Agricultural support in the WTO Green Box: An analysis of EU, US and Japanese spending. By Jesús Antón. ICTSD Draft

Transcription

1 ICTSD Programme on Agricultural Trade and Sustainable Development Agricultural support in the WTO Green Box: An analysis of EU, US and Japanese spending By Jesús Antón ICTSD Draft Agricultural Subsidies in the WTO Green Box: An Overview of Upcoming Issues from a Sustainable Development Viewpoint. ICTSD Expert Meeting,

2 Agricultural support in the WTO green box: an analysis of EU, US and Japanese spending Paper prepared for the International Centre for Trade and Sustainable Development (ICTSD) Draft paper, not for citation 9 April 2007 Jesús Antón* *Jesús Antón is economist in the Spanish Ministry of Agriculture, Fisheries and Food, currently on secondment from the Organisation for Economic Co-operation and Development (OECD). The views expressed in this paper are those of the author and not necessarily those of the Spanish Ministry, the OECD Secretariat or its member countries. i

3 Contents Abbreviations and acronyms...iii Tables...iv Foreword...v Executive summary...vi 1 Introduction The economics of agricultural policy reform The WTO URAA framework The economics of reducing the production and trade impacts of agricultural support measures The economics behind the law.4 3 Extent of green box spending: comparison with other boxes Domestic support in the European Union Domestic support in the United States Domestic support in Japan Domestic support across all WTO countries Focus of green box spending: types of green box measure Green box spending in the European Union Green box spending in the United States Green box spending in Japan Green box spending across all WTO countries Concluding remarks...28 Appendix 1: Summary of main green box provisions and requirement in Annex 2 of the WTO Agreement on Agriculture...31 Appendix 2 Summary of WTO notified support by the European Union, the United States and Japan...33 Appendix 3 Detailed green box notifications by the European Union, the United States and Japan 35 ii

4 Abbreviations and acronyms AMS aggregate measure of support APHIS Animal and Plant Health Inspection Service CAP Common Agricultural Policy CCC Commodity Credit Corporation CRP Conservation Reserve Program EQIP Environmental Quality Incentives Program EU European Union FSA Farm Service Agency FSIS Food Safety Inspection Service GATT General Agreement on Tariffs and Trade LFA less favoured area MLA Market Loss Assistance NRCS Natural Resources Conservation Service OECD Organisation for Economic Co-operation and Development PFC Production Flexibility Contract PSE Producer Support Estimate RFIS Rice Farming Income Stabilisation SCM Subsidies and Countervailing Measures SFP Single Farm Payment URAA Uruguay Round Agreement on Agriculture US United States WRP Wetland Reserve Program WTO World Trade Organization iii

5 Tables iv

6 Foreword v

7 Executive summary The Uruguay Round Agreement on Agriculture (URAA) has created a framework to discipline agricultural domestic support policies. The main discipline mechanism consists of reducing the amount of amber box support while reforming policies towards the blue and the green boxes. No monetary limits on expenditure are imposed on these latter, but there are provisions in the implementation criteria and in the definition of the objective of the measures. The green box exemption is based on the idea of these measures having no, or at most minimal, trade-distorting effects or effects on production, which is a general criterion imposed on all green measures. Each type of green box measure has its own short definition of the objective and additional implementation criteria that are intended to limit production effects while permitting the achievement of domestic objectives. However, a broad consideration of the economic effects of support programmes, including price, risk and dynamic effects, makes the absence of production effects in some green box programmes very unlikely. There is also the possibility of providing green box services and payments whose objectives are not listed specifically. There are significant delays in notifications, which make the monitoring and review of domestic support spending difficult: latest notification from the United States (US) corresponds to 2001, while notifications from Japan and the European Union (EU) correspond to The EU, Japan and the US together have notified about 87 percent of all World Trade Organization (WTO) domestic support (EU 41 percent, US 28 percent, Japan 18 percent). The EU has notified 58 percent of all amber box support, 91 percent of all blue box support and 19 percent of all green box support. The US has notified 64 percent of the de minimis and 44 percent of all green box support, and Japan 19 percent of the amber box and 21 percent of the green box support. Total WTO notifications show an important reduction in the level and share of the amber box and an increase in the share of the green box. Since the start of notifications in 1995, several shifts in boxes have been observed. In 1995 notification as compared with the reference and from 2000 onwards, the EU has moved amber support to the blue box following 1992 reform, with the creation of the compensatory area payments and Agenda The US moved from the amber box to the green box in 1995 compared with , and domestic food aid was duplicated. The US also moved from the blue box to the green box in 1996, with the creation of Production Flexibility Contract (PFC) payments. Japan moved from the amber box to the green box in 1995, compared with , by increasing its general services on infrastructure. The EU is likely to move large amounts of spending from the blue box to the green box because of the 2003 Common Agricultural Policy (CAP) reform that created the Single Farm Payment (SFP) scheme and subsequent reforms (including the proposals for future fruit and vegetable reforms that could eliminate the prohibition of these products under the SFP). All these shifts are in the same direction implied by the URAA from amber to blue, and from amber and blue to green. Despite the increase in green box share in total notified 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, stability in the US since 1996, and important reductions in Japan. The only large increases in green box support occurred before The exception will very likely be the new SFP scheme, not yet notified by the EU. The US is the main user of the green box; percent of its green spending is on domestic food aid, followed by general services and decoupled income support. This structure has remained stable since Japan is the second-highest user of the green box, but with a decreasing trend in green vi

