic conditions are more problematic. One might argue
that rewards for ecosystem services from the farm are payments above
and beyond the costs of complying with an existing government program.
However, this may dependonthe way inwhichthe programis formulated.
If a farmer has a choice between joining an environmental stewardship
program or keeping eligibility for current farm income payments (direct
payments, counter-cyclicals, etc.), income forgone includes the amount
of those payments. Furthermore, if the payments are calculated with the
cost to the farmer in mind, it would be difcult to argue that they are not
equivalent to the extra costs involved in complying with the program.
26
So all, or most, of the stewardship payments might be notied as green
box payments with relative safety.
27
The legality of certain green box payments has recently been called into
question as a result of a WTO ruling on a dispute between Brazil and the
US over US upland cotton programs (WTO 2004b, 2005a). The essence
of the case was that a wide range of US domestic subsidies, as well as some
export programs, had caused serious prejudice to Brazil by depressing
world cotton prices and increasing the US share of world exports. The
domestic programs challenged included some notied as amber box sup-
port (including marketing loans), some green box payments (including
direct payments) and some notied as amber box, but potentially includ-
able in an expanded Doha blue box (countercyclical payments). The US
disputed Brazils allegations, arguing that the Peace Clause sheltered many
of these programs from challenge under the subsidies rules, and that in
any case serious prejudice had not been the result of US programs. The
WTO Panel found that the export programs were in breach of US limits
for such subsidies and that many of the domestic programs did in fact
cause serious prejudice (WTO, 2005a).
desired supply of environmental services (i.e. their opportunity cost). The use of such
mechanisms may make a payment less likely to be challenged.
26 If the payments were to be calculated as the amount needed to encourage adequate
participation (e.g. by distributing payment entitlements equal to the benets from the
system), could this still be interpreted as the extra cost . . . involved in complying with
the government program?
27 The precedent exists for a country to notify a part of the payments for a program as
green-box compatible, leaving other parts of the payment to be added to the current
TAMS.
biofuels subsidies and the green box 555
As the panel was considering the extent to which US direct payments
were correctly notied under the green box, they concluded that some
do not satisfy the fundamental requirement because they are linked to
production. In the judgment of the panel, this linkage was created by
limitations on planting exibility for land upon which the payments are
based. Producers who wish to receive payments cannot plant fruits and
vegetables on eligible land. This was interpreted to mean that there is, in
fact, a linkage between payments and production and that, consequently,
they do not qualify for the green box.
28
This judgment is highly signicant
for the design of programs that countries wish to be exempt from reduc-
tion commitments since it appears to imply that any direct linkage that
can be established between payments and production decisions would
make their green box status potentially open to challenge. This issue is
particularly important for policies that are designed to increase the use of
biofuels.
The distinctionbetweenthe decisioninthe Uruguay Round Agreement
on Agriculture to classify subsidies on the basis of whether they were
considered to be trade distorting, and therefore had to be reduced, on
the one hand, and that in the Subsidies and Countervailing Measures
Agreement to distinguish among prohibited and allowed subsidies on
the other, is at the heart of the problem. Subsidies can be notied to
the Agriculture Committee as green box by the country concerned and
not be challenged. However, a policy could still be actionable even if
allowable, and it could be found to cause serious prejudice.
29
Moreover,
the treatment of agricultural subsidies in the AoA was premised on a rm
distinctionbetweendomestic support andexport subsidies, but bothwere
legal if within scheduled commitments. The Canada Dairy case (WTO,
1999) cast doubt on the validity of that distinction when applying WTO
rules: the price support program for domestic dairy sales was held to have
the effect of providing an export subsidy for cheese producers who did
not have to pay the full cost of production for the milk that they used. The
28 The argument of the panel was that cotton production could still be encouraged as a result
of the restriction on possible (more protable) alternatives. Thus, the subsidy was not
fully decoupled from cotton production. Of course, one could argue that the restriction
gave a benet to fruit and vegetable growers, by reducing domestic competition. However,
as the restriction acts to reduce the production of fruits and vegetables, it is unlikely that
rival producers abroad would pursue such a challenge.
29 Apanel could nd that the policies in question did not t under the denition of the green
box (as happened in the US cotton case) and thus were incorrectly notied. However, this
would only be a signicant violation if it caused a country to exceed its scheduled subsidy
commitments.
556 agricultural subsidies in the wto green box
EU sugar case (WTO, 2005b) rested on the same premise, that there was
cross-subsidization from domestic prices to export sales, and the panel
opinion was similar. The ASCM includes export subsidies as one of two
types of prohibited subsidies. Thus, any such subsidy is actionable (since
the expiry of the Peace Clause) and the challenge does not have to show
impacts on other countries. Therefore, a policy deemed to fall under the
heading of domestic support in the AoA can be declared by a panel to be
an export subsidy when viewed through the lens of the ASCM.
The AoA, on the other hand, permits domestic subsidies and (existing)
export subsidies. However, members undertake not to provide export
subsidies except as specied in that members schedule, and gradually to
reduce overall levels of domestic support, measured by the total Aggregate
Measurement of Support (AMS). The classication of policy instruments
into export subsidies and domestic support is crucial if not central to
the current round of negotiations. Export subsidies are expected to be
phased out and domestic support payments are to be reduced. However,
countries do not currently know what subsidies are likely to pass the test
if examined by a panel. This has implications for current negotiations on
disciplines on the boxes. Why negotiate separate restraints if these are not
to be found relevant by WTO panels? These are the challenges raised by
the cotton and sugar cases.
Biofuel subsidies and green box criteria
The criteria for classifying a subsidy in the green box are set out in
Annex 2 of the AoA. General criteria are dened for payments that fall
within the green box and specic criteria for individual payment types.
These two components dene the green box. All payments have to meet
the general criteria, but in addition they must meet specic criteria for
the category under which they are notied.
The fundamental requirement is that green box payments should have
no, or at most minimal trade-distorting effects or effects on production
(paragraph 1). Two criteria are specied to ensure that this requirement
is met:
1. support should be provided through a publicly funded government
program and should not involve transfers from consumers; and
2. the measures should not provide price support to producers.
The specic criteria are specied for 11 categories of payments:
biofuels subsidies and the green box 557
1. the provision of general services for agriculture, such as research and
extension, pest and disease control, product inspection, and technical
assistance and training for producers;
2. expenditures on public stockholding for domestic food security;
3. expenditures on domestic food aid;
4. payments to producers for decoupled income support;
30
5. payments for income insurance and income safety net programs;
6. subsidies for disaster relief (including crop insurance);
7. payments designed to promote structural adjustment through pro-
ducer retirement;
8. payments designed to promote structural adjustment through
resource (land) retirement;
9. payments designed to promote structural adjustment through invest-
ment;
10. payments under environmental programs; and
11. payments to producers in disadvantaged regions under regional assis-
tance programs.
The criteria for each category of payments are summarized in table 18.7.
31
Given the current structure of Annex 2, two questions are relevant:
1. Do biofuel subsidies meet the fundamental requirement?
2. If they do, is there an existing category of payment in Annex 2 under
which they can be notied?
To answer these questions we must return to the classication of biofuel
policies set out in table 18.1. None of the measures set out in the table
ts easily within the categories of measures set out in Annex 2. With one
exception, the three categories of subsidy listed in the table (to biofuel
producers, biofuel users and subsidies on feedstocks) are all publicly
funded mechanisms designed to subsidize the xed costs (for example,
capital subsidies) or variable costs (for example, per unit subsidy tobiofuel
producers) of production and use of biofuels. Some of the mechanisms
involve direct public expenditures (for example, subsidies on feedstock)
or indirect transfers through tax revenue foregone (for example, an excise
tax exemption for biofuel). Consequently, all of these measures would
seemto satisfy the fundamental criterion that subsidies should be publicly
30 Annex 2 requires that any program not tting into any of the specic categories has to
satisfy the criteria for decoupled payments as well as the general criteria.
31 Annex 2 lists the categories of payments included in the green box and the specic criteria
that apply to each of these. The groupings used here are similar to those in Annex 2.
558 agricultural subsidies in the wto green box
Table 18.7 Summary of types of allowable green box measures
Type of measure Characteristics
General services Must not involve direct payments to producers or
processors. Marketing and promotion expenditures
must not allow sellers to reduce their sales price or to
confer a direct economic benet to them. Expenditures
on infrastructure can only cover capital costs and
exclude the provision of on-farm facilities, except for
connection to public utilities.
Public stockholding
for food security
purposes
Must be part of a program identied in public
legislation. Volumes to be governed by legislated food
security targets; nancial transparency and purchase
and sale at current market prices are required.
Domestic food aid Must have clearly dened eligibility criteria based on
nutritional objectives. Direct provision of food or
provision of the means to acquire food are both
permitted. Purchases to be made at current market
prices and transparency required in nancing and
administration.
Decoupled income
support (including
payment in kind)
Must have clearly dened eligibility criteria with
respect to a dened and xed base period. Payments
cannot be related to the volume of production, prices
or to factors of production employed in any year after
the base period. No requirement to produce to receive
payments.
Income insurance
and income safety
nets
Eligibility based on the loss of greater than 30 per cent
of average gross income from agriculture for the
previous three-year period or three-year average
excluding high/low from a ve-year period.
Compensation must be less than 70 per cent of the
income loss in the eligible year. No linkage to
production, prices or factors of production. If disaster
payments are made, total payments must not exceed
100 per cent of the producers total loss.
Disaster payments
(direct or through
government
participation in crop
insurance schemes)
Requires formal recognition by government of a
natural or like disaster that involves a production loss
greater than 30 per cent of the average for the previous
three-year period or three-year average excluding
high/low from a ve-year period. Payments to be
biofuels subsidies and the green box 559
Table 18.7 (cont.)
Type of measure Characteristics
applied only for loss of income, livestock, land and
other production factors, limited to replacement cost
and not linked to requirements for future production.
Payments made during a disaster not to exceed that
required to alleviate further loss. If payments are made
under income insurance and safety net programs, the
total must not exceed 100 per cent of the producers
total loss.
Producer retirement
schemes
Require clearly dened eligibility criteria to facilitate
retirement of those involved in marketable agricultural
production or movement to non-agricultural activities,
with payments conditional upon total and permanent
retirement from marketable agricultural production.
Structural
adjustment through
resource retirement
schemes
Require clearly dened eligibility criteria to remove
land or other resources (including livestock) from
marketable agricultural production. Land retirement
required for a minimum of three years, or for the
slaughter or denitive permanent disposal of livestock.
Payments not to require alternative uses of resources to
generate marketable agricultural production. Payments
not to relate to the volume of production or the price
of land or of other resources remaining in production.
Structural
adjustment through
investment aids
Require clearly dened eligibility criteria to assist
nancial or physical restructuring for objectively
demonstrated structural disadvantages. May also relate
to the re-privatization of land. Payments should not be
based on production or prices in any year after a base
period, are to be provided for a xed period of time
and should not mandate future production (except no
production), and are limited to the amount needed to
compensate for structural disadvantage.
Environmental
payments
Must be part of a clearly dened environmental or
conservation program with specic conditions,
including those related to production methods or
inputs. Amount of payment limited to extra costs or
loss of income involved in complying with the
program.
(cont.)
560 agricultural subsidies in the wto green box
Table 18.7 (cont.)
Type of measure Characteristics
Regional assistance Must be limited to producers in a clearly identied
contiguous geographical area with a denable
economic and administrative identity considered to be
disadvantaged on the basis of neutral and objective
criteria spelt out in law or regulation, and indicating
that a regions difculties are not temporary. Payments
should not be based on the type or volume of
production or prices in any year after a base period
(other than to reduce production). Payments should be
available to all producers in eligible regions and limited
to extra costs of loss of income related to undertaking
agricultural production in the prescribed area.
Payments linked to factors should be made a degressive
rate above a threshold level for the factor concerned.
Source: WTO Agreement on Agriculture, Annex 2.
funded and not involve a transfer fromconsumers. However, to the extent
that the domestic subsidy is linked to import restrictions (for example,
the value of tax exemption on biofuel use is increased by restricting
competing imports), there is arguably a consumer transfer involved, so
that the fundamental criterion would not be satised. In addition, it could
be argued that such a linkage violates the fundamental criterion that
the measures involved should not provide price support to producers.
The arguments for this were set out above in the discussion of an AMS
calculation for biofuel subsidies.
The one exception to the publicly funded criterion in the subsidy group
is the use of set-aside land. This involves aneasing of restrictions onthe use
of land whose allocation is otherwise tied to other government transfers
under price support or environmental programs. Release of land from
the conservation reserve for the production of biofuel feedstock would
not seem to satisfy the fundamental criterion of public funding, since
it removes a subsidy and provides additional market-generated income
to producers. Consequently, this type of measure would not seem to be
covered by green box criteria. Its impact of any subsidy remaining would
be captured in the AMS through its effect on the volume of production of
feedstocks. However, if land is put into the conservation reserve and used
biofuels subsidies and the green box 561
for producing feedstock, then the production of biofuel feedstock on such
land could be held to benet from a subsidy. Furthermore, if the set-aside
is linkedtopayments under environmental programs, the relaxationof the
conditions upon which those payments are made could bring the green-
box compatibility of such payments into question, unless the production
of biofuel feedstock is determined to constitute an environmental good.
There is no current green box category for the types of regulatory mea-
sures identied in table 18.1 since they do not involve the use of public
funds. However, to the extent that these impose additional costs on con-
sumers (for example, through blending requirements), they would seem
to violate the fundamental criterion of the green box and are therefore
ineligible for inclusion.
Possible changes to green box criteria
The search for rules to ensure that domestic agricultural programs were
more consistent with open international markets revolved around the
designation of new types of agricultural payments as being free from
reduction commitments (namely, put in the green box). From the view-
point of agricultural policy and trade reform, it is pivotal that there is
widespread acceptance by other countries that the changes in policies
adopted by the developed countries are desirable for the development of
international trade.
This acceptance has not been universal. The current green box criteria
are viewed by many countries as permitting policies that have signicant
trade-distorting effects. Others consider that green box denitions do not
allowfor the development of a full range of legitimate domestic programs,
such as those relating to environmental issues, without payments being
counted against domestic support limits. Furthermore, others claim that
the green box does not take into account the difculties experienced by
developing countries in providing direct payments, and underplay the
desirability of payments coupled to production and price in the context
of rural development. A further concern is that widespread use of green
box measures by developed countries gives them a competitive edge even
if direct output effects are difcult to determine.
As a result of these concerns, several countries have called for a review
of green box payments. The main users of the green box, the US and the
EU, have argued against re-opening denitional issues. It has been left
largely to the developing countries and the Cairns Group of agricultural
exporters to lay out their ideas on the review of the green box. In 2005,
562 agricultural subsidies in the wto green box
the G-20 produced a proposal that reected their view on preventing the
green box from becoming a means for continuing to provide support
under a different label. The G-20 Review and Clarication paper (G-
20, 2005) shows unease not so much with the concept of the green box,
but with its contents. The major problem identied is that the green box
includes both direct payments, often introduced to compensate for the
removal of price supports, and public good payments that encourage
farmers to provide benets to society other than their marketed output.
The G-20 would prefer that the former be moved to the amber box or
otherwise be constrained. They argue that these payments are not truly
production-neutral. However, such a change is unlikely to be acceptable
to the EU and the US, as policy changes in these countries have been
geared towards the greater use of direct payments. Therefore, the G-20
focused on the modication of the green box criteria to minimize the
wealth and insurance effects inherent in current direct payments even
when these are not tied directly to price or output.
In the context of biofuels, a key issue is whether countries would be
prepared to accept a public-good argument for the promotion of biofuel
production, due to their environmental benets. If so, a production link-
age to payments would need to be accepted in the same way that this
appears to have been accepted for payments under environmental pro-
grams. However, the mainproponents of the current greenbox provisions
have not attempted to push this point. The EU made no effort to include
biodiesel subsidies as green box measures, although they were instituted
largely on environmental grounds, and the costs of long-standing wine
distillation policies (in effect ethanol subsidies) have been reported in the
past as amber box support.
The applicability of the green box to developing countries is a part of
the broader debate about policy space and the need for a safe haven for
development policies that might otherwise seem to violate WTO rules.
However, the G-20 paper restricts its suggestions to additions to the text
of Annex 2 to make it clear that certain policy instruments common in
developing countries (and not markedly trade distorting) are included.
As this would not alter the reality of the current situation greatly, such
changes are likely to be agreed to by developed countries.
In addition to suggestions by the G-20, other countries have come
forward with specic proposals which focus on the clarication and pos-
sible extension of the green box to encompass development programs,
including those related to land reform, so as to t better with policies
common in developing countries. This extension, often referred to as a
biofuels subsidies and the green box 563
development box, could take account of the fact that developing coun-
try rural policy is usually designed to expand production. Rules that are
premised on the notion that agricultural subsidies add to surpluses and
retain inefcient productive capacity may not be well tuned to the situa-
tion in all developing countries. Such a shift in emphasis from developed
to developing country policy circumstances may indeed require some
clarication, although most of what developing countries currently do
in the way of general service and structural programs is arguably already
covered by some aspect of the green box criteria.
32
In the context of
development policies that include the production of biofuels to sell to
industrial countries, based on sugar cane, palm oil or more exotic crops,
the argument could get highly charged: it is unlikely that producers in the
EU or the US could be denied subsidies for ethanol at the same time as
such subsidies were allowed in the green box for developing countries as
favouring development policies.
The suggestions of the G-20 and the Cairns Group have been reected
in the steps toward an agreement. The July Framework (WTO, 2004a)
was explicit on the issue of reviewing the criteria for policy payments that
fall under the green box:
Greenboxcriteria will be reviewedandclariedwitha viewtoensuringthat
green box measures have no, or at most minimal, trade-distorting effects
or effects onproduction. Sucha reviewandclaricationwill needto ensure
that the basic concepts, principles andeffectiveness of the greenbox remain
and take due account of non-trade concerns. The improved obligations
for monitoring and surveillance of all new disciplines foreshadowed in
paragraph 48 below will be particularly important with respect to the
green box (paragraph 16).
The Hong Kong Ministerial in 2005 conrmed the commitment to clari-
cation and reviewand added that developing country policies that cause
minimal trade distortions should be adequately covered in the green box.
Subsequently, this was restated by the Chairman of the Agricultural Com-
mittee as a need to ensure that developing country policies that do not
cause signicant trade distortions are not inadvertently excluded. How-
ever, the rst version of the Chairmans draft modalities (June 2006)
reected a lack of progress, and did not include any tentative language
32 Moreover, the chances of a challenge to the notication by a developing country of a
subsidy as green can be considered unlikely in most cases. Notications by India, China
and Brazil may be scrutinized on account of the size of potential impacts from measures
such as investment aids. If there is little slack in the AMS for such countries, a successful
challenge on green box status could require a change in policy.
564 agricultural subsidies in the wto green box
for a compromise. Later drafts were more explicit, introducing in Annex
B the possible text for some revised green box text. This was included
also in the third revision of the draft modalities paper, of 10 July 2008,
which constituted the text on which the Mini-ministerial of 22 to 29 July
focused.
The modications to the green box that are suggested in the 10 July
draft include a paragraph covering land reform and other rural devel-
opment and employment programs among the list of general services
that can be included in the green box. This could at a stretch be taken
to include development of biofuels industries, if they did not involve
payments per unit of production to farmers. Also included in the sug-
gested changes are modications of the green box text to cover acquisition
of stocks for poverty alleviation as well as the payment of subsidies to
resource-poor farmers for similar purposes. The suggested paragraphs
about the issues of updating bases for farm payments and of den-
ing further the rules for crop insurance are mainly aimed at developed
countries.
Failure of the Geneva meeting to agree on draft modalities to put before
the whole membership has left the issue in limbo. However, the green box
modications were never seen as highly contentious. If and when the talks
resume, they will probably pick up the text in this area as it was left in July
2008.
The way forward?
Biofuel subsidies have an uncertain place in the WTO, falling somewhat
between agricultural and industrial subsidies. If they are indeed agri-
cultural subsidies, a central issue is whether they should be classied as
trade-distorting: they certainly are intended to have an impact on the
production and use of ethanol. Furthermore, even if ethanol itself is not
an agricultural product, the effect might still be to subsidize the produc-
tion of corn and soybeans and other agricultural products. However, if
producing the feedstock for biofuels is not itself deemed to be produc-
tion of a marketable agricultural product, there could still be room in
the green box for such subsidies. Furthermore, is not the green box the
place for policies that stimulate rural development so long as there is no
incentive to increase output to be sold on agricultural and food markets?
If so, should the green box be more welcoming of biofuel subsidies?
Most biofuel policies are either mandates or tax concessions toblenders.
The mandates have an uncertain relationship to subsidies and are best
biofuels subsidies and the green box 565
thought of as technical standards applying through regulations on mixing
fuel components. As such, the WTO is concerned about whether they are
used in a discriminatory way, but can do little to inhibit the practice.
Tax concessions are more easily identied as coming within the scope of
WTO subsidy rules. To the extent that the tax concessions are subsidies
to producers of blended fuel, they encourage the use of ethanol and other
biofuels. In that sense they are certainly coupled to production of ethanol
or biodiesel. Therefore, the case for putting them in the green box seems
to rest on whether this also constitutes a subsidy to the production of the
feedstock. The a priori assumption is that subsidies that expand corn and
soybean production are ill-suited for the green box.
However, stepping back from that argument gives a different perspec-
tive. Encouraging the use of farm products for energy has a long history
and has rarely been thought of as a trade distortion for non-energy pro-
ducers. In fact, payments that take crops off the food market and into the
energy market would in normal circumstances be seen to be helping to
reduce the over-supply of farmproducts and raise agricultural prices. This
is indeed the benet that producers of corn and soybeans see in this devel-
opment. So in one sense the payment for the provision of feedstock for
alternative energy is a partial solution to the problem of improving farm
incomes without the need for price supports and avoiding the production
of surpluses. Furthermore, why should other activities that are included
under rural development policies (for example, the development of eco-
tourism) be encouraged and rewarded, but biofuel production penalized?
The green box was designed for the support of public goods and non-
agricultural activities. Could the case be made that ethanol and biodiesel
are benecial to society and should be encouraged? If the environmen-
tal goods argument applies, there could be broader public-good benets
from the promotion of biofuel production that parallel the argument for
the inclusion of payments under environmental programs in the green
box.
Following this argument suggests that the problems have to do with
timing, environmental doubts and the thin international market for
ethanol. The timing is unfortunate for the advocates of increased ethanol
use: although increased oil prices have stimulated biofuel production,
increased commodity prices pushed up by corn and soybeans have
focused on the competition between biofuel and food uses of the agri-
cultural crops. Instead of a benecial non-food use of crops, ethanol is
seen as a threat to food supplies. Add to this the uneven environmental
benets of substituting biofuels for petroleum-based products and the
566 agricultural subsidies in the wto green box
fact that ethanol for export is produced by only one country Brazil
and the argument looks somewhat shaky. Ethanol subsidies may become
the target of challenge in the WTO. Can Brazil allowthe US and Europe to
subsidize their ownbiofuel productionand lessenthe market for Brazilian
exports? In addition, if ethanol subsidies were to be classied as agricul-
tural in nature, pressure through negotiations and litigation on the US
ethanol program would make commercial policy sense. Hiding ethanol
subsidies in the green box would not be in the interest of Brazil.
If we accept this line of reasoning, the mandates and tax concessions for
ethanol may never be accepted as green box policies. The issue would
then seem to be one of whether to allow countries to include those parts
of biofuel subsidies in the green box that are minimally production and
trade-distorting, while excluding other forms of subsidies. Expenditures
on research and development that benet feedstock production and use
would already be eligible for inclusion in the general services category.
Investment grants, loan guarantees and other similar measures designed
topromote investment inthe productionanduse of biofuel feedstocks and
biofuels could also be dened to be green-box compatible, even though
these will inevitably have an impact on the production of feedstocks.
More problematic are direct or indirect subsidies that are most directly
linked to the output of feedstocks (for example, direct or indirect produc-
tion subsidies). To the extent that these are considered to be contributors
to the production of environmental goods, they might be covered under
the existing green box conditions applying to environmental programs.
However, the case for the WTO compatibility of measures that discrimi-
nate against imported sources of biofuel or provide an incentive to export
biofuels is extremely weak. Even if the distortions created by such pay-
ments in agricultural markets are not great, they promise to create dis-
tortions in global energy markets and consequently threaten the global
trading regime.
So the policies that may be fashioned to support energy uses as an
alternative to food markets for corn, soybeans and palm oil can survive
in the green box only if carefully crafted not to boost production of
a food product. The prospect for second-generation feedstocks appears
brighter. Cellulosic ethanol would be easier to subsidize in the shelter of
the greenbox if no marketable agricultural product was involved. The case
for including such biofuels programs in environmental strategies would
be enhanced and the chances of existing energy producers (bio or not)
challenging the support given to second-generation biofuels development
biofuels subsidies and the green box 567
seem low. However, whether the economics of such policies are sound is
another question.
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the U.S. Biofuel Tax Credit with a Mandate Subsidizes Oil Consumption
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PART V
Looking forward: how can change take place?
19
Improving monitoring and surveillance of
green box subsidies
andrea cerda
Background
Agricultural trade reform is based on the principle that further agricul-
tural trade liberalization, together withprogressive reductions indomestic
support, will benet both developing and developed countries. Pressures
in favour of reform come not only from multilateral commitments, but
relate also to the domestic setting, where agricultural policies need to take
into account economic, political and social considerations.
Domestic pressures infavour of reformdiffer widely betweencountries.
Developing countries main concerns focus on the need to design policies
aimed at facilitating structural adjustment, providing public goods and
correcting market failures. Domestic pressures in developed countries are
related to: (i) inconsistencies in traditional agricultural policies, with a
huge proportion of subsidies historically being devoted to the same few
products without taking into account major changes in their agricultural
sectors; (ii) the need to address better issues related to environmental
and conservation concerns; and (iii) the need to improve targeting of
transfers, in order to keep supporting producers, but in a less production-
and trade-distorting way.
As a result of such a wide range of requirements, there are legitimate
reasons for ensuring that developing and developed countries are able to
provide agricultural support in a way that facilitates reform processes.
The Uruguay Round and the Agreement on Agriculture (AoA) recog-
nized this through the green box,
1
allowing countries to support their
producers as long as budgetary expenditures generate no or minimal dis-
tortions in production and trade. This basic requirement was intended to
1 Together with other programmes exempted from reduction commitments.
571
572 agricultural subsidies in the wto green box
facilitate reform by focusing efforts on the introduction of disciplines for
countries trade-distorting domestic support.
The Doha Round agenda on domestic support is aimed at further
strengthening disciplines and reducing commitments on trade-distorting
support. Although countries agree to reduce or cap support provided
through the amber box, blue box and de minimis, there has so far been
no plan to set limits on the amount of payments classied as green.
Regarding the green box, ongoing negotiations have addressed the
following concerns:
r
the need to ensure that green policies are genuinely non- or minimally
production- and trade-distorting;
r
the need to introduce changes in order to ensure that the green box
is more development-friendly, providing appropriate provisions to
address the realities of developing countries agriculture and ensuring
that developing country programmes are covered effectively; and
r
the need to improve the monitoring and surveillance (M&S) process.
Proposals for changing green box provisions so that they better address
developing country concerns have been well received among World Trade
Organization (WTO) members. However, most developed countries have
rejected major changes aimed at guaranteeing that green box subsidies
do not contravene the requirement not to distort trade, arguing that they
are comfortable with current provisions and wish to avoid constraining
their ability to support producers. This will make it challenging for other
members to introduce strengthened criteria that programmes must full
if they are to be included in the green box.
The Doha Roundoutcome ondomestic support is therefore more likely
to consist of a reduction in the amount of payments that can be provided
to farmers using the more trade-distorting channels (amber box, blue box
and de minimis). Depending on the size of the reductions agreed in the
round and domestic resistance to major policy changes, there is a risk that
amber box policies will be moved into the green box without undergoing
substantial amendments to make them minimally trade-distorting.
Evidence suggests that an increasing proportion of subsidies are being
categorizedas greenbox payments, causing members toallege that subsidy
programmes are simply being shifted from one box to another. Further-
more, it seems that this box shifting is due not to insufciently rigorous
green box criteria, but rather, in most cases, to the current criteria not
being observed effectively and inadequate means to prevent this.
improving monitoring and surveillance 573
It will therefore be crucial to ensure that policy developments are
checked effectively especially in the case of green box programmes
and instruments, which will probably not be subject to signicant new
constraints in order to assess their compliance with the agreed criteria.
In this context, enhanced mechanisms and provisions for M&S emerge as
one of the main possible outcomes of the current negotiations. All WTO
members have agreed on the need to improve current M&S provisions,
although concrete proposals have not been discussed in detail.
