How farmer trade aid undermines the US in world markets

U.S. agricultural producers have been hard hit by China, Mexico, Canada and other countries who have imposed tariffs against U.S. agricultural products in retaliation for adverse trade actions taken by the Trump administration against their exports. Agricultural exports to China have fallen from almost $22 billion in fiscal 2017 to $6.5 billion projected for fiscal 2019. Soybeans exports have fallen by about 15 percent in volume, as exporters have sought alternative markets and stocks have grown as a result. A big winner from the tariffs has been Brazil, which has seen its exports to Brazil

To shore up support from an important constituency, the administration has provided farmers and ranchers with generous compensation packages for 2018 and 2019 losses which could top over $26 billion. Yet, while that aid will help the sector in the short term, the level of subsidies threatens to prompt further trade actions against U.S. agriculture as support levels are in danger of exceeding domestic support limits in the World Trade Organization.

Current WTO rules limit U.S. trade distorting support to $19.1 billion. Since the WTO disciplines went into effect in 1995, the United States has remained within its limits. In 2016, the most recent year reported, U.S. trade distorting support was less than $5 billion. However, the 2018 trade aid package more than tripled those levels and the 2019 package could push the United States over its limits. This could in turn prompt WTO members from challenging U.S. support programs and if successful, seek damages or other trade concessions.

Ironically, the United States has long argued for farm subsidy reforms within the WTO, particularly for large emerging economies whose farm supports have grown considerably in recent years according to the Organisation for Economic Co-operation and Development. To that end, in the waning days of the Obama administration, the United States launched a WTO challenge against China’s support for corn, wheat and rice producers claiming that China’s support levels were inconsistent with China’s obligations under the WTO Agreement on Agriculture.

Last February, a WTO panel largely agreed with the United States and China agreed to implement the pane’s recommendations and rulings by March 2020. The United States has raised similar concerns with India’s farm programs and with Canada, has recently questioned India’s support for lentil and pulse producers.

Now, the shoe could be on the other foot. WTO members have raised concerns over U.S. trade aid at the recent Committee on Agriculture meeting in Geneva. A formal challenge through the WTO dispute settlement body if it appears that U.S. support levels are exceeding limits.

What is more likely, however, is a challenge under the WTO Subsidies and Countervailing Measures Agreement, similar to that brought by Brazil against US cotton subsidies in 2003. In the Brazil cotton case, Brazil successfully argued that large payments to cotton insulated U.S. producers from price shortfalls thus stimulating increased production and adversely affecting agricultural producers in other countries. The United States eventually lost that case and was forced to change its agricultural policies.

Under either scenario, not only would an adverse ruling have potential consequences in the form of compensatory actions, but it would further erode U.S. leadership in seeking further reforms in domestic subsidies and increased market access within the WTO.

With the recent breakdown in trade talks and renewed threat of additional tariffs being imposed by the United States in September, hopes for a resumption of agricultural trade with China are dwindling fast. Agricultural prices, which had risen in recent months with weather concerns and hopes for renewed purchases by China, have fallen again with the onslaught of tweets threatening an escalating trade war.

If price levels remain low and exports stagnant, pressures for another round of trade aid will be hard to resist in 2020, particularly in an election year. While such aid may help producers in the short run, the long-term harm in world markets could well prolong problems for the sector.

Joseph Glauber is a senior research fellow at the International Food Policy Research Institute and a visiting scholar at the American Enterprise Institute. He previously spent 30 years at the U.S. Department of Agriculture, where he served as chief economist from 2008 to 2014.