8 box spending and a high concentration (77 86 percent) of green box measures in general services on infrastructure (construction of irrigation/drainage facilities and rural roads). Japan has increased its expenditure on environmental programmes. The EU distributes its green box expenditure among several sub-boxes, most of it under the second pillar (rural development) of the CAP. The three main sub-boxes are general services, structural adjustment assistance provided through investment aids, and environmental programmes. Several difficulties mean that looking at total expenditure in boxes is not enough to assess the economic impacts of support. Changes in WTO notifications on market price support do not always have the same economic implications. There are good economic reasons to argue that measures that comply with blue box and green requirements would potentially have smaller impacts on production than measures with no implementation requirements in the amber box. However, quantifying the economic impacts of each programme requires analysis that is specific for each measure. Recent empirical research on this area looks promising. vii

9 1 Introduction The Uruguay Round Agreement on Agriculture i has provided a framework to discipline support to agricultural 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 possibility of challenging agricultural measures that do not comply with World Trade Organization provisions through the dispute settlement procedures was prevented by the Peace Clause that expired at the beginning of 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 frame that takes into account all kinds of economic linkage, and it cannot be interpreted as a tool for the analysis of support. The notification process to the WTO has generated a database of expenses and support to agriculture in all member countries, which are classified according to different criteria defining boxes and sub-boxes. This is particularly the case of the green box, which lists a series of payment types that are oriented to a shortly defined objective and have to conform to some general and specific provisions in Annex 2 of the URAA. The purpose of this paper is to look with some detail at the agricultural notifications to WTO by the three main providers of support to agriculture: the European Union, the United States and Japan, which are called the Trio in this paper. This overview is focused on identifying trends and patterns of support measures in each country, with particular attention being paid to movements of expenditure from one box to another, sometimes imprecisely called box shifting, and to on 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 paper to make any legal assessments of the conformity of notified measures with URAA legal provisions. Why may some agricultural support measures have smaller impacts on production and trade? How do WTO provisions help to prevent this production effect to occur? 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 measure are being used by the EU, the US and Japan? Have there been changes in green box measures since the first notifications in 1995? Can we expect further changes with the ongoing policy changes and announcements? The first two questions are tackled in Section 2 about the production effects of support programmes and WTO provisions for different boxes and sub-boxes. Section 3 reviews expenditure across boxes in order to identify potential box shifting. Section 4 analyses the green box expenditure of each of the Trio countries, identifying trends and patterns. Finally, section 5 poses questions that remain open. The main source of data for the analysis in this paper is the set of notifications to the WTO ( Unfortunately, these notifications suffer a large delay of several years, and the last notifications at the date of writing this paper correspond to 2003 (Japan, the EU) and 2001 (the US). In this paper, data are expressed, as in the original notifications, in national currency and converted into US dollars only for comparisons, using current yearly average exchange rates from the Organisation for Economic Co-operation and Development. ii 2 The economics of agricultural policy reform 1

