ICTSD - IPC ROUNDTABLE Exploring Options for Making Progress on Agricultural Market Access and Domestic Support

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1 ICTSD - IPC ROUNDTABLE Exploring Options for Making Progress on Agricultural Market Access and Domestic Support PRODUCT SPECIFIC CAPS ON DOMESTIC SUPPORT Marcos Sawaya Jank André Meloni Nassar Cinthia Cabral da Costa Glion, Switzerland 23 January 27

2 Source: WTO notifications and Icone estimations. USD Billion ( Billion for EU) WTO: OVERVIEW OF DISTORTIVE DOMESTIC SUPPORT (e) 3(e) 4(e) EU (e) 3(e) 4(e) 5(e) USA AMS: trade-distorting price or income guarantee payments linked to current levels of production, whether or not directed at specific products. They are subject to binding and reduction commitments. S&D (Special and Differential Treatment): measures exempt from reductions for developing countries. De Minimis: trade-distorting payments, whether or not directed at specific products, which represent less than 5% of the production value. Blue Box: trade-distorting compensatory payments linked to production-limiting programs. They are exempt from binding and reduction commitments Brazil

3 (USD billion) Trade Distorting Domestic Support at the WTO: US vs. Brazil AMS: trade-distorting price or income guarantee payments linked to current levels of production, whether or not directed at specific products. They are subject to binding and reduction commitments. S&D (Special and Differential Treatment): measures exempt from reductions for developing countries. De Minimis: trade-distorting payments, whether or not directed at specific products, which represent less than 5% of the production value. Blue Box*: trade-distorting compensatory payments linked to production-limiting programs. They are Exempt from binding and reduction commitments. Production Flexibility Contracts: WTO Cotton Panel concluded these payments are not Green, and thus trade-distorting. PFC was replaced by the Direct Payments** in US 1 Notes: * Counter cyclical payment was classified as blue box. ** data for DP presented in fiscal year. Source: WTO notifications, USDA-CCC, Icone s estimations. 2(e) 3(e) 4(e) 5(e) Brazil 1 2 3

4 KEY ISSUES Trade-off: AMS and OTDS vs. Product Specific Disciplines cuts = disciplines; but cuts = disciplines. Cuts and disciplines are necessary to promote integral reforms, reducing the opportunities for box and product-shifftings. Proposed individual cuts/ceilings or overall cut are not capable to avoid over-subsidization in specific products. Lower ambition should be compensated by precise productspecific disciplines, which are needed to minimize the distortions caused by domestic policies (mainly their adverse effects on world prices). AMS and Blue Box subsidies are product-specific. Learning with the Cotton Case.

5 United States - Domestic Support Proposed cuts and ceilings (US$ Million) Departure Point US EU G-2 AMS 19,13 7,641 7,641 5,731 Blue Box 9,753 4,877 4,877 4,877 NPS De Minimis 9,753 4,877 1,951 1,483 PS De Minimis 9,753 4,877 1,951 OTDS 48,362 22,271 16,419 12,91 Available OTDS n.a. 17,394 14,468 12,91 REDUCING BOX-SHIFTING Resulting amount to implement OTDS assuming 1% usage of AMS and BB Cuts and ceilings proposed for the US DS US EU G-2 AMS 6% 6% 7% Blue Box 2.5% VOP 2.5 % VOP 2.5% VOP NPS and PS De Minimis 5% 8% 84.7% OTDS 54% 7% 75% It should be at least 64%

6 US Ag Domestic Support Proposed cuts and ceilings (US$ Billion) Blue Box NPS de minimis PS de minimis AMS Departure Point Applied level (24e) Cuts and ceilings proposed US EU G-2 AMS 6% 6% Blue Box 2.5% VOP 2.5 % VOP 2.5% VOP NPS and PS De Minimis 5% 75% 84.7% OTDS 53% 7% 75% US EU G-2 Notes: (e) estimated. Concerning the EU and G-2 proposals, it is assumed that the PS de minimis will continue unused by the US. Source: WTO 7%

7 European Union - Domestic Support Proposed cuts and ceilings ( Million) Departure Point US EU G-2 AMS 73,228 12,449 21,968 18,37 Blue Box 2,621 6,447 6,447 6,447 NPS De Minimis 12,893 6,447 2,579 PS De Minimis 12,893 6,447 2,579 OTDS 119,636 29,99 35,891 23,927 Available OTDS n.a. 25,342 3,994 12,91 Resulting amount to implement OTDS assuming 1% usage of AMS and BB Assuming 4,5 million (26), NPS De Minimis goes to 1,12 Cuts and ceilings proposed for the US DS US EU G-2 AMS 83% 7% 75% Blue Box 2.5% VOP 2.5 % VOP 2.5% VOP NPS and PS De Minimis 5% 8% 65% OTDS 75% 7% 8% It should be at least 74%