Current provisions on monitoring and surveillance
Current provisions for M&S, as set out in Article 18 of the AoA, have
proved insufcient for monitoring agricultural policy developments,
compliance with commitments and, remarkably in the case of green box
programmes, that the fundamental requirement of being non- or mini-
mally production- and trade-distorting is being complied with. It seems
that since green box budgetary expenditures were not subject to reduction
commitments and will not be in the present round either surveil-
lance for this category is secondary compared with that for other subsidy
types.
It is widely recognized that the Uruguay Rounds limited success in
reducing subsidies effectively has been compounded by mechanisms that
are tooexible andinefcient tomonitor whether commitments are being
implemented. These two shortcomings together make the system much
more inefcient, and prevent it from achieving the long-term objective
of agricultural policy reform.
Most of the problems with the current M&S provisions relate to noti-
cation, including the following:
r
Unlike other agreements, the provisions of the AoA are not strong
enough to ensure timely notications.
2
Most countries, including
notably the major users of agriculture subsidies, have consequently
lagged several years behind with their notications, including those for
the green box.
r
The lack of notications is particularly relevant when countries put in
place new measures which they claim are green-box compliant. The
provisions of the AoA are not strong enough to ensure that members
have a reasonable knowledge of new policies being implemented and,
2 e.g. provisions of the Agreement on Subsidies and Countervailing Measures (Art. 25).
574 agricultural subsidies in the wto green box
unlike other agreements, does not provide ways in which members can
comment on new policies.
3
r
Delayed and non-existent notications make it difcult to match cur-
rent programmes in individual countries with notied subsidy spend-
ing. This means that members are unable to assess the impact of current
agricultural policies or new developments in a timely manner.
r
Notications do not include the information that is needed for coun-
tries toassess effectively whether commitments are being compliedwith
and in the case of the green box that the fundamental requirement
is being respected. Most green box programmes have to meet specic
criteria, but notications do not provide information on how they
conform to these, nor on where these criteria are reected in domestic
regulations.
Lack of relevant information is a major source of misclassication. For
example, decoupled income support notications do not demonstrate
that the payment is not subject to production restrictions or that all
relevant land uses are allowed, which would effectively mean the same.
Payments aimed at providing structural adjustment assistance through
producer or resource retirement programmes shouldinclude information
on the number of producers or quantity of resources effectively moved
out of marketable agricultural production for each period. In order to
check that they are provided in order to help with a time-limited adjust-
ment process, the duration of the programme should be clearly indicated.
Similarly, notication of payments for structural adjustment through
investment aids should provide information on the characteristics and
number of beneciaries, the type of investment and an estimation of
the duration of the programme, in order to verify that the payment is
provided for the time necessary for its realization.
In addition to the shortcomings related to notications, it is clear that
the institutional support provided by the Secretariat and the Committee
on Agriculture, given their dened responsibilities and mandates, has not
been sufcient to allow members to monitor effectively the implementa-
tion of the provisions of the Agreement on Agriculture and compliance
with them.
The inadequacy of the means for ensuring respect for green box
criteria has been brought to light by the resolutions adopted through
3 e.g. provisions of the Agreement onthe Applicationof Sanitary andPhytosanitary Measures
(Art. 7 and Annex B) and the Agreement on Technical Barriers to Trade (Arts. 2.9.1 and
2.9.4).
improving monitoring and surveillance 575
the dispute settlement procedures. The panel ruling on United States
Subsidies on Upland Cotton
4
stated that some components of the domes-
tic support programme used by the United States (US) were inconsis-
tent with green box criteria due to the production exibility limitations
contained in that programme. Members are now using this nding, in
the Committee on Agriculture, to question US programmes which have
the same limitations, but are nonetheless classied in the green box.
Current surveillance provisions are thus unable to detect and prevent
misclassication.
More effective M&S mechanisms could reverse the above situation, so
that M&S becomes a source of evidence in support of cases presented to
the dispute settlement body.
The Doha Round mandate
Given that the surveillance, monitoring and comment mechanism pro-
vided by the AoAhas provento be so weak for agricultural policies that are
deemed to cause not more than minimal production and trade distortion,
the Doha Round represents an excellent opportunity to move forward,
by improving the existing provisions set out in Article 18.
Paragraph 48 of the July 2004 framework states the objective of effec-
tively ensuring full transparency, through timely and complete notica-
tions in all three AoA pillars,
5
while paragraph 16 states that the criteria
will be reviewed and claried and that improved M&S obligations will be
particularly important with respect to the green box (WTO, 2004).
Consequently, the Doha Roundhas establishedtwomandates regarding
new commitments under the green box category:
r
review and clarication with a view to ensuring that measures have no,
or at most minimal, trade-distorting effects or effects on production.
This mandate arises fromthe belief that simply asserting that a measure
is green is insufcient in allowing it to be categorized in this way,
and that strong disciplines most of them related to criteria to be
respected will therefore be necessary; and
r
improved obligations for monitoring and surveillance, emphasizing its
importance for the green box.
4 United States Subsidies on Upland Cotton, dispute DS267, http:://www.wto.org./english/
tratop e/dispu e/cases e/ds267 e.htm.
5 Taking into account developing countries concerns.
576 agricultural subsidies in the wto green box
As discussed above, even though there is some evidence to suggest that
criteria for the categorization of policies exempted from reduction
particularly direct payments and decoupled income support require
effective review and clarication, a number of members are reluctant to
introduce major changes, arguing that the green box is already minimally
or non-production- and trade-distorting. In contrast, there is a broad
consensus on improving current M&S provisions.
By emphasizing the importance of M&S for the green box, members
recognize the special nature of some programmes and measures in this
category. In theory, all domestic support policies distort, to some extent,
production and hence potentially also trade. For example, because there
is a lack of empirical evidence on the production and trade effects arising
from direct payments and decoupled income support, there is a need to
provide effective mechanisms to follow their developments: this issue can
be addressed by new M&S provisions.
Effective monitoring is feasible by ensuring full transparency, by mak-
ing explicit all eligibility criteria and the specic ways in which these are
respected, and by providing as much information as possible on type,
volume and area of production of payment recipients, starting from base
levels. For example, countries should be able to prove, with evidence, that
all relevant land uses are allowed for recipients of green box payments,
or, in the case of adjustment programmes involving resource retirement,
that the amount of resources expected to leave the sector do effectively
leave it.
Following this approach, enhanced M&S provisions agreed in the cur-
rent round would allow for a better understanding of the impact of green
box measures, which would subsequently facilitate changes to the criteria
to prevent programmes or measures from distorting production or trade.
Enhanced M&S mechanisms and provisions could thus emerge as one of
the main outcomes of the current negotiations.
Monitoring and surveillance proposals submitted by
the G-20 and Cairns Group
The G-20 and Cairns Group have recently submitted comprehensive pro-
posals for enhancingM&Sprovisions inagriculture (WTO, 2007a, 2007b).
Two broad types of provision are included: (i) improvements in notica-
tion commitments, including both cross-cutting requirements and those
specic to each of the three pillars; and (ii) improvements aimed at better
improving monitoring and surveillance 577
assessing compliance with commitments, involving new responsibilities
for the Committee on Agriculture.
Bothproposals set out changes that wouldstrengthenthe AoAs existing
notication provisions, including by:
r
establishing effective provisions that would ensure timely notication;
setting out agreed schedules by notication type; allowing reasonable
time periods for completion; providing incentives for members to meet
deadlines; and curbing non-compliance; and
r
ensuring that notications provide all the information necessary to
assess compliance effectively; and improving the level, type and speci-
city of the information in order to allow members to understand
clearly the operation and effects of notied measures.
Specic changes that have been proposed would ensure that green box
notications require new information allowing members to verify com-
pliance with specic criteria, including, amongst other things, the base
period used and details of the applicable base area, yields or livestock
numbers; initial production levels; and the expected duration of the pro-
gramme or measure.
This information is essential, because budgetary expenditures can only
be said not to distort production and trade when they are predicated on
base period levels. Any evidence of a relationship between annual pay-
ments and the current type or volume of production or prices would
mean that payments had been misclassied. Whenever possible, mem-
bers should therefore provide annual data on the type and volume of
production covered by green box payments.
In order to provide institutional support for a fuller and deeper review
of the implementation of commitments, both groups propose that the
Secretariat and Committee on Agriculture carry out new tasks. These
new responsibilities include:
r
undertaking regular country reviews that would provide full infor-
mation on agricultural policies, implementation of commitments and
compliance with them;
6
during the examination process, members will
be provided with the information and allowed to ask questions; and
6 In addition to country reviews, the G-20 proposes undertaking reports on the progress of
agricultural trade reform, on the general implementation of commitments and on S&D
implementation and development concerns, as well as a special report on the implemen-
tation of cotton-related commitments.
578 agricultural subsidies in the wto green box
r
undertaking a thematic work programme that would allow members
to discuss topics in any of the three pillars, the agricultural trade reform
process and issues of particular interest to developing countries. The
Secretariat will prepare ad hoc reports as a basis for discussions and
recommendations.
The G-20proposedthe creationof a newinstitutionwithinthe Committee
on Agriculture, to be known as the Sub-Committee on Monitoring and
Surveillance (SCMS): this would be responsible for conducting the tasks
described above and for reviewing members notications. The SCMS
would thus be the forum in which members could discuss agricultural
policies and trade reform, compliance with commitments and specic
issues such as special and differential treatment or cotton.
Finally, both groups call for observer organizations to be invited to
deliver presentations on global agricultural trade reform and agricultural
policies in major agriculture subsidizing and trading members, and to
assist discussions at a technical level.
Green box: specic ways to improve the current monitoring and
surveillance system
Enhanced M&S provisions would primarily aim to provide greater trans-
parency and facilitate full compliance with commitments. Full trans-
parency will be achieved only by major improvements in all of the issues
related to the notication process, including the following:
r
Stronger provisions toprevent delays innotication: these shouldestab-
lish clear schedules, incentives to meet deadlines and ways of punishing
non-compliance. Incentives to comply with notication commitments
should include the opportunity to use provisional information when
nal data are not available, and the possibility of requesting an exten-
sion when the deadline will not be met (providing explanations for
the delay). Members that do not comply with notications and give
no explanations would not be allowed to participate fully in the Com-
mittee on Agriculture (for example, their right to pose questions could
be curtailed) when other members notications are being reviewed or
when the committee debates other issues.
r
New provisions should establish requirements on early notication of
policy changes and their potential impacts, providing members with
the opportunity to make comments and ask questions.
improving monitoring and surveillance 579
r
Notications should include all of the information that members need
to assess that general and specic criteria are indeed being respected.
As described above, this includes all available information on the base
period and any evidence proving that there is no link between current
production and prices, and payments received in each period.
r
Notications should include all relevant base data (period, area, yields,
livestock numbers, initial production) in order to assess that there are
no production or trade distortions.
r
Notications should include information about the expected duration
of the policy in place.
r
Notications should include references with all relevant domestic reg-
ulations in force and detailed sources of information.
Full compliance objectives will be achieved largely by enhancing the
responsibilities of the Secretariat and the Committee on Agriculture,
thus providing members with a means to monitor effectively agricultural
policy developments. There are two types of improvement:
r
Those related to the adequacy of the institutional support provided
by the Secretariat and the Committee on Agriculture for the review of
notications. Enhanced provisions should provide developing coun-
tries with special support to assist them with their notication com-
mitments and to follow other Members compliance.
r
In order to achieve the long-term objective of effective policy reform,
the institutional framework needs to provide members with the means
to assess compliance with commitments and policy developments in
major agricultural traders and producers in a more comprehensive way.
Negotiators need to give serious consideration to proposals that aim
to establish a regular agricultural policy review process, similar to the
current trade policy reviews.
Trade policy reviews are not very good at capturing the special features
and complexities of agricultural policies. A review devoted exclusively to
agricultural policies in major agricultural traders would increase trans-
parency, and deepen members understanding of agricultural policies and
their trade impacts. As the Cairns Group has suggested, the frequency of
the reviewcan be established on the basis of the importance of each mem-
bers share inglobal agricultural trade, withthe largest agricultural traders
being reviewed more frequently. The information provided through the
review should be coordinated as much as possible with that provided
through notications. Procedures would be very similar to those already
580 agricultural subsidies in the wto green box
established for trade policy reviews: this would consist of a policy review
division in charge of the preparation of the Secretariat report, meetings
for discussions, appointed discussants to lead the debate, a report made
by the country reviewed, and the publication of both reports together
with questions and answers derived from the process.
The G-20 and Cairns Group proposals point out the need for close
engagement withobservers andother international organizations inorder
to benet from their potential technical assistance. This would be of par-
ticular importance for the issues related to the green box in order to raise
and debate the evidence of production and trade effects of policies cur-
rently classied as green. It would therefore be valuable if the Secretariat
and the Committee on Agriculture could establish mutual collabora-
tion with international organizations such as the Food and Agriculture
Organization (FAO) and the Organization for Economic Cooperation
and Development (OECD), in order to benet from their experience in
assessing the effects of agricultural policies on production and trade.
7
A
better assessment of the effects of green box policies may, in the future,
establish consensus between members on how to move forward and fur-
ther strengthen green box criteria.
Existing provisions that could be useful for improving monitoring
and surveillance
Some existing provisions can serve as models for improving M&S, and
particularly for strengthening the timely notication of green box mea-
sures and instruments. They include:
r
Notication and surveillance provisions of the Agreement on Subsidies
and Countervailing Measures (ASCM): these state that notications
of subsidies shall be submitted not later than 30 June of each year.
The ASCM also states that: The content of notications should be
sufciently specic toenable other Members toevaluate the trade effects
and to understand the operation of notied subsidy programmes and
then lists various specic kinds of information that must be included.
r
Notication provisions of the Agreement on Import Licensing Proce-
dures: this states that: Members whichinstitute licensing procedures or
changes in these procedures shall notify the Committee of such within
60 days of publication.
7 See, e.g. FAO (2005) and OECD (2005).
improving monitoring and surveillance 581
r
Transparency provisions of the Agreement on the Application of San-
itary and Phytosanitary Measures: this states that: Members shall
notify changes in their . . . measures and shall provide information
on their . . . measures in accordance with the provisions of Annex B.
Annex B states that: Members shall ensure that all . . . regulations
(including laws, decrees or ordinances which are applicable generally)
which have been adopted are published promptly in such a manner as
to enable interested Members to become acquainted with them.
r
Preparation, adoption and application of technical regulations of the
Agreement on Technical Barriers to Trade: these consider a number of
provisions aimed at ensuring full transparency of domestic regulations,
such as:
Members shall publish a notice in a publication at an early appro-
priate stage, in such a manner as to enable interested parties in other
Members to become acquainted with it, that they propose to intro-
duce a particular technical regulation;
Members shall without discrimination, allow reasonable time for
other Members to make comments in writing, discuss these com-
ments upon request, and take these written comments and the results
of these discussions into account; and
Members shall ensure that all technical regulations which have been
adopted are published promptly or otherwise made available in such
a manner as to enable interested parties in other Members to become
acquainted with them.
Summary and conclusions
r
Pressure for reform comes both from multilateral commitments and
at the domestic level, so agricultural policies need to take into account
economic, political and social considerations.
r
Both developing and developed countries should be able to provide
agricultural support in a way that facilitates reform processes.
r
The green box was intended to facilitate reform by focusing efforts on
disciplining trade-distorting domestic support.
r
The Doha Rounds most apparent outcome on domestic support will
probably be major constraints in trade-distorting support.
r
Reduction commitments and domestic resistance to major policy
changes will put greater pressure on the green box. Evidence suggests
that anincreasing proportionof subsidies are being categorizedas green
582 agricultural subsidies in the wto green box
box payments and that most of the time the main problem is not the
lack of criteria per se, but poor compliance with existing criteria.
r
Within this context, enhanced mechanisms and provisions for mon-
itoring and surveillance emerge as one of the main outcomes of the
current negotiations.
r
Enhanced M&S provisions agreed to in the current round will sub-
sequently facilitate the introduction of changes to green box criteria
that would prevent the use of programmes or measures that distort
production or trade.
r
EnhancedM&S provisions shouldprovide greater transparency andfull
compliance with commitments. Transparency relies on major improve-
ments on all issues related to notications, while compliance is closely
linked to major enhancement of the responsibilities of the Secretariat
and the Committee on Agriculture.
References
FAO (2005), Domestic Support: Trade Related Issues and Empirical Evidence,
Trade Policy Technical Notes No. 5, Rome, Italy, Food and Agricultural
Organization.
OECD (2005), Decoupling: Illustrating Some Open Questions on the Production
Impact of Different Policy Instruments, AGR/CA/APM(2005)11/FINAL, 3
May, Paris, France, Organisation for Economic Cooperation and Develop-
ment.
WTO (2004), July Framework, WT/L/579, 2 August, Geneva, Switzerland, World
Trade Organization.
(2007a), Improving Monitoring and Surveillance, Cairns Group Proposal,
JOB(07)/88, 13 June, Geneva, Switzerland, World Trade Organization.
(2007b), Improving Monitoring and Surveillance Mechanisms, Contribu-
tion by the G-20, JOB(07)/97, 20 June, Geneva, Switzerland, World Trade
Organization.
20
EU subsidy reform: options for achieving change
teresa cavero
1
Introduction
The European Commission initiated, at the end of 2007, a process to
review the reform of the Common Agricultural Policy (CAP) agreed in
2003 and which applies until 2014. These negotiations initiated the debate
about the future of the European budget for the agricultural sector after
2014.
The present and future of the CAP cannot properly be understood
without an appreciation of the World Trade Organisation (WTO) negoti-
ations. The WTOs Uruguay Round was supposed to reduce agricultural
subsidies, but the 1994 Agreement on Agriculture nonetheless was suf-
ciently vague to allow rich countries, including the European Union, to
pass reforms that would not end trade-distorting agricultural subsidies
and hence would not stop dumping. Furthermore, the 2001 Doha Min-
isterial Declaration stated that WTO member states were committed to
sustainable development, and that future progress in trade liberalisation
would take into consideration and address the needs and vulnerabilities
of developing countries.
Acentral problemis the assumptionof the minimally trade distorting
nature of green box measures, which is a very subjective concept. This
ambiguity has allowed the European Union and United States, instead of
complying with WTO requirements, simply to shift subsidies from the
amber and blue boxes and hide them in the green box, allowing them
to maintain or even increase the high level of support provided by these
countries to agricultural production.
2
The debate ongreenbox reform, and CAPreformmore broadly, should
not be rst and foremost a discussion about the scale of the budget
1 Note: this chapter is the sole responsibility of the author. It does not reect Oxfams
opinions.
2 Joint NGO Brieng Paper, 2005.
583
584 agricultural subsidies in the wto green box
allocated to agriculture. It is necessary rst to recognise that agricultural
production in Europe is, in general terms, marginally or not at all com-
petitive, given the high costs of production (land, labour, inputs and
transport). The challenge then is how to design a European policy that
enhances social welfare: one that provides economic, social and environ-
mental gains, targeted to small producers and less favoured areas in the
European Union. The budget can only be determined once an appropriate
policy has been designed, and if the policy fulls the suggested objectives,
it deserves a suitable budget, which may even be greater than the current
one.
The objective of this chapter is to offer trade negotiators, policy mak-
ers and other interested readers with insights into strategies that could
be pursued to promote reform of green box subsidies in the European
Union, taking into account a series of policy change objectives that would
enhance social welfare both for citizens in the EUand those in developing
countries. An attempt has been made to identify the various actors that
seek to inuence CAP reform towards a sustainable and development-
friendly agricultural policy framework for the 21st century.
This chapter rst provides some initial background, explaining the
history of CAP reform, the current state of green box subsidies, the
context of the WTO Doha Round and the calendar for CAP reform. It
then analyses the main levers for achieving policy change in the CAP, and
suggests ve areas of policy reform which would have positive economic,
social and environmental impacts in developed and developing countries.
The third part of the chapter analyses the main political forces in the
European Union that play a role in the reform process. The fourth part
of the chapter elaborates further on ve suggested reforms, and assesses
the viability of achieving policy change in these areas, namely: promoting
rural development, protecting and restoring the environment, mitigating
the causes of climate change and adapting to its inevitable effects, and
fullling Europeanobligations towards developing countries. The chapter
closes with a summary and a few nal conclusions.
Background
Where the CAP comes from
In the several reforms of the Common Agricultural Policy (CAP), a series
of proposals has been put forward and implemented which favours a
change in the nature of CAP expenditure, moving away from price and
eu subsidy reform: options for achieving change 585
production support (known as Pillar 1 payments, which are generally
categorised in the WTOs amber and blue boxes) towards environmental
protection, rural development, the preservation of the European agricul-
tural landscape and animal welfare (Pillar 2 payments, which are generally
notied in the green box). The MacSharry reform, proposed in 1992 and
implemented from 1994 onwards, for the rst time made a switch from
market support to direct support for farmers incomes, linked to pro-
duction limitations. In 1999, the Agenda 2000 agreement intensied the
1992 reforms.
3
In 2003, the Austrian commissary Franz Fischler pushed
an ambitious reform towards a more competitive and market-responsive
CAP, with higher environmental and animal welfare standards, and sub-
stantial but incomplete decoupling, which led to the modication of the
Common Market Organisations of sugar, tobacco, olive oil and fruits and
vegetables.
4
Specic developing country concerns, such as the impact that green
box subsidies have on European agricultural production and exports, as
well as the trade and non-trade barriers to accessing European markets,
still remain to be addressed in full. The measures introduced with the
Fischler reforms in 2003 signal a marked shift in the European approach
to agriculture. The reforms can be seen as resulting from several factors:
rst, pressure at the WTO from EU trading partners that demanded
reduced support to farmers, including green box payments;
5
secondly, the
difculty of defending a system that absorbs 50 per cent of the European
budget, benets roughly 2 per cent of the population and concentrates
80 per cent of its support on 20 per cent of all farmers;
6
and thirdly,
growing public concern that the abuse of natural resources is becoming
ever more unsustainable.
There is a genuine concern that the EU is using green box measures to
channel farmsubsidies under the CAP to the same beneciaries and in the
same volumes as it did before the reforms, thereby maintaining a strong
international trading position. This situation allows the EU to maintain
a completely unbalanced subsidy distribution system, in which about 80
per cent of subsidies are concentrated on 20 per cent of the farms.
7
Direct
support to farmers through the Single Payment Scheme violates some of
the basic principles of the WTO, but permissive interpretation of these
3 Matthews and Gallezot (2006). 4 Cooper et al. (2007).
5 Halderman and Nelson (2006) argue that multilateral trade negotiations at the WTO have
been the most important force in CAP reform. Cooper et al. (2007) do not consider this
inuence critical, and suggest that the core of the reform is negotiated domestically.
6 Godet (2007). 7 Interm on Oxfam, (2005).
586 agricultural subsidies in the wto green box
principles has allowed a continuation of agricultural subsidies worldwide.
The main principle that decoupled payments violate is the non-trade-
distorting requirement, since direct payments affect productioninvarious
ways, as Oxfam has identied:
8
r
Wealth effects: A guaranteed stream of direct income may increase pro-
ducers willingness to plant. For instance, decoupled payments can
help farmers cover xed costs and stay in business when they would
otherwise go bust.
9
This is particularly true in the case of large, fairly
competitive farms, where xed costs are reduced to a minimum. Due
to the highly regressive nature of European subsidy distribution, this is
the type of farm that attracts most subsidies.
r
Risk/insurance effects: Direct payments create insurance effects, chang-
ing the producers perception of risk. At higher levels of wealth, farmers
may be willing to take more risks, including expanding agricultural pro-
duction. Guaranteed support based on land ownership also strengthens
land value, and hence the capacity to borrow and invest in land, equip-
ment or inputs.
r
Land allocation effects: As farmers know the payment reference year
may be updated, they may want to keep up production levels.
10
If
updating today leads farmers to anticipate that future legislation will
again update base acreage and yields, there is a clear incentive to build
acreage for future assessments. In Europe, the requirement to keep the
land in good agricultural condition may cause farmers to continue to
cultivate land that would otherwise be left fallow.
r
Accumulation effects: The distorting effects of decoupled payments are
multiplied when such payments are given to farmers already beneting
from insurance or price support mechanisms. A farmer who receives
a decoupled direct payment on a commodity crop that is also eligible
for a loan rate (in the US, for example) will have an incentive to keep
both payments, thereby undermining the decoupling effect. Concerns
relating to this accumulation have been consistently raised by G-20
countries.
Also, when domestic support is very high, it effectively acts as a hidden
export subsidy, because it allows production to take place more cheaply,
and so effectively lowers export prices and allows dumping to happen.
8 Oxfam, (2005) Box 5. 9 Chau and de Gorter, 2001, cited in Oxfam, (2005).
10 Hart and Beghin, 2004, cited in Oxfam, (2005).
eu subsidy reform: options for achieving change 587
Moreover, the discussion on the distorting nature of direct payments
will remain inconclusive until the price difference between the cost of
production and market prices is completely transparent. Even in the
absence of this information, it is easy to appreciate that nancial support
received by any farmer for any reason is going to inuence his or her
production decisions. Direct payments in any particular year are related
to the land area at a farmers disposal that year, which implies that the
recipient has to have farmed before; and the amount of the payment
is based on the factors of production used.
11
These conditions imply a
necessary predispositiontoproduce, whichis relatedtothe direct payment
incentive.
For all of the reasons statedabove, decoupledincome support payments
currently allocatedvia the greenboxshouldbe a likely target tobe removed
in the Doha negotiations or, failing that, a future round.
Where the CAP is now: green box contents
The text of the WTO Agreement on Agriculture denes in its Annex 2 the
basis for exemption from reduction commitments for certain domestic
support measures, namely the green box measures. Besides direct pay-
ments and payments that are decoupled from the scale of production and
number of farmanimals, the green box also includes measures addressing
environmental protection. The EU also allows a limited percentage (5 per
cent) of green box support to be allocated by its Member States to cover
additional environmental incentives to farmers under certain conditions
(mainly alignment with national environmental policies).
The EUs December 2006 subsidy notication to the WTO covers the
2003/2004 period, in which green box payments account for 22 billion.
This amount does not reect the impact of the Single Payment Scheme
introducedwiththe 2003 reform. Oxfamhas estimatedthat, once the 2003
CAP reform has been fully implemented in 2006/2007, European green
box payments would amount to 50 billion, much of which would be a
simple shift fromthe amber and blue boxes under the reforms introduced
in the 2003 CAP review.
12
No measures currently in the green box have been designed specically
to promote agriculture or food security in developing countries. Devel-
oping countries concerns have been addressed in part through special
and differential treatment. Hidden barriers to the successful export of
11 Swinbank (2007). 12 Oxfam (2005), see Annex D for calculation of this gure.
588 agricultural subsidies in the wto green box
developing countries agricultural produce persist in the form of techni-
cal limitations to sanitation, quality control, transport and traceability.
Reforms of the green box which support, regulate and normalize agricul-
tural exports fromdeveloping nations would be a viable and fair initiative.
WTO Doha Round context: developing countries and
the external agenda
The ultimate aim of WTO negotiations is a worldwide zone of free trade,
which implies the elimination of domestic support and export support,
and the elimination of trade barriers to facilitate access to markets. Com-
plete attainment of this goal may not be desired by some of the negotiating
parties. Powerful groups of agricultural producers, such as those in the
EU, would like to keep the support they have received until now. Devel-
oping countries would also like to keep some policy space in order to
decide the necessary speed and scope of liberalisation in order to achieve
comprehensive economic and social development.
After several years of inconclusive negotiations, and nearly four years
after governments failed to conclude the round in Hong Kong in 2005,
WTO members again failed to achieve an agreement in June 2008. The
negotiations do require a change in position from the EU, as EU trading
partners demand more equitable trade in agricultural products,
13
and the
EU itself desires greater access for industrial products and services. If the
EU chooses to pursue further the shift in its agricultural policy that has
already been initiated towards a sustainable, environmentally friendly
and exible approach to developing countries this will allow it to take a
viable position in the WTOnegotiations while at the same time maintain-
ing a vibrant agricultural community and contributing to counteracting
global climate change and local environmental degradation.
Green box reform: objectives and main interest groups
The reform of the CAP should ensure that green box payments promote
economic, social and environmental sustainable development, both in
developed and developing countries, so that spending in this area gen-
uinely supports the provision of public goods. The challenge is to tailor
the reform so that different stakeholder parties, together, achieve a net
13 e.g. India has called for decoupled payments to be removed from the green box, which
would mean placing theminstead in the amber or blue boxes, where they would be subject
to reduction commitments (Swinbank, 2007).
eu subsidy reform: options for achieving change 589
benet in both the short and long term. For this, interested groups must
assess howthey see their role and position in the future. The fundamental
debate is not about the amount of money in the pot, but about guarantee-
ing that the CAP budget supports policies that enhance social welfare in
the EU. If this objective is tackled properly, it should generate a virtuous
cycle of positive externalities that have a positive impact in developing
countries.
