Domestic support policies were recognized as one source of
market and trade distortions in negotiating the Uruguay Round
Agreement on Agriculture (AoA). Countries, therefore, agreed to
limit domestic policies presumed to be the most trade distorting
and to exempt non- or minimally trade-distorting policies from any
limitations.
Policies were categorized by color
according to whether and how they were disciplined. Policies that
directly influence production decisions, such as price support
policies (amber box policies), were capped and subject
to cuts. Support levels from amber box policies are quantified,
according to the AoA, by calculation of an
aggregate measure of support (AMS), which combines estimated
support levels for all commodities into one overall measure.
The AoA exempted three types of domestic programs from reduction
commitments. The first type of exempt support is amber box policies
deemed to be de minimis-defined as support that is less
than 5 percent of the value of production. The second type of
domestic program exempt from reduction commitments is expenditures
that are entirely government funded and do not vary with prices.
This type of support (green box policies)-deemed to have little or
no effect on production or trade-includes research programs,
domestic food aid, environmental programs, and certain crop
insurance and income-support programs. The third type of exemption
(blue box policies) includes direct payments that are related
to production-limiting programs (e.g., subsidies paid as a result
of production quotas or those that require producers to set aside
land in order to qualify for subsidies).
In the Doha Ministerial Declaration, members
committed to negotiations to achieve "substantial reductions in
trade-distorting domestic support." As with market access,
negotiators in the Doha talks have agreed that there will be an
element of harmonization in the reductions made by developed
countries. Specifically, countries with higher levels of permitted
amber box trade-distorting domestic support will be subject to
deeper cuts. In a departure from the AoA commitments, blue box
expenditures will be capped and, along with de minimis support,
reduced. Amber box, blue box, and de minimis policies will
be aggregated together, named
Overall Trade-Distorting Domestic Support (OTDS), and subject
to cuts.
As for special and differential treatment for developing
countries, there is agreement to provide developing countries with
longer implementation periods and lower reduction coefficients for
all types of trade-distorting domestic support.
See the AoA Domestic Support section of the recommended
readings page for more information regarding domestic-support
issues related to the WTO Agreement on Agriculture.
Other Agreement on Agriculture Issues:
AoA
Issues Series: Domestic Support Policies
Frederick Nelson, Edwin Young, Peter Liapis, and Randall
Schnepf
USDA, Economic Research Service
Domestic support policies were recognized as one source of
market and trade distortions in negotiating the Uruguay Round
Agreement on Agriculture (AoA). Countries, therefore, agreed to
limit domestic policies presumed to be the most trade distorting
but to exempt other policies from any limitations. A key issue in
the next round of trade talks is identification of further limits
or exemptions for domestic policies. A critical question is
whether, and to what extent, policies exempt from limitations
actually alter production and trade. The continuing challenge for
WTO negotiations is obtaining effective commitments about domestic
support policies to reduce world market distortions in agricultural
trade while allowing countries the flexibility they need to achieve
their unique national priorities.
Domestic and trade policies are interrelated, change in one has
implications for accomplishing the goals of the other. Trade
policies, by directly influencing imports and exports, facilitate
domestic price and income goals; domestic price, income, and
production policies by changing production and prices affect a
country's ability to compete in world markets.
Limits of any kind on domestic agricultural policies are
unprecedented in a trade agreement. But, because of the
interrelationships among policies, limits on domestic policies were
thought to be essential to the success of the primary WTO goals of
increased market orientation and reduced protection in world trade.
Under the Uruguay Round Agreement on Agriculture (AoA),
support levels from domestic policies presumed to be the most trade
distorting are subject to upper limits that decline over time.
Negotiators of the AoA recognized the need for individual
countries to use domestic policies to address certain issues,
especially those related to
- equity (e.g., aid to the needy),
- market failure (e.g., environmental programs), and
- the absence of risk markets (e.g., income safety net
programs).
As a result, expenditures on selected
policies were exempt from reduction commitments, as long as these
policies were considered to be no more than "minimally distorting"
of production and trade.
A traffic light analogy is used to
categorize types of policies. WTO strategies for limiting support
were tailored to the different categories or "boxes."
Red box policies must be stopped or eliminated.
Amber box policies are subject to limitations.
