Think Piece

Rethinking the Rules for Agricultural Subsidies

February 2015
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The Uruguay Round’s Agreement on Agriculture (AoA) categorised “domestic support” according to its presumed effect on trade. Subsidies that were deemed to be “trade distorting” were subject to limits specified in member schedules. Those that were regarded as having no (or minimal) impacts on trade were sheltered from reduction obligations. In practice, few countries have provided trade-distorting support to the level allowed, and so the limits have acted only as a “loose” constraint. Domestic agricultural policies have been radically reformed in a number of countries. This reform has been in the direction of reducing reliance on price supports in favor of direct payments. Subsidies to farming in developed countries operate through a variety of measures that provide incentives to remain in farming even when not tied to output and prices. Countries have found ways to adjust policy instruments to appear to show trade-distorting support reductions even when incentives to producers are maintained. Emerging and developing countries have increased their support to agriculture, often in ways that distort trade. Issues such as the purchase of grain for food reserves have sprung up, linking the restrictions on trade-distorting support with food security. In short, there is plenty of scope for improving the disciplines on domestic farm programs embodied in the AoA. Agricultural subsidies are also constrained by the Agreement on Subsidies and Countervailing Measures (ASCM), as that agreement applies to all subsidies related to the production of goods. Subsidies could violate the ASCM even if within the limits set by the AoA. So the ASCM might seem to be a more viable way to avoid the adverse trade impacts of domestic farm policies.

The paper raises several questions that need to be faced while further developing subsidy rules in the World Trade Organization. Its primary focus is on whether the shift in the distribution of agricultural subsidies has changed the relevance of the AoA. Examining whether the AoA has successfully distinguished between “good” farm subsidies and “bad” ones, it considers whether the agreement has hindered agricultural subsidies that are deemed desirable for development and sustainability. It also thinks over the question of disciplining food subsidies and biofuel programs by counting them as agricultural subsidies. Finally, it deliberates on the benefit of keeping the AoA subsidy framework when the ASCM (perhaps revised) would do as well. The paper puts forth alternative suggestions, including dividing the Green Box into direct income payments and “public goods” payments, which could operate under different constraints, and phasing out the AoA over time by shifting some of its provisions to the ASCM.

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