In the authors view, the reform should address objectives that, in
the rst instance, deliver public services for European citizens. These
include the promotion of sustainable rural development, the protection
and restoration of the environment, mitigation of the causes of climate
change andadaptationtoits unavoidable effects. These objectives are elab-
orated onfurther inthe next section. Apolicy reformwith these objectives
should generate benecial impacts for developing countries. For devel-
oping countries to capitalise on the gains of this reform, the EU should
guarantee policies that are coherent with its agreements with developing
countries in other areas, such as international (including regional and
bilateral) trade and development aid.
At the moment, interests are to a large extent polarised. The European
Parliament would like to rationalize agricultural spending, so that other
imminent needs in the EU can be addressed with the existing limited
funding. In fact, the European Parliament has been active in making pro-
posals through non-binding resolutions, which are far more progressive
than those of the Council. This has been possible because the power
of inuence of the strong protectionist lobbies is more diluted at the
Parliament level.
For individual Member States, conditions are very different depending
on the current internal structure of agricultural support: for example,
Luxembourg and Finland already provide almost all of their agricul-
tural support in the form of agri-environmental subsidies, under Pillar 2;
Sweden and Austria have over 80 per cent of their support in this category;
while others, such as France, have under 40 per cent.
14
Some states such
as the UK and Germany would like to re-nationalise agricultural spend-
ing, in particular in view of the possible expansion of the EU to include
newcountries with signicant agricultural sectors, such as Croatia, Mace-
donia and Turkey. Spain has recently taken a more progressive position
towards agriculture through the approval of the Rural Development Law
in 2006. Norway (which is not a EU Member State, but is an interesting
example to consider) would like to keep some level of support coupled
14 Swinbank (2007).
590 agricultural subsidies in the wto green box
to production, arguing that the countrys producers have to bear higher
production costs.
15
Interestingly, countries political stances on agricul-
tural issues appear historically to be fairly stable, and relatively immune
from the agendas of different political parties at the national level.
Consumers in general demand fresh food all year round and, to the
extent possible, for it to be cheap. Those that become organised in con-
sumers groups are primarily concerned with food safety. Some such
groups support a wider CAP reform based on the belief that this would
bring better quality food. The consumers association Which? has calcu-
lated that the CAP has inated the cost of food in the EU to be among the
highest in the world.
Farmers organisations have for many years been highly inuential
and have played an important part in shaping the CAP. However, it
is worth drawing attention to the fact that not all farmers are in the
same situation, as large-scale producers have very different objectives to
small-scale farmers. The latter have systematically been made worse off
by the various CAP reforms. For this reason, they have tended to asso-
ciate with large producers, in order to preserve their existing privileges. A
good example of these differences is illustrated by the COPA-COGECA
(Committee of Professional Agriculture Organisations General Con-
federation of Agricultural Cooperatives in the EU) as the union of big
producers, and the CPE (Coordination Paysanne Europ eenne) represent-
ing small-scale farmers. Small farmers might thus support CAP reform
if it is truly focused on supporting small-scale, family-based production.
Currently, these farmers strongly resist any proposal to expand the list
of Statutory Management Requirements or broaden the scope of Good
Agricultural and Environmental Conditions. There is growing demand
from some of these organisations for some kind of safety net against low
prices, in view of further reductions in intervention support and export
subsidies. Many producers, be they individual farms and food-processors
or agri-businesses, are currently beneting from the high prices induced
by recent increases in global demand for cereals, although livestock pro-
ducers have expressed concern over the higher feed prices they face as a
consequence.
Reconciling these various interest groups is the main challenge for a
reform that should back producers by rewarding quality, environmental
friendliness, and non-commercial products and services that are public
goods.
16
15 Swinbank (2007). 16 Godet (2007).
eu subsidy reform: options for achieving change 591
Green box: suggested reforms and assessment of success
Assessing the likelihood of success of a policy reform requires a good
understanding of the relative political relevance and inuence of different
parties involved in the decision-making process, their political relation-
ships and how these actors may be inuenced in order to achieve the
desired change. In other words, it is necessary to review all of those par-
ties that will be directly or indirectly affected by the reform in one way
or another, identify their interests and estimate what incentives would be
necessary for them to support the reform.
Four entry levels are crucial: (1) the multilateral trading system,
through the WTO negotiations; (2) the individual EU Member States;
(3) the EU institutions; and (4) civil society.
17
In negotiating the reform,
the following forces all play a role: the multilateral trade negotiations
themselves; budgetary pressures within the EU, including those resulting
from EU enlargement; and issues raised by groups concerned about ani-
mal welfare, food safety and developing countries, advocate groups, as
well as by food retailers and processors.
18
Advocacy organisations there-
fore play a crucial role in pushing the reform in various directions. The
potential and capacity of these groups to mobilise public opinion and civil
society should not be underestimated; in this, the media plays a funda-
mental role.
19
Academic and institutional research groups which address
specic issues dealing with policy reform often have limited impact on
CAP negotiations, as their results do not generally receive a wide enough
audience. It would be very helpful for these institutions to raise their voice
and contribute to the debate more actively.
Promotion of sustainable rural development
The CAP should redistribute funding to support job creation in rural
areas, small farms and sustainable ecological production in the EU.
Opportunities may not be directly related to agricultural production,
but could include forestry or e-business, for example.
20
To tackle prop-
erly the needs of small farms, direct payments should not be based on
historical acreage or anticipated crop yields, but rather on the basis of a
farmers nancial need.
The European Commission Directorate General of Agriculture sets
the agenda for EU agricultural policy. It has to address two objectives:
17 Halderman and Nelson (2006). 18 Halderman and Nelson (2006).
19 Cooper et al. (2007). 20 Cavero (2007).
592 agricultural subsidies in the wto green box
the promotion of European integration and the allocation of limited
budgetary resources. The Commission has previously argued for the need
to pledge CAP spending in context, emphasizing that the share of the CAP
in the total EU budget is falling and that the proportion of EU GDP spent
on the CAP is less than 1 per cent.
21
It would like to cement the Single
Payment Scheme by strengthening its rationale, and to reduce the extent
to which Member States are permitted to continue with payments that
are coupled to production.
The council provides the forum where interstate negotiations take
place. France and Germany have been particularly active in past CAP
reforms. They are currently unlikely to agree to an overall reduction of
the agriculture budget. Some Member States frequently use the argument
that the present CAP has been in existence for less than three years as
an argument to postpone detailed discussions that could lead to further
reform. The French position, which has always been very powerful in
shaping European agricultural policy, will be key.
Pillar 2 can be strengthened by increasing compulsory modulation,
22
and farmers and rural communities could be assisted through cohesion
policy and structural funds.
23
The Health Check proposals may pave the
way for increasing the level of compulsory modulation from 5 per cent
in 2008 and rising thereafter by 2 per cent per annum, until reaching
13 per cent in 2013.
24
Diverting direct support to so-called Pillar 2
measures is one option for the EU to maintain agricultural support,
while simultaneously promoting an arguably more sustainable agricul-
tural future for Europe. Althoughshifting the CAPina greener direction
would lead to a number of geographical and administrative challenges, it
could also facilitate the next phase of the Doha negotiations.
Member States are divided on the reforms of Pillar 1 and Pillar 2. With
the exception of Germany, Finland and the UK, old Member States such
as France, Ireland and Spain broadly support the retention of a strong
Pillar 1, maintaining continuity in the historical support levels received
by farmers and opposing a rise in the rate of compulsory modulation.
21 Successive CAP reforms have brought the share of the CAP in the total EU budget down
from a maximum of nearly 70 to 40 per cent currently (due to fall to 30 per cent by 2012).
22 Modulation is an instrument that allows CAP funds to be transferred from Pillar 1
(covering direct aids to farmers and market measures) to Pillar 2 (rural development
measures). Under Agenda 2000, Member States had the option to apply modulation on
a voluntary basis, although few did so.
23 Cooper et al. (2007) estimate that an increase of 2 per cent on compulsory modulation
would release between 500 and 600 million for rural development.
24 Cooper et al. (2007).
eu subsidy reform: options for achieving change 593
However, the UK and Germany are intensely opposed to a reduction
in direct payments to large farms, and the UK and Denmark favour an
increase in modulation.
Current Health Check proposals seek adjustments to the Single Pay-
ment Scheme to make it more effective, efcient and simple. One obvious
measure that has been set forward is for a cap on payments, imposing
upper and lower limits. Commissioner Mariann Fischer Boel suggested a
limit of 300,000 maximum subsidy per recipient under the Single Pay-
ment Scheme: this would affect 0.04 per cent of farms, mostly in Germany
and the UK, releasing close to 1 billion.
25
Another option would be to
implement a system of digressive capping, leading to an overall reduction
in total payments: in this case, large farms would experience a bigger
reduction than small farms. Alower limit on payments can be introduced
by raising the minimum coverage area in order to increase efciency and
reduce bureaucracy.
Other measures related to the Single Payment Scheme could include
using a regional average model to calculate entitlements. The 12 new
Member States favour at-rate area payments which would imply a con-
siderable redistribution of funds towards the poorest regions. In partic-
ular, Bulgaria and Romania are very keen to agree a greater redistribu-
tion of support. Member States that are currently net contributors to
the EU budget would like to prot from their contributions and hence
oppose a regionalisation scheme, but the Commission strongly opposes
re-nationalisation of agricultural spending because it goes against the EU
integration principles of the CAP.
Measures covering the main market regimes could include new mech-
anisms to manage risks and buffer farms against price shocks; revision of
the compulsory set aside scheme, taking into consideration concerns
raised by environmental groups; and the end to milk quotas.
26
In future WTO negotiations, it is fairly certain that major trading
partners, such as Brazil and Argentina, will press the EU to decrease
signicantly or even eradicate the direct support to farmers that is cur-
rently categorised in the green box, due to the distorting effects of these
payments. The EU will not be able to ignore these pressures, due to the
signicant trading interests that the bloc has with these countries in other
25 Thurston (2006). Calculation modelled by Farmsubsidy.org, based on gures relating to
the 2003 nancial year and therefore relating to the old EU15, and published in the article
Big landowners to lose millions in EU reforms, published in the Financial Times, 7 June
2006.
26 Cooper et al. (2007).
594 agricultural subsidies in the wto green box
sectors. Pressures will, however, also come from European citizens, who
are becoming more informed about the contradictions involved in a sys-
tem that supports farmers without guaranteeing their contribution to the
provision of public goods and services. In this scenario, it is unlikely that
all of the money saved would simply go to rural development expen-
diture, and two scenarios can be envisaged: (1) a reduction in Member
State contributions, which would just imply lower expenditure levels; and
(2) a redirection of released funds to the competitiveness and cohesion
headlines in support of innovation, research and development, job cre-
ation and competitiveness. In this discussion, the position of individual
Member States will be crucial.
27
Protection and restoration of the environment
The CAP must include a coherent and effective set of measures to protect
Europes valuable agrarian landscapes, by redirecting support targeted to
the most valuable and vulnerable landscapes.
28
Different environmen-
tal attributes must be addressed by different policy instruments.
29
At
the moment, the environmental demands placed by cross-compliance
standards on farmers, and consequently the benets they deliver, are dis-
proportionately small relative to the size of payments.
30
The reform of
the green box has to introduce a correction to the perverse situation cre-
ated by the Single Payment Scheme, which rewards producers based on
historical yields and acreage, while traditionally it has been the practices
of the larger and more productive farms that have most damaged the
environment.
The EU has introduced legislation (for example, Natura 2000) to allow
nancial compensation to be provided to land users in areas of high
environmental value who, in order to preserve the environment, are no
longer allowed to cultivate their land. The CAP reform should provide
for this type of compensation for land users who refrain from farming
in valuable landscapes. Some authors suggest the introduction of either
a performance-oriented or market-oriented payment base, which could
include special treatment for less favoured areas.
31
The Health Check will
possibly seek to encourage Member States to use measures in Pillar 2 to
set up risk management processes to provide specic solutions to mitigate
or adapt to risks in different regions and sectors.
32
27 Cooper et al. (2007). 28 Terwan and van der Weijden (2005).
29 Swinbank (2007). 30 Brunner and Huyton (2007).
31 Terwan and van der Weijden (2005). 32 Cooper et al. (2007).
eu subsidy reform: options for achieving change 595
A good example of environmental policy is the UK, where support to
the environment through agricultural policy must be accompanied by
government environmental programmes, including conditions related to
production methods or inputs used. Under this scheme and in accordance
withparagraph12b of the greenbox, the amount of support receivedmust
be limited to the extra costs or loss of income involved in complying with
the government environmental programme.
33
Other Member States are
at different stages of development of their environmental regulations and
hence some are not at the point of implementing the regulation.
One mechanism to reduce farming pressure on arable land is the com-
pulsory set-aside of land. This land, when taken out of production, pro-
vides habitat for farmland biodiversity, improves water quality through
reduced pesticide and fertiliser use, decreases the risk of soil erosion
and promotes carbon sequestration. The European Commission Direc-
torate General of the Environment is supporting compulsory set-aside,
cross-compliance and an increase in the rate of modulation. It will most
likely press for the judicious inclusion of more environmental obliga-
tions, such as rules on sustainable water use.
34
The European Commis-
sion Directorate General of Agriculture is in support of simplication and
improvement of controls and cross-compliance sanctions, and is expected
to favour the delivery of regulatory or incentive options through volun-
tary measures to safeguard the environmental benets associated with
set-aside, in case it is completely abolished.
Environmental advocacy groups like Friends of the Earth, BirdLife
International, WWF and Greenpeace have already proven to be quite
inuential. Their pressure led to the creation of Pillar 2 in the 1992 CAP
reforms, and to its further extension in the Agenda 2000 and June 2003
reforms.
35
Some environmental advocacy groups like Friends of the Earth
and WWF support a wider CAP reform, including in general payment
limits, and opposing the abolition of compulsory set-aside policy. These
groups are likely to exert some pressure for the inclusion of more envi-
ronmental obligations, such as rules on sustainable water use.
Farmers groups, led by representatives of large-scale producers and
with the tacit support of small farmers associations, in general strongly
resist any proposals that would expand the list of Statutory Management
Requirements or broaden the scope of Good Agricultural and Environ-
mental Conditions. A good reform of green box measures, addressed at
supporting small-scale production that delivers positive environmental
33 Swinbank (2007). 34 Cooper et al. (2007). 35 Halderman and Nelson (2006).
596 agricultural subsidies in the wto green box
impacts, could end the association between large- and small-scale pro-
ducers and ease the success of the reform. The recent increase in demand
for agro-fuels in Europe has led to the removal of compulsory set-aside,
a measure that has been welcomed by farmers organisations, and seri-
ously criticised by environmentalists like Friends of the Earth, WWF and
Greenpeace.
Developing countries have expressed concern that the current CAP is
built on the rather ambiguous notion of multifuctionality a term
used to refer to the multifaceted role played by the agricultural sector in
providing public goods and services.
36
Although this concept was largely
abandoned in the last CAP reform, it is worth mentioning that developing
countries have perceived it as a deliberate grey area that could be used by
developed countries to justify continued high levels of domestic support.
The decoupling of support has, in this view, been a way to move subsidies
fromthe amber box tothe greenbox without affecting either the recipients
or the production levels.
37
Developing countries have therefore requested
the EU to be much more transparent on the actual measures included
under Pillar 2.
Climate change: the contribution of agriculture to the mitigation of
climate change and adaptation to its unavoidable effects
The CAP must contribute towards the mitigation of climate change by
reducing greenhouse gas emissions along the entire length of agricul-
tural supply chains, taking into account the full range of inputs and
externalities, and strengthening geographical comparative advantages
that improve environmental efciency.
38
There is an obvious connec-
tion between this policy change objective and the previous one on the
environment, but in the current situation, with the climate change debate
gaining serious political attention in the last months, it is worth according
special consideration to the mitigation and adaptation aspects of climate
change as a subject in its own right.
Climate change is the most serious long-termchallenge facing the world
today, and farmers and other land managers will be among the rst to feel
its effects. The International Federation of Organic Agricultural Move-
ments (IFOAM) believes that modern agriculture is a largely overlooked
contributor to climate change. Agriculture is a very important source of
major greenhouse gas emissions, especially carbon dioxide, nitrous oxide
36 Halderman and Nelson (2006). 37 Oxfam (2005). 38 Cavero (2007).
eu subsidy reform: options for achieving change 597
and methane. Some of the main causes of these emissions in agriculture
are not yet being addressed by policy-makers. CAP reform should pro-
vide opportunities to reduce greenhouse gas emissions, including nitrous
oxide and methane, and to enhance carbon storage.
The main sources of greenhouse gases in current agricultural produc-
tion systems are fertilisers:
39
the production of fertiliser is an energy-
intensive process which uses fossil fuels as a raw material. This results
in the emission of large quantities of carbon dioxide and nitrous oxide.
In addition, when fertiliser is applied to the land, it emits more nitrous
oxide. Fertilisers acidify the soil, requiring regular application of lime by
farmers, the production of which in turn produces more carbon dioxide.
Fertilisers also have the effect of suppressing micro-organisms in the soil
that would otherwise break down methane in the atmosphere.
40
Organic
agriculture is probably one of the best alternatives to reduce the con-
tribution of agriculture to climate change, while enhancing sustainable
agricultural practices. Green box subsidies could be oriented to support
practices that reduce emissions, andagri-environmental programs should
explicitly exclude practices that involve intensive use of fertilisers.
Agriculture can play a key role in providing bioenergy to replace fossil
fuels to a certain extent, and in providing other non-food crop products
that replace those that are currently made fromfossil fuels. The expansion
of agrofuels as an alternative source of energy, mainly in the transport
sector, is generating a lively debate in many sectors. While agrofuels can
indeed serve as an alternative to traditional cereal and oil crops, there is
an urgent need to contextualise their energy potential: rst, calculation
of their mitigation effect must take into consideration the net balance of
emissions in the production cycle and, secondly, this boom should not
undermine the progress made in shaping a European agricultural sec-
tor that is respectful of the environment and developing country needs.
If not properly regulated, there is a serious risk that the expansion of
intensive large-scale agrofuels could lead to many of the environmental
problems seen in other intensive agricultural systems. Policy-makers need
to be aware of the risk of boosting exports of agrofuels from developing
countries that do not respect labour rights.
41
It is also worth consider-
ing that production of agrofuels for export requires a level of scale and
technological development that is out of the reach of most smallholder
farmers in developing countries. International agrofuels trade has yet to
be brought within WTOrules, and the distortions created by current CAP
39 Flessa et al. (2002). 40 Soil Association (2006). 41 Oxfam (2007).
598 agricultural subsidies in the wto green box
energy crop subsidies (45 per hectare up to 1.5 million hectares) should
be reviewed urgently.
Like other sectors of the economy, agriculture must also address its own
direct emissions.
42
The draft proposal in the Health Check explored ways
in which the CAP can be adapted to take account of the following broader
issues over the period up to 2013: (1) to include climate change and water
management objectives within revised cross-compliance requirements;
(2) to extend the options for rural development spending to provide
incentives for adaptation to and mitigation of climate change, including
support for biodiversity corridors, carbon sequestration, improved water
management and the provision of environmental services in the area
of biofuels; and (3) to support the development of second generation
biofuels.
43
Farmers must also consider the likely impacts of climate change and
adapt to minimise the risks of such impacts. Farmers and other land
managers can change their practices to help reduce the impacts of climate
change on the wider economy and society. Farmers can tackle and adapt
to climate change as part of developing a sustainable agricultural business.
The general consensus around the need to act against climate change
offers a unique eld for policy-makers to reach an agreement on a gen-
uinely sustainable model of agriculture. Advocacy groups from various
interest areas (environment, animal welfare, developing countries), as
well as consumer organisations, are likely to be keen to support a reform
framed in this context.
Support developing countries in their policies
to achieve sustainable development
The reform of the CAP, and in particular of green box subsidies, must
primarily address the public-good nature of the rural sector in Europe,
addressing in particular all of the conditions related to the environment
and to rural communities (axes 2 and 3). By doing this, the CAP would
generate a spiral of positive externalities that would have a benecial
impact on developing countries. Progress in the rural development and
environmental measures proposed for the CAP reform will already make
an important difference to the impact that EU agriculture policy has on
42 Agriculture contributes about 7 per cent of total UK greenhouse emissions (Defra, UK,
2007).
43 Cooper et al. (2007).
eu subsidy reform: options for achieving change 599
developing countries. However, some additional measures also need to be
included. While the progress made in the 2003 reforms may have fullled
the aspirations of EUtrading partners for the WTOUruguay Round, they
have yet to correspond to these countries hopes for the Doha Round.
Countries like Brazil or India, which have gained considerable political
weight inthe negotiations, will not accept a reformthat does not guarantee
major steps towards the elimination of domestic support to European
agricultural production. It is crucial that the system of trade regulation
applies in the same way to all WTOcountries: if anything, it should favour
developing countries.
The EU, through the design of the CAP, should contribute to a joined-
up development policy that does not just provide development aid, but
also ensures that European agricultural, trade and industrial policies sup-
port opportunities for poor countries development. CAP reform should
eliminate agricultural subsidies that allow European agricultural prod-
ucts to be exported at less than the cost of production, going beyond
the current compromise to eliminate export subsidies by 2013. Decou-
pled income support measures should therefore be removed in the future
as well. The requirements of the green box should be reviewed so as to
prevent further box shifting of subsidies.
The CAP reform should unconditionally open European markets to
agricultural imports that sustain the lives of millions of poor farmers in
developing countries, not only reducing import tariffs, but also simpli-
fying import requirements. Health and environmental standards should
be rationalised, and genuine technical and nancial support should be
provided to developing countries to full them, bearing in mind that
small producers in developing countries can often nd detailed and strict
regulations to be too expensive and cumbersome to comply with.
44
Developing countries can best inuence the CAP through the WTO
negotiating process. The WTO Doha Round has provided an important
hook for short-term political objectives, but longer-term prospects for
policy change must also be addressed. The European Commission Direc-
torate General of Trade exerts pressure internally to reform the CAP in
order to advance the Doha negotiations. In reality, the inuence that the
Doha round may have on CAP reform is already very limited because the
EU has already pre-empted most of the outcomes: elimination of export
subsidies by 2013; decoupling of support fromproduction that was intro-
duced in 2003 and is nowto be extended further; and reduction of import
44 Cavero (2007).
600 agricultural subsidies in the wto green box
tariffs (which would have a signicant impact on European production
of certain key commodities like beef).
45
Until now, the CAP design and
subsequent reforms have mainly been driven domestically. An agreement
at the WTOwhich affects agriculture to a signicant degree would require
another set of policy amendments in the CAP.
Developing countries have different interests according to the differ-
ences in their agricultural systems and trade capacity. This has been
evident throughout the WTO negotiations. The Group of 20 (G-20),
which includes major players such as Brazil, Argentina, India and South
Africa, are divided in their interest in further trade liberalisation: while
Brazil and Argentina, both with competitive agricultural exporting sec-
tors, seek ambitious levels of agricultural liberalisation, India and South
Africa defend slow and controlled liberalisation in developing countries.
The G-20 supports further decoupling in the CAP with an overall reduc-
tion of support to European farmers and greater concessions in market
access.
46
On the contrary, the ACP countries (77 countries from Africa,
the Caribbean and the Pacic) want to maintain their preferential access
to European markets. The Cairns Group, which includes the major tradi-
tional producers of cereals, is losing inuence as the new exporters such
as Brazil become more important.
47
Some developing country advocacy groups like Oxfam and WWF are
supporting a wider CAP reform. They can best inuence the CAP by
raising public awareness and creating public pressure. In general, they
support payment limits. For advocacy groups defending the needs of
developing countries, it is crucial to maintain close contact with repre-
sentatives of individual developing countries at the WTO, and also with
those at the International Ofce of Epizoonosis (IOE) and the Codex Ali-
mentarius, in charge of the sanitary and phytosanitary trade conditions
and requirements.
Summary and conclusions
I have outlined a set of reforms which indicate that CAP reform could
promote a sustainable and development-friendly European agriculture
that enhances social welfare in both developed and developing coun-
tries. Retargeting green box subsidies towards environmentally sound
landmanagement andpromoting economic andcultural diversity inrural
areas (axis 2 and 3 respectively) is the path for a CAP system that truly
45 Thurston (2006). 46 G-20 (2005). 47 Cooper et al. (2007).
eu subsidy reform: options for achieving change 601
delivers on public goods. By doing so, negotiations at the WTO would
be much more transparent and smooth, because developing countries
would not mistrust the EUs proposals on agricultural domestic support.
The EUcould indeed go further, providing nancial assistance that would
enable developing countries to enhance sustainable agricultural produc-
tion, strengthening trade systems in developing countries, lowering trade
and non-trade barriers to access to the European markets, and allowing
for more value-added production and exports fromdeveloping countries.
Rural development and agri-environment schemes should be redened
in order to promote good practices and eliminate harmful production
methods. Existing measures should be screened for harmful environ-
mental impacts and those that do not pass the test should be excluded. If
the competitiveness of agricultural production is to be addressed, it has to
be limited to the added value of environmentally friendly products, and
guarantee that these measures do not incentivise production. There has
to be greater investment in axis 3, tackling the population in rural areas
that is most in need, dened by income levels rather than by historical
agricultural practices. Furthermore, CAP reform must ensure that these
measures exploit the social value of the preservation of biodiversity and
the landscape.
48
Climate change has the potential to drive a long-term CAP reform
towards a truly sustainable agricultural system in Europe and beyond.
The universal nature of the climate change challenge, together with the
economic threat that this already represents for all countries, paves the
way for positive negotiations towards a more sustainable model of devel-
opment. Policy-makers in industrialised countries should carry out a
long-term constructive analysis of policy options that will allow them to
set out a path towards a more equitable future.
References
Action Aid, Caritas, CIDSE et al. joint NGO Brieng Paper (2005), Green but not
clean.
Bonilla, S. (2007), El uso en los pases desarrollados de los subsidios agrcolas
de Caja Verde de la OMC: Los efectos socioecon omicos en los pases en
desarrollo, ICTSD Draft.
Brunner, A. and Huyton, H. (2007), The Environmental Impact of European
Union Agricultural Subsidies in the World Trade Organisation Green Box
(draft paper).
48 Brunner and Huyton (2007).
602 agricultural subsidies in the wto green box
Cavero, T. (2007), For International Justice in Food Ethics, Vol. 2, Issue 3, autumn,
Food Ethics Council, Brighton.
Cooper, T. et al. (2007), Towards the CAP Health Check and the European Budget
Review: The Proposals, Options for Reform, and Issues Pending, IEEP.
DEFRA (2007), UK Climate Change Sustainable Development Indicator:
2007 Greenhouse Gas Emissions, Provisional Figures, statistical release,
http//www.defra.gov.uk/News/2008/080327a.htm.
Dwyer, J. (2005), Rural Development under the CAP: Signicance, Likely
Impacts and Modelling Issues, JRCworkshop, Italy, http://www.enarpri.org/
Publications/SPNo14.pdf.
Field, H. (1998), EU Politics, Eastwards Enlargement and CAP Reform, Grifth
University.
Fischer, Boel M. (2007), The Future of the CAP and Rural Development,
SPEECH/07/533 http://europa.eu/rapid/pressReleasesAction.do?reference=
SPEECH/07/533&format=HTML&aged=1&language=EN&guiLanguage=
en.
Flessa, H., Ruser, R., Dorsch, P. et al. (2002), Integrated Evaluation of Greenhouse
Gas Emissions (CO2, CH4, N2O) from Two Farming Systems in Southern
Germany in Agriculture, Ecosystems Environment, Vol. 91, issues 13,
September, pp. 17589.
G-20 (2005), Review and Clarication of Green Box Criteria.
Godet, M. (2007), The Developing World: Reform the CAP Yes, But Dismantle it
at Our Peril, Europes World, autumn.
Halderman, M. and Nelson, M. (2005), EU Policy Making: Reform of the
CAP and EU Trade in Beef and Dairy with Developing Countries, PPLPI,
http://www.fao.org/ag/againfo/programmes/en/pplpi/docarc/wp18.pdf.
ICTSD(2007), Agricultural Subsidies in the WTOGreen Box: An Overviewof the
Key Issues from a Sustainable Development Viewpoint, draft background
paper.
Interm on Oxfam (2005), Goliat contra David.
Matthews, A. and Gallezot, J. (2006), The Role of EBA in the Political Econ-
omy of CAP Reform, IIIS Discussion Paper no. 133, April, Institute for
International IntegrationStudies, Dublin, http://www.tcd.ie/iiis/documents/
discussion/pdfs/iiisdp133.pdf.
OECD (2002), Agricultural Policies in OECD Countries: A Positive Reform
Agenda.
Oxfam International (2005), A Round for Free.
(2007), Biofuelling poverty.
Soil Association (2006), Climate Change and Agriculture, information sheet.
Swinbank, A. (2007), The Reform of the European Unions Common Agricultural
Policy, ICTSD Draft.
eu subsidy reform: options for achieving change 603
Terwan, P. and van der Weijden, W. (2005), CAP Reform, Rural Develop-
ment and the Environment, Centre for Agriculture and Environment,
http://www.clm.nl/publicaties/data/623.pdf.