10 It is obvious that in 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 defined in the WTO URAA and the processes of General Agreement on Tariffs and Trade (GATT)/WTO negotiations, particularly the Uruguay and Doha rounds. 2.1 The WTO URAA framework Article 6 of the URAA establishes that member countries commit to reduce 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 on production and may allow to achieve 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 to reduce amber support but leaves the door open 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 need not be included in AMS calculations and, therefore, are exempted from reduction commitments. Paragraph 2 refers to government measures that are an integral 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-specific measures up to 5 percent iii of the value of production of a basic agricultural product (product-specific de minimis) and non-product-specific measures up to 5 percent 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 impact, the impact will be small in quantitative terms. The possibility of shifting support from amber box to the de minimis is limited by the 5 percent bounds. Paragraph 5 of Article 6 creates the remaining exception to domestic support reduction commitments: the blue box. These are direct payments under production limiting programmes with three alternative criteria: based on fixed area and yields, made on 85 percent or less of the base level of production, or made on a fixed 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 Common Agricultural Policy 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 green. 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 WTO agreements and, particularly, the Subsidies and Countervailing Measures (SCM) agreement. This protection was exhaustive for green box measures, and only partial for amber and blue box, but it expired in Since then, in principle, all domestic support measures are actionable for litigation through all WTO 2

11 mechanisms. Steinberg and Josling (2003) describe this situation as legal vulnerability of domestic support measures notified under the URAA, particularly with respect to SCM. This has become evident in the dispute US v. Upland Cotton, or Cotton Case, which was initiated before the end of the Peace Clause. The WTO system of boxes is based on notifications by each country that decides, on its own, how to classify each domestic support measure. This notification can be challenged in the mutual review process or through the WTO dispute settlement procedures, but it can change only by another correcting notification by the country. 2.2 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 conform to the criteria in the other boxes (green, de minimis or blue), and it is the only box subject to reduction commitments. That is, the URAA created incentives to reduce amber box support while permitting its 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. But 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, and some of its publications can serve as reference iv and are used in this sub-section of the paper. Its Producer Support Estimate (PSE) is an alternative quantification and classification of support that has no simple correspondence with the legal WTO box classification and methodology, but it is useful to assess this agricultural policy reform process. In the real world of policy changes, the main reforms that have occurred with the aim of moving towards more decoupled programmes have been characterised by two main axes (Antón, 2006; Antón and Sckokai, 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 specifically for individual commodities. There are good economic reasons to argue that, for the same amount of support, these movements reduce the production and trade response. If there is some substitution between land and other inputs, as is normally assumed, then support to a more inelastic input than land generates a smaller production response. If the farmer has more freedom on what to produce (or not to produce) on land benefiting 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 first axe corresponds to the first step in time (late 1980s for the US, early 1990s for the EU) and has supposed in WTO terms movements towards the blue box, while the second axe corresponds to the US 1996 Fair Act and the EU 2003 CAP reform and generated (or is likely to generate) movements into green box notifications. Even if there are solid arguments on the more decoupled nature of payments based on land with more production freedom, this type of programme can potentially have some impacts on production 3

12 and trade, to be investigated empirically. This is why in economic terms it is preferably to talk about degree of decoupling and to link this quantification to a body of empirical results. In more general terms, what are the potential mechanisms that can make a support programme have impacts on production and trade? It is the objective of this section not to develop these mechanisms in detail, which have already been developed and discussed elsewhere, but to acknowledge them v and check the extent to which these effects 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 price or price plus output payment or on the use of some agricultural inputs for the production of some commodities through the price of these inputs or the price minus the payment. These relative price effects are modulated directly by the conditions stating the activities required, allowed and/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 benefit from support. In this context, empirical evidence shows significant differences in the production effects 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, vi or by ad hoc government decisions that are modulated with farm income circumstances. In both cases, farmers decisions on production 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 support 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 significant in several 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 simultaneously 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 specific effects associated with investment and expectations. Investment in agriculture may be facilitated by support measures under certain circumstances. 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 difficult to obtain empirical evidence on the magnitude of these effects. These effects can occur simultaneously, and the magnitude of the production effects depends both on policy design and on the size of the support provided The economics behind the law 4