8 Dep. Point US OTDS (US$ billion) Blue box NPS / PS De Mininis G Estimated US AMS (US$ billion) G-2 Dep Point Estimated US and EU: OTDS and AMS Reduction according to different proposals (5.% VOP for Blue Box) Source: WTO notifications and ICONE s Simulations. Note1: Counter cyclical payments for the Blue Box from 22 to 25. Note 2: on the starting point, AMS for EU-25 US Dep. Point Blue box NPS / PS De Mininis G-2 EU OTDS ( billion) Estimated G-2 EU AMS ( billion) Dep Point Estimated EU

9 United States: Product-specific disciplines and the reforms of dairy, sugar and corn (US$ Million) US$ Million AMS: 19,13 Max. CCP expenditure: 7,6 Corn 25: 3,4 Dairy/Sugar: 5,5 Product-specific disciplines are needed to avoid a huge PRODUCT-SHIFTING: Dairy (MPS AMS) Sugar (MPS AMS) Corn (AMS GB) BB: 2.5% VOP 4,9 AMS: 6% cut 7,641 Soybeans Cotton Rice Wheat Current Situation After Reduction Max. Price Sub. Milk Loss Payment 23: 1,8 Max. MLP SO/CT/RI/WT: 7,65 Notes: SO (Soybeans), CT (Cotton), RI (Rice), WT (Wheat), CCP (Counter-Cyclical Payments AMS (Amber Box); BB (Blue Box), GB (Green Box); MPS (Market Price Support). Elaboration: ICONE

10 (f) forecast Source: USDA-CCC, Fiscal Years. Elaboration: ICONE. USD Billion US: Domestic Support Main Commodities (F) Corn Cotton Soy Rice Wheat 26 (F)

11 Product Specific Disciplines and Adverse Effects. What Economic Theory recommend us Adverse effects: important concept from the Cotton Case. Measuring adverse effects: Effect of domestic subsidies on world markets capturing the exporteffect of domestic subsidy. World price is the key variable price distortion is distributed over time. Sumner s model: supply response to price+subsidy (market-share). Designing product-specific disciplines: Target is to minimize adverse effects. Overall capping: amber and blue box. Product capping calculated from an acceptable price-distortion threshold.

12 9 8 Prices Received by U.S. Cotton Farmers and the World Prices US World Export Market Share 26% 28% 18% 25% 26% 38% 39% 41% 41% Cents per pound /1 1/2 2/3 3/4 4/5 Subsidy per unit Farm Gate Price AWP Cotlook A Index Source: ICAC; USDA; CCC.

13 Source: OCDE 23. SHARE OF AGRICULTURAL SUBSIDIES IN US PRODUCTION - BY COMMODITY 16% 14% 12% 1% 8% 6% 4% 2% % Rice Cotton Wheat Soybeans Maize

14 P P w *(1+s) P w a Product Specific Capping Disciplines Methodology based on potential adverse effects THE CASE OF THE US b USA S 1 S 2 P P w P w World S 1 S 2 D Qus 1 Qus 3 Qus 2 Q Q RW + Qus 1 Q RW + Qus Qus 3 1 = volume produced by the US without subsidy Qus 3 = volume produced by the US with subsidy Q RW = volume produced by the rest of the world a + b = value of the subsidy = S P w = world price without the US subsidy. Total world production = (Q RW + Qus 1 ) Pw = world price with the US subsidy. Total world production = (Q RW + Qus 3 ). and: (P w - Pw ) / Pw = US subsidy reduction impact on world price = D dp * ds Q S

15 Product Specific Capping Disciplines Methodology based on potential adverse effects THE CASE OF THE US USA Farm price USA Supply World World Supply world price how much the world price (P) decreases with 1% increase in the US subsidy (S)= dp ds Fixed Found So, the total reduction in world price is = dp * ds S

16 Partial Equilibrium Model References Daniel A. Sumner. Boxed In: Conflicts between U.S. Farm Policies and WTO Obligations. Trade Policy Analysis, 32 (December 25). Cato Institute Center for Trade Policy Studies. Daniel A. Sumner. A Quantitative Simulation Analysis of the Impacts of U.S. Cotton Subsidies on Cotton Prices and Quantities. (mimeo)