Thurston, J. (2006), Capping the CAP, Farmsubsidy.org.
UK Food Group (2002a), The CAP doesnt t.
(2002b), The Common Agricultural Policy: How the CAP Operates, the Key
Commodities, Competitors and Markets for the European Union, Back-
ground Brieng 1.
(2002c), The CommonAgricultural Policy: Options for Reformandtheir Poten-
tial Impact, Background Brieng 2.
21
Subsidy reform in the US context: deviating
from decoupling
ann tutwiler
Introduction
In 1983, a US senator and several aides were discussing ideas to reformUS
farmpolicy. At the time, high government support prices were interfering
with the market and the government was accumulating stocks. The aides
proposed deeply cutting support prices and substituting direct payments
that were decoupled from prices and production. Around the same
time, agricultural economists began to recognize that domestic agricul-
tural policies had signicant impacts on world markets. They started to
distinguish between different types of agricultural policies and to mea-
sure the impact that these policies had on world markets. Payments that
were decoupled from prices and production had smaller negative effects
on world markets and on third country exporters.
These ideas were taken up by Uruguay Round negotiators when they
classied different agricultural policies into amber, blue and green boxes.
Negotiators were explicitly recognizing the work of these policy makers
andeconomists: that some policies (whichcame tobe knownas amber and
blue box) had a bigger impact on global trade than others, and that these
policies should rightly be disciplined by the World Trade Organization
(WTO). They also recognized that some policies (now known as green
box measures) had less impact on world trade and should be exempt from
WTOdisciplines. They were implicitly hoping to drive US and EUpolicies
away from amber and blue box subsidies into green box subsidies.
At one level, green box measures in the United States have been
increasing and will continue to increase as a share of overall budget
assistance to the US food and agricultural sector. As the table below
illustrates, the main elements of the US green box subsidies are food
assistance programs for lowincome school children and other Americans,
604
subsidy reform in the us context 605
0
10
20
30
40
50
60
70
80
90
100
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
$
b
i
l
l
i
o
n
Environmental payments
Investment aids
Resource retirement
Disaster relief
Decoupled income support
Domestic food aid
General services
Figure 21.1 US green box payments, notied (19952001) and projected
(200214)
(i)
Note:
(i)
these gures include some projections from the CBO on environmental
payments. The projections for decoupled income support reect an assumed sign-up
of 90 per cent for corn, soybeans and wheat in the ACRE program.
environment and land conservation programs, structural adjustment and
general services (research and food safety). Direct payments to farmers,
which receive the bulk of attention in trade negotiations, account for a
small percentage of total US green box measures. In 2005, 70 per cent
of US green box measures (or $50.7 billion) fell under food assistance
programs (gure 21.1). Under the new Farm Bill, the assistance provided
to low income families and environmental programs has been increased
further.
However, interms of policy structure andpayments tofarmers, USfarm
legislation is continuing to move away from decoupled income support
to re-coupled income safety nets in WTO speak, away from green box
and towards amber box, or box shifting in reverse.
Even though the concept of decoupling did not appear until 1985, the
economic philosophy of decoupling began to play a role in US farm
policy as early as 1981, culminating with the 1996 Freedom to Farm
legislation. In 1998, Congress retreated from decoupling with emergency
Agricultural Market Transition Account payments. In 2002, Congress
made these transitionpayments permanent and instituted countercyclical
payments that increased as market prices fell. Direct, decoupled payments
remained an important part of US farm policy. However, after nearly
20 years of slow, steady, incremental moves towards decoupling, it appears
that this may be stalled or thrown into reverse in the 2008 Farm Bill.
606 agricultural subsidies in the wto green box
Recent evolution of US farm policy
To appreciate the dynamics of the 2008 Farm Bill debate, it is useful
to delve a little into history. The farm programs that emerged out of the
Great Depressionwere relatively modest until the 1981 FarmBill. That bill
contained all of the elements of the 1970s farm programs, but a perfect
storm of record-breaking harvests, a global recession, interest rates in
excess of 20 per cent and a credit crunch combined to trounce land values
and create real problems in rural America. Costs under the 1981 FarmBill
soared. Congress responded to the rural crisis with the 1985 Farm Bill, a
very expensive farm bill that retained many elements of Depression-era
policies, but created a massive export subsidy program, raised minimum
agricultural support prices and idled, at the highest point, 33 per cent of
US farmland (Orden, 2003).
The experiences of 1981 and 1985 awakened policy makers to the
inuence that government subsidies had on production and trade. The
rst real steps towards decoupling began in 1991 when farm payments
no longer increased as farmers raised their crop yields. The 1991 Farm
Bill began to give farmers marginal exibility in their planting decisions
in exchange for reduced subsidies. The 1996 Farm Bill moved further
towards decoupling. Driven by high prices, strong exports, budget decits
and a Republican majority that eschewed government involvement in the
economy, the 1996 Farm Bill completely decoupled a portion of farm
payments from production (known as Agricultural Market Transition
Accounts or AMTAcc payments). The bill called for these payments to
decline over a ve-year period, in theory to give farmers time to adjust
to market forces. The bill coincided with the conclusion of the Uruguay
Round and was touted as a new direction for US farm policy. However,
this new direction proved unsustainable as prices fell in 1998, and was
essentially undermined by the 2002 Farm Bill.
The dynamics of the 1996 FarmBill debate are helpful inunderstanding
the 2002 and 2008 Farm Bill debates. In 1995, commodity prices were so
high that no payments would have been made under the 1991 farm legis-
lation. Moreover, the 1991 Farm Bill required farmers to take land out of
production in exchange for receiving subsidies with high prices, farmers
were losing money on land they were not allowed to farm. Farmers were
also frustrated with farm policies that limited their planting exibility.
Farmers needed the 1996 FarmBill reforms to eliminate mandatory land-
idling programs, so they could take advantage of high commodity prices,
to allow exibility to plant the most remunerative crops, and to make
subsidy reform in the us context 607
direct payments that were not related to prices, so they could still receive
subsidies.
More importantly, US budget rules meant that if no payments were
made to farmers under the old farm bill, future US agricultural budgets
would have to be cut. Therefore, in order to keep money in the agricul-
tural budget baseline, farm programs had to be de-linked from prices.
In keeping with the Republicans free market philosophy, the direct pay-
ments were supposed to provide farmers with a transition to the market,
declining over time and eventually falling to zero. While hailed as a vic-
tory for decoupling, Freedom to Farm did not last long. When prices
began to fall in 1998, the farm community demanded emergency relief.
In response, Congress added an average of $13 billion in subsidies back
to the farm programs between 1998 and 2001. By 2001, the farm bill
was distributing $38 billion annually to farmers alongside $38 billion to
low-income Americans.
The 1996 Farm Bill turned out to be a marriage of convenience. Even
though farmers needed decoupling to keep money in the agricultural
budget, most farm groups and members of Congress never embraced
decoupling as a concept. They did not like the fact that the decoupled
payments were to be phased out or that the payments did not increase
when prices fell. Some did not like it because it represented welfare
to farmers since there were no planting requirements. The agribusiness
groups who supported decoupling wanted to see acreage set-asides elim-
inated and high commodity support prices reduced. They were willing to
take farmers on, as long as the argument was about policy, not money.
However, for most of the members, decoupling was an expedient way to
get more through-put and to reduce the role of the government in the
marketplace. Other changes in the 1996 Farm Bill marketing loans in
particular mollied agribusiness leaders who were mainly concerned
that the government policies were interfering with supplies and prices.
By 2002, the US budget was in surplus, although as the farm bill
debate got under way, everyone in Washington knew that budget decits
were looming. Again, in order to keep money in the agricultural budget,
the farm bill needed to be reformed again, this time by making the
emergency payments permanent. These transfers which became known
as countercyclical payments increase when prices fall. Target prices and
support prices were increased, and direct payments became a permanent
xture of US farm programs. Agribusiness groups stood idly by, since
no one was threatening a return to supply controls or to government-
dictated planting restrictions. Furthermore, the agribusiness companies
608 agricultural subsidies in the wto green box
did not want to get into an ugly ght with farmers over how much money
they deserved. Marketing loans made sure that the government did not
accumulate stocks or prop up prices. Agribusiness groups that were happy
to reform policies in 1996 did not want to be accused of taking money
away fromfarmers in 2002. Not only did the 2002 FarmBill stop the long-
standing trend towards decoupling, it also attracted global condemnation
for increasing farm subsidies, just one year after the launch of the Doha
Development Agenda.
The 2008 Farm Bill debate
A convergence of factors led reformers to hope that the 2008 Farm Bill
would bring true reforms. The Doha Development Agenda was stalled,
largely over agricultural subsidies. The Bush Administration had made
the global trade talks a centrepiece of its global economic policy. Brazil had
recently won a landmark case against US cotton subsidies which required
the US to reform the cotton program. There was mounting evidence
that: US farm subsidies were negatively affecting farmers in developing
countries; they were going to the wealthiest farmers; that they did little
for rural communities; they did not support the crops (namely fruits and
vegetables) that Americans were being urged to consume; and they were
not supporting environmental or conservationist goals. All of these forces
led many to think that the 2008 Farm Bill would return to the path set
out in 1981.
Reformers also believed that the costly Iraq war combined with huge
budget decits and a pay-as-you-go budget system that made it impos-
sible to propose newfunding without newtax increases would put further
pressure on antiquated and expensive farm programs. They thought that
historically high farmincomes, land prices and commodity prices in 2008
would demonstrate that most farmers did not need government support.
(Reformers also believed that the biofuels boom would provide another
market outlet for farmers, making the countercyclical and marketing loan
programs irrelevant as prices for corn and other commodities surge as
more farmers switch to corn and away from other commodities such as
wheat, cotton and soybeans.) Finally, reformers thought that a Republi-
can Administration with a pro-reform Secretary of Agriculture, coupled
with a Democratic Congress that campaigned on its concern for poor
Americans, would bode well for change.
Each of these hopes encouraged different groups to decide to partici-
pate in the farm bill debate. Religious and charity groups like Bread for
subsidy reform in the us context 609
the World, Oxfam and the Catholic Bishops focused on the impact of
farm subsidies on the poor in Africa and Asia. Environmental and con-
servation groups like the American Farmland Trust and Environmental
Defense supported conservation and environmental measures. (Even the
AFL-CIO the major labour union in the United States asked for more
conservation funding since 70 per cent of its members hunt and sh and
depend on the Conservation Reserve to provide wildlife habitat.
1
) Groups
like the American Dietetic Association and medical doctors weighed in on
nutrition and obesity. The Rural Policy Research Institute (RUPRI) talked
about rural economic development. The Family Farm Coalition pushed
for limits on payments to rich farmers. Citizens groups such as Taxpayers
for Common Sense and Citizens against Government Waste pushed for
reform on budgetary grounds. Business groups like the Grocery Manu-
facturers saw an opportunity to push for sugar and dairy reform to lower
their input costs.
From past history, each of these groups knew that reforming US
farm policy would be difcult. Powerful commodity groups provide vast
nancial support to members of Congress, and members of Congress
favourable to farmers interests dominate the House and Senate Agricul-
ture Committees, as well as the Senate Budget and Finance Committees.
So, these groups came together in an unprecedented alliance, known as
the Alliance for Sensible Agricultural Policies or ASAP (which is also the
acronym for As Soon As Possible). Together they worked to educate their
constituents about the impact of US farm subsidies on other objectives.
They succeeded in generating 300 pro-reform editorials in 48 states, and
throughout rural America, with 105 being published since July 2008, in
response to the House-passed farm bill. They worked together on media
and advocacy strategies as the farm bill debate unfolded. As a result of
their advocacy efforts, several reform-minded proposals were developed
and considered by Congress.
Despite all of the positive factors and this historic strange bedfellows
alliance, farm policy reforms did not move away from amber box sub-
sidies. An income cap was placed on amber and green box payments to
farmers and funding for (green box) nutrition and environmental pro-
grams was increased. However, loanrates and target prices were increased.
Under the current price environment, these higher prices do not trigger
payments; nevertheless they are policy structures that would increase
1 http://www.farmpolicy.com/?p=297#more-297.
610 agricultural subsidies in the wto green box
Commodity Political campaign contributions (PACs only) ($) Government share of farm revenue (%)
Sugar 2,375,000 5362
Dairy 1,757,000 3556
Cotton 479,000 3652
Rice 253,000 1552
Wheat 100,000 2245
Corn 37,000 1334
Soy 17,000 1425
Figure 21.2 Campaign contributions mirror protection (2004 election cycle)
Sources: Center for Responsive Politics/Federal Elections Committee; OECD Producer
Subsidies Equivalent database; Robert Thompson, U. of IL; John Baffes, the World
Bank.
66%
7%
7%
20%
Sugar
Cotton
Rice
Other
(i)
Figure 21.3 Commodity group contributions to Congress
Note:
(i)
Other includes specialty crops, wheat and primary processors.
Source: Center for Responsive Politics (2007).
amber box subsidies should prices return to more historic levels. In addi-
tion, a new revenue insurance program (ACRE) was created, which will
also be in the amber box. Farmers can update their base acreage (which
links production back to prices) and the planting exibility programs
which were questioned by the Brazil cotton decision were subject to only
limited reforms. Ironically, some of the initiatives have undermined the
case for the very same direct payments encouraged by WTO negotiations.
In 1995, the Environmental Working Group (EWG) began to publish
data on subsidy payments made to individual farmers. The EWGs web-
site showed what economists had always known, that farm subsidies
linked to production would favour the farmers with the highest levels of
subsidy reform in the us context 611
production. The EWGs website showed that the top 10 per cent of US
farms collect three-quarters of all agricultural subsidies. Stories about the
inequity of US farmprograms began appearing in the press and reached a
crescendo in the run up to the 2008 FarmBill debate. Stories detailed indi-
vidual farmers subsidy payments, also reported that only certain crops
were eligible for subsidies and pointed out that the income and wealth of
subsidy recipients is many times that of average Americans.
However, in and of themselves, the EWG data did not particularly
implicate decoupled payments. Nevertheless, ground-breaking investiga-
tive reporting by the Washington Post, the Atlanta Constitution and others
uncovered stories of payments made to dead farmers and payments to
farmers growing houses in suburban subdivisions. An article in the
Washington Post based on USDA data found that $1.1 billion was dis-
tributed to dead farmers between 1999 and 2005. The article highlighted
former farmland that had been divided into housing subdivisions that
still qualied for farm subsidies, even though no crops had been grown
for years.
2
Then-Secretary of Agriculture Mike Johanns presented evidence that
many subsidy recipients lived far from their farms: six people on Park
Avenue collected over $250,000 per year in farm subsidies. Taxpayers
for Common Sense analyzed farm subsidy data and found that only
15 per cent of all farmers received subsidies and, of those (since farm-
ers producing fruit, vegetables and livestock typically receive none), just
8 per cent received 78 per cent of all subsidies.
3
When prices began to
increase in 2006, reporters and editorial boards began asking why farmers
received government checks when they did not really need them. More
importantly, perhaps, as commodity prices rose, the direct payments rep-
resented a source of funds for other priorities.
In the run-up to the 2008 FarmBill debate, several of the reformgroups
began to develop new ideas for subsidy reform. Conservationists devel-
oped proposals to link payments more explicitly to conservation mea-
sures. They proposed fully funding the Conservation Security Account,
which made payments to farmers to offset the costs of environmental
measures: this account was instituted in the 2002 Farm Bill, but never
fully funded. Conservation groups wanted to transfer some of the money
going to commodity programs (including direct payments) to fund this
program fully. Demands to create a Conservation Security Account that
2 http://www.washingtonpost.com/wp-dyn/content/article/2007/07/22/AR2007072201128.
html.
3 http://www.taxpayer.net/agriculture/learnmore/factsheets/agpolicy.pdf.
612 agricultural subsidies in the wto green box
would pay farmers for conservation further undermined the case for
direct payments made to farmers for doing nothing.
Other groups developed revenue insurance programs on the theory
that these would be less trade-distorting than traditional countercyclical
or marketing loan programs. The Integrated FarmRevenue Programpro-
posal developed by the American Farmland Trust eliminated the market-
ing loan and countercyclical programs and replaced themwith a National
Revenue Deciency Program that would make payments to farmers only
when the national revenue of a particular crop fell below the expected
national target revenue, thus replacing static target prices with moving
target revenue (namely, price times yields). Payments would be made only
when a farmers total crop revenue fell below the target. Because these
payments are not known in advance, farmers decisions would be market
driven. A similar proposal was adopted by the National Corn Growers
Association.
Another proposal known as FARM21, developed by Environmental
Defense, would have replaced countercyclical and direct payments with
risk management accounts that farmers could access if their income
dropped below 95 per cent of a rolling ve-year average. Because of
this, FARM21 was considered the least trade-distorting and most market-
oriented of the various reform proposals.
As the 2008 Farm Bill debate began, these and other proposals were on
the table, but in the early days of the debate, most farm groups called for
a simple extension of the 2002 Farm Bill. Once again, however, budget
dynamics intervened. As commodity prices began to increase, payments
under the countercyclical andmarketing loanprograms fell for most crops
(in some cases to zero). It became increasingly clear to the commodity
groups that extending the 2002 Farm Bill would mean less money for
future agricultural budgets. Mainstream commodity groups began to
argue for higher support and higher target prices that would provide a
safety net in times of low prices. Farmers from the vulnerable Northern
Plains states began pushing for permanent disaster aid again, in part to
capture agricultural budgets that would evaporate if the 2002 Farm Bill
were extended.
A retreat from decoupling
Despite all of the elements arguing for fundamental reforms, the House
version of the 2008 Farm Bill (approved in July 2008) represented a fur-
ther retreat from decoupling. Given the seemingly positive environment
subsidy reform in the us context 613
for reform, what happened? First, while the members of the Alliance
for Sensible Agricultural Policies all supported farm bill reforms, they
supported reforms for vastly different reasons. While all agreed that com-
modity programs needed to be reduced, some wanted more money for
nutrition programs, others for conservation programs and still others for
decit reduction. These groups did agree on how to divvy up the savings
fromcommodity reforms and, ultimately, most of the reformgroups sup-
ported the FARM21 proposal (sponsored by Ron Kind and Jeff Flake).
However, that legislation proved too radical a departure for members of
Congress to support.
Second, House Speaker Nancy Pelosi turned the farm bill into a test
of Democratic Party loyalty. In exchange for support of various groups,
additional funding was made available. For example, the Congressional
Black Caucus received $100 million to settle discrimination lawsuits led
by African Americans against the USDA. Nutrition groups got $4 bil-
lion in food stamps and enhanced child nutrition programs; the popular
ConservationReserve Programwas increasedby 3 millionacres. The Con-
servation Security Program was expanded. Congress added $1.8 billion
in subsidies for fruit and vegetable farmers and introduced country-
of-origin labelling on fruits and vegetables. These offers were enough
to convince many reform-minded members of Congress to support the
House-passed farm bill.
Most of these proposals were supported by the Senate and found their
way into permanent legislation. The FarmBill offers producers the option
of enrolling in a new revenue-based countercyclical program rather than
the current price-based countercyclical program. The bill excludes pay-
ments to farmers making over $1 million in adjusted gross income; it
eliminates a rule that allowed farmers to collect double payments; and
it halved the payment cap per farmer for direct and countercyclical pay-
ments. However, these reforms will have little impact onoverall payments:
while the overall subsidy cap was lowered, limits on direct payments were
raised from $40,000 to $60,000 and the $75,000 limit on marketing loan
payments was eliminated altogether.
Increases in nutrition spending and in conservation spending both
shifted more funds into green box subsidies; but the bulk of changes in
the commodity programs have the potential to increase further US amber
box spending.
The FarmBill did not bring US policies into compliance with the WTO
cottonruling. The exemptionthat prevents commodity cropfarmers from
planting fruits and vegetables on land receiving commodity payments was
614 agricultural subsidies in the wto green box
not changed. The most recent and nal WTO nding that the US has not
complied with the cotton panel means that the failure to address this will
become more of an issue.
The FarmBill also raised marketing loan rates and target prices, further
insulating farmers from market signals and potentially increasing amber
box payments, should commodity price levels fall. Finally, the sugar sup-
port price was increased. It is signicant that President Bush chose to veto
the farm legislation (something he had to do twice because of a clerical
error). However, it is also signicant that in both cases, Congress over-
rode the veto with sizeable margins. As a result, subsidy payments will
continue to go to the major commodity crops, in particular corn, cotton,
sugar, soybeans and wheat, concentrated in the Midwest and South. Seven
states collected over one-half of the subsidies distributed from 2003 to
2005 (Environmental Defense, 2008).
Apreliminary analysis of the 2008 FarmBill indicates that if commod-
ity prices were to fall the likelihood of a WTO challenge would actually
increase because marketing loans and revenue-based countercyclical pro-
grams, as well as higher target prices for certain crops, have the potential
signicantly to affect markets, production and trade (Sidley and Austin,
2008). According to the analysis, prices of the ve major commodities
would not have to fall far to be vulnerable to a WTO challenge.
Direct payments, while less likely to be challenged than amber and
blue box subsidies, nevertheless are vulnerable to challenge. Direct pay-
ments as currently constructed continue to violate the terms of the cotton
agreement, as pointed out in a Sidley Austin analysis of prospective US
farm policy. In addition, other policies notied as green box could also
be challenged, including existing crop insurance and quite possibly the
new revenue insurance program. Finally, the cumulative effect of the
price-contingent subsidies, crop insurance and disaster assistance would
likely nd that such subsidies ensure that farmers are protected frommost
types of harmful uctuations in their revenue. Farmers produce more
than they would under normal circumstances because they are insulated
fromrisk, whichdistorts worldmarkets. Therefore, the cumulative impact
of green, blue and amber box subsidies could be challenged at the WTO.
Recent analysis (Blandford and Orden, 2008) suggests that the limits on
Overall Trade Distorting Support will not become binding, evenat the end
of the Doha implementation period, assuming no substantial payments
are made under the ACRE programme. However, the water would be
reduced signicantly, and amber box limits would become binding for
cotton and sugar both of which are important to developing countries
subsidy reform in the us context 615
US projected notifications and WTO limits
0
10
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 20111 2012 2013
$
b
i
l
l
i
o
n
Green box
Total AMS
AMS limit
Blue box
Blue box limit
OTDS
OTDS limit
Figure 21.4 US projected notications and WTO limits
(i)
Note:
(i)
the projections for the green box include updated numbers from the CBO on
environmental payments. AMS, blue and green box numbers reect an assumed
sign-up of 90 per cent for corn, soybeans and wheat under the ACRE program.
and politically sensitive for the United States. With the suspension of the
Doha negotiations, it is nonetheless unclear whether and when the types
of proposals on the table in the negotiations will be agreed.
In part, the reverse box shifting in the 2008 Farm Bill is because of
the nature of the US budget process: policies are shaped in order to get
the most money from that years budget and to retain budget authority
over the longer term. In part it is due to farmers memories after the 1996
Farm Bill when prices fell sharply, when they felt that direct payments
did not sufciently compensate for the fall in income. The notion of a
safety net that operates only when farmers need it has a great deal of
emotional and political appeal. The fact that such a safety net would
likely be amber box is of little importance in US politics. However, at
another level reverse box shifting is due to a lack of alternative ideas.
The 2008 reform movement came together mostly because the groups
opposed the current commodity programs, but they had too many ideas
about how to x it, why it needed xing and what they wanted it to do
instead. The concept that tax revenue should provide for public goods
that are available to the citizenry as a whole and not be transferred to a
few private citizens or public money for public goods has become
a mantra in European policy reform circles, but did not take hold in
the United States. The notion that public spending be used to improve
the competitiveness of farmers, to support the economic vitality of rural
areas or to promote environmental sustainability did not garner sufcient
support either (Johnson and Runge, 2008).
616 agricultural subsidies in the wto green box
In a recent paper, Johnson and Runge develop these arguments more
fully. They argue that for many farmers, the private market should step
in where the government has heretofore provided support. In particu-
lar, private risk management tools can take over from public systems
such as price, yield and revenue insurance schemes (Johnson and Runge,
2008). They argue that private insurance schemes would develop if pub-
lic spending did not crowd out the market. In their view, farm policy
should evolve from an income support system for all farmers to one that
differentiates between farmers in different categories. Large commercial
farmers would not continue to benet fromprograms originally intended
as welfare support for smaller farmers. This is particularly true for 150,000
farms that earn over $250,000 per year and account for 70 per cent of US
farm policy benets (Johnson and Runge, 2008). Instead, the US Gov-
ernment would concentrate its efforts on improving productivity and the
long-term competitiveness of US agriculture.
Conclusion
Before the recent nancial crisis, many arguedthat witha cheapandfalling
dollar, low commodity stocks, with increasing demand for commodities
(in part due to biofuels mandates) and a long-term forecast of robust
economic growth in consumer demand in China and India, it was a
propitious time for the US to reform its subsidy policies. The global
economic slowdown is depressing commodity prices, although not yet
to levels that will trigger farm payments. Should payments be triggered,
the emerging US budget decit may force Congress to make cuts in
commodity programs under the guise of decit reduction that they could
not make under the farm bill. However, it is equally straining the US
budget. Unfortunately, US farmers have chosen to retain a status quo
farm policy that does not look forward to the 21st century.
References
Blandford, David and Josling, Tim (2008), Meeting Future WTO Commitments
on Domestic Support: The Implications of Ambassador Falconers July 2008
proposals for the European Union and the United States, German Marshall
Fund Paper Series, September.
Blandford, D., Laborde, D. and Martin, W. (2008), Implications for the United States
of the 2008 Draft Agricultural Modalities, International Centre for Trade and
Sustainable Development, Geneva, Switzerland.
subsidy reform in the us context 617
Blandford, D. and Orden, D. (2008), United States: Shadow WTO Agricultural
Domestic Support Notications, IFPRI Discussion Paper 00821, November,
IFPRI, Washington, DC.
Environmental Defense (2008), Ways to improve Americas farm and food poli-
cies, Environmental Defense Fact Sheet, http://www.edf.org/documents/
7026 Fact%20Sheet National.pdf.
Johnson, Robbin and Ford Runge, C. (2008), The Next Farm Bill: Will it
look backward or forward?, prepared for the Wilson Center for Scholars
Perspectives on the 2008 farm bill, http://www.wilsoncenter.org/events/
docs/The%20Next%20Farm%20Bill%20Will%20it%20Look%20Forward
%20or%20Backward.doc.
Orden, David (2003), U.S. Agricultural Policy: The 2002 Farm bill and the WTO
Doha Round Proposal, IFPRI TMD Discussion Paper 109.
Sidley Austin LLP (2008), Legal Analysis performed for Environmental Defense,
July.
22
Agricultural trade policy reform in Japan:
options for achieving change
kazuhito yamashita
Introduction
Although Japanese agriculture has long been protected from overseas
competition by border measures, the state of the countrys farming has
continued to decline. Japan has established an agricultural policy domi-
nated by price support that supports farmers income, but places a large
burden on consumers. In order to maintain high prices, Japan has to
rely on tariffs. High prices have slowed down structural reform and
deprived Japanese agriculture of international competitiveness. In moves
to strengthen international competitiveness, the European Union (EU)
has lowered prices for agricultural products and introduced a direct pay-
ment scheme. Japan should transformits agricultural policy to cease price
supports backedby tariffs onproducts suchas rice anduse direct payments
to compensate farming households that are affected by reduced prices.
This would not only overcome immediate obstacles to trade negotiations,
but also reduce the burden on the Japanese public, lead to greater com-
petitiveness in agriculture, cope with a shrinking domestic market and
offer benets to consumers. For structural reform, it will be necessary
to reduce prices and adopt direct payments limited to eligible farms. In
order to adopt aggressive agriculture policy, there is a vital need to carry
out structural reform and achieve strong and robust farming.
There are political obstacles which hinder the Japanese Government
from realizing this policy reform. In particular, most of the politicians in
the Diet believe that in the latest election of the upper house, rural voters
showed a negative attitude towards targeting agricultural policies only at
eligible farmers. On the other hand, agricultural policy reform will be
inevitable. Japan enters an era of major population decline. The nations
population is estimated to fall fromthe current 130 million to 100 million
in 2050. Per-capita rice consumption has halved in 40 years. This trend
618
agricultural trade policy reform in japan 619
will continue. This means that the domestic market is shrinking. In order
to maintain agriculture, Japan has no other option than to recuperate
international competitiveness so as to export rice and other agricultural
products in the promising Asian market with increasing population and
income.
International comparison of agricultural policies
The Uruguay Round negotiations established the World Trade Organi-
sation (WTO), which encompasses trade in services and protection of
intellectual property rights, in addition to trade in goods. The negotia-
tions on agriculture also marked a watershed. It was agreed that the WTO
Agreement on Agriculture would discipline domestic agricultural sup-
port as well as market access and export subsidies. Under the WTO rules,
agricultural subsidies such as direct payments are classied into three
boxes: amber subsidies, which should be reduced and can be retali-
ated against; blue subsidies, which do not require reduction, but may
face retaliation; and green subsidies, which do not need to be reduced
and will not be targeted for retaliation.