13 Rational objectives for agricultural policy include the redistribution of income, based on equity considerations, and the correction for market failure, based on efficiency criteria. The optimal economic responses to these objectives are, respectively, lump sum transfers, which cannot be affected by the recipient s 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 defined. The result is the set of boxes and the specific rules applied to the different sub-boxes inside the green box. These latter are written in Annex 2 of the URAA and summarised in Appendix 1 of this paper. Table 1 identifies 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 define the target, objective or purpose of a given measure. The amber box and the de minimis are the only WTO boxes with a limit on expenditure defined, respectively, in each country s 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. TABLE 1: Do WTO provisions constraint or reduce the potential impacts on production and trade? Amber Box De minimis Blue box Green Box WTO provisions... on total expenditure Measures in the AMS Exemped programmes Production limiting programmes General services Public Stock holding Domestic Food aid Decoupled income Support Income insurance / safety nets Relief from Natural Disaster Producer retirement Resource retirement Investment aids Environmental programmes Regional assistance Other direct payments (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)...impose a Monetary limit on expenditure Yes Yes No No No No No No No No No No No No No on implementation rules...forbide price support and/or input subsidies No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes...forbide area payments No No No (1) Yes Yes Yes Yes Yes No Yes Yes No No No (3) Yes impose that parameters determining the amount are based on defined-fixed period No No Yes (1) No No No Yes No No No No Yes No Yes Yes...forbide specific production requirement No No No No No No Yes No No Yes Yes Yes No Yes Yes impose that production is not required (recipient farmer may opt for idling)...require retirement of resoucers from agriculture No No No No n.a. n.a. Yes No No Yes Yes No No No Yes No No No No n.a. n.a. No No No Yes Yes No No No No...forbide counter-cyclical payments No No No No Yes Yes Yes No No Yes Yes Yes No Yes Yes...rule out base parameters updating and expectations effects No No No No No No No No No No No No No No No...rule out possible wealth effects No No No No No No No No No No No No No No No on targeting...pose at least rough limitations on the main objective / target limit individual payments to additional costs associated to objective/target (1) It is not specified if the base area has to be applied at the individual farmer level. (2) Blue box measures have to be direct payments under production-limiting programmes (3) However, factor payments have to be degressive n.a. = non applicable since those programmes are applied in the demand side. No No No (2) No Yes Yes No Yes Yes Yes Yes Yes Yes Yes No No No No No No No No Yes Yes No No Yes Yes Yes No 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 specified for green box measures. Payments have to be a part of production-limiting programmes, but there is no 5

14 definition 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 fixed 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 it will not create incentives to change production decisions. However, blue box provisions do not define whether the base area has to be determined at the individual or the aggregate level. In practice, current parameters have determined the amount of the payment received by individual farmers. The main notified programmes the EU area compensatory payments had an aggregate across countries or regions base area, and individual farmers decisions on the allocation of land among commodities and uses had direct implications on the total payments received. On the contrary, the yields were fixed for individual farmers. These EU payments were area payments, with a maximum total area receiving 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-specific. 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-defined 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, defined 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 government services are domestic food aid and public stockholding for food security, which define 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, extension, inspection, marketing and promotion, infrastructural services) that 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 definition of the purpose of the measures to be included in each sub-box. The loosest of these definitions 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 definition 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 almost minimal, trade-distorting effects (this could be interpreted as deviations from efficient trade that account for potential externalities induced by the measures) or effects on production (this is independent of the externalities that may be derived from the corresponding green box measure). Therefore, a fundamental criterion for green box measures is the magnitude of their impact on production, which has to be at most minimal, even when other specific provisions are respected. 6

15 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 additional constraints. Marketing and promotion excludes expenditure for unspecified purposes that could be used by seller to reduce their selling price. Infrastructural services exclude the subsidised provision of on-farm facilities. Public stockholding should correspond to predetermined targets related solely to food security, and the process should be transparent. Similarly, domestic food aid requires clearly defined criteria related to nutrition objectives and transparency. The decoupled income support sub-box has a detailed list of constraints on implementation rules. Eligibility has to be based on clear criteria applied in a defined and fixed 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 based period. No production shall 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 fixed 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. 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. However, the Cotton Case has ruled out the possibility of excluding some commodities in payments under Decoupled income support. Except for the provision on eligibility based on clearly defined criteria in a fixed base period, the rest of the provisions are applied 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 from natural disasters. Eligibility is based on a minimum 30 percent loss of income or production; the amount of the payment will compensate, respectively, a maximum of 70 percent and 100 percent of this loss, and the sum of both types of payment cannot exceed the producer s loss. In the 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 subbox, the existence of potential insurance impacts on production is unavoidable, since the money received by the farmer will, by nature, be countercyclical with respect to income or production. The main constraint on impact may come from the specificity of the objective of these payments or programmes. Many developed countries have notified their crop insurance subsidies not in this subbox but under the non-product-specific AMS (amber box or de minimis), due to non-compliance with requirements, particularly the need for a formal recognition by government authorities that a natural disaster has occurred and the minimum 30 percent loss. There are three green sub-boxes dealing with structural adjustment: producer retirement programmes, resource retirement programmes and investment aids. The first 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 URAA accepts a negative impact on production compared 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 objectively demonstrated structural disadvantage of 7

