Reaction to U.S. Farm Act Highlights Tension Between Domestic Politics and International Obligations
Reaction to U.S. Farm Act Highlights Tension Between Domestic Politics and International Obligations

“This nation has got to eat. It’s in our national security interests that we be able to feed ourselves. Thank goodness, we don’t have to rely on somebody else’s meat to make sure our people are healthy and well fed.”

—President George W. Bush, in a speech before the Cattle Industry Annual Convention and Trade Show, Denver, Colorado, Feb. 8, 2002.

U.S. President George W. Bush signed into law the Farm Security and Rural Investment Act (the “Act”) on May 13, 2002. The Act increases support to American farmers for a wide range of crops over the next six years, including direct subsidy payments for producers of, among other goods, wheat, corn, soybeans, cotton, rice, peanuts, and dairy products, and provides government loans for cultivation of those goods, as well as mohair, wool, honey, chickpeas, lentils, peas, and sugar.

The bill also introduces a system of “counter-cyclical payments” under which farmers are guaranteed a certain price for commodities such as wheat, corn, grain sorghum, barley, oats, rice, cotton, soybeans, oilseeds, and peanuts. If, during a downturn in the agricultural business cycle, the market price for any of these commodities falls below the target price, the federal government will pay the difference between the prices.

America’s trading partners have condemned the Act as a politically driven, protectionist measure that violated WTO rules on agricultural subsidies established in the Uruguay Round of trade talks, backtracked on U.S. commitments, set back multilateral efforts to reduce agricultural subsides, and harmed developing countries’ access to global agricultural markets. Coming on the heels of already-controversial U.S. tariffs on steel and lumber, increases in U.S. farm subsidies threaten to cloud both the world-wide Doha Round of trade negotiations and efforts to establish a Free Trade Area of the Americas.

The European Union’s Commissioner for Agriculture, Franz Fischler remarked that the U.S. farm bill should have been called the “Flunk Bill.” The European Union and the 15-member Cairns Group of agricultural exporting countries, including such important U.S. trading partners as Australia, Argentina, and Brazil, have indicated that they will challenge the Act’s subsidies by initiating WTO dispute settlement cases. Meanwhile, China has threatened to increase agricultural subsidies to its farmers, and a number of African countries have voiced their concerns that cheap agricultural products will flood into their markets.

These countries argue principally that the counter-cyclical payments and favorable loans will be trade distorting. With such programs, subsidies will increase as commodity prices fall. Lower prices will thus mean greater price supports. At the same time, greater supports will lead to larger production. (Ironically, too, more production will depress prices, so that counter-cyclical programs could be viewed as inherently self-contradictory.) More production will, in turn, lead to more exports of subsidized U.S. agricultural products as U.S. producers seek markets abroad for their excess goods.

Meanwhile, availability of subsidized production may make it more difficult for foreign producers to sell their goods in the United States. Thus, counter-cyclical programs fit into the “amber box” (as in a yellow warning light) of subsidies established in the Uruguay Round Agreement on Subsidies and Countervailing Measures because they are linked to market prices paid for the commodity and will, then, distort free trade. Such subsidies, while allowed, are subject to limits and are supposed to be reduced over time. (“Green box” subsidies that have no or minimal trade effects, e.g., income payments to farmers unrelated to production of any commodity, are permitted, as are “blue box” subsidies tied to limits on production.)

Critics of the Act say that the U.S. will inevitably breach the $19.1 billion limit it committed to in the Uruguay Round through use of the counter-cyclical payments. Perhaps more importantly, however, critics argue that granting the subsidies goes back on the general agreement among WTO members in the Uruguay Round that “amber box” subsidies should be reduced. Rather than viewing the $19.1 billion figure as the top rung of a ladder from which to climb down, the United States, according to these critics, views it as a goal to be reached.