The European Community (EC) instituted reforms in 1992 towards
the end of the negotiations, reducing its support prices for cereal and
beef and compensating farmers by blue box direct payments, which
were equivalent to the amount of price reductions and linked to farmland
area and livestock numbers. This policy reform with price reduction
would enable the EC to reduce the volume of subsidized exports through
reductions in surpluses. At present, the EU support price for cereal is
lower than the Chicago Board of Trade price for wheat.
As for Japan, rice is the most difcult item to be liberalized because of
several reasons. One is its large share of agricultural production, amount-
ing to approximately 25 percent of agricultural production. Another is the
geographical location of production spreading over more or less through-
out Japan. These twofactors result instrong political factor (Urata, 2006).
Japan strongly resisted tarifcation of import quantity restrictions for rice
in the negotiations. It became one of the most important issues at the top
of Japans political agenda in that period. As compensation for the special
treatment of tarifcation of rice, the single most important agricultural
product in Japan, Japan had agreed to raise the minimum access tariff
quota of 5 per cent of domestic consumption in the case of tarifcation to
8 per cent. However, in 1999, Japan ceased the application of the special
treatment and introduced tarifcation, because the increase in minimum
620 agricultural subsidies in the wto green box
access would lead to even more reductions in production. As a result of
Japans delay in introducing tarifcation, however, the minimum access
rate was raised to 7.2 per cent and has remained the same ever since. It is a
basic rule of the General Agreement on Tariffs and Trade (GATT) and the
WTO that if a country seeks exemption from general principles, it must
invariably provide compensation in return.
In 2003, the EUswitched to United States (US)-type green box direct
payments, or decoupled payments, which were no longer linked to the
type or volume of production, prices or production factors. At the same
time, the EU reduced support prices on dairy products, cutting the price
of skimmed milk powder by 15 per cent and butter by 25 per cent. In
2005, the EU reduced the support price for sugar (previously unchanged
for 40 years) by 36 per cent and switched to paying the remaining
64 per cent directly. For these reasons, the EU could make a commit-
ment to eliminate export subsidies and tolerate 100 per cent tariff caps in
the Doha Round of negotiations.
The US had already introduced amber box deciency payments in
the 1970s. Later, it introduceda production-limiting set-aside programme
and made farmers participating in this programme eligible for deciency
payments. This payment, coupled with the set-aside programme and the
EUs area or livestock payments, was categorized as blue-box and was
introduced by the Blair House Agreement between the US and the EU
in the Uruguay Round negotiations. The 1996 Farm Bill did away with
production-limitationset-aside programmes andreplaceddeciency pay-
ments with decoupled direct payments.
The producer support estimate (PSE) was developed by the Organisa-
tionfor Economic CooperationandDevelopment (OECD) as anindicator
of agricultural protection and evolved into the aggregate measure of sup-
port (AMS) in the WTO Agreement on Agriculture in a legally binding
form. The PSE is the sum of the taxpayer burden in the form of subsidies
and payments made to farmers and the consumer burden
1
in the form of
price support higher than an international price brought about by border
and domestic measures (calculated as the difference between domestic
and international prices multiplied by domestic production volume).
According to the OECD (2007), in 2006 the PSE was US$29.3 billion in
the US, US$138.0 billion in the EU and US$40.7 billion in Japan. Japans
1 In OECD, it is called Market Price Support (MPS). It is dened as the estimated annual
monetary transfers from consumers and taxpayers to agricultural producers arising from
policy measures that create a gap between domestic market prices and border prices of a
specic agricultural commodity, measured at the farm gate level (OECD, 2007).
agricultural trade policy reform in japan 621
overall level of protection, being 39 per cent higher than that of the US
and less than one-third of that of the EU, is not especially high.
In spite of this, Japan is criticized abroad for being protective of its
farming sector by its rigid opposition to tariff reductions, while at home
the government is blasted for damaging the nations interests because its
position on agricultural issues stalls negotiations in the WTO and talks
on free trade agreements (FTA). This criticism, however, stems from the
fact that Japan uses the wrong method of protection.
If the overall PSE is broken down into its two constituent parts (the
consumer burden and the taxpayer burden), it can be seen that the pro-
portion of the consumer burden declined in the US from 37 per cent in
the period 1986 to 1988 to 17 per cent in 2006, and in the EU it went
down from 86 to 45 per cent; in Japan, however, it changed slightly from
90 to 88 per cent over the same timeframe. The US and the EU are mov-
ing forwards with agricultural policy reform that shifts the burden from
the consumer to the taxpayer. In the face of the EU switch to a US-style
agricultural policy that places the burden more heavily on the taxpayer,
Japan has been left high and dry, and the battle lines have been redrawn
no longer pitting the EU and Japan against the US, but rather the US
and the EU against Japan. Unlike the US and the EU, which have low-
ered their dependence on tariffs by switching to direct payments, Japan
maintains conspicuously high tariffs on products such as rice, wheat and
dairy products. For Japan, the most important issue in the WTO agri-
cultural negotiations is thus not domestic support, but maintaining tariff
levels.
In the current Doha Round of negotiations, many WTO members
favour a tariff cap in the order of 100 per cent. The EU approves a tariff
cap on the one hand while resisting tariff reductions on the other hand
because an 80 per cent reduction in its highest tariffs (relatively low at
around 200 per cent) would reduce them to 40 per cent that is, below
the permissible 100 per cent tariff level. Conversely, Japans tariffs are
extremely high; if its rice tariff of 778 per cent were reduced by 80 per
cent, it would still stand at 156 per cent. Since a reduction to 100 per
cent would lower it even further than this, Japan is opposed to a tariff
cap.
It is agreed that the tariff reduction method should consist of applying
a high rate of reduction to high-tariff items. Japan is seeking exceptions
for as many items as possible. Japan will, however, be required to increase
its low tariff-rate quota by way of compensation for the exceptions that it
seeks.
622 agricultural subsidies in the wto green box
Table 22.1 Comparison between the Policies of Japan, the US and the EU
Country Japan US EU
Decoupled direct
payments
(Partially introduced) yes yes
Environmental
direct payments
(Partially introduced) yes yes
Direct payments for
less favourable
regions
yes no yes
Production
limitation
programme for
price maintenance
yes no no
Tariffs >1,000% 2 (konjac root, beans) None None
Tariffs of
5001,000%
2 (rice, peanuts) None None
Tariffs of 300500% 2 (butter, sugar) None None
Tariffs of 200300% 5 (including wheat,
starch our and
raw silk)
None 2 (some dairy products
such as butter;
sugar), although
reforms will let the
EU reduce them to
less than 100%
Formation of Japanese agricultural policy and decline
in international competitiveness of agriculture and
food self-sufciency
Although Japanese agriculture has been protected over the years by high
agricultural prices backed by tariffs and non-tariff border measures, its
decline continues unabated, with agricultures share of gross domestic
product dropping from 9 to 1 per cent and the percentage of farm-
ers over 65 years of age rising from 10 to 60 per cent over the past
40 years. The proportion of full-time farming households has declined
from 35 to 20 per cent, while that of part-time farming households (for
which other income exceeds income from farming) has increased from
30 to 70 per cent. Japans food self-sufciency rate has declined from 79
to 39 per cent, while most of the other developed nations have increased
their food self-sufciency rate during the same period.
agricultural trade policy reform in japan 623
Japan is now the greatest net importer of agricultural products in
the world. Japans international competitiveness has declined markedly,
as demonstrated by the 788 per cent tariff on rice imports in order to
protect domestic rice (which had until 1953 been cheaper than rice on
the international market). Japans lack of international competitiveness
stems from its small land mass and the fact that Japanese agriculture can
no longer realize even its limited potential in the wake of failed policies
such as the high rice price policy.
Countries have a comparative advantage in products that make inten-
sive use of the factors that they possess in relative abundance, according
to the HeckscherOhlin theorem of international economics. Japan is
endowed with relatively little land and labour and with relatively abun-
dant capital. Inorder to eliminate its comparative disadvantage inagricul-
ture, Japan must rst implement technological progress in a less land- or
labour-intensive or a more capital-intensive way of agriculture, for which
land constraints will become a less critical factor. First, in order to econo-
mize on land, per-unit crop yield should be increased through improve-
ment in crop varieties. This will lower costs, as the per-lot production
cost for agricultural products is the per-area cost divided by the per-unit
crop yield. Japan should also economize on labour and encourage the use
of capital for large-scale mechanization. For large-scale mechanization to
be efcient, the scale of agriculture will have to be increased.
The old Agricultural Basic Law enacted in 1961 made an attempt to
increase farmers incomes by increasing the size of Japans small farms
while cutting costs. Income is equal to sales (price multiplied by pro-
duction volume) minus cost. Even for a commodity such as rice, whose
consumption and sales volume cannot be expected to rise, farm income
could have been increased if costs had been reduced.
Rather than take this approach, however, the ruling Liberal and Demo-
cratic Party (LDP), whose main constituent is a group of Japanese agri-
cultural cooperatives (JAs; the most powerful interest group along with
labour unions in post-war Japanese politics with a membership of more
than 5 million farmers), forced the agricultural administration to drive
up the price of rice in order to boost farmers income, especially at an
annual rate of 9 per cent in the 1960s. Even part-time weekend farmers,
the majority of JA members, who operated on a small scale and with
high costs, found it more protable to grow rice themselves than to pay
high prices to buy it and thus have not handed their farmland over to
full-time farmers. Once full-time, large-scale, business-oriented farmers
could be put on the expansion track, their costs would decrease and they
624 agricultural subsidies in the wto green box
would be able to spend more on renting land, which would fuel further
expansion. However, Japan failed to embark on this virtuous circle of
increasingly large-scale farming, as part-time farmers would not rent out
their farmland. The costs for full-time farmers did not fall.
Average farm size in Japan has grown only slightly from 0.9 hectares
to 1.2 hectares over the past four decades. Structural reform has been
especially slow in the rice sector. Although full-time farmers produce
80 per cent of Japans wheat and barley, 81 per cent of its vegetables and
96 per cent of its milk, they account for only 38 per cent of the rice grown
in Japan in 2004.
The high rice price increased production and spurred a reduction
in consumption, resulting in a rice glut. Having peaked in 1962 at
118 kilograms, annual per-capita rice consumption dropped to 61 kilo-
grams. In 1960, the itemized daily individual caloric intake for Japanese
people was as follows: rice, 1,106 kcal; livestock products, 85 kcal; fats
and oils, 105 kcal; and wheat, 251 kcal. In 2005, the daily intake was as
follows: rice, 599 kcal; livestock products, 397 kcal; fats and oils, 368 kcal;
and wheat, 320 kcal. Rice was thus the sole loser. If the Japanese Gov-
ernment had prioritized supplying food to consumers before boosting
farmers income, it should have decreased the price of rice with decreas-
ing demand and increased that of wheat with increasing demand.
The production-limitation programme implemented since 1970 in
order to cope with the surplus caused by the high price of rice has esca-
lated year by year and now applies to 1 million hectares equivalent to
40 per cent of the total 2.7 million hectares of paddy elds. While Japan
has carried out a production-limitation programme corresponding to
approximately 6 million tons against a potential rice production capacity
of approximately 14 million tons, it imports as much as 6 million tons of
wheat annually. Increases in the yield per unit area resulting fromtechno-
logical advances such as improved rice varieties boost the productivity of
land and eventually strengthen international competitiveness. However,
producers disliked this idea, since this would have exacerbated the rice
glut and led to a greater reduction in the rice acreage. In 2002, the per-unit
rice crop yield in Japan was 527 kg 10 per cent less than the average
for the US as a whole (593 kg), and 30 per cent lower than the gure for
California (744 kg).
Frances agricultural administration has conned itself to full-time
farmers andhas takensteps toensure that agricultural landis concentrated
together. From 1960 to 2002, France has increased its rate of food self-
sufciency from 99 to 130 per cent, and farms have increased in scale
agricultural trade policy reform in japan 625
from 17 to 42 hectares. The yield of wheat per unit area in France is three
times as much as in the US. Of its farmers, 12 per cent are under 35 years
of age, 51 per cent between 35 and 54 years of age and a mere 16 per cent
aged 65 years or older.
Political environment of Japanese agricultural policy
Japanese agricultural cooperatives are the most powerful and inuential
participant in the formation of Japanese agricultural policy, since they
have continued to support LDP by supplying a high number of farmers
votes in rural districts. A JA is an agricultural organization with com-
prehensive roles and functions, rarely seen in other countries. JAs were
created as a government initiative to revamp the wartime control associ-
ations to which all farmers belonged. These cooperatives handled many
businesses related to farming and farming communities, such as the pur-
chase of inputs, sales of farm produce, provision of commodities and
services needed for farmers daily life, and provision of credit (nance).
These businesses were brought into JAs to ensure food collection and
distribution in the post-war period of severe food shortages.
Because the majority of Japans farmers grew rice, raising the price
of rice became the central agricultural policy objective of JAs. This also
served the interests of JAs, since higher rice prices translated to more
revenue from commissions of selling rice and higher sales of inputs, such
as chemical fertilizers and pesticides, at higher prices. Since 1960, the use
of agrochemicals has surged. The original aim of the collective purchase
of inputs by cooperatives was to allow members to obtain lower-cost
supplies by enhancing their negotiating power in the market. However,
for the cooperatives themselves, it is more protable to sell inputs to
members at higher prices. Also, because the revenues from higher rice
prices are deposited in JAs by farmers, these assets have increased. If the
price of fertilizer, for example, is raised, then loans extended to agro-
chemical makers by JA assets earn higher yields. Until 1995, when the
Food Control Law was abolished, price increases of production factors
such as fertilizer had been incorporated automatically into the adminis-
tered rice price determined under the law. Thus, despite the decline of
agriculture in Japan, JAs have ourished under high rice prices in their
comprehensive role, both as sellers of inputs and farm produce and as
nanciers.
Weekend farmers do not run their operations along strictly business
lines, thinking about how to lower their production costs or how to sell
626 agricultural subsidies in the wto green box
their produce more protably. JAs that offer a full set of inputs and sell
their produce in total are convenient for these part-time farmers. Under
the one-member-one-vote system stipulated by the Agricultural Cooper-
ative Law, the opinions of part-time farmers, who are by far the majority,
are certainly reected in the operations of the JAs, which in turn main-
tain their political clout by having a large number of part-time farmers
as members rather than a small number of full-time farmers. Although
many JAs have merged to improve management and organizational ef-
ciency, they have consistently opposed any structural reforms aimed at
fostering business-minded full-time farmers and expanding farming scale
since the days of the Agricultural Basic Law.
The state of Japanese agricultural policy reform
Shortly after the Uruguay Round negotiations, Japan abolished the Food
Control Law and the administered price of rice, which led to a huge
reduction in the Japanese AMS to 16 per cent of the level of the binding
commitment or 13 per cent of the level of 1986 to 1988. The rice price,
however, has been maintained by a production-limitation programme
since then. The market price support element of the AMS is calculated by
the difference between an administered price and an international price.
2
Without an administered price, the AMS will not contain the difference
between domestic and international prices. On the other hand, with or
without an administered price, the PSE measures the difference which is
backed by the existence of tariffs that isolate the domestic market from
the international market.
3
In 1999, Japan enacted the new Basic Law of Food, Agriculture and
Villages. Under this new law, the government set the goal of attaining
45 per cent food self-sufciency by 2015 and introduced a green box
direct payment scheme for less favourable regions, similar to that which
has been in practice in the EU since 1975.
2 It is dened in para. 8 of Annex 3 in the Agreement on Agriculture as follows. Market
price support shall be calculated using the gap between a xed external reference price and
the applied administered price multiplied by the quantity of production eligible to receive
the applied administered price. Budgetary payments made to maintain this gap, such as
buying-in or storage costs, shall not be included in the AMS.
3 What is the difference between AMS and PSE? One point is that AMS is an indicator not
of border measures, but of domestic support, while PSE is an indicator of overall level
of protection of domestic and border measures. Another point is that the government
cannot change a market price, but can change an administered price as a legally binding
commitment at the WTO.
agricultural trade policy reform in japan 627
In 2005, the Japanese Government decided to change 70 per cent
of current amber box deciency payments for wheat, sugar and soy-
bean growers, which are designed to compensate for the gap between
government-guaranteed prices and domestic market prices, to green box
decoupled payments. At the same time, the government will limit the
scope of subsidy recipients to farmers above a certain scale of operation
from the viewpoint of promoting structural reform. This limitation of
scope applies not only to the decoupled payments for wheat, sugar and
soybeangrowers, but also to the price-stabilizationprogramme, including
for rice farmers, whichwill pay for the revenue lost whenmarket prices fall
below the average price of the base period. The new policy marks a major
shift that will introduce selective, rather than across-the-board, support
to eligible farmers, a measure that was once vigorously opposed by JAs.
Contrary to the EU, however, the Japanese Government has decided that
no direct payments will be made as a means to reduce the prices of any
agricultural products.
If the government lets rice prices fall by abolishing the production-
limitation programme, which is, in effect, an output-restricting cartel for
price maintenance, then small-scale farmers would get into the red and
begin to offer their farmland for lease. Then, if the government imple-
ments a direct payment scheme in a way to alleviate the full-time farmers
income loss, full-time farmers canaffordtopay rent tosmall-scale farmers
so that farm plots would be put to concentrated use by full-time farm-
ers. This would enable cost reduction by economies of scale, accelerate
structural reform and increase full-time farmers incomes. Small-scale
part-time farmers average combined farmand non-farmincome exceeds
that of wage earners. On the other hand, the average income of full-
time farmers is falling below the level of wage earners; that is, large-scale
farmers are poor farmers. Unlike price support, which affects all farmers,
focusing assistance on certain farmers is indeed the essence of direct pay-
ments, and it is inappropriate to subsidize farmers who are not adversely
affected by lower prices.
This round of reforms represents an important rst step towards fully
edged reformin Japanese agricultural policy by introducing the element
of limiting eligible farmers. The reform, however, is incomplete both in
that it failed to cut into the rice problem, the core issue that should have
been addressed at all costs, and in that it will not lead to price reductions
that will initiate structural reform. Factors necessary to achieve more
efcient agriculture through structural reform are lower prices and direct
payment limited to eligible farms (Yamashita, 2006). It will be necessary
to continue the reform process.
628 agricultural subsidies in the wto green box
With consumer-funded measures, it is unclear who is carrying the
burden of payment, but with taxpayer-funded measures the relationship
between costs and benets is clear to the public. Price support is unfair in
that poor consumers alsoshoulder the burden, while wealthy land-owning
farmers who only farm part time also receive benets. Direct payments
through taxpayer burden will not only do away with the distortions on
consumption and raise economic welfare, but can also limit beneciaries
to those farmers who really need public assistance. If Japan can do away
with the so-called convoy style of agricultural policy and farmland can
be concentrated through direct payments for specic targets, costs will
decrease as a result of an increase in farming scale, prices will fall and
the scal burden of agricultural policy can be transformed into consumer
benet.
In the meantime, the opposition Democratic Party came up with an
amber box deciency payment scheme with a budget in the order of
1 trillion yen (US$8.5 billion) to all of the farmers, including small-scale
rice farmers, together with the abolition of the production-limitation
programme. It does not make any contribution to structural reform. The
Democratic Party, however, conducted a political campaigncriticizing the
policy of the government for abandoning small-scale farmers. It succeeded
in attracting the small-scale part-time farmers votes in rural districts and
gained a landslide victory in the upper house election of the Diet in July
2007. The Democratic Party is nowthe majority party in the upper house.
The LDP has two-thirds of the seats in the lower house. No act is easy to
be passed in the Diet because each party would exercise the veto over the
others act. Threatened by the proposal by the deregulation committee
of the government to separate a protable and lucrative nancial section
(banking and insurance section) from JAs that makes up for the loss
of the other JA sections, JAs were united to back an LDP candidate, a
former executive director of the JA Federation. This candidate gained the
second-largest vote of more than 400,000 in the nationwide district, while
the LDP lost many seats in rural districts. Part-time farmers and workers
who belong to JAs voted for the LDP candidate in the nationwide district,
but voted for candidates of the Democratic Party in rural districts. Part-
time farmers and JAs do not like the idea of targeting an agricultural
policy at full-time farmers.
Contrary to the policy of the government which does not propose
price reduction, the advantage of the DP proposal was abolishing the
production-limiting programme of rice. After the election was over,
however, the Democratic Party proposed a plan of deciency payments
with a production-limiting programme. Curiously enough, this is exactly
agricultural trade policy reform in japan 629
the same kind of policy which was abolished by the 1996 Farm Act in the
US. On the other side, the LDP, fearing the nightmare of a loss of seats in
the next lower house election, has started to profess that due and careful
consideration should be given to small-scale farmers and that a targeting
government policy should be revised.
Future prospects: globalization and Japans declining population
Against this political background, it seems unlikely that Japan will intro-
duce a fully edged direct payment scheme accompanying agricultural
price reduction, as the EU has done. Rather, a political backlash is taking
place. There are, however, some silver linings.
Japanese industry is eager to promote WTO and FTA negotiations. It
criticizes agriculture as the main obstacle for negotiations. If Japanese
agriculture is to survive competition with foreign agricultural products,
it will have to lower prices for agricultural products. The question of
protecting agriculture is one thing, but the question of what means to
use in order to protect agriculture is another. Direct payments to reduce
domestic prices will cope with tariff reductions. However, where there is
disparity between domestic and international prices, expanded tariff-rate
quotas will reduce domestic production and thus the rate of food self-
sufciency, the very rationale for rice tarifcation in 1999. With the new
basic law demanding to increase the rate of food self-sufciency, when
Japanis facedwithdemands for either tariff reductions or expandedtariff-
rate quotas, it should without doubt or hesitation choose to reduce tariffs
and introduce direct payments. Japan should not repeat the mistake made
in the Uruguay Round negotiations.
There is also a distinct domestic rationale in Japan for lowering prices
to confront the era of population decline as the birth rate falls and society
ages.
Per-capita rice consumption has halved in the space of 40 years . . .
Moreover, as society ages, the average amount that each person eats will
decrease even further. In short, the overall level of rice consumption will
decline at a higher rate than the population decrease. If by 2050 per-capita
rice consumption were to fall to half the current level and the population
were to decrease from 130 million to 100 million, the overall amount of
rice consumed would drop signicantly from its present level of 9 million
tons to 3.5 million tons. Even if per-capita rice consumption were only to
fall from its present level of 61 kg to the order of 50 kg, the overall amount
of rice consumed would still drop to 6 million tons (Yamashita, 2006b).
630 agricultural subsidies in the wto green box
Without reducing the price, a production-limiting programme would
have to be applied to 2.2 million hectares of the 2.7 million hectares
of paddy elds, reducing the rice crop area to approximately 500,000
hectares.
There is rice demand other than for human consumption. Lowering
the price of rice might attract new demand
4
(such as for use as livestock
feed, and for use of rice as a raw material in biodegradable plastic and
ethanol). Japan imports as much as 16 million tons of grain for use as
livestock feed. Export of rice to the eastern Asian region is much more
promising. In 2007, Japan started to export 24 tons of rice to China. The
current price of rice in Japan is US$2,000 per ton. If the production-
limitation programme is abolished, the equilibrium price is estimated
at US$1,365 per ton. Since Japan pays US$1,335 per ton for imported
rice from China, it is highly likely that Japan can export as much rice as
possible to the Asian market with an increasing population and income,
taking into account its reputation of high quality. The huge Asian market
can swallow the 5 million tons of rice that Japan will export.
Redressing the balance by reduction of the rice price to make crops
such as wheat relatively protable would increase their production. Mak-
ing full use of its paddy elds will improve Japans food self-sufciency
rate. In addition, the fact that full-time farmers (who are not conned to
working weekends and can thus devote themselves to farming) use fewer
agrochemicals andchemical fertilizers wouldmake agriculture more envi-
ronmentally friendly.
The production limitation programme of rice is losing its effectiveness.
In 2007, JAs started to play the central and main role of implementing
the programme instead of the government. Because JAs market share of
rice has been reduced to only 50 or 60 per cent, this cartel programme
cannot control outsiders. The actual production is 8.56 million tons more
than the planned 8.28 million tons in 2007, although the government
strongly supported the programme and JAs. Rice price decreased from
250,000 yen per ton to 233,000 yen by 7 to 8 per cent. JAs reduced down
payments of rice to farmers from 200,000 yen to 117,000 yen by 40 per
cent. Now the governmental expenditures for this programme amount to
approximately 200 billion yen. The marketing-clearing price without the
4 As a consequence of switching to direct payments to farmers to reduce the price of grain,
the EU proceeded to substitute grain produced within the EU region for the US grain that
it had hitherto imported for use as livestock feed. In 1992, the EU reduced grain prices by
29 per cent and a mere three years later feed grain consumption had increased by 21 per
cent, while overall grain consumption had increased by 14 per cent.
agricultural trade policy reform in japan 631
programme is 160,000 yen. If the government compensates the full-time
farmers whose market share is about 40 per cent for the price reduction,
total expenditures will be almost the same at 200 billion yen.
5
This policy
change with the same amount of money will not only maintain the full-
time farmers income, but additionally reduce the price of rice which
enhances consumer welfare.
There is no valid reason for JAs to oppose this reform on the grounds
that farms are chosen on a selective basis. If farmland were rented out to
full-time farmers, then it would be possible for those small-scale farmers
to receive a portion of the direct payments in the form of increases in
their land rental income.
6
This is exactly what happened in the EU. In
the case of area payments, nearly all the benets are absorbed in increased
land values. Farmers that own land do benet (OECD, 2002).
Nokyo (JA)s economic position became less secure in the mid-1990s.
The protability of its banking and insurance activities was seriously
undermined by nancial liberalization . . . The cosy relations among JAs,
farmers, the LDP and the Ministry of Agriculture, Forestry and Fisheries
will decay if JA loses its economic power and therefore its organising
ability (Godo, 2003).
This issue is not whether or not agriculture should be protected, but
which method should be adopted price support or direct payments.
Rather than continuing with business as usual in agricultural policy and
waiting for the collapse of Japanese agriculture, Japan could do worse
than to resort to structural reform by means of direct payments.
References
Godo, Y. (2003), The Changing Economic Performance and Political Signi-
cance of Japans Agricultural Cooperatives, Japan Food Market Study: the
Australia-Japan Research Centre.
OECD (2002), Agricultural Policies in OECD Countries: A Positive Reform
Agenda, OECD, Paris, France.
(2007), Agricultural Policies in OECD Countries: Monitoring and Evaluation,
OECD, Paris, France.
5 The total supply in the market (7.5 million tons) the market share of full-time farmers
(40 per cent) price reduction (230,000 yen to 160,000 yen) =210 billion yen.
6 The owner of agricultural land is rather like the landlord of an apartment, with the party
who leases the land and engages in agricultural operations being akin to the renter. The
renter pays rent and consequently the landlord, as the owner, carries out maintenance,
such as repairs. However, if the landlord becomes the resident, he or she will receive no
rent and will no longer be able to carry out maintenance.
632 agricultural subsidies in the wto green box
Urata, S. (2006), Japans FTA Strategy and a Free Trade Area of Asia Pacic in An
APEC Trade Agenda? The Political Economy of a Free Trade Area of the Asia
Pacic, a joint study by the Pacic Economic Cooperation Council and the
APEC Business Advisory Council.
Yamashita, K. (2006a), Expectations for Completion of Full-Fledged Agricul-
tural Policy Reform, Agriculture, Forestry and Fisheries Research Division,
Research Bureau of the House of Representatives in Scholars Viewpoints on
New Measures for Stabilizing Farming Household Incomes.
(2006b), FoodandAgriculture Problems for Japanandthe Worldinthe Twenty-
rst Century, Asia-Pacic Review, Vol. 13: 115.
23
Towards a green box subsidy regime that promotes
sustainable development: strategies
for achieving change
pedro de camargo neto and renato henz
Introduction
The objective of this chapter is to provide trade negotiators and policy-
makers withinsights intostrategies that couldbe pursuedtoencourage the
reform of green box subsidies, including through trade negotiations and
litigation, in order to promote a subsidy regime that is more supportive of
sustainable development goals. The analysis is based on an understanding
of the political economy of agricultural trade policy-making and seeks to
make sense of green box reform within the context of subsidy reform
more generally.
Before engaging in this discussion, however, it must be recognized
that although developing countries have the option of a wide array of
domestic support exemptions in the WTO Agreement on Agriculture
(AoA) as it stands now (paragraph 6.2 and higher de minimis, as well as
green box), many countries cannot afford the high costs of agriculture
support and do not have the necessary expertise to implement many of
these programmes. It should also be noted that many developing coun-
tries, particularly those in the earlier development stages, discriminate
against their own agriculture sectors. Besides export taxation justied
in many developing countries by limited resources for tax collection
industrial policies, macroeconomic factors and underinvestment in rural
infrastructure, research and extension services continue to reect an anti-
agricultural bias. Concerns about food supply for poor consumers also
lead governments to intervene in agricultural markets, bringing domes-
tic prices down below international levels. This discrimination against
agricultural producers can impair development efforts. The World Trade
Organization (WTO) negotiations and the agricultural reform process
633
634 agricultural subsidies in the wto green box
cannot signicantly help countries that became prisoners of this vicious
circle.