Green box policies are exempt from any limitations. An
additional category,
blue box, was created especially for payment programs that
limit production and meet specified criteria.
Red box policies were prohibited.No
domestic support policies are prohibited or scheduled to be phased
out under the current AoA.
Amber box policies are subject to
reductions.Support levels from nonexempt (or amber box) domestic
policies are quantified, according to the AoA, by calculation of an
aggregate measure of support (AMS), which combines estimated
support levels from all nonexempt policies for all commodities into
one overall measure. Nonexempt policies in the AMS include
- commodity-specific market price supports based on administered
prices,
- government payments to producers related to current production
or prices,
- other commodity-specific transfers, and
- non-commodity-specific measures of support received by
producers, such as capital, input, and insurance price
subsidies.
A traffic light analogy is used to
catergorize WTO domestic support policies and to place them in one
of four colored policy boxes
Prohibited policies that must be stopped
(an emptyred box, as no domestic policies were prohibited)
Policies subject to careful review and
reduction over time areamber boxpolicies (includes market price
support, payments related to current production or prices, and
input subsidies)
Payments made in conjunction with
production-limiting programs are in theblue box(includes the
1986-95 deficiency payments in the U.S.)
Green box policies are considered
nontrade-distorting and are not subject to any limitations
(includes domestic food aid and environmental programs)
As a domestic measure, the AMS
excludes export subsidies and the impacts of import restrictions
that are not also tied to domestic administered price programs.
Countries that committed to reducing
domestic support (see table 1) agreed to reduce their AMS below the
level that existed during the 1986-88 base period, a period of
relatively high support resulting from depressed market prices.
Small levels of support (less than 5 percent of the value of
production in developed countries (10 percent in other countries)
do not have to be disciplined under the so-called
de minimis rule. Developing countries were given
special and differential treatment through special policy
exemptions and by lower reduction commitments that are implemented
over a longer period of time. Least developed countries were not
required to make any commitments to reduce domestic support.
|
Table 1-Distorting domestic policies
are limited
|
|
Country classification
|
Reduction
commitment
|
De
minimis
|
Deadline
(year) |
| Developed countries |
20%
|
5% |
2000
|
| Developing countries |
13%
|
10% |
2004
|
| Least developed countries |
0%
|
10% |
* |
| * Least developed countries agreed not to increase
domestic support policies from the base period. |
Green box policies are deemed non-trade-distorting and exempt
from reductions.Domestic policies presumed to have the minimal
impact on trade were excluded from the AMS and limits on support
levels.
To be considered in the green box, policies must
- have no, or, at most minimal, effects on production or trade
(decoupled);
- not increase market prices or consumer costs;
- be financed by the Federal budget; and
- meet other more detailed policy specific conditions (none of
which limit the level of subsidy per se).
Blue box policies have exempt status.Government payments related
to current production or prices and to production-limiting programs
are exempt if the payments are based on fixed production levels or
are made on no more than 85 percent of the base level of
production. The production-limiting features of such payments might
or might not offset, to some extent, expansionary production
effects of the payments. Inclusion of the blue box provision,
however, was basically a political strategy required to bring the
negotiations to a close, and the specifics primarily benefited the
United States and the European Union. Blue box policies are
excluded from AMS calculations for 1995-2000, but not from the base
year AMS.
How has support from domestic policies changed since the 1986-88
base?Governments have reduced domestic support levels relative to
1986-88, as measured by the AMS. While intervention continues,
there has been a shift away from the use of market price support
toward less distorting payments. Information on AMS's reported in
the
notifications provided by member countries to the WTO shows
that the level of domestic support expressed as a percentage of the
commitment ceilings varied widely among countries. However,
three-quarters of the country support levels were less than 80
percent of their respective ceilings.
|
Table 2-Actual support (AMS) as a
percent of commitment levels, latest year during 1995-1998 *
|
Percent of
commitment levels |
Countries
|
| 0 to 19 % |
Canada, Colombia, Costa Rica, Czech Republic, Mexico,
Morocco,
New Zealand, Poland |
| 20 to 39 % |
Australia, Brazil, Cyprus, United States, Venezuela |
| 40 to 59 % |
Hungary |
| 60 to 79 % |
European Union, Iceland, Japan, Slovak Republic, Switzerland,
Thailand |
| 80 to 100 % |
Argentina, Israel, Korea, Norway, Slovenia, South Africa,
Tunisia |
| * Last year notified as of April 2000.