U.S. officials have denied both that the Act violates U.S. commitments and that it represents a retreat from the Administration’s free trade goals. U.S. Trade Representative (USTR) Robert Zoellick in an address to the Council of the Americas on May 7, 2002, pointed out that the Act provides the Secretary of Agriculture authority to adjust farm support levels if they would cause the U.S. to exceed the WTO “amber box” limit.

Furthermore he said, “The new farm bill should not raise any questions about our common aims to eliminate export subsidies and substantially improve market access…Nor will we shrink from pursuing substantial reductions in trade-distorting domestic support.” Left unspoken, however, is the question of whether a popular subsidy program could be rolled back once it has started paying out funds.

American defenders of the Act also argue that the level of protection for U.S. production is only moderate compared to that of other countries. Agriculture Secretary Ann Veneman explained to the press that the U.S. allowance of $19.1 billion in “amber box” subsidies is significantly less than the $31 billion permitted to Japan and the $62 billion permitted to the European Union. She also noted that the U.S. market is more open to agricultural trade than other countries’. She pointed out that agriculture tariffs average 59 percent in Japan and 30 percent in the EU and among Cairns Group members, but only 12 percent in the United States.

The controversy over the Act highlights several important features of global trade relations and globalization in general. U.S. enactment of the bill demonstrates the powerful impact that domestic politics has on government policies that affect international trading relations. Congress passed the Act and the President signed it into law to solidify their political bases for the fall 2002 Congressional election, in which farm constituencies may well hold the balance in many hotly contested races. Underlying this political pressure is also the strong psychological factor that drives much of agriculture policy throughout the world—the belief that farmers represent an almost mythical embodiment of a nation’s character. In the United States, for example, the idea of the family farm has an appeal similar to that of the rice farmer in Japan or the Provencal farmer in France.

At the same time, the passage of the Act points to the competing pressures faced by governments in satisfying both their domestic political obligations and their international commitments. Supporters of the Act, for example, while acknowledging the political factors that led to the bill, nevertheless defend it by saying not only that the bill would not violate U.S. trade commitments, but that it will in fact empower the Bush Administration by ensuring support for trade liberalization in the future. Indeed, the controversy over the Act is similar in this way to international disagreement over tariffs the Administration imposed on foreign steel in March 2002. In both cases, the U.S. Administration was caught between political constraints that seemed to require concessions to the domestic industry and the complaints of trading partners that those concessions threatened U.S. international commitments.

The existence of this tension points to the deeply interconnected nature of domestic politics, international politics, and the globalized economy. The U.S. Congress and Administration felt that domestic politics required increasing agricultural support, but this move decreased U.S. credibility in on-going and future international negotiations to reduce trade-distorting subsidies. It created an impression of American hypocrisy that will likely limit the United States’ ability to push for changes in other countries’ agricultural policies that harm U.S. exporters.

Furthermore, the Act may encourage other countries not just to rebuff U.S. efforts on that score, but also to increase their own agricultural supports—using the justification of domestic political needs, just as the United States did. In fact, the European Union is working to reduce farm subsidies within Europe in order to liberalize their own market, but the U.S. action gives ammunition to those lobbies that oppose such reform.

The Act may also be a sign of a trend toward using subsidies as a negotiating tactic in trade disputes. USTR Zoellick, for example, admitted that the provision of subsidies to American farmers would enhance U.S. bargaining power in multilateral negotiations. Similarly, the European Union has decided to restore subsidies to European shipbuilders in order to counter what it considers unfair subsidies by the South Korean government to its shipbuilding industry.

Thus, while domestic farm constituencies in the United States and elsewhere may benefit from increased agricultural subsidies, the global free market in agricultural goods will lose—with higher prices for consumers, less market access for developing countries to rich countries, and fewer export opportunities for competitively produced goods from the developed countries trading among themselves and with the developed world.

Click here for more information on U.S. agricultural trade policy

Click here for more information on WTO agricultural policy

Click here for more information on European Union agricultural trade policy

Leave a Reply

nine + 7 =