Taking into account this reality, developing countries must evaluate
what would be the most fruitful strategy to adopt in the WTO negotia-
tion process. For instance, they should consider whether the Agreement
onAgriculture, as presently drafted, imposes concrete limits onthe imple-
mentation of developing country programmes, and whether more policy
space is needed. In other words, the objective of developing countries in
these negotiations would be to amplify their policy space, thus incurring
the costs implied by the adoption of a defensive position, or to make
better use of exibilities available in the AoA and adopt an offensive
position against the trade-distorting subsidies which developed countries
are currently allowed to provide. However, it is clear that developing
countries can benet from an offensive position, by proposing substan-
tive reductions in distorting domestic support available for producers in
developed countries. Agricultural support in developed countries affects
developing countries in different ways: by reducing access to their own
markets, by increasing competition on world markets and by depressing
and destabilizing world market prices.
Developing countries gains can result fromboth sides: better use of the
present and negotiated support exemption, from the reviewed green box,
and principally by limiting as much as possible the market distortions
due to domestic support available to producers in developed countries.
Once this evidence is accepted, the gains for developing countries in these
negotiations, in principle, would be maximized by adopting an offensive
position against distorting subsidies, a strategy already adopted by G-20
members and other groups of developing countries.
Agreement on agriculture and the agricultural reform process
In order to achieve the general objectives of this analysis, we examine
broadly the role of the AoA in the reform process to establish a fair and
market-oriented agricultural trade system, and specically the insertion
of the green box in this process. To do this, we must take into account
that the Doha Round mandate, by itself, will not fully permit accom-
plishment of the reform process, as established in the AoA Preamble. The
Doha Mandate states in the domestic support pillar that the negotiating
objective is substantial reductions in trade-distorting domestic support,
and not a phase out, as set for the export competition pillar. According
to this mandate, unless the members agree to increase the ambition of
towards a green box regime 635
the mandate in the present negotiation, the reform process will not be
accomplished fully in this round. However, this can still be a valuable
opportunity to move forward signicantly.
To discuss green box reform realistically, however, we have to take into
account additional guidance accorded in the negotiations so far. In the
2004 July package, in paragraph 16 of Annex A, the following was agreed:
Green box criteria will be reviewed and claried in order to ensure that
green box measures have no, or at most minimal, trade-distorting effects
or effects onproduction. Sucha reviewandclaricationwill needto ensure
that the basic concepts, principles andeffectiveness of the greenbox remain
and take due account of non-trade concerns. The improved obligations
for monitoring and surveillance of all new disciplines foreshadowed in
Paragraph 48 below will be particularly important with respect to the
green box.
According to the Hong Kong Ministerial Declaration, in paragraph 5,
members reafrmed that: Green Box criteria will be reviewed in line with
Paragraph 16 of the Framework, inter alia, to ensure that programmes of
developing country members that cause not more than minimal trade-
distortion are effectively covered. It must be noted that this paragraph
emphasizes the importance to be given to programmes that favour devel-
oping countries. This emphasis is important because in the Uruguay
Round, as was the case in other areas, the green box negotiation was
dominated by the interests of developed countries. As a consequence, the
negotiated policy-specic list generally reected the interests and policies
currently implemented by those countries.
An expected outcome that emerges from the objective of the reform
process that is, to establish a fair and market-oriented agricultural trad-
ing system (a consequence that could be taken as a working hypothesis)
is that at the endof this process, agriculture will be fully integratedinto the
WTOdisciplines, with all forms of distorting measure banned. The amber
and blue boxes will have to be phased out, and green box support will
remain as the only accepted category. This underscores the importance
of the green box review, as this category must be sufcient to accom-
modate all non-distorting policies in conformity with the principles of
paragraph 1.
Another consequence that follows the expected phasing out of dis-
torting measures is the AoA elimination and the insertion of remaining
disciplines in the general WTO Agreement Framework. The main objec-
tive, since the inclusion of agriculture in the WTO negotiations agenda,
636 agricultural subsidies in the wto green box
was the elimination of the agricultural exception in the multilateral
trade system. When the waivers that were legalized in the Uruguay Round
are eventually eliminated, there will be no reason to maintain a separate
agreement to discipline agriculture.
For instance, there is a compromise inthe Doha Declaration, conrmed
in the Hong Kong Declaration, about the elimination of export subsidies.
Once those countries that bound these subsidies in their individual WTO
schedules of commitments have phased out these measures, the disci-
plines applied to this pillar can be covered by Part II of the Agreement
on Subsidies and Countervailing Measures (ASCM). The general WTO
framework can also absorb, with appropriate language adjustments, the
agricultural market access chapter. In the case of domestic support, when
the distorting measures in the amber and blue boxes that are presently
allowed are eliminated, the remaining domestic support permitted can
be inserted into the ASCM: this would consist of the green box measures,
paragraph 6.2 (Special and Differential Treatment) and a de minimis
clause. This step would eliminate the former conict between the ASCM
and the AoA a conict that the extinguished peace clause tried to solve
in the past.
Green box negotiating objectives
Taking as a principle that a reviewed and improved green box classied
as non-actionable subsidies in Part IV of the ASCM will be the central
element of the agricultural WTO disciplines, the review must be con-
ducted in such a way that ensures it can appropriately accomplish this
task. The description, criteria and conditions must be clear enough to per-
mit improved monitoring and surveillance and, if necessary, to facilitate
a low-cost recourse to the dispute-settlement body.
As mentioned above, the present guidance to green box negotiation
can be summarized as follows: to preserve the green box basic concepts
and principles that is, not to amend paragraph 1; to review and clarify
the existing programmes and new programmes to be included, in order
to ensure compatibility with this paragraph; to ensure that programmes
of interest to developing countries are covered; and to take due account
of non-trade concerns. No less important is the agreement on improved
obligations for effective monitoring and surveillance. This is essential,
considering the present and expected tendency observed in developed
countries to shift their policies from amber and blue box support to the
green box category.
towards a green box regime 637
To accomplish this task, we must understand the logic by which the
green box was structured. The core of the box is paragraph 1, which
species the basis for exemption from reduction commitments that is,
when the support measure shall meet the fundamental requirement that
they have no, or at most minimal, trade-distorting effects or effects on
production. However, the expression no, or at most minimal, although
this can currently be accepted by any member, is too subjective to be
interpreted clearly in particular cases. To explain the expression in more
concrete terms, two basic criteria are specied in paragraph 1: (a) the
support in question shall be provided through a publicly funded govern-
ment programme (including government revenue forgone) not involving
transfers from consumers; and (b) the support in question shall not have
the effect of providing price support to producers. Although these criteria
give general elements for interpreting the fundamental requirement, it
is not enough to assess compatibility in each policy-specic case. So, at
the end of this paragraph, it is indicated that policy-specic cases must
comply additionally with the criteria and conditions in the following
paragraphs.
In the next 12 paragraphs, policy-specic cases are described, with
respective criteria and conditions, which presumably ensure that the
measures comply with paragraph 1. As the Doha Round main objec-
tive is development, the question we pose is this: Do these policy-specic
lists preclude the possibility of developing countries implementing any
measure not presently included in the green box, or is this merely an
illustrative list? Can a member notify a measure not explicitly included in
the present Annex 2 as green box, arguing that although it is not listed,
and so does not have specic criteria and conditions, it conforms with
paragraph 1? The answer in both cases is yes. In the case of general ser-
vices, this possibility is explicitly accepted in the introductory paragraph,
which states: Such programmes, which include but are not restricted to
the following list, shall meet the general criteria in Paragraph 1 above and
policy-specic conditions where set out below.
Similarly, in the case of direct payments, the second sentence of para-
graph 5 (which is a general introduction that covers the direct payments
described insubsequent paragraphs) admits this possibility. This sentence
states: Where exemption from reduction is claimed for any existing or
new type of direct payment other than those specied in Paragraphs 6
through 13, it shall conform to criteria (b) through (e) in paragraph 6,
in addition to the general criteria set out in paragraph 1. In fact, the
only obligation when introducing or modifying a new domestic support
638 agricultural subsidies in the wto green box
measure is to notify the Committee on Agriculture that the measure has
been implemented, as stated in Article 18.3: any new domestic support
measure or modication of an existing measure, for which exemption
from reduction is claimed shall be notied promptly. This notication
shall contain details of the new or modied measure and its conformity
with the agreed criteria as set out, either in Article 6 or Annex 2.
Therefore, it is clear that the AoA does not prevent developing coun-
tries from notifying and implementing any green-box-like measure that
they consider necessary to implement a development policy, even if that
measure is not currently listed in Annex 2. In this sense, the review and
clarication process, from the point of view of developing countries,
would be useful to propose adjustments in the existing policy-specic
criteria and conditions, and introduce some programmes and measures
that reect their needs.
To full the mandate for review and clarication, bearing in mind
the previous comments and the increased importance of the green box
in WTO future disciplines, the strategy to be adopted must focus on:
reviewing the present policy-specic criteria and conditions, based on
the experience during the implementation period, to identify possible
circumventions that currently permit countries to use some subsidies
that, in fact, have trade-distorting effects; identifying and agreeing on
additional policy-specic cases that cover developing countries interests,
since they are in conformity with paragraph 1 criteria; and improving
notication requirements, especially on some direct payments, in order
to facilitate monitoring and surveillance.
Comments on the present green box
Beginning with paragraph 2, which describes general services, the list
covers a number of public services that canimprove the systemic efciency
of agricultural productionina non-distorting way: research, information,
transfer of technology, sanitary services, training services and infrastruc-
ture services. Such measures reduce long-term producer costs, mostly
beneting efcient producers and crops.
General services can be considered and treated as investment expen-
ditures. These measures improve the competitiveness of the productive
sector as a whole. The benets to producers continue far beyond the
year in which the expenditure is made. This kind of measure is neutral
from the point of view of the market, as benets are reaped by the more
efcient production. The effects of general services are usually to reduce
towards a green box regime 639
production costs and to improve the efciency of the allocation of scarce
resources, beneting producers without punishing consumers. As gen-
eral services are characterized as public goods, they are supplied more
efciently by government, unlike other goods, such as price and credit
which can be supplied adequately by private market agents. General ser-
vices measures are more efcient than direct payments and price support
in assisting agricultural producers in developing countries. As the benets
of direct payments and price support are limited to the moment of the
expenditure, they must be renewed every year in order to maintain the
effectiveness of the measure benets.
As mentioned above, this list is not restrictive, and so developing coun-
tries can notify and implement any additional public service needed to
reach their development objectives. However, if members agree about
some additional programmes, for instance land reform programmes,
then it would be desirable to make this explicit in the green box, using
clearly dened criteria.
General services by itself can be the core of a sustainable agricultural
development policy. Even recognizing the importance that programmes
listed in paragraphs 3 to 13 can have in a development policy, they are
complementary or temporary andseek toreachsome specic andtargeted
objectives.
However, there are no doubts about the importance, to developing
countries, of the two programmes, described in paragraphs 3 and 4,
Public stockholding for food security purposes and Domestic food
aid. For these programmes, there are some amendments proposed by
developing countries in order to revise footnotes 5 and 6. In the present
disciplines, the main objective of both programmes is oriented primarily
to benet not producers, but consumers in paragraph 3 by stabilizing
the supply, volume and prices of agricultural products, and inparagraph 4
by providing domestic food aid to sections of the population in need.
In the case of public stockholding, the intervention measures bene-
t agricultural producers when the stock is formed, but cause negative
effects when the product returns to the market. Even when the stock is
maintained, it represents a negative effect, implying permanent risks to
producers and market operators, particularly when the government does
not have clear rules to release the stock. In the case of domestic food aid,
the programme, if designed to target effectively the population in need,
can increase the consumption in under-nourished populations, as is the
case in developing countries, with positive net effects in the demand for
agricultural products. If there is no discrimination between domestic and
640 agricultural subsidies in the wto green box
imported products in the acquisitions for these programmes, then the
programme can clearly be considered a non-distorting measure.
As the objective is to favour consumers, the footnotes refer to possible
distorting support effects of these programmes. If the acquisition and
release are made at administered prices a possibility accepted by these
footnotes then the difference between the acquisition price and the
external reference price must be accounted for in the AMS. In general
terms, the proposals made by developing countries amend the footnotes,
so that the price support to producers, when it exists, should not be
accounted for in the AMS.
As the basic criteria (b) in paragraph 1 establish that the support in
questionshall not have the effect of providing price support to producers,
this proposal, if accepted, can set a precedent that can degrade the green
box principles. This proposal could be considered more adequately if
the support provided in these programmes is accounted for in AoA para-
graph 6.2, the so-called development box. Some adjustments in this
paragraph, with some specic criteria and conditions in order to limit
their distorting effects, could accommodate these proposals better. The
objective of paragraph 6.2 is to consider measures that, even having dis-
torting effects but being an integral part of the development programmes,
shall not be required to be included in a members calculation of its cur-
rent total AMS. Therefore, these two programmes should be kept in
accordance with the strict principles of paragraph 1, changing only the
footnote to notify the price support in paragraph 6.2, instead of in the
AMS, and so be excluded from their reduction commitments.
Before moving on to the other policy-specic cases included in the
green box, in paragraphs 5 to 13, which refer to direct payments to
producers, it must be stressed again that to promote any sustainable
development objectives, in order to deal with food security purposes
and domestic food aid, the programmes included in paragraphs 2, 3
and 4 of Annex 2, the exemptions of paragraph 6.2 (S&D programmes)
and the de minimis clause for developing countries (paragraph 6.4(b))
give policy-makers a wide range of policy space to promote those goals.
Paragraphs 5 to 13 refer to direct payments that are intended to respond
to specic objectives, most of which, although important for the country,
are not necessarily linked to development objectives.
In this context, however, it must be considered that due to some char-
acteristics of developing countries, the nature of the short-term impact
of the trade liberalization differs from the impact on developed coun-
tries. Therefore, some measures could be needed to absorb the effects of
towards a green box regime 641
trade liberalization in these countries. Even if the results of the liberal-
ization process are eventually positive, the costs of the transition process
can be high. Some of the characteristics that prevail in developing coun-
tries emphasize the limits of their adjustment options. Given the large
size of the rural population, the lack of alternatives to less competitive
producers in other economic sectors could be mentioned. Likewise, no
social safety net programmes are available, as in developed countries, to
absorb the impact of the agricultural adjustment. Therefore, paragraphs
9, 10 and 11, which set out criteria and conditions for structural adjust-
ment programmes, must be scrutinized in order to conrm that they
are adequate for developing countries needs, and allow these countries
to accommodate their adjustment processes.
Given the characteristics of these policies, principally the direct pay-
ments for decoupled income support, special attention must be paid to
reviewing these programmes. The tendency of the domestic support in
developed countries is to shift the present high volume of money from
the amber and blue boxes to the green box. This is, in principle, a positive
move. As mentioned above, the reform objective is, at the end of this pro-
cess, to eliminate distorting policies. What must be ensured is that these
policy-specic measures are, and continue to be, in conformity with the
agreed green box criteria. For this, some questions must be discussed in
the light of the AoA implementation experience and based on economic
theory.
In general terms, the present green box can be considered a good
starting point for the review and clarication process. It was tested in
the upland cotton case, where it proved to be an adequate instrument to
challenge alleged green box measures notied as such. However, taking
into account the increasing volume of money expected to be spent in the
green box, some effects must be considered.
Considering the revision of policy-specic criteria, there is an increas-
ing consensus that the concept of a xed base period could not guarantee a
decoupled support if, as in the case of US legislation, changes in this xed
base period will be permitted. In the panel, for instance, Brazil claimed
that the DP
1
payments and provisions of the FSRI Act of 2002 and imple-
menting regulations that provide for the DP programme are inconsistent
with Paragraphs 6(a) and (b) of Annex 2, because they permitted updat-
ing base acres from the PFC programme. Brazil argued that successive
decoupled income support programmes with the same structure, design
1 Direct payment.
642 agricultural subsidies in the wto green box
and eligibility criteria must have a xed and unchanging base period, to
be consistent with Paragraph 6(a). The coupling occurs, according to
Brazils arguments, because the updating of base periods captures addi-
tional payment acreage for a particular crop and links increased recent
volumes of production with the amount of current payments which is
inconsistent with Paragraph 6(b). To conclude, Brazil argued that the
object and purpose of Paragraph 6 is to ensure that members do not
permit payments to increase over time in a manner linked to increases in
production over time.
Unfortunately for this discussion, as the panel had already found that
DP payments failed to conform to the provisions of paragraph 6(b) of
Annex 2, it considered that it was unnecessary for the purposes of the
dispute to make ndings on their conformity with paragraph 6(a), due
to the updating. Therefore, in the negotiations of paragraph 6, and any
other new green box measure that refers to a xed base period, it must be
ensured that, in the cases that they would be permitted, this possibility
does not alter the productiondecision. Changing the termxed toxed
and unchanging, as suggested by Brazil in the panel and as included
in some proposals already presented, could be a satisfactory solution.
Additionally, language must be found that accommodates the case of
those countries, in particular developing countries, which presently do
not apply these kinds of measures, but want to preserve the possibility
of gradually implementing them in the future. A rst notication of
an experimental programme cannot freeze its future expansion of the
programme in new areas. An improved notication mechanism could
help to ensure that the recourse to measures that demand xed base
periods complies effectively with the decoupled principle.
Another question more theoretical and so more difcult to deal
with is the effect of direct payments, even if formally decoupled in
conformity to criteria (b) to (e) in paragraph 6. The effects of some other
requirements or conditions for receiving benets must be monitored in
the implementationprocess, eventhough the effects may be less clear for
instance, the cross-compliance required to receive single farm payments
under the reformed Common Agricultural Policy (CAP). This payment
will be linked to the respect of environmental, food safety, animal and
plant health, and animal welfare standards, as well as the requirement
to keep all farmland in good agricultural and environmental condition.
Although these requirements are decoupled according to criteria set out
in paragraph 6, the possible effects on production due to these or other
requirements and restrictions must be considered case by case.
towards a green box regime 643
Even when completely decoupled, a direct payment can result in some
economic effects that can affect production decisions. The dialectic prin-
ciple that the quantity alters the quality can be applied in this case. The
effect in reducing the xed cost, the nancial cost, the wealth effect and
the income effect, although difcult to measure and foresee, affects in
some way the production decision. As paragraph 1 accepts the possibility
that the measure has at most minimal . . . effects on production, only
ex post the magnitude of this effect can be assessed. The magnitude is
certainly linked to the volume of the subsidy available to producers. In
this sense, some proposals are intended to restrict the volume of direct
payments to a percentage of the production value. However, it is dif-
cult to establish this percentage empirically, as the payment is not linked
to specic production. Additionally, it is difcult to assess the volume
of subsidies that begins to affect signicantly (more than minimally)
the producer behaviour for instance, the indifference slope between
leisure and work, which is inuenced by psychological and social factors.
These effects are also inuenced by many other economic factors that
make it difcult to translate in policy-specic criteria.
In the direct payment cases mentioned above, due to the possibility
of updating the base period, possible coupling of some measures due
to requirements and restrictions in their implementation, the impact of
these payments on nancial and xed cost reduction, wealth effects and
income effects, the establishment of clear policy-specic criteria is very
difcult, if not impossible, because of the different ways in which they can
affect production decisions. The impact of these kinds of measures in a
real-world situation can be known only by observing their ex post effects.
In this sense, improved monitoring and surveillance can play essential
roles.
In recognizing transparency problems in the AoA implementation, the
July 2004 Framework states in paragraph 48: Article 18 of the Agreement
on Agriculture will be amended with a view to enhancing monitoring so
as to effectively ensure full transparency, including through timely and
complete notications with respect to the commitments in market access,
domestic support andexport competition. As part of the implementation
of improved monitoring and surveillance, specic notications when a
country noties direct payment measures wouldbe foreseen. The notica-
tionof these measures wouldcontaindata about the productionevolution
in main crops and the respective market and production shares. When
there are signicant changes in these variables, additional information
would be provided that justies atypical evolutions for instance, prices
644 agricultural subsidies in the wto green box
and supply and demand information for the crop. Although distorting
measures are not phased out completely, and considering the cumulative
effects of different categories of domestic support (amber box and blue
box), it would be required to inform members of the total sum of support
provided to the product where an atypical behaviour is detected. This is
justied because although a green box measure can be neutral in itself,
it can nonetheless replicate the distorting effects of the amber and blue
boxes due to the cumulative effects these payments can have when made
simultaneously.
The WTO as a locus to support sustainable development goals and
the role of litigation
Finally, the role of the WTO as a locus to support development must be
considered. We examine alternative strategies to be adopted by developing
countries in building rules and disciplines that favour this objective. A
common understanding that is generally shared by members is that the
existence of clear rules and disciplines, an efcient dispute-settlement
system and an enforcement mechanism to make them respected is of
interest to all, in particular weaker WTO members. If the law of the
jungle rules international trade, then the interests of wealthy developed
countries prevail and the objective of a fair agricultural trade system is
not reached.
Historically, the sources of rules and disciplines in the WTO system are
negotiation and litigation. However, all efforts, in the interest of develop-
ing countries, would be to transform the WTO as much as possible into a
negotiation instead of a litigation locus. Negotiations are more transpar-
ent and facilitate the participation of developing countries in consensus
construction, the basis of the WTO decision process, inuencing the
results according to their interests. Litigation has two important roles
in the WTO. First, it guarantees to the members their negotiated rights;
second, it helps to interpret the provision of agreements. The political
negotiating process to reach results when clear agreements became dif-
cult accepts the intentional ambiguity of the language, so that it can
be interpreted by the members in different ways. Although this language
makes agreements possible, the ambiguity results in so-called grey areas.
Therefore, litigationcanalsohave the useful duty of interpreting the nego-
tiators meanings and intentions.
Although the panel results do not establish formal jurisprudence, con-
sidering that the ndings are applied only to the case under consideration,
towards a green box regime 645
they help to construct understandings that are eventually incorporated
into WTOrules and disciplines. In this sense, fewer ambiguities and more
negotiating efforts result in a fairer, more transparent system. Having to
resort to a group of experts in a panel to ensure a presumable right in the
multilateral system is a stake that is too risky to be the principal way to
construct rules and disciplines.
This conclusion does not mean that the litigation route is the wrong
way to ensure developing countries interests. On the contrary, the rein-
forcement of the WTOdispute-settlement systemis considered one of the
most important results (or outcomes) of the Uruguay Round. Litigation
must be an integral part of the broader strategy of developing countries
to reform the agricultural system. Bearing in mind the examples of the
market impact of the sugar case and (to a lesser extent due to the remain-
ing enforcement weaknesses) the upland cotton case, the importance of
litigation is not negligible. For developing countries in general, the cost of
this route to building fair rules and disciplines can be too high; rather, it
is a way to ensure that already agreed rules and disciplines are respected.
The strategy to be adopted in this negotiation is, in general terms,
to reduce the cost in order to have recourse to litigation. As mentioned
above, improved monitoring and surveillance by means of additional
and timely notication help to detect possible sources of distortions and
reduce costs of litigation processes. It is essential to re-establish the Article
6.1 provision, which states that serious prejudice shall be deemed to exist
when the total ad valorem subsidisation of a product exceeds 5 per cent.
This provision is currently not in force. Article 31 established duration of
only ve years, with a reviewof its operation before the end of this period,
but this did not happen. This provision is very important to developing
countries, as it ensures that the burden of proof reverts to the subsidizing
country. This can also reduce the costs incurred by the litigating member,
working in favour of developing countries interests.
Conclusions
The importance of the green box is that it is the core of the permanent
domestic support disciplines in agriculture. The amber box, for instance,
is dened by exclusion. Annexes 3 and 4 are not denitions of support,
but calculations methodology. Considering also that the objective of the
reform process is to phase out distorting measures, the green box will
establish the agricultural parameters of the ASCM. Therefore, the green
box must be in the centre of the negotiations of the domestic support
646 agricultural subsidies in the wto green box
disciplines and, as is expected, the only support accepted at the end of
the reform process to offer enough space for manoeuvre to governments
implementing public policies for their agricultural sectors.
The essence of the green box is paragraph 1, which sets the parameters
to be followed inthe illustrative list and to any measure notied as green.
There is no restriction on notifying any measure that is deemed necessary
to implement a development policy, so long as those parameters are
respected. In this sense, the importance of general services to developing
countries must be stressed.
The main and costless source of gains to be reaped by developing coun-
tries on domestic support results from the reduction of distortions that
originated in developed countries. Most important, then, in the review
and clarication process is ensuring the non-distorting characteristic of
the measures included in the green box. The emphasis needed in this
process is reinforced by the welcome tendency, already observed in devel-
oped countries, of greening their policies. The explicit inclusion of
programmes that cover the interests of developing countries is important
in order to correct the present imbalance observed in the list negotiated
in the Uruguay Round.
In reviewing the present green box, it must be ensured that policy-
specic criteria make the included measures effectively decoupled. In this
sense, as well as criteria (b) to (e) in paragraph 6, the possible impact from
other forms of requirement and restrictions on receiving these payments
must be considered. The economic effects of direct payments that cannot
be captured by the design of policy-specic criteria must be monitored
ex post by extra notications in the context of an improved monitoring
and surveillance mechanism whenever these measures are implemented.
Litigation, although not considered a preferred way to build a multilat-
eral systemof rules and disciplines, must be an integral part of developing
countries strategies inthe quest for a less distorted, more sustainable trade
environment. Although the main objective of litigation is to ensure rights,
litigation can also be important in helping the reform process by enforc-
ing rules and disciplines already agreed, by clarifying agreements and in
building common understandings. Developing countries strategies must
work in a cost-reducing direction, with a view to facilitating recourse to
this mechanism.
APPENDIX: TEXT OF ANNEX 2 OF THE WTO
AGREEMENT ON AGRICULTURE
(THE GREEN BOX)
Domestic support: the basis for exemption
from the reduction commitments
1. Domestic support measures for which exemption fromthe reduction
commitments is claimedshall meet the fundamental requirement that
they have no, or at most minimal, trade-distorting effects or effects on
production. Accordingly, all measures for whichexemptionis claimed
shall conform to the following basic criteria:
(a) the support in question shall be provided through a publicly-
funded government programme (including government revenue
foregone) not involving transfers from consumers; and,
(b) the support in question shall not have the effect of providing
price support to producers;
plus policy-specic criteria and conditions as set out below.
Government Service Programmes
2. General services
Policies inthis category involve expenditures (or revenue foregone) in
relation to programmes which provide services or benets to agricul-
ture or the rural community. They shall not involve direct payments
to producers or processors. Such programmes, which include but
are not restricted to the following list, shall meet the general criteria
in paragraph 1 above and policy-specic conditions where set out
below:
(a) research, including general research, research in connection with
environmental programmes, and research programmes relating
to particular products;
(b) pest and disease control, including general and product-specic
pest and disease control measures, such as early-warning systems,
quarantine and eradication;
(c) training services, including both general and specialist training
facilities;
647
648 appendix
(d) extensionandadvisory services, including the provisionof means
to facilitate the transfer of information and the results of research
to producers and consumers;
(e) inspection services, including general inspection services and the
inspection of particular products for health, safety, grading or
standardization purposes;
(f) marketing and promotion services, including market informa-
tion, advice and promotion relating to particular products but
excluding expenditure for unspecied purposes that could be
used by sellers to reduce their selling price or confer a direct
economic benet to purchasers; and
(g) infrastructural services, including: electricity reticulation, roads
and other means of transport, market and port facilities, water
supply facilities, dams and drainage schemes, and infrastructural
works associated with environmental programmes. In all cases
the expenditure shall be directed to the provision or construction
of capital works only, and shall exclude the subsidized provision
of on-farm facilities other than for the reticulation of generally
available public utilities. It shall not include subsidies to inputs
or operating costs, or preferential user charges.
3. Public stockholding for food security purposes
5
Expenditures (or revenue foregone) in relation to the accumulation
and holding of stocks of products which form an integral part of a
food security programme identied in national legislation. This may
include government aid to private storage of products as part of such
a programme.
The volume and accumulation of such stocks shall correspond to
predetermined targets related solely to food security. The process
of stock accumulation and disposal shall be nancially transparent.
Food purchases by the government shall be made at current market
prices and sales from food security stocks shall be made at no less
5 For the purposes of paragraph 3 of this Annex, governmental stockholding programmes
for food security purposes in developing countries whose operation is transparent and
conducted in accordance with ofcially published objective criteria or guidelines shall
be considered to be in conformity with the provisions of this paragraph, including pro-
grammes under which stocks of foodstuffs for food security purposes are acquired and
released at administered prices, provided that the difference between the acquisition price
and the external reference price is accounted for in the AMS.
appendix 649
than the current domestic market price for the product and quality
in question.
