Ignoring trade commitments and trade relations only hurts our credibility

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Article Highlights

  • The US taxpayer is annually contributing $147 million to improve the productivity of the Brazil cotton industry.

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  • The US cotton lobby is a poster-child when it comes to subsidies that violate US trade agreements, but the disease is endemic.

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  • As long as congressional ag committees ignore US trade commitments, the US will lack credibility in negotiations.

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For many years, a persistent theme in House and Senate Agricultural Committee debates over farm policy has been “Give the farm lobbies the subsidy programs they want and the heck with the consequences for U.S. trade relations.”  Nothing reflects that attitude better than the recent history of the cotton subsidy program. Like other developed countries, the United States agreed to end explicit export subsidies for all agricultural commodities by the early 2000’s under the terms of the 1994 Marrakesh Treaty that established the World Trade Organization (WTO).

However, the cotton lobby had sought and obtained the Step 2 program that paid subsidies to domestic mills and exporters that purchased upland cotton. Step 2 clearly included export subsidies that violated U.S. WTO commitments and in 2006 a WTO dispute resolution committee determined that such was indeed the case. So now the U.S. taxpayer is annually contributing $147 million to improve the productivity of the Brazil cotton industry.
 
You might think that the cotton lobby would have learned its lesson, but no. In 2010, as the current farm bill debate was beginning to have a real life, they dreamed up a new subsidy program called STAX (apparently not to many literary types in cotton policy circles). The cotton guys claimed that because STAX would be an “insurance” program to which farmers would contribute 20 percent of total government payments, it would be a WTO legal policy. The Brazilian government argued that STAX was just another potentially large subsidy that would expand U.S. cotton production and suppress world prices. The Brazilian government was correct, but that did not stop the House Agricultural Committee from including the STAX program in its 2012 Farm Bill proposal.
 
The U.S. cotton lobby might be a poster-child when it comes to seeking subsidies that are likely to violate US trade agreements, but the disease is endemic in the industry. Last week, even the American Farm Bureau, which has had a long history of advocating for free markets, came out with a new “STAX for all” farm bill proposal. In their current Farm Bill rent seeking activities, peanuts, rice and cotton farmers have sought a new Price Loss Coverage price support program that would likely trigger large subsidies, even though crop prices are at near record levels for many commodities. Corn, soybeans and wheat organizations have been seeking an expanded and potentially very lucrative “shallow loss” program. Both proposals have been included in at least one of the Senate and House agricultural committee farm bills.
 
Why do these proposals all pose problems for U.S. international trade relations? First, as new subsidy programs, they undercut the credibility of the U.S. as a proponent for free trade in all goods and services. Second, all of the new farm lobby proposals (STAX, shallow loss, higher price supports, and the most widely used and heavily subsidized crop revenue insurance products) increase subsidies when international agricultural commodity prices fall. As a result, they create the potential for new WTO price suppression complaints from dozens of countries on over twenty agricultural commodities, ranging from major commodities such as corn and cotton to smaller acreage commodities such as canola, sunflower, chickpeas and lentils. Third, the subsidies associated with the proposed shallow loss and price support programs are potentially so large that they could cause the US to violate its commitments to limit spending on production distorting farm programs (its “amber box aggregate measures of support).
 
All this means that other countries are likely to bring more complaints against the U.S. and win the right to impose “countervailing measures”. These could legitimately include new tariffs on any U.S. agricultural exports, manufactured goods, or services. Alternatively, the U.S. can try to buy complainants off with taxpayer dollars to improve wheat production in Canada and Australia, and wine production in France and Austria, as well as cotton production in Brazil. But most seriously, perhaps, as long as congressional agricultural committees persist in ignoring U.S. trade commitments and trade relations, the U.S. government will continue to lack credibility in negotiations that open and expand new markets for all U.S. products and protect U.S. intellectual property from international theft.

Smith is a professor at Montana State University and a visiting scholar at the American Enterprise Institute where he directs the American Boondoggle farm policy project.

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About the Author

 

Vincent H.
Smith
  • Vincent H. Smith is Professor of Economics in the Department of Agricultural Economics and Economics at Montana State University and co-director of MSU’s Agricultural Marketing Policy Center. He received his Ph.D. from North Carolina State University in 1987 and his bachelor’s and master’s degrees from the University of Manchester in 1970 and 1971. Dr. Smith’s current research program examines agricultural trade and domestic policy issues, with a particular focus on agricultural insurance, agricultural science policy, domestic and world commodity markets, risk management, and agricultural trade policy. He has authored nine books and monographs and published over 100 articles on agricultural and other policy and economic issues. His work has been recognized nationally through multiple national awards for outstanding research programs. In 2008, he became a Distinguished Scholar of the Western Agricultural Economics Association. Currently he is a Visiting AEI Scholar and co-director of AEI’s agricultural policy initiative. Dr. Smith is married and he and his wife, Laura, have two children, Karen and Meredith.
  • Email: uaevs@montana.edu
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