16 the operation, and they can only compensate for this disadvantage with no relation to future production. 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. The eligibility for payments under environmental programmes has to be based on the fulfilment of specific conditions, including production 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 welldefined structural 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 specific programme, and deciding whether they are minimal would additionally require a benchmark for comparison. None of these standards is defined in the URAA. 3 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 movements 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? 3.1 Domestic support in the European Union The EU is the first provider of domestic support among all WTO members, representing more than 40 percent of all WTO-notified support across the period Total notified support amounted to an annual billion (bn vii ) in and was reduced by about 15bn to 75 80bn in , the last two notifications available (figure 1). Overall trade-distorting support viii (amber plus de minimis plus blue) was 71bn in 1995 and was progressively reduced since 1998 to 58bn in The EU has clearly reduced its total WTO-notified support since 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 notified in the amber box. However, there is a clear trend of reduction in amber box expenditure in the EU. It accounted for 88 percent of total support in the reference period , while it was only 39 percent of support in 2003 (table 2). This very significant reduction in amber support has brought its expenditure to around 30bn in 2003, compared with 74bn in and 50bn in 1995 (table A.1 in Appendix 2). This is well below the amber box ceiling for the EU15 (the EU with 15 members up to 1994) 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 8

17 2003. Blue box expenditure has increased from 0.4bn in to 25bn in Green box expenditure has fluctuated more and in 1996 had the same expenditure as in 2003 of 22bn. Figure 1 Notified Domestic Support: EU15 100,0 90,0 80,0 UE Million Euros 70,0 60,0 50,0 40,0 30,0 green box blue box Total de minimis AMS amber AMS ceiling 20,0 10,0 0,0 1986/ Table 2 Wha t are the mai n shift s observed in the notifications of the EU, and what are the underlying policy changes that have occurred? Three main shifts can be identified in the data. First, 1995 notifications 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 as a consequence of 2003 reform of the CAP. EU15 DOMESTIC SUPPORT: PERCENTAGE OF EACH BOX IN TOTAL EU NOTIFICATION 1986/ AMS ceiling (1000 million ) 81,0 78,7 76,4 74,1 71,8 69,5 67,2 67,2 67,2 67,2 AMS amber 88% 55% 53% 56% 54% 54% 49% 46% 38% 39% Total de minimis 0% 1% 1% 1% 0% 0% 1% 1% 3% 2% blue box 0% 23% 23% 23% 24% 23% 25% 28% 33% 31% green box 11% 21% 23% 20% 22% 23% 25% 24% 27% 28% Total notified (1000 million ) 83,6 90,5 95,4 89,3 86,7 87,9 88,5 84,7 75,6 79,7 Notifications from 1995 include 21bn under the blue box, 75 percent of which is compensatory payments for arable crops notified as payments based on fixed area and yields, and 25 percent of which is compensatory payments per head notified as livestock payments made on a fixed number of head. These payments were created to compensate farmers for the reduction in institutional prices decided under the 1992 McSarry reform, which included a 30 percent cut in cereals intervention prices. The new payments are based on area or head, with a maximum guaranteed area or number of animals and with fixed yields. 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 notifications included a reduction of 23bn in the amber box. This reduction is explained by lower levels of market price support for the products affected by the reform, mainly 14bn reduction for 9

18 cereals and 4.5bn for beef. In 1995, compared with the reference , 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 significant change in the composition of support in EU notification occurs from 2000 onwards and is the same type of shift observed after 1992 reform: a reduction in amber box support accompanied 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 percent for cereals, 20 percent 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 This reduction is driven by a drop in the price of cereals and, particularly, a drop in the beef market price support, which fell 13bn down to zero level in This fall is explained by the replacement of the beef intervention price that was 3013 /t (euros per metric ton) in 2001 by a basic price for storage of 2224 /t in 2002, which is lower than the fixed reference price used in WTO calculations for price support. Due to various economic reasons, particularly the existence of border tariffs, reductions in institutional prices of this nature may not always be transmitted fully to producer prices. Calculations of the OECD for market price support follow a different, noncomparable methodology based on observed price gaps between producer prices and border reference prices. According to these calculations, beef market price support did not fall between 1999 and ix The third important change in domestic support composition in the EU is still to be observed in the years to come when there will be notifications that include the new SFP scheme. The main underlying policy changes are in the 2003 CAP reform package, which has created this new type of payment, the main characteristic of which is 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 with the environment and animal welfare, and it is forbidden to 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 fit 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. However, the proposal of reform for the fruit and vegetables sector that has been announced by the EU Commission in January 2007, and is currently under discussion, includes the potential elimination of this prohibition. This new payment directly substitutes former domestic support, mainly blue box payments based on area and livestock heads. There are alternative choices for EU members on how to apply the reform, but it is estimated that, given the decision taken to date, at least 80 percent of the expenditure on compensatory payments in the blue box would be moved to the new SFP scheme. If finally notified 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 (Mediterranean products, sugar and, in the very near future, fruit, vegetables and wine). Current decisions would imply that market price support will fall mainly for sugar, milk, butter, olive oil and rice, which could add up to around 9bn. According to the draft proposals circulated by the EU Commission, the two pending reforms will very likely suppose further reductions in amber box support. These cuts in support are mostly compensated by additional payments under the SFP scheme. Finally, the 2003 reform establishes a reduction of all direct payments of 5 percent (called modulation), which will be used for rural development expenditure, mostly notified in 10