17 Soybean Product Specific Capping based on Adverse Effects on World Market Million acres US$ billion , 3,5 3, 2,5 2, 1,5 1,,5, Area vs Farm Prices USD/bushel /1 1/2 2/3 3/4 Trade-Distorting DS (AMS+BB) 4/5 5/6(e) /1 1/2 2/3 3/4 4/5 5/6(e) Source: USDA; WTO notifications; ICONE s Simulations. Green Box (PFC/DP) Price Distortion US$ billion,% -1,% -2,% -3,% -4,% -5,% -6,% -7,% -8,% 4, 3,5 3, 2,5 2, 1,5 1,,5, Implied Adverse Effects 1,7 1,5 /1 1/2 Alternatives for Capping 2/3 1,1 3/4 AMS + BB 1% VOP 2% Price Distortion 4/5 5/6(e) 2,2 4% Price Distortion

18 Cotton Product Specific Capping based on Adverse Effects on World Market Million acres US$ billion 18, 16, 14, 12, 1, 8, 6, 4, 2,, 4,5 4, 3,5 3, 2,5 2, 1,5 1,,5, Area vs Farm Prices US$ cents/pound Trade-Distorting DS /1 1/2 2/3 3/4 4/5 5/6(e) /1 1/2 2/3 3/4 4/5 5/6(e) Source: USDA; WTO notifications; ICONE s Simulations Price Distortion US$ billion,% -1,% -2,% -3,% -4,% -5,% -6,% -7,% -8,% -9,% -1,% 4,5 4, 3,5 3, 2,5 2, 1,5 1,,5, Implied Adverse Effects 1,7 /1 1/2 Alternatives for Capping 2/3,6,5 3/4 AMS + BB 1% VOP 2% Price Distortion 4/5 5/6(e) 1,2 4% Price Distortion

19 Rice Product Specific Capping based on Adverse Effects on World Market 4, Area vs Farm Prices 3,5 Price Distortion 3, 2,5 2, 1,5 1,,5, USD CWT ,% Implied Adverse Effects -1,% -2,% -3,% -4,% -5,% -6,% -7,% 1,6 1,4 1,2 1,,8,6,4,2, /1 1/2 2/3 3/4 4/5 5/6(e) /1 1/2 2/3 3/4 4/5 5/6(e) /1 1/2 2/3 3/4 4/5 5/6(e) Trade-Distorting DS 1,6 1,4 1,2 1,,8,6 US$ billion,4,2, Alternatives for Capping US$ billion Million acres Source: USDA; WTO notifications; ICONE s Simulations.,4,1,2 AMS + BB 1% VOP 2% Price Distortion,5 4% Price Distortion

20 Corn Product Specific Capping Based on Adverse Effects on World Market Million acres US$ billion , 8, 7, 6, 5, 4, 3, 2, 1,, Area vs Farm Prices USD/bushel Trade-Distorting DS /1 1/2 2/3 3/4 4/5 5/6(e) /1 1/2 2/3 3/4 4/5 5/6(e) Source: USDA; WTO notifications; ICONE s Simulations. 3, 2,5 2, 1,5 1,,5, Price Distortion US$ billion,% -1,% -2,% -3,% -4,% -5,% -6,% -7,% -8,% -9,% -1,% 9, 8, 7, 6, 5, 4, 3, 2, 1,, Implied Adverse Effects 3,4 /1 1/2 Alternatives for Capping 2/3 2,1 1,3 3/4 AMS + BB 1% VOP 2% Price Distortion 4/5 5/6(e) 2,8 4% Price Distortion

21 Wheat Product Specific Capping based on Adverse Effects on World Market Million acres US$ billion ,2 3,9 3,6 3,3 3, 2,7 2,4 2,1 1,8 1,5 1,2,9,6,3, Area vs Farm Prices USD/bushel /1 /1 1/2 Trade-Distorting DS 1/2 2/3 2/3 3/4 3/4 Source: USDA; WTO notifications; ICONE s Simulations. 4/5 4/5 5/6(e) 5/6(e) Price Distortion US$ billion,% -1,% -2,% -3,% -4,% -5,% -6,% 4,2 3,9 3,6 3,3 3, 2,7 2,4 2,1 1,8 1,5 1,2,9,6,3, Implied Adverse Effects 1,4,8 /1 1/2 Alternatives for Capping 2/3 1,3 3/4 AMS + BB 1% VOP 2% Price Distortion 4/5 5/6(e) 2,9 4% Price Distortion

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