The United States and China remain in the midst of a trade war that seems to have no end. But beyond the commercial tensions between the two countries, the growing tendency of the U.S. government to alleviate the pressure of the trade war on its producers through subsidies has received little attention at the international level. At the rate it’s going, the U.S. is set to exceed the ceiling of agricultural aid it has committed at the World Trade Organization (WTO). If this happens, it will trigger the WTO’s Dispute Settlement Body, making retaliation by commercial partners likely.
One of the WTO’s greatest achievements is, on the one hand, to set limits on the amount of production subsidies for the agricultural sector. On the other the WTO has promoted the reduction of agriculture subsidies through trade negotiations—an extremely valuable achievement that avoids the market distortions for raw materials and food that favor subsidized producers against producers in other countries.
Following the Uruguay Round, which established the WTO, the trade body’s goal turned to reducing the levels of assistance (subsidies) in a second round of negotiations, known as the Doha Round. Negotiations stagnated, and subsidies have remained at the levels of the Uruguay Round. To address the issue in the absence of a deeper, comprehensive deal, the WTO established the 1995 Agricultural Agreement. The agreement states that “the overall aim is to establish a fairer trading system that will increase market access and improve the livelihoods of farmers around the world” with the goal of “making it [agricultural trade] fairer and more competitive.” The last big step related to this agreement happened in 2015, when WTO members adopted a historic decision “to abolish agricultural export subsidies and to set rules for other forms of farm export support.”
The Agreement on Agriculture comprises specific commitments to reduce support and protection in the areas of domestic support. Based on this agreement, countries have a limit of subsidies known as Total Aggregate Measurement of Support (AMS). Under this, the U.S. is limited to a total amount of $19.1 billion per year in total subsidy assistance. In 2016, the last agricultural report by the United States contemplated disbursements for subsidies that would reach approximately $16 billion dollars. Included in this was an aid package for the agricultural sector composed of subsidies classified as de minimis; which refers to the minimum amount of domestic support (subsidies) that is allowed for a specific product, even when its effects alter free trade. The U.S. aid package for agricultural products totaled $8.5 billion, of which only $3.8 billion was reported, since the rest was classified as de minimis—which don’t have to be reported to the WTO because they compose less-than or equal to five percent of the agricultural products total production value. This implies that for this campaign, the United States spent 20 percent of its allowed limit on assistance to its agricultural sector.
In the framework of the trade war with China—with agricultural products among the most affected—the United States Department of Agriculture (USDA) announced additional aid packages to compensate for the losses suffered by farmers. This is added to those already granted, through the approval of the “Farm Bill,” legislation negotiated every five years that defines agricultural public policy. While the compensation aid to farmers in 2018 totaled $12 billion dollars, this year, it was announced that aid would reach $16 billion.
The next notification to the WTO The Agriculture Committee, which usually meets four times a year, will likely incorporate the increase in assistance. When it does it’s safe to say the new U.S. aid package will exceed its WTO limits. Take the specific product subsidy for soybeans—the product most affected by the trade war: in 2016, the U.S. granted soybeans approximately $1.2 billion in aid. But with a production value of more than $40 billion, the subsidy was classified as a de minimis because the grant did not exceed soybeans’ five percent production value, which was therefore not included in the AMS. But if on top of the $3.7 billion given to soy through the compensatory aid package (Farm Bill) the government continues to provide the same amount of assistance as it did in 2016, the U.S. would surpass the requirements for aid to be considered de minimis, and would therefore have to be included in the AMS. If this happens, the U.S. may very well exceed their $19.1 billion limit.
Beyond any possible action against the U.S. by members of the WTO for breaching its commitments—which would be before a dispute settlement body on the verge of paralysis, largely due to the U.S.’s refusal to appoint new members—the question arises on whether these U.S. farm subsidies are the new norm. If so, the new U.S. subsidy policy will have important implications to the world’s agricultural trade, affecting overall global production decisions and markets.
In short, despite the declarations by American officials who hope that American farmers will continue to respond to market signals, the White House policies justified only as retaliation for Chinese trade practices, should they become semi-permanent will move the U.S. away from the commitments resulting from the Uruguay Round of GATT.
If the conflict and increased assistance continues, it will deal a blow to the multilateral trading system, which is already weakened. The return of distortionary subsidies implies a clear blow to the WTO in agricultural matters. Restoring a system that ensures fairer global trade in agriculture could take decades.
Nicolás Albertoni (@N_Albertoni) is a principal investigator for the commercial policy project in the laboratory of Political Economy and International Security at the University of Southern California, where he holds a PhD in Political Science and International Relations
Nelson Illescas (@nelson_illescas) is the director of the Foundation Institute for International Agricultural Negotiations (INAI). He is a professor at Universidad Austral (Legal System of Agribusiness), University of Belgrano (International Agricultural Trade), National University of Tres de Febrero (Logistics and Quality Course) and National University of La Plata (International Trade).