19 different green sub-boxes. The decision by the European Council on budgetary perspectives opened the door to a further 20 percent modulation to be decided by EU members, but this is still to be regulated. 3.2 Domestic support in the United States The US is the second-largest provider of domestic support among all WTO members, with 28 percent of all WTO-notified support across the period Total notified support by the US added up to $61 59bn in and increased by about $13bn to $74-72bn in , the last notifications available. The US has clearly increased its total WTO-notified support since the beginning of the URAA process in This increase in support was due mainly to increases in overall trade-distorting support, starting in Most US domestic support has been notified as green box in all years since In the reference period , green box expenditure already represented 41 percent of the total; it was 88 percent in 1996 and 1997 and 70 percent in In monetary nominal terms, green box expenditure in the US increased in 1995 to $46bn relative to the reference level of $24bn in ; it has remained fairly constant around $50 51bn since Blue box expenditure disappeared after 1996, and amber and de minimis expenditure was stable in the period In 1998 and 1999, both amber and de minimis expenditure increased, with a minor reduction in Most support in the US is declared as green, but the amount of (presumably most distorting) amber box support has increased in the latest notifications available up to 88 percent of the amber ceiling in 2000 and 75 percent of the ceiling in What are the main shifts observed in the notifications of the US, and what are the underlying policy changes that have occurred? Three main shifts or changes are observed in figure 2 and table 3. First, in 1995 notifications show a reduction in amber box and an increase in green box, compared with the reference period Second, 1996 supposed a shift from blue expenditure to green expenditure. Third, since 1998 there has been an increase in the total domestic support notified due to increases in both amber and de minimis expenditure. Figure 2 11

20 Notified Domestic Support: UNITED STATES 80,0 70,0 60,0 000 Million Dollars 50,0 40,0 30,0 20,0 green box blue box Total de minimis AMS amber AMS ceiling 10,0 0,0 1986/ Table 3 US DOMESTIC SUPPORT: PERCENTAGE OF EACH BOX IN TOTAL US NOTIFICATION 1986/ AMS ceiling (1000 million $) 23,9 23,1 22,3 21,5 20,7 19,9 19,1 19,1 AMS amber 40% 10% 10% 11% 16% 23% 23% 20% Total de minimis 2% 3% 2% 1% 7% 10% 10% 10% blue box 16% 12% 0% 0% 0% 0% 0% 0% green box 41% 76% 88% 88% 77% 67% 67% 70% Total notified (1000 million $) 59,0 60,9 58,9 58,3 65,0 74,0 74,2 72,1 The 1995 notification 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, since most of the new green expenditure is oriented towards domestic food aid in the form of financial assistance for low-income families to purchase food. Meanwhile, the reduction in the amber box is support received directly by farmers, particularly cereals producers, in the form of market price support and deficiency payments. Expenditure shifts between boxes, and the recipients and nature of the support provided have also changed. The 1996 shift is referred to the blue box. In 1995, blue box support notified under payments based on 85 percent or less of base level of production added up to $7bn. These were deficiency payments declared to be made only on 85 percent of base area, with constant yields. This support is eliminated in the 1996 notification. 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 FAIR Act). These payments are based on fixed area and yields, and there is freedom on what to produce in the land benefiting from them including idling except for the production of fruit and vegetables. These payments were renewed by the 2002 Farm Bill as direct payments, while the option of updating the area to the average was also provided. 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. 12