U.S. subsidies at risk

During WTO talks in Hong Kong three weeks ago, it was easy to cheer on the U.S. position as it pushed for bold and dramatic changes in world farm subsidies in exchange for greater market access in countries where high tariffs keep out cheaper farm goods. The U.S. has proposed cutting its farm subsidy programs deeply in exchange for deep cuts in tariffs, thus opening up markets worldwide and allowing farmers to get more income from the marketplace.

As part of its offer on lowering tariffs, the United States has asked for much less protection of politically sensitive commodities than the European Union. The EU wants to preserve tariffs on roughly 8 percent of its products compared to the U.S. proposal of 1 percent. Last week, both USDA Secretary Mike Johanns and U.S. ag trade negotiator Richard Crowder called on the EU to do better. The groups are locking horns again later this month and on into spring, trying to find some compromise by the end of the year.

In Hong Kong, it appeared the EU was squirming under relentless pressure. But time and distance have changed my perspective. Judging from the opening comments at GreenWeek, Europe's international food and agriculture exhibition held here in Berlin, Germany, I'm nearly certain of two things: First, the EU will not budge on its trade stance, and two, the U.S. position is extremely weak.

More export opportunities

Without more opportunity to export farm products, the Bush administration says it would not agree to the reduction in government supports that would be part of an agriculture pact, along with elimination of export subsidies.

That only makes sense. A FAPRI analysis of the U.S. position shows that U.S. farm income would be more at risk, as domestic subsidies fade out but riskier world markets come into play.

The problem now is, Europe has already reformed its Common Agricultural Policy (CAP), shifting in 2003 to decoupled payments as a way to compensate its farmers. That means those subsidies are no longer 'trade distorting' in the eyes of WTO. As of January 1, the five EU countries that had not yet done so have implemented the CAP 2003 reforms, notes Mariann Fisher Boel, EU Agriculture commissioner.

"By the time the reforms are up and running, some 90% of direct payments to farmers will be decoupled from production," she told a group of reporters at GreenWeek. "This is a major achievement. It will support farmers while encouraging them to react to market signals. It also helps us in the current round of world trade talks."

On the other hand, the U.S., with its 2002 Farm Bill, moved itself perhaps unwittingly into a vulnerable position by bringing countercyclical payments into play. These kinds of subsidies will likely be found to be trade distorting in the eyes of WTO. You can expect to see countries file suit against the U.S., and if so, they will very likely win.

So even as Mike Johanns and Richard Crowder call for the EU to "improve their offer," it favors the EU to do nothing. Soon enough, the U.S. and its counter-cyclical payments will be in the hot seat. And we risk losing those farm programs and getting nothing in return for them.

The EU sees its offer to cut tariffs by half as "reasonable," says Boel. And in fact the EU did agree to end export subsidies by 2013, one of the few decisions reached in Hong Kong. But the Europeans say market access is hindered by export subsidies, such as our cotton programs. "Trade-distorting domestic support•also limits access to markets," says Boel. "With this in mind, we expect our trade partners to commit themselves to meaningful disciplines in these areas, as we are ready to do."

When you hear the Europeans say "as we are ready to do" it usually means they already have the programs in place. So, with their reformed CAP and decoupled payments, it's easy for Boel to make those statements. Export subsidies for both the EU and the U.S. have been dropping anyway; most of the world wanted an end date of 2010 for export subsidies, so the EU probably considered the final agreement of 2013 a victory.

Back door protectionism

The EU shouldn't worry much about dropping its tariffs anyway. Both the EU and the U.S. find ways to keep products out through other channels, usually under the guise of "quality standards" or "consumer safety concerns."

Even so, I was amazed this week to talk to European journalists who told me Brazil was flooding Europe with cheap beef, despite the high tariffs designed to keep it away. I was surprised there was no food quality or safety issue that the Europeans could use to keep Brazilian beef out. After all, they're still using the old 'growth hormone' issue to keep U.S. beef out.

At GreenWeek, Fisher Boel talked about the EU position on labeling food products entering the EU. The EU has insisted throughout these trade talks on country of origin labeling, or 'geographical indications (GIs).'

"Some people criticize GIs and other kinds of regulated labeling as protectionism introduced through the back door," she says. "We see them as a lubricant for rational trade. Better-informed consumers send clearer market signals when they make their purchases."

I have to agree with her on this one. If the U.S. opens its markets along with the Europeans, U.S. consumers need to know where food originates, especially with our own unique safety concerns (think: 9/11). But when does such labeling become excessive? I was surprised at her answer.

"We should avoid allowing high standards to become obstacles to trade, where possible," says Fisher Boel. "On the other hand, we have those standards in the EU because our consumers have asked for them, very clearly.

"We can't fully resolve this tension between consumer protection and free trade. But we must make sure that we keep it in view, and always ask ourselves carefully whether a given new standard or label is really necessary."

Such comments make me think the EU is starting to warm up to allowing more products in through lower tariffs. We'll see.

Next week: Reasons why globalization through free trade may fail.

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