4. Domestic food aid
6
Expenditures (or revenue foregone) in relation to the provision of
domestic food aid to sections of the population in need.
Eligibility to receive the food aid shall be subject to clearly-dened
criteria related to nutritional objectives. Such aid shall be in the form
of direct provision of food to those concerned or the provision of
means to allow eligible recipients to buy food either at market or at
subsidized prices. Food purchases by the government shall be made
at current market prices and the nancing and administration of the
aid shall be transparent.
5. Direct payments to producers
Support provided through direct payments (or revenue foregone,
including payments in kind) to producers for which exemption from
reduction commitments is claimed shall meet the basic criteria set
out in paragraph 1 above, plus specic criteria applying to individual
types of direct payment as set out in paragraphs 6 through 13 below.
Where exemption from reduction is claimed for any existing or new
type of direct payment other than those specied in paragraphs 6
through 13, it shall conform to criteria (b) through (e) in paragraph
6, in addition to the general criteria set out in paragraph 1.
6. Decoupled income support
(a) Eligibility for such payments shall be determined by clearly-
dened criteria such as income, status as a producer or
landowner, factor use or production level in a dened and xed
base period.
(b) The amount of such payments in any given year shall not be
related to, or based on, the type or volume of production (includ-
ing livestock units) undertaken by the producer in any year after
the base period.
(c) The amount of such payments in any given year shall not be
related to, or based on, the prices, domestic or international,
5&6 For the purposes of paragraphs 3 and 4 of this Annex, the provision of foodstuffs at
subsidized prices with the objective of meeting food requirements of urban and rural
poor in developing countries on a regular basis at reasonable prices shall be considered
to be in conformity with the provisions of this paragraph.
650 appendix
applying to any production undertaken in any year after the base
period.
(d) The amount of such payments in any given year shall not be
related to, or based on, the factors of production employed in
any year after the base period.
(e) No production shall be required in order to receive such pay-
ments.
7. Government nancial participation in income insurance and income
safety-net programmes
(a) Eligibility for such payments shall be determined by an income
loss, taking into account only income derived from agriculture,
which exceeds 30 per cent of average gross income or the equiva-
lent in net income terms (excluding any payments from the same
or similar schemes) in the preceding three-year period or a three-
year average based on the preceding ve-year period, excluding
the highest and the lowest entry. Any producer meeting this con-
dition shall be eligible to receive the payments.
(b) The amount of such payments shall compensate for less than
70 per cent of the producers income loss in the year the producer
becomes eligible to receive this assistance.
(c) The amount of any such payments shall relate solely to income;
it shall not relate to the type or volume of production (including
livestock units) undertaken by the producer; or to the prices,
domestic or international, applying to such production; or to the
factors of production employed.
(d) Where a producer receives in the same year payments under
this paragraph and under paragraph 8 (relief from natural
disasters), the total of such payments shall be less than 100 per
cent of the producers total loss.
8. Payments (made either directly or by way of government nan-
cial participation in crop insurance schemes) for relief from natural
disasters
(a) Eligibility for such payments shall arise only following a for-
mal recognition by government authorities that a natural or like
disaster (including disease outbreaks, pest infestations, nuclear
accidents, and war onthe territory of the Member concerned) has
occurred or is occurring; and shall be determined by a produc-
tion loss which exceeds 30 per cent of the average of production
appendix 651
in the preceding three-year period or a three-year average based
on the preceding ve-year period, excluding the highest and the
lowest entry.
(b) Payments made following a disaster shall be applied only in
respect of losses of income, livestock (including payments in
connection with the veterinary treatment of animals), land
or other production factors due to the natural disaster in
question.
(c) Payments shall compensate for not more than the total cost of
replacing such losses and shall not require or specify the type or
quantity of future production.
(d) Payments made during a disaster shall not exceed the level
required to prevent or alleviate further loss as dened in cri-
terion (b) above.
(e) Where a producer receives in the same year payments under this
paragraphandunder paragraph7 (income insurance andincome
safety-net programmes), the total of such payments shall be less
than 100 per cent of the producers total loss.
9. Structural adjustment assistance provided through producer retire-
ment programmes
(a) Eligibility for such payments shall be determined by reference
to clearly dened criteria in programmes designed to facil-
itate the retirement of persons engaged in marketable agri-
cultural production, or their movement to non-agricultural
activities.
(b) Payments shall be conditional upon the total and perma-
nent retirement of the recipients from marketable agricultural
production.
10. Structural adjustment assistance provided through resource retire-
ment programmes
(a) Eligibility for such payments shall be determined by reference
to clearly dened criteria in programmes designed to remove
land or other resources, including livestock, from marketable
agricultural production.
(b) Payments shall be conditional upon the retirement of land from
marketable agricultural productionfor a minimumof three years,
and in the case of livestock on its slaughter or denitive perma-
nent disposal.
652 appendix
(c) Payments shall not require or specify any alternative use for such
land or other resources which involves the production of mar-
ketable agricultural products.
(d) Payments shall not be related to either the type or quantity of
production or to the prices, domestic or international, apply-
ing to production undertaken using the land or other resources
remaining in production.
11. Structural adjustment assistance provided through investment aids
(a) Eligibility for such payments shall be determined by reference
to clearly-dened criteria in government programmes designed
to assist the nancial or physical restructuring of a producers
operations in response to objectively demonstrated structural
disadvantages. Eligibility for such programmes may also be based
on a clearly-dened government programme for the reprivatiza-
tion of agricultural land.
(b) The amount of such payments in any given year shall not be
related to, or based on, the type or volume of production (includ-
ing livestock units) undertaken by the producer in any year after
the base period other than as provided for under criterion (e)
below.
(c) The amount of such payments in any given year shall not be
related to, or based on, the prices, domestic or international,
applying to any production undertaken in any year after the base
period.
(d) The payments shall be given only for the period of time necessary
for the realization of the investment in respect of which they are
provided.
(e) The payments shall not mandate or in any way designate the
agricultural products to be produced by the recipients except to
require them not to produce a particular product.
(f) The payments shall be limited to the amount required to com-
pensate for the structural disadvantage.
12. Payments under environmental programmes
(a) Eligibility for such payments shall be determined as part of a
clearly-dened government environmental or conservation pro-
gramme and be dependent on the fullment of specic condi-
tions under the government programme, including conditions
related to production methods or inputs.
appendix 653
(b) The amount of payment shall be limited to the extra costs or
loss of income involved in complying with the government pro-
gramme.
13. Payments under regional assistance programmes
(a) Eligibility for such payments shall be limited to producers in
disadvantaged regions. Each such region must be a clearly des-
ignated contiguous geographical area with a denable economic
and administrative identity, considered as disadvantaged on the
basis of neutral and objective criteria clearly spelt out in law or
regulation and indicating that the regions difculties arise out
of more than temporary circumstances.
(b) The amount of such payments in any given year shall not be
related to, or based on, the type or volume of production (includ-
ing livestock units) undertaken by the producer in any year after
the base period other than to reduce that production.
(c) The amount of such payments in any given year shall not be
related to, or based on, the prices, domestic or international,
applying to any production undertaken in any year after the base
period.
(d) Payments shall be available only to producers in eligible regions,
but generally available to all producers within such regions.
(e) Where related to production factors, payments shall be made at
a degressive rate above a threshold level of the factor concerned.
(f) The payments shall be limited to the extra costs or loss of income
involvedinundertaking agricultural productioninthe prescribed
area.
INDEX
abandonment of land 291, 480, 482
accumulation of subsidies 458, 586, 644
economic analysis 24043
hypothetical example 350, 361
introduction 23940
negotiating a solution 25355
taxonomy 24347
United States 353, 586, 614
corn 24853
support levels in 24748
advocacy groups 591, 595, 596, 598,
600, 60809, 611, 612, 613
afforestation see forests
AFL-CIO 609
Africa 41214
Doha Round 41214
African Group see African Group
August 2007 draft modalities 422
proposed changes 42022
green box subsidies 42224
relevance of 41820
use of 41418
historical context 23, 25
see also individual countries
African, Caribbean and Pacic (ACP)
group 47, 600
African Group: Doha Round 40, 45, 46,
51, 53, 355, 356, 412, 413,
42022
disaster relief (para 8) 41, 66, 42021
environmental programmes
(para 12) 55, 67, 421, 422
EU-US proposal (August 2003) 47
general services (para 2) 41, 58, 421,
422
public stockholding: food security
(para 3) 59, 422
regional assistance programmes
(para 13) 41, 68, 421, 422
African Union 47
aggregate measure of support (AMS)
see amber box
Agreement on Agriculture 3233,
23940, 243, 258
Annex 2 see Annex 2
Article 1a: biofuels 54041
Article 6 13940
SDT see special and differential
treatment
Article 13 (peace clause) 44, 137,
140, 259, 260, 553, 636
Article 18 638
Article 20 38, 41
base periods see base periods
Committee on Agriculture 488, 574,
577, 578, 579, 580, 582, 638
notications 13738, 140, 16667,
18588
across all WTO countries 16266,
18084, 33138
China 163, 166, 184, 376, 378,
382, 400, 428
European Union 7678, 15155,
16366, 16771, 18088,
26266, 332, 335, 341, 427, 545
Japan 12732, 15962, 16366,
17688, 332, 335, 341, 404, 427,
54749
problems with/action required
490, 57374, 580, 643
United States 11215, 118,
15559, 16366, 17276,
18088, 24748, 30407, 332,
335, 341, 404, 427, 543
654
index 655
agrofuels 596, 59798
Alliance for Sensible Agricultural
Policies (ASAP) 609, 613
amber box 126, 141, 146, 185, 239, 243,
330
accumulation of subsidies 245
marginal impact 246
negotiating a solution 25355
United States: corn 24953
across all WTO countries 16266
Agreement on Agriculture
framework 13941
AMS calculation 18788, 345, 620,
626
biofuels 531, 54042, 54345, 547,
55356, 55761, 562
China 363, 410
Cotton case: product-specic
direct-income payments 324
de minimis see de minimis support
denition 26061
developing countries 55, 62, 333,
356, 358, 562
food security 5859, 37172, 388,
38990, 422
Doha Round 48, 60, 82, 11516, 343,
356, 358
accumulation of subsidies 53, 55,
62, 245, 356
developing countries 55, 5859,
62, 356, 388, 38990, 422, 562
European Union 82, 263, 54142
United States 11516, 118, 54142
environmental impact 460
European Union 71, 73, 83, 15155,
166, 184, 26263, 267, 268
bioenergy 547, 562
Doha Round 82, 263, 54142
France 274, 279
India 363
insurance subsidies 150, 184
irrigation 44142
Japan 12728, 132, 15962, 166, 549,
626, 627, 628
prohibited 361
reduction commitment 127, 141,
146
United States 101, 11214, 15559,
166, 176, 184, 247, 332, 543
2008 Farm Bill 60910, 613, 614,
615
accumulation of subsidies: corn
24953
bioenergy 512, 54042, 54345
Cotton case: PFC and direct
payments 324, 33031
Doha Round 11516, 118, 54142
income insurance 512
see also box shifting
American Farm Bureau Federation
(AFBF) 8889, 90
AMS (aggregate measure of support)
see amber box
animal welfare
Doha Round 37, 40, 81
European Union 81, 154, 476, 585
Annex 2 (green box) 139, 14750, 240,
243, 261, 42830
accumulation of subsidies 245
marginal impact 246
negotiating a solution 25355
United States: corn 249, 252
biofuels and green box criteria
55661
notications 13738, 140, 16667,
18588
across all WTO countries 16266,
18084, 33138
China 166, 382, 400, 428
developing countries 33138,
37578, 414
European Union 7678, 15155,
166, 16771, 18088, 26266,
332, 335, 341, 427, 545
Japan 12832, 15962, 166,
17688, 332, 335, 341, 404, 427,
54749
problems with/action required
57374, 580
United States 112, 118, 15559,
166, 17276, 18088, 24748,
30407, 332, 335, 341, 404, 427,
543
para 1 261, 556, 637
para 2 see general services
656 index
Annex 2 (green box) (cont.)
para 3 see public stockholding for
food security purposes
para 4 see domestic food aid
para 5 see direct payments
para 6 see decoupled income
support
para 7 see income insurance and
income safety-net programmes
para 8 see disaster relief payments
para 9 see producer retirement
programmes
para 10 see resource retirement
programmes
para 11 see investment aids
para 12 see environmental
programmes
para 13 see regional assistance
programmes
see also box shifting
arboriculture: European Union 282
see also forests
Argentina 30, 253, 333, 537, 593,
600
use of green box subsidies 335, 338,
381
per capita support 404
types of programme 339, 383,
408, 449
armed conict 108, 117, 608
Asia 21, 23
see also individual countries
Australia 247, 295, 338, 441,
549
biofuels 537
forests 455
per capita support 404
Austria 270, 284, 287, 483
agri-environment 77, 477,
589
biofuels 536
less favoured areas 481
bananas: European Union 73
barley
Japan 132, 133, 624
United States 508
base periods 64142
Agreement on Agriculture 306
Doha Round 40, 41, 42, 45, 49, 51,
53, 56, 6264, 67, 68, 25455,
357, 358, 410, 458, 459, 64142
United States 255, 306, 321, 323,
357, 64142
beef
European Union 71, 83, 154, 262,
267, 475, 600, 619
Austria 287
Belgium 287
Denmark 287
France 274, 276, 288, 289, 291,
292, 293, 294
Belgium 270, 284, 287, 438, 477
biodiesel 533, 540, 541
Argentina 537
European Union 534, 535, 539, 562
biodiversity 469
agriculture 430
environmental programmes
(para 12) 459
European Union 595
afforestation 48182
agri-environment 47779
greening of CAP 47172
less favoured areas 446, 480, 486,
488
Life+474
public payments for land
management 47273
rural development axes 1 and 3
48384
HNV farming see high natural value
(HNV) farming
investment aids (para 11) 449
biofuels 88, 524, 53032, 608, 616
agrofuels 596, 59798
biodiesel 533, 540, 541
Argentina 537
European Union 534, 535, 539,
562
green box criteria and subsidies
55661
possible changes to criteria
56164
green box spending 543
compatibility with rules 55356
index 657
European Union 54547
other countries 54753
United States 54345
policies 53233
Brazil 536
European Union 53436
other countries 53637
United States 107, 251, 25253,
501, 53334
way forward 56467
WTO and subsidies 53741
Doha Round 538, 54142, 56164
see also ethanol
biomass/feedstock 512, 532, 533, 534,
535, 53637, 545
cellulosic ethanol 566
green box criteria 55761
Blair House Agreement 32, 620
blue box 127, 140, 14647, 150, 185,
239, 243, 330
accumulation of subsidies 245
negotiating a solution 25355
across all WTO countries 16266
denition 260
developing countries 333
Doha Round 48, 53, 60, 82, 343, 356,
358
United States 115, 116
European Union 71, 72, 73, 77, 147,
15155, 166, 170, 262, 264, 267,
268, 270, 333, 474, 545, 619,
620
France 27476, 279
Japan 128, 160, 162, 166
Norway 333
prohibited 361
Switzerland 333
United States 101, 156, 158, 166,
176, 333, 543, 620
Doha Round 115, 116
see also box shifting
Botswana 414
box shifting 18588, 331, 362, 36466,
599
accumulation of subsidies
cap on green box 253
marginal impact 246
across all WTO countries 16266
African Group/countries 356, 412,
413
environmental impact 462
European Union 74, 15155,
16366, 170, 270, 279, 34446,
361, 583, 596
France 276, 279
G-20 355
Japan 15962, 16366
monitoring and surveillance 57273,
636
United States 15559, 16366, 176,
344, 34647, 361, 373, 583
reverse box shifting 60416
Brazil 247, 253, 543, 553, 593, 600, 641
biofuels 536, 566
Doha Round 363, 542, 599, 600
food security and domestic food aid
339
forests 455
notications 332, 333
use of green box subsidies 335, 338,
381, 382, 428, 549
per capita support 404
types of programme 385, 386,
408, 439, 444
see also Cotton case
Bulgaria 477, 593
butter: European Union 155
buyouts 323
United States 9596, 116, 175, 508,
51112
hypothetical example 10103
Cairns Group 600
Doha Round 39, 42, 44, 45, 47, 48,
53, 358, 362, 561
base periods 41, 56, 63
decoupled income support
(para 6) 62, 63
direct payments (para 5) 60
disaster relief (para 8) 65
environmental programmes
(para 12) 67
income insurance and income
safety-net programmes (para 7)
6465
658 index
Cairns Group (cont.)
investments aids (para 11) 67
monitoring and surveillance
57678, 579
green box spending by 381, 383
notications 376
Uruguay Round 2829, 30
Canada 247, 253, 543, 553
Dairy case 555
Doha Round 4849, 53, 355, 357,
362
base periods 41, 49, 63, 459
decoupled income support
(para 6) 62, 63, 459
direct payments (para 5) 49, 55,
60, 61
disaster relief (para 8) 49, 6566
environmental programmes
(para 12) 49, 67, 458
general services (para 2) 58
income insurance and income
safety-net programmes (para 7)
6465
investments aids (para 11) 49, 67
producer and resource retirement
programmes (paras 9 and 10)
49, 66, 458
environmental impact 437, 438
per capita support 404
carbon
neutral fuel 532
offsets 456, 512
storage 52123
afforestation 482
perennial and annual crops 509
rainforests 48788
Caribbean countries 537
cash out reform strategy, US 100, 103
Central and Eastern Europe 72, 480
see also individual countries
cereals
European Union 71, 83, 152, 154,
262, 267, 282, 296, 475, 590,
619
France 274
United States 158
see also barley; maize; oats; rice;
sorghum; wheat
chickpeas 93
Chile 338, 383
China 21, 111, 399400, 411, 616
base periods 410
biofuels 536
Doha Round 45, 47, 64, 68, 363, 409
Japan 630
notications 163, 166, 184, 376, 378
objectives 40607
use of green box subsidies 335, 337,
380, 381, 382, 386, 400, 428
environmental impact 462
inefcient 40206
opportunities and challenges
40709
types of programme 339, 385,
386, 40002, 40406, 408, 440,
444, 451
Chinese Taipei 46, 64
climate change 351, 418, 437, 438, 455,
473
afforestation 48182
mitigation of and adaptation to
59698, 601
rainforests 48788
Colombia 332, 333, 339, 537
green box subsidies 335, 383
corn
accumulation of subsidies 245,
24853
biofuel subsidies 531, 533, 541,
56467
Japan 536
United States 90, 109, 307, 310, 322,
508, 523, 524, 608, 614
accumulation of subsidies 24853
ethanol 108, 512, 516, 523, 534
Costa Rica 487
cotton
China 400
European Union 73, 263
United States 90, 93, 94, 104, 107,
307, 310, 508, 513, 608, 614
Cotton case 7879, 83, 112, 140, 149,
155, 158, 175, 187, 248, 252,
317, 324, 33031, 343, 360, 362,
508, 543, 553, 55455, 575, 608,
613, 641
index 659
credit, access to 419
Croatia 589
cross-compliance, environmental 154,
45253, 468, 471, 47677,
50809, 525, 594, 595, 642
cross-subsidisation 31821, 32224
Cuba 383, 385, 386, 412
cumulative effects see accumulation of
subsidies
cutout reform strategy, US 100
dairy
European Union 71, 73, 155, 263,
267, 620
France 274, 279, 288, 289, 291,
292, 293, 294, 296
Japan 131, 179, 621, 624
United States 90, 9596, 9798, 105,
107, 115, 175, 319
de minimis support 48, 127, 13940,
146, 239, 330
accumulation of subsidies
negotiating a solution 25355
United States: corn 249, 251,
252
across all WTO countries 163,
166
biofuels 542
Brazil 333
China 410
denition 261
developing countries 636, 640
draft modalities (August 2007) 422
European Union 152, 166, 179, 184,
54142
India 363
insurance subsidies 150, 184
Japan 160, 166, 179
United States 11214, 156, 158, 159,
166, 179, 184
accumulation of subsidies: corn
249, 251, 252
countercyclical payments 247, 251
Doha Round 11516, 54142
de Zeeuw, Art 30
decoupled income support (para 6)
14849, 37273
Doha Round 40, 45, 47, 49, 51, 55,
6164, 82, 357, 358, 388,
45859, 491
environmental impact 445, 47577,
491, 50712, 519
spending by
across all WTO countries 183
China 406
developing countries 339, 408
European Union 170, 171, 183,
341, 445
European Union: France 276
Japan 179
United States 158, 172, 17475,
183, 306, 307, 310, 31921,
32224, 341
trade distortion see decoupled
programmes
decoupled programmes
economics of decoupling 14146,
24143, 64243
trade distortion 33839, 34243,
36465, 424, 596, 599
decoupled income support in EU
and US 34447, 58687
G-20 35556
hypothetical example 34750
United States 34447, 58687
2008 Farm Bill: deviating from
decoupling 60416
deforestation see forests
Denmark 270, 273, 28487, 438
pesticides 453
desertication 489
developed countries 2, 571
Doha Round 40, 47, 49, 61, 255,
35658
equity 489
evolution of green box subsidies:
developing and 33138,
34142
agri-environmental programmes
35052
decoupled income support in EU
and US 34447
decoupled programmes 34243
decoupled subsidies and
distortion effects 34750
660 index
developed countries (cont.)
domestic food aid 353
types of programme 33841
historical context 1923, 26
Uruguay Round 635
see also European Union; individual
countries
developing countries 571, 63334
biofuels 530
Coalition for Rainforest Nations
487
Doha Round 37, 39, 40, 51, 35358
African Group see African Group
decoupled income support
(para 6) 45, 47, 49, 51, 63, 388,
410
direct payments (para 5) 45, 47,
51
disaster relief (para 8) 41, 46, 47,
49, 50, 66
Doha Declaration 38
domestic food aid (para 4) 40, 41,
50, 51, 53, 5960
environmental programmes
(para 12) 47, 55, 67
EUUS proposal (August 2003)
4748
G-20 see G-20
general services (para 2) 40, 41,
50, 51, 5658, 389
Hong Kong Declaration 38
income insurance and income
safety-net programmes (para 7)
45, 46, 47, 50, 55, 65, 388, 390
investment aids (para 11) 47, 410
like-minded group 4244, 45, 46,
61, 62, 64, 66, 68
peace clause (Art 13) 44
producer retirement programmes
(para 9) 45, 47
public stockholding: food security
(para 3) 40, 41, 50, 51, 53,
5859, 388, 38990
regional assistance programmes
(para 13) 41, 46, 47, 50, 68,
390, 410
resource retirement programmes
(para 10) 45, 47
special and differential treatment
(SDT) 61, 363, 38889, 42021,
422, 56263, 572
environmental impact 518
increase in agricultural
production 43435
equity 489, 58788
G-20 see G-20
historical context 2023, 2526, 27
labour rights 597
reform of green box, possibilities for
36264, 38790
directions for reform 36162
not in Doha Round 35961
SDT see special and differential
treatment
use of green box subsidies 329,
34142, 36970, 390
agri-environmental programmes
35052
conclusions 36467
decoupled income support in EU
and US 34447
decoupled programmes 34243
decoupled subsidies and
distortion effects 34750
domestic food aid 353
legal arguments and
interpretations 32931
limitations 37075, 40809
notications 33138, 37578, 414
reform 35964, 38790
relative signicance of green box
spending 378
revision of Doha Round proposals
35358
trends 38183
types of programme 33841,
38387
see also Africa; individual countries;
sustainable development
diminishing marginal impact of
support 246
direct payments (para 5) 148, 637
Doha Round 45, 47, 49, 51, 55,
6064, 82, 357, 413, 490
environmental impact 44451, 490
spending by
index 661
China 406
European Union 171
United States 176
trade distortion 338
see also decoupled income support
(para 6); disaster relief
payments (para 8);
environmental programmes
(para 12); income insurance
and income safety-net
programmes (para 7);
investment aids (para 11);
producer retirement
programmes (para 9); regional
assistance programmes (para
13); resource retirement
programmes (para 10)
direct and PFC payments, US see under
United States
disaster relief payments (para 8)
14950, 342
Doha Round 41, 45, 46, 47, 4849,
50, 6566, 42021, 459
environmental impact 44748,
51314, 519, 520, 521
spending by
across all WTO countries 183, 184
developing countries 339, 417
European Union 170, 184, 265,
266
European Union: France 27879
Japan 177, 179, 184
United States 110, 112, 159, 172,
175, 184, 306
Dispute Settlement Body/
Understanding/system 82,
14041, 187, 362, 64445, 646
cotton see Cotton case
Dairy case 555
Sugar case 556
distributional structure of green box
subsidies
Doha Round
decoupled income support: G-20
proposal 62
European Union 25859
budgetary support and green box
subsidies 26679
conclusion 29596
denitions: amber, blue and green
26062
estimate for each member state
26873
New Member States (NMS) 267,
268, 270, 282, 288
notications 26266
role of subsidies in farming
economy 27995
United States 30413, 503
conclusion 32124
conservation payments
31417
farm assets 307, 314
trade distortions 31721
Doha Round 147, 57273, 588
accumulation of subsidies 245, 253,
361
hypothetical example 350, 361
negotiating a solution 25355
Annex 2 35358
decoupled income support
(para 6) 40, 45, 47, 49, 51, 55,
6164, 82, 357, 358, 388,
45859, 491
direct payments (para 5) 45, 47,
49, 51, 55, 6064, 82, 357, 413,
490
disaster relief (para 8) 41, 45, 46,
47, 4849, 50, 6566, 42021,
459
domestic food aid (para 4) 40, 41,
50, 51, 53, 56, 5960
environmental programmes
(para 12) 46, 47, 49, 55, 67,
421, 422, 458, 492
general services (para 2) 40, 41,
50, 51, 53, 5658, 357, 389, 421,
422, 458, 459
income insurance and income
safety-net programmes (para 7)
45, 46, 47, 50, 55, 6465, 82,
388, 390
investment aids (para 11) 40, 45,
47, 49, 55, 6667, 458
producer retirement programmes
(para 9) 45, 47, 49, 66
662 index
Doha Round (cont.)