Twenty-seven countries had notified for at least one year.
Bulgaria and Papua New Guinea had not yet notified. |
Unresolved Issues
Assuming future trade agreements will place further limits on
domestic support programs, there are several procedural and
research issues remaining:
- Effectiveness of current agreement.Support from
trade-distorting domestic policies has declined since the base
period. Non-trade-distorting green-box expenditures have increased.
What have been the effects on world markets and trade?
- Trade-off between market orientation and other goals.The
challenge for the future is to negotiate substantive reductions in
support from trade-distorting domestic policies while allowing
countries adequate flexibility to pursue non-trade-distorting
policy objectives. There are potential trade-offs between the goals
of reducing distortion and of pursuing non-trade concerns.
Countries disagree about the combination of support reductions and
restrictions that should be employed to achieve WTO goals; namely
more effective cuts in the amber AMS; equalization of amber support
levels, elimination of the blue box exemption, or tightening up of
the definitions of exempt green box policies.
- Future reductions in the aggregate measure of support.While
most countries are already well under their current support
reduction commitment ceilings, some countries might be very
concerned that future requirements will mean new or increased
support reductions, especially if blue box policies are
reclassified as amber box. Some countries appear to be looking to
coupled domestic support policies, instead of using green box
policies, to help accomplish nontrade goals related to rural
communities, which would place their national priorities squarely
in conflict with WTO market orientation goals.
- Definition and criteria for the exempt green box policies.An
issue concerns the current vague requirement that green box
policies must have, at most, minimal "trade-distorting effects or
effects on production." Exactly what this means quantitatively is
subject to judgment, challenge, and negotiation. All policies
involve some amount of subsidy to agriculture, otherwise it would
not matter if they were exempt or not.
- Limits on green box subsidies.There is currently no limit on
the total amount of subsidy that can flow through individual green
box policies. There is, also, no WTO limit on the total
amount of green box expenditures. What is the overall effect of
green box policies on world markets and trade?
- Decoupled payments.Decoupled payments increase the wealth of
farmers. Does this increased wealth affect farmers'
production decisions?
- Role of blue box.Blue box policies are not market oriented
because they reduce domestic and world output and increase prices
by idling resources. When such policies negatively distort
production, however, a country's export competitors may benefit.
Product importers may then have to pay higher prices with decreases
in output. Production may be increased in the future by these
programs through risk reduction and increased wealth, especially if
payments are larger than needed to compensate for resource
idling. What is the impact of blue box policies on
production, prices, and trade?
- Adjustments for inflation.Support from nonexempt policies are
currently measured in nominal terms but member countries are
encouraged to "give due consideration" to countries with
significant inflationary problems when reviewing their compliance
with commitments. Ignoring inflationary trends in reporting support
measures complicates evaluation of policy effects. How would
accounting for inflation impact compliance?
- De minimis rules.The rules allow exclusion from the AMS measure
amber support that could amount to as much as 5 to 10 percent of
the total value of agricultural production in developed countries
(10 to 20 percent in developing countries). Up to 5 percent of the
value of production of each commodity in developed countries, for
example, could be excluded under the de minimisrule, plus up to
another 5 percent of the total value of production in the country
could be excluded by applying the rule to the
non-commodity-specific policy category. What are the overall
effects of the de minimisrules?
- Non-commodity-specific policy category.Policies can be
categorized as non-commodity-specific even if only a subset of a
country's commodities were actually involved in a program. Are
these policies really non-commodity-specific?
- Aggregate or commodity-specific AMS?The aggregate AMS approach
gives countries flexibility to seek competitive advantages in one
area while reducing subsidies in another commodity area. This may
be a problem for some countries faced with an increase in
commodity-specific subsidies by another country. Would market
impacts differ if commodity-specific limits were imposed?
- Relationship between domestic and trade policies.Market price
support programs depend on border restrictions and export
subsidies. If trade or border polices are substantially
constrained, how important are additional restraints on domestic
policies?
For Additional Information, See:
Other Papers in This AoA Issues Series:
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