public stockholding: food security
(para 3) 40, 41, 50, 51, 53, 56,
5859, 388, 38990, 40910,
422
regional assistance programmes
(para 13) 40, 41, 46, 47, 50,
6768, 390, 421, 422, 459,
49293
resource retirement programmes
(para 10) 45, 47, 49, 66, 458
special and differential treatment
61, 363, 38889, 42021, 422,
56263, 572
base periods 40, 41, 42, 45, 49, 51,
53, 56, 6264, 67, 68, 25455,
357, 358, 410, 458, 459, 64142
biofuels 538, 54142, 56164
chairs of special sessions on
agriculture
Falconer, Crawford 42, 50, 5156,
255, 35354, 355, 358
Falconer, Crawford: challenge
and reference papers 5153,
59, 60, 35758
Grosner, Timothy 50
Harbinson, Stuart 42, 4647,
38889
commodity-specic caps 109
conclusion 6869, 118
cotton initiative 104
draft modalities texts 42
2003 Derbez Text 48
2003 Feb/Mar Harbinson Texts
4647, 38889
2006 June 36, 42, 53, 58, 60, 61,
65, 66, 67, 563
2007 July/August 5556, 58, 59,
60, 62, 255, 355, 358, 422
2008 Feb 56, 59, 60
2008 May 56, 59, 60
2008 July 40, 56, 58, 59, 60, 6364,
6566, 82, 255, 564
EUUS proposal (August 2003) 42,
47
evolution of negotiations 4156, 82
food aid 105
General Council Decisions
July 2004 Framework 37, 42, 48,
331, 354, 389, 409, 563, 575,
635, 643
introduction 3637
likely outcomes 4041
Ministerial Conferences
Canc un 4748
Hong Kong 489
Ministerial Declarations
Doha 38, 387, 409, 542, 636
Hong Kong 38, 42, 50, 354, 389,
408, 409, 458, 563, 635, 636
monitoring and surveillance 57273,
57578
negotiating mandates 3738, 407,
457, 469, 57576, 634
papers from chair
challenge papers 53, 59
reference papers 5153, 59, 60,
35758
political dynamics and coalitions
3940
reform not possible in 35961
directions for reform 36162
green box and developing
countries 36264
domestic food aid (para 4) 148, 63940
Doha Round 40, 41, 50, 51, 53, 56,
5960
environmental impact 44344, 507
spending by
across all WTO countries 183
developing countries 339, 372,
385, 417, 444
European Union 170, 265
Japan 179
United States 158, 172, 174, 176,
187, 307, 339, 444, 543, 605
trade distortion 342, 353
Dominican Republic 412, 449
dry peas: United States 93
Dunkel, Arthur 26, 83
dynamic effects 14346, 241, 242,
317
economics of agricultural policy
reform 18788
accumulation of subsidies 24043
index 663
Agreement on Agriculture
framework 13941
economics behind law 14650
reducing production/trade impacts
of support measures 14146,
31721, 32223
economies of scale 499, 518, 627
Egypt 376, 412, 414
electricity 440, 442
employment 25, 419
energy security 108, 534
environmental cross-compliance 154,
45253, 468, 471, 47677,
50809, 525, 594, 595,
642
environmental impact assessments
497, 50102, 514, 522
environmental impact of EU green box
subsidies
background 496503
changes needed
Common Agricultural Policy
48486, 59496
green box criteria 48790
proposed amendments to Annex 2
49093
Common Agricultural Policy 470
greening 47172
green box subsidies 47374
afforestation 48182
agri-environment 45051,
47779
decoupled/partially coupled direct
payments and
cross-compliance 47577
general services 437, 438
less favoured areas 48081
overview of CAP spending
47475
rural development axes 1 and 3
48284
introduction 46870
public payments for land
management 47273
study on agri-environmental policies
45051
environmental impact of US green box
subsidies 496
assessment of impact 519
green box subsidies 503
direct payments and decoupled
income support 50712
disaster relief payments 51314
domestic food aid 507
environmental programmes 450,
51519
general services 437, 503
income insurance and safety-net
programmes 51213
investment aids 51415
recommendations 52126
water pollution 454
environmental impacts of green box
subsidies
conclusions and research
recommendations 460
criteria and structure of green box
42830
direct and indirect impacts 437
decoupled income support
445
direct payments 44451
disaster relief payments 44748
environment programmes
44951
food security and domestic aid
44344
general services 43743, 45657
income insurance and income
safety-net programmes
44748
policy lters 45156
regional assistance 44546
structural adjustment assistance
44849
summary 45657
European Union see environmental
impacts of EU green box
subsidies
evaluating link between production
and 43035
introduction 42762
reform proposals 45760
United States see environmental
impacts of US green box
subsidies
664 index
environmental programmes (para 12)
150
Doha Round 46, 47, 49, 55, 67, 421,
422, 458, 492
environmental impact 44951,
47779, 492, 51519, 520
practicality 7981
spending by
across all WTO countries 183, 184
China 402, 406, 451
developing countries 350, 417
European Union 77, 83, 167, 171,
184, 26566, 339, 341, 449
European Union: France 277
Japan 131, 176, 179, 184, 187,
341
United States 112, 175, 306
trade distortion 338, 342, 35052,
364, 36566
equity: developed and developing
countries 489
Estonia 480
ethanol 53637, 630
Brazil 536, 566
cellulosic 566
green box rules 55356
criteria 55661
possible changes to criteria
56164
taxation 533, 53637, 56467
Brazil 536
United States 107, 114, 25253,
450, 512, 533, 534
United States 88, 107, 114, 251,
25253, 450, 501, 512, 516, 523,
533, 534, 539, 54142, 54345
WTO and subsidies 53741
Doha Round 54142
eucalyptus 482
European Union 2
biofuels see under biofuels
Commission 73, 77, 78, 7980, 591,
593, 595, 599
The Future of Rural Society 74
Common Agricultural Policy 7071,
8284, 142, 147
Agenda 2000 reforms 71, 74, 77,
154, 168, 262, 470, 585
aims and principles 25859
decoupling support 7174
environmental impact see
environmental impact of EU
green box subsidies
expansion of green box 8182
Fischler reforms 2003 2, 7173,
83, 84, 142, 152, 15455, 170,
171, 259, 263, 343, 356, 453,
468, 470, 471, 535, 546, 585,
620
green box declarations 7678,
152, 15455, 166, 16771,
18088, 26266
Health Check 2008 73, 79, 82, 84,
468, 535, 592, 594, 598
MacSharry Reforms 1992 2, 26,
71, 74, 83, 84, 140, 152, 267,
470, 471, 585, 619
pillar 1 to pillar 2, switch from
7475, 84, 168, 17071, 184,
187, 470
WTO compatibility of policies
7881
Common Agricultural Policy:
options for change 58384
background 58488
climate change 59698
developing countries 598600
environment 59496
green box reform: objectives and
main interest groups 58890
green box reform: reforms and
assessment of success 591600
summary and conclusions
60001
sustainable rural environment
59194
Council of Ministers 73, 592
Directives
Biofuels 535
Birds and Habitats 472
Nitrate 454
Water Framework 442
distributional structure of green box
subsidies 25859
budgetary support and green box
subsidies 26673
index 665
budgetary support and green box
subsidies in France 27379
conclusion 29596
denitions: amber, blue and green
26062
estimate for each member state
26873
New Member States (NMS) 267,
268, 270, 282, 288
notications 26266
role of subsidies in farming
economy 27988
role of subsidies in farming
economy in France 28895
Doha Round 40, 45, 50, 51, 355, 409,
588, 599600
base periods 41, 63, 255
biofuels 54142
decoupled income support
(para 6) 62, 63, 255
EUUS proposal (August 2003)
42, 47
food aid 105
environment see environmental
impact of EU green box
subsidies
euro 170
European Council 155
Dec 2005 meeting 75
historical context 23, 26
less-favoured areas (LFAs) 7778, 83,
171, 265, 270, 446, 475, 48081,
486, 488
France 265, 28991
Parliament 75, 79, 589
pension schemes 179
pillars 26768
switch from pillar 1 to pillar 2
7475, 84, 168, 17071, 184,
187, 470
producer support estimate 620, 621
regionalisation, principle of 282
Single Area Payment
New Member States (NMS) 267,
270, 288
Single Payment Scheme/Single Farm
Payment 2, 7274, 76, 79, 82,
83, 15455, 170, 171, 183, 187,
263, 341, 343, 453, 54546, 585,
592, 593, 594, 642
France 279, 29395
subsidy
distribution see above
distributional structure
levels 7678, 15155, 16366,
16771, 18088, 26266, 332,
335, 341, 427, 545
per capita support 404
Sugar case 556
trade distortion
decoupled income support
34446, 350
United States 247, 258
Uruguay Round 28, 2930, 3132,
82, 83
exit deterrence 31821, 32224
export credits and guarantees 412
export subsidies 1, 55556, 586
European Union 274, 470, 474, 556,
590, 599, 620
historical context 20, 23, 259
United States 105
Farm Accounting Data Network
(FADN) 27982
farmers
France 288, 289, 292, 624
large-scale 445, 461
European Union 62, 282, 476,
586, 593, 59596
European Union: France 292
Japan 121, 125, 126, 133, 134, 623,
627
United States 62, 304, 30717,
322, 499, 51920, 522, 525, 610,
613, 616
middle-scale
United States 313, 322
response to government behaviour
31
small-scale 445, 461
Africa 418, 421
Austria 284
European Union 476, 484, 590,
591, 59596
European Union: France 288, 289
666 index
farmers (cont.)
Japan 622, 62324, 62526, 627,
62829, 631
United States 30717, 322, 518
study of agri-environmental policies
45051
feed grains
United States 93
see also barley; corn; oats; sorghum
fertilisers 489, 499, 500, 505, 595,
597
Africa 419
Japan 625, 630
Finland
Common Agricultural Policy 77,
477, 481, 589, 592
green box 270, 284
national expenditure 270
Fischler, Franz
2003 reforms 2, 7173, 83, 84, 142,
152, 15455, 170, 171, 259, 263,
343, 356, 453, 468, 470, 471,
535, 546, 585, 620
ax: France 276
food aid
para 4 see domestic food aid
US foreign 105, 507
food security 125, 162, 258,
406
para 3 see public stockholding for
food security purposes
forests 45556
European Union 479, 48182,
483
hurricanes Katrina and Rita 514
rainforests 48788
France 624
biofuels 536
Common Agricultural Policy 75, 77,
267, 592
agri-environment 479, 589
less favoured areas 265
green box 270, 273, 284
budgetary support and
importance of 27379
decoupling and future single
payment 29395
farm economy 28895
livestock rearing in mountain
areas 28891
modernisation of animal housing
29193
Institute National dAppellations
dOrigine 279
national expenditure 270, 274
notications and 269
Societe dAmenagement Foncier et
dEtablissement Rural (SAFER)
277
fruit and vegetables
European Union 73, 79, 155, 168,
170, 263, 282, 343, 546, 585
Japan 624
United States 90, 91, 104, 105, 107,
114, 149, 158, 159, 247, 248,
252, 320, 323, 343, 509, 555,
608, 611, 613
G-10 39, 51, 62, 356, 409
G-20 634
divisions within 600
Doha Round 39, 40, 41, 42, 47,
4850, 51, 53, 55, 56, 331,
35556, 358, 359, 362, 38990,
409, 562
accumulation of subsidies 254
base periods 41, 49, 25455, 356,
458, 459
decoupled income support
(para 6) 49, 51, 55, 6264, 323,
35556, 358, 373, 458, 491
direct payments (para 5) 51, 55,
61, 358, 490, 562
disaster relief (para 8) 50, 66, 356
domestic food aid (para 4) 41, 50,
5960
general services (para 2) 41, 50,
58, 356, 389
income insurance and income
safety-net programmes (para 7)
50, 55, 6465, 356, 390
investment aids (para 11) 458
monitoring and surveillance
57678
public stockholding: food security
(para 3) 41, 50, 59, 38990
index 667
regional assistance programmes
(para 13) 41, 50, 68, 390,
49293
G-33 373
Gambia 378, 414
General Agreement on Tariffs and
Trade (GATT) 20, 2325, 239,
258, 369, 537, 620
general services (para 2) 147, 148, 342,
37071, 63839
Doha Round 40, 41, 50, 51, 53,
5658, 357, 389, 421, 422, 458,
459
environmental impact 43743,
45657, 503
spending by
across all WTO countries 183
China 402, 404
developing countries 339, 383,
38586, 408, 417, 41920
European Union 83, 167, 168,
183, 265, 266, 339
European Union: France 27778,
279
Japan 12831, 162, 176, 177, 183,
187, 339, 547
United States 17274, 183, 306,
339
Germany
biofuels 535
Common Agricultural Policy 267,
589, 592, 593
agri-environment 478
green box 270, 279, 284, 287
national expenditure 270
pesticides 454
Global Environment Facility (GEF)
489
goats
European Union 71, 267
Denmark 287
France 274, 276, 288, 289, 291
granivores
France 289, 292
see also pigs; poultry
Great Depression of 1930s 499
Greece 77, 270, 279, 284
green box see Annex 2
greenhouse gases 530, 532, 535,
59697, 598
groundnuts see peanuts
Guatemala 449
Haberler Report 2324
high natural value (HNV) farming 446,
471, 472, 476, 480, 481, 483,
486
green box denition and 48788
historical context
conclusion 3334
international economy 1923
trading system 2325
Uruguay Round see Uruguay Round
HNV farming see high natural value
Honduras 412
honey: United States 93
hops: European Union 263, 276
horticulture: European Union 267, 282
Import Licensing Procedures,
Agreement on 580
income insurance and income
safety-net programmes (para 7)
149, 342
Doha Round 45, 46, 47, 50, 55,
6465, 82, 388, 390
environmental impact 44748,
51213
spending by
across all WTO countries 183,
184
China 406
developing countries 339, 37374,
420
European Union 170
Japan 179
United States 175
trade distortion 338
India 21, 616
biofuels 537
Doha Round 44, 47, 82, 36364, 599,
600
green box subsidies 335, 338, 380,
382, 428, 549
types of programme 339, 385, 386,
408, 438, 439, 440, 444, 449
668 index
India (cont.)
notications 332, 333, 376, 378,
549
pesticides 454
indirect subsidies see accumulation of
subsidies
Indonesia 333, 335, 338
biofuels 537
food security and domestic food aid
339
forests 455, 456
ination 20, 25, 117
United States 101
insurance
crop/revenue 41, 65, 14950, 179,
184
developing countries 37374
United States 89, 105, 110, 112,
114, 251, 614
para 7 see income insurance and
income safety-net programmes
private schemes 616
risk/insurance effects 143, 241, 242,
252, 317, 322, 338, 360, 447,
586, 614
international development aid 434, 589
International Monetary Fund (IMF) 26
investment aids (para 11) 150, 342
Doha Round 40, 45, 47, 49, 55,
6667, 458
environmental impact 449, 51415
spending by
across all WTO countries 183,
184
China 406
developing countries 339, 374
European Union 83, 167, 17071,
184, 265, 339
European Union: France 277,
29193
Japan 177, 179
United States 175, 306, 545
Iraq 108, 117, 608
Ireland 279, 284, 287, 477, 592
Rural Environment Protection
Scheme (REPS) 450
irrigation and drainage 418, 44143,
480, 483, 50019, 547
Italy 267, 270, 279, 284, 481
Japan 134
Basic Law on Food, Agriculture and
Rural Areas 1999 121, 12425,
626
biofuels 536
Democratic Party 628
Doha Round 39, 45, 48
income insurance and income
safety-net programmes (para 7)
45, 64
domestic support in decoupling
policy 12732
environmental impact 438
Farm Management Stabilization
Programme 2007 121, 13234
generally 12122, 439, 440
historical context 26
Liberal Democratic Party (LDP)
134, 623, 625, 62829
major policy change and its political
economy 13234
New Basic Plan of Food, Agriculture
and Rural Areas 2005 121,
12526
pension schemes 179, 184
principal farmers 121, 125, 126, 133
producer support estimate 62021
reform: options for change 61819
current position on reform 626
decline in competitiveness 62225
future prospects 62931
international comparison 61921
political environment 62526
recent policy reform 12426
structure of agriculture in 12224
subsidy levels 12732, 133, 15962,
16366, 17688, 332, 335, 341,
404, 427, 54749
per capita support 404
United States 108, 247
Japanese agricultural cooperatives
(JAs) 133, 134, 623, 62526,
627, 628, 63031
Johanns, Mike 611
Jordan 338
Kenya 414, 417
Korea see South Korea
Kyrgyz Republic 46
index 669
labour rights 597
land
abandonment 291, 480, 482
allocation effects 586
degradation 418
Japan 623
land-idling see Conservation Reserve
Program under United States
reform programmes 639
set-aside 2, 595
use and zoning policies 455
Latin America 23, 25
see also individual countries
Latvia 477
least developed countries (LDCs) 48,
375, 376, 387
lentils: United States 93
less favourable regions: Japan 626
less-favoured areas: EU (LFAs) 7778,
83, 171, 265, 270, 446, 475,
48081, 486, 488
France 265, 28991
Life+474
litigation see Dispute Settlement Body
livestock
accumulation of subsidies 246
African Group 422
environmental impact 430, 484
European Union 590
mountain areas in France
28891
Japan 179
nitrate pollution 454
United States 90, 306, 503, 611
see also beef; dairy; goats; pigs;
poultry; sheep
Luxembourg 77, 270, 536, 589
Macedonia 589
maize: France 293
Malaysia 333, 335, 381, 383, 537,
549
Malloch Brown, Mark 94
Malta 477
market gardening: European Union
267
Mediterranean area 480, 482, 483
Mexico
notications 333, 335
per capita support 404
types of green box programmes 339,
362
mohair: United States 93
monitoring and surveillance 58182,
636
African countries 413
agri-agriculture schemes 479
background 57173
China 409
current provisions 57375, 58081
developing countries 353, 365,
366
Doha Round 57273
mandate 57576
proposals by G-20 and Cairns
Group 57678
improve, ways to 57880, 638,
64344
independent authority 488
Morocco 414, 417
mountain areas
livestock rearing in France in
28891
multifunctionality 40
European Union 8182, 596
Japan 124, 126, 132
see also public goods
Namibia 413, 414, 417
Natura 2000 472, 479, 594
Netherlands 77, 270, 273, 455, 536
agri-environment 477, 478
New Zealand 247, 295, 338, 437, 549
newspapers 611
nitrate pollution 454
Norway 163, 332, 333, 549, 589
Doha Round 39, 45, 48, 64, 81
pesticides 453
oats 508
obesity 353, 609
OECD see Organisation for Economic
Cooperation and Development
oil
biofuels and 524, 532, 533, 565
crises in 1970s 1
prices 106, 107, 108, 117, 524, 532,
533
670 index
oilseeds 32
biofuel subsidies 531, 533
European Union 71, 534
France 274
United States 90, 93, 501, 508, 522,
525
see also rapeseed; soybeans
olive oil
European Union 73, 155, 263, 267,
475, 585
organic agriculture 597
Organisation for Economic
Cooperation and Development
(OECD) 580
environmental programmes 449
European Union
beef market price support 154
producer support estimates (PSEs)
141, 162, 163, 188, 62021, 626
research on decoupling 3031, 141,
24243, 329, 360
statistics: support to agricultural
producers 34
total support estimate (TSE) 34546
wealth effects 49
overall trade distorting support
(OTDS) 69
across all WTO countries 163
European Union 82, 151
Japan 160
United States 116, 118, 156, 614
overseas development aid 434, 589
Pakistan 378
Panitchpakdi, Supachai 48
Papua New Guinea 487
peace clause 44, 137, 140, 259, 260,
553, 636
peanuts: United States 9596, 175, 508,
511, 512
Pelosi, Nancy 613
pension schemes 179, 184
P erez del Castillo, Carlos 48
pest and disease control/pesticides 439,
45354, 456, 457, 471, 499, 500,
505, 509, 513, 595, 625
Philippines
biofuels 537
Doha Round 45, 62
food security and domestic food aid
339
notications 333, 335
pigs: European Union 267, 282
pine 482
planning policies 455
Poland 75, 480
polluter pays 99, 449
pollution 454, 471, 479, 489, 500, 505
Portugal 75, 270, 478, 479
potatoes
European Union 155, 170
Japan 132, 133
poultry
European Union 267, 282
United States 90
poverty reduction 419
producer retirement programmes
(para 9) 150, 342
Doha Round 45, 47, 49, 66
environmental impact 448
spending by
across all WTO countries 184
China 406
European Union 170, 265
European Union: France 278, 279
Japan 131, 177, 179, 184
United States 175
producer support estimates (PSEs)
141, 162, 163, 188, 62021,
626
protectionism 2, 366, 589
historical context 1923
Haberler Report 2324
public goods 324, 472, 562, 565,
58889, 594, 615
see also biodiversity;
multifunctionality
public stockholding for food security
purposes (para 3) 148, 342,
63940
Doha Round 40, 41, 50, 51, 53, 56,
5859, 388, 38990, 40910,
422
environmental impact 44344
spending by
across all WTO countries 183
index 671
China 402, 404
developing countries 339, 37172,
385
European Union 170
India 408
Japan 177, 179, 183
United States 174
rapeseed 534
regional assistance programmes
(para 13) 150, 342
Doha Round 40, 41, 46, 47, 50,
6768, 390, 421, 422, 459,
49293
environmental impact 44546,
48081, 486, 488, 49293
spending by
across all WTO countries 183,
184
developing countries 339, 37475,
417, 420
European Union 7778, 83, 167,
171, 184, 265, 339, 545
Japan 13132, 180, 184
United States 176
relative price effects 14243, 149,
242
resource retirement programmes
(para 10) 150, 342
Doha Round 45, 47, 49, 66, 458
environmental impact 448
spending by
across all WTO countries 184
China 406
European Union 77, 170, 265
Japan 179
United States 175, 184
rice
European Union 155
France 276
India 339
Japan 121, 124, 12728, 131, 133,
134, 162, 179, 547, 618, 619,
621, 62324, 625, 62627,
62831
United States 90, 93, 94, 307, 310,
508
wild 509
risk/insurance effects 143, 241, 242,
252, 317, 322, 338, 360, 447,
586, 614
Roberts, Pat 92
Romania 477, 593
Russia 111
Sanitary and Phytosanitary Measures,
Agreement on 581
Scandinavia 480
seeds
Africa 419
China 407
sheep
European Union 71, 267
Denmark 287
France 274, 276, 288, 289, 291
Single Area Payment (EU)
New Member States (NMS) 267,
270, 288
Single Payment Scheme/Single Farm
Payment (EU) 2, 7274, 76, 79,
82, 83, 15455, 170, 171, 183,
187, 263, 341, 343, 453, 54546,
585, 592, 593, 594, 642
France 279, 29395
soil erosion 419, 482, 489, 503, 509,
516
sorghum 508, 512
South Africa 335, 414, 537, 600
use of green box subsidies 381, 414,
417, 549
per capita support 404
types of programme 339, 449
South Korea 333, 335
Doha Round 45, 46, 48
income insurance and income
safety-net programmes (para 7)
46, 64
per capita support 404
use of green box subsidies 404
types of programme 339
soybeans
biofuels 56467
European Union 534
Japan 132, 133, 627
United States 90, 92, 93, 109, 307,
503, 508, 512, 520, 608, 614
672 index
Spain 270, 284, 536, 589
Common Agricultural Policy 267,
592
less favoured areas 481
special and differential treatment
(SDT) 33, 139, 330, 640
Doha Round 61, 363, 38889,
42021, 422, 56263, 572
SCM Agreement 636
use of 333
splash and dash trade 539
SPS (Sanitary and Phytosanitary
Measures) Agreement 581
squeeze out reform strategy
United States 101, 104, 105, 106,
110, 11718
Sri Lanka 412
stakeholder participation 479
static effects 241, 242
Stiglitz, Joseph 94
subsidiarity, principle of 295
Subsidies and Countervailing Measures
(SCM), Agreement on 24, 140,
361, 440, 530, 537, 55556, 636
biofuels 530, 537, 53940, 553,
55556
notications 580
sugar
biofuels 530, 533, 53637, 541,
563
European Union 73, 155, 263, 475,
546, 585, 620
Japan 132, 133, 627
United States 90, 9597, 105, 110,
502, 513, 614
Sugar case 556
sustainable development 598600
Agreement on Agriculture and
reform process 63436
conclusions 64546
green box
current position 63844
negotiating objectives 63638
introduction 63334
role of WTO 64445
Sweden 77, 270, 453, 589
Switzerland 163, 333, 404
Doha Round 39, 41, 45, 48, 63
use of green box subsidies 332, 335,
338, 549
tariff rate quotas (TRQs)
Japan 619, 621, 629
United States 96, 97
tarifcation 619, 629
tariffs 188, 259
Africa 422
European Union 154, 258, 470, 535,
542, 599, 600, 620, 621
Japan 132, 134, 618, 621, 623, 626,
629
United States 90, 533, 542
taxation
biofuels 533, 53637, 56467
Brazil 536
European Union 535
United States 107, 114, 25253,
450, 512, 533, 534
China 406
European Union
biofuels 535
modulation 73, 75, 79, 155, 171,
470, 592, 593, 595
pesticides 453
United States 114
ethanol 107, 114, 25253, 450,
512, 533, 534
Technical Barriers to Trade, Agreement
on 581
Thailand 332, 333, 537
green box subsidies 335, 338, 381
types of programme 385, 386
tobacco
China 406
European Union 73, 263, 267, 475,
585
France 276
United States 9596, 175, 508,
51112
tourism, rural 483, 486
trade distortion 33839, 34243
agri-environmental programmes
338, 342, 35052, 361, 36566
decoupled income support 338,
34243, 36465, 424
in EU and US 34447
index 673
G-20 35556
hypothetical example 34750
domestic aid programmes 342,
353
economic analysis 14246, 31721,
32223
reform of green box, possibilities for
not in Doha Round 35961
see also box shifting
transparency 488, 490, 575, 576,
57881, 582, 64344
Trinidad and Tobago 338, 376
Tunisia 376, 378, 414, 417
Turkey 439, 589
Uganda 412
unemployment 25
United Kingdom 270, 279, 536
Common Agricultural Policy 75, 77,
81, 267, 476, 483
agri-environment 477, 478, 479,
595
cap on single payments 593
less favoured areas 481
reform 589, 592, 593
United Nations
Conference on Trade and
Development (UNCTAD) 447,
450
Environment Programme (UNEP)
488
United States 2
accumulation of subsidies 24748
corn 24853
Average Crop Revenue Election
(ACRE) 10910, 118, 159, 610,
614
base periods 255, 306, 321, 323, 357,
64142
biofuels see under biofuels; ethanol
Commodity Credit Corporation
(CCC) 97, 175
Congress 92, 93, 95, 103, 106, 107,
110, 111, 114, 606, 607, 608,
609, 613, 614, 616
House Agriculture Committee 95
House of Representatives 105
Senate 10506, 613
Conservation Reserve Program
(CRP) 98, 99, 118, 175, 176,
306, 448, 500, 502, 503, 515,
51617, 521, 523, 524, 609,
613
Conservation Security Program
(CSP) 99100, 501, 515, 517,
518, 521, 522, 611, 613
countercyclical payments (CCPs) 93,
96, 98, 101, 103, 104, 105, 106,
107, 114, 115, 116, 159, 247,
251, 307, 508, 515, 605, 607,
608, 612, 613, 614
deciency payments 91, 92, 95, 107,
158, 543, 620
Democratic Party 110, 613
Department/Secretary of Agriculture
91108, 111, 112, 249, 497, 498,
499, 502, 503, 504, 505, 507,
517, 518, 52021, 525
Risk Management Agency 251
direct payments 93, 104, 105, 106,
108, 11214, 117, 118, 306, 307,
318, 33031, 508, 515, 521,
52425, 605, 607, 613, 614, 615,
64142
distributional structure of green box
subsidies 30413, 503
conclusion 32124
conservation payments 31417
farm assets 307, 314
trade distortions 31721, 32223
Doha Round 40, 50, 51, 53, 118, 355
base periods 255, 357
biofuels 54142, 553
commodity-specic caps 109
decoupled income support
(para 6) 62, 255, 357
disaster relief (para 8) 40, 51, 65
EUUS proposal (August 2003)
42, 47
food aid 105
general services (para 2) 58
income insurance and income
safety-net programmes (para 7)
51, 55, 64
regional assistance programmes
(para 13) 41, 68, 255
674 index
United States (cont.)
Energy Independence and Security
(EIS) Act 2007 108, 534
environment see environmental
impact of US green box
subsidies
Environmental Quality Incentives
Program (EQIP) 98, 99100,
176, 306, 515, 518, 523
Farm Bills
1996 (Federal Agriculture
Improvement and Reform Act)
3, 88, 9192, 97, 98, 107, 116,
142, 158, 174, 252, 344, 543,
60607, 615, 620
2002 (Farm Security and Rural
Investment Act) 63, 88, 90,
9295, 96, 97100, 103, 107,
112, 116, 158, 159, 176, 249,
252, 306, 500, 509, 516, 521,
525, 606, 60708
2008 (Food, Conservation and
Energy Act) 10311, 112, 115,
117, 159, 176, 501, 534,
60416
farm policy reform 142, 60416
continued support under 2008
Farm Bill 10311
historical perspective 90100
hypothetical buyout: main farm
support programmes 10103
introduction 8687
policy visioning assessments
8890
strategic reform paths 10001
summary and conclusion 11618
WTO, role of 11116
Food Security Act 1985 453, 500
Food Stamp program 507, 543, 613
historical perspective 9091, 605,
60607
buyouts 9598
conservation program subsidies
98100
environmental impacts 499501
re-institutionalizing higher farm
support in 2002 9295
unilateral reform: 1996 FAIR Act
9192
WTO green box 25, 26
loan deciency payments (LDPs) 91,
93, 159, 249, 307
pension schemes 179
producer support estimate 620, 621
production exibility contract
(PFC) payments 91, 93, 149,
158, 174, 183, 185, 187, 252,
306, 33031, 519, 52021, 641
Republican Party 88, 92, 606,
607
subsidy 60405
distribution 90, 30417, 322
income eligibility criteria 94, 104,
108
levels 95, 10607, 109, 110,
11215, 118, 15559, 16366,
17276, 18088, 24748,
30407, 332, 335, 341, 404, 427,
543, 607
per capita support 404
trade distortion
decoupled income support 344,
34647
domestic food aid 353
trade representative (USTR) 97
Uruguay Round 28, 29, 32, 112,
115
Wetland Reserve Program (WRP)
176
Upland Cotton case 7879, 83, 112, 140,
149, 155, 158, 175, 187, 248,
252, 317, 324, 33031, 343, 360,
362, 508, 543, 553, 55455, 575,
608, 613, 641
Uruguay Round 82, 573, 604, 635,
645
Agreement on Agriculture 3233, 83
background: political economy
2527
mandate and proposals 2730, 115,
369
negotiations 3132, 112
OECD research 3031
United States: ethanol 534
index 675
vegetables see fruit and vegetables
Venezuela 333, 335, 339
war 108, 117, 608
water pollution 454, 471, 479, 489, 500,
505
wealth effects 49, 143, 147, 241, 242,
252, 317, 322, 508, 562, 586,
643
wheat
France 625
India 339
Japan 132, 133, 621, 624, 627, 630
United States 90, 92, 93, 109,
307, 310, 322, 508, 512, 608,
614
wine
European Union 73, 155, 170, 263,
265, 267, 282, 546
ethanol 535
France 278, 279, 289
wool: United States 93
World Bank 26
Zambia 378, 414, 417
Zimbabwe 